Saunders v. Comm'r of Internal Revenue (In re Estate of Saunders)

• Decision Date: 28 April 2011
• Docket Number: No. 10957–09.,10957–09.
• Citation: 136 T.C. 406,136 T.C. No. 18
• Parties: Estate of Gertrude H. SAUNDERS, Deceased, William W. Saunders, Jr., and Richard B. Riegels, Co–Executors, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

136 T.C. 406

136 T.C. No. 18

Estate of Gertrude H. SAUNDERS, Deceased, William W. Saunders, Jr., and Richard B. Riegels, Co–Executors, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 10957–09.

United States Tax Court.

April 28, 2011.

Decedent's estate claimed a deduction of $30 million in relation to litigation pending against the estate at the date of death. The case was submitted on stipulated facts and an offer of proof for a preliminary determination as to whether the amount of the claim was ascertainable with reasonable certainty and deductible as of the date of death, in accordance with sec. 20.2053–1(b)(3), Estate Tax Regs.

Held: Different standards apply to including a claim in favor of an estate in the gross estate and deducting a claim against an estate for estate tax purposes.

Held, further, as demonstrated by the expert reports submitted on behalf of the estate, the value of the claim was too uncertain to be deducted based on estimates as of the date of death and must be deducted based on the ultimate outcome, in accordance with the regulation.

Thomas F. Carlucci, for petitioner.

Andrew R. Moore and Shannon Edelstone, for respondent.

OPINION

COHEN, Judge:

Respondent determined a deficiency of $14,400,000 in estate tax due from the Estate of Gertrude H. Saunders (decedent). Respondent also determined a penalty under section 6662(h) of $5,760,000, but that penalty has now been conceded. The case is before the Court for a preliminary determination of whether a claim against the estate satisfies the requirements of section 20. 2053–1(b)(3), Estate Tax Regs., as in effect for the date of the decedent's death that a claim may be deducted “though its exact amount is not then known, provided it is ascertainable with reasonable certainty, and will be paid.” (Respondent concedes that final regulations at section 20.2053–1(b)(3), Estate Tax Regs., effective for estates of decedents dying on or after October 20, 2009, are not applicable although they are consistent with respondent's litigating position in this case and in prior cases discussed below.) Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the date of decedent's death, and Rule references are to the Tax Court Rules of Practice and Procedure.

Before a scheduled trial date in San Francisco, California, the parties submitted expert reports in accordance with Rule 143(g) and pretrial memoranda as required by the Court's standing pretrial order. The parties then requested a conference call to discuss a date and time certain for trial to accommodate numerous witnesses who would be expected to travel from Hawaii and other places. During those conversations, the Court suggested that review of the tendered expert reports and the legal authorities cited in respondent's pretrial memorandum raised a question that could be decided preliminarily and possibly avoid an expensive trial. In the Court's stated view, the differences between the experts as to the correct value to be placed on a claim against the estate were an indication that the value of the claim could not be ascertained with reasonable certainty. By agreement of the parties, that issue has been briefed and submitted on stipulated facts and the estate's offer of proof.

If the preliminary issue is decided in favor of the estate, the issue of the correct value to be placed on the claim remains for trial. If the preliminary issue is decided in favor of respondent, the claim ultimately paid may be treated as a deduction in the final computation of the estate tax liability.

Background

Decedent, a resident of Hawaii, died on November 27, 2004. She was predeceased by her husband, William W. Saunders, Sr. (Saunders), who died on November 3, 2003. Prior to his death, Saunders was a practicing lawyer and at one time represented Harry S. Stonehill (Stonehill).

William W. Saunders, Jr. (Saunders, Jr.), and Richard B. Riegels are coexecutors of the estate and resided in Hawaii at the time the petition was filed. Between approximately June 1988 and March 2004, Saunders, Jr. was a partner in the law firm formerly known as Bickerton Saunders & Dang and later known as Bickerton Lee Dang & Sullivan.

The Stonehill Litigation

Robert Heggestad (Heggestad), a partner in a Washington, D.C., law firm, beginning in 1990 was lead counsel in extensive tax litigation involving Stonehill. See United States v. Stonehill, 83 F.3d 1156 (9th Cir.1996); United States v. Stonehill, 959 F.2d 243 (9th Cir.1992); United States v. Stonehill, 702 F.2d 1288 (9th Cir.1983); Stonehill v. United States, 405 F.2d 738 (9th Cir.1968). After 10 years of litigation, including litigation relating to Freedom of Information Act (FOIA) production, Heggestad obtained numerous previously classified documents from the Internal Revenue Service (IRS), Federal Bureau of Investigation, State Department, and Department of Justice. Among the documents Heggestad received during the FOIA litigation was an April 27, 1960, memorandum by IRS agent James H. Griffin (the Griffin memo). The Griffin memo suggested that Saunders had acted as a secret IRS informer against the interest of his client, Stonehill.

Heggestad engaged co-counsel, John Edmunds (Edmunds), a plaintiffs' counsel in Honolulu, Hawaii, in relation to potential claims against Saunders by the Estate of Harry S. Stonehill (the Stonehill estate). (Stonehill died in 2002.) Heggestad recognized legal impediments or hurdles involved in pursuing the claims but believed that he and Edmunds could overcome them. Heggestad and Edmunds had sufficient confidence in the case to take it on a contingency fee basis, understanding that if they did not prevail they would not get paid, unless the matter otherwise settled. Heggestad and Edmunds prepared a demand letter on behalf of the Stonehill estate alleging that Saunders had committed legal malpractice, breach of confidence, breach of duty of loyalty, and fraudulent concealment against Stonehill.

The demand on the Estate of William Saunders, Sr. (the Saunders estate) by the Stonehill estate was based on the claim that Saunders, while Stonehill's attorney, had informed the IRS that Stonehill maintained a Swiss bank account. Allegedly as a result of this disclosure, the IRS investigated Stonehill for tax fraud, leading to jeopardy assessments for 1958–62 and a 1975 suit to reduce the assessment to judgment and to foreclose liens. The claimed consequence of these actions was loss of business interests and property from the collection of taxes.

The demand letter was received by Saunders, Jr. on September 15, 2004, 73 days before decedent's death. Saunders, Jr. consulted James J. Bickerton (Bickerton), a former partner of Saunders, Jr., and retained Bickerton to represent the Saunders estate with respect to the claim by the Stonehill estate.

On September 24, 2004, 64 days before decedent's death, the Stonehill estate filed formal complaints against the Saunders estate in the U.S. District Court for the District of Hawaii (Hawaii Federal District Court) and in a Hawaii State court. The complaints were prepared by Heggestad and Edmunds and alleged four causes of action for legal malpractice, breach of confidence, breach of duty of loyalty, and fraudulent concealment. The complaints requested over $90 million in compensatory damages, plus additional punitive damages.

From September through November 2004, Saunders, Jr. and Bickerton were unsuccessful in finding any relevant or material evidence that would benefit the defense of the Stonehill claims. Saunders, Jr. believes that the difficulty was due to the significant passage of time from the date of the alleged misconduct and the date the claims were made. However, they did learn that relevant documents might be in Oregon. Elizabeth Anne Saunders, Saunders, Jr.'s sister, is an attorney residing in Oregon. Beginning on October 14, 2004, and on several occasions thereafter, she went to the U.S. District Court for the District of Oregon in Portland to search for documents from earlier tax litigation involving Stonehill.

Bickerton entered an appearance and answered the Hawaii Federal District Court complaint on October 7, 2004. In mid-December 2004, Saunders, Jr. retained John Francis Perkin (Perkin), a member of the Hawaii firm Perkin & Faria, as litigation counsel. Although Perkin became lead counsel, Bickerton remained involved in the Stonehill litigation until its final resolution.

Perkin entered his appearance in the State case on February 2, 2005, by filing a motion to dismiss. He answered the State complaint on March 28, 2005. On July 18, 2005, Saunders, Jr., Perkin, and Brandee Faria of Perkin & Faria traveled to Portland, Oregon, to examine documents potentially related to the Stonehill litigation.

Trial preparation, discovery, depositions, and motions proceeded over the course of the next year and a half. From approximately May 2006 through July 2007, the parties discussed settlement prior to and during trial, but no settlement was reached.

On April 17, 2007, the Saunders estate, as defendant, moved for summary judgment in the Hawaii State court as to damages on the ground that the Stonehill estate could not prove any damages. On August 24, 2007, the State court granted the motion to the extent that that court would not allow relitigation of the underlying Stonehill tax judgment but denied the motion as to the remainder of the relief sought.

Before and during trial of the State court action, settlement demands and offers were exchanged. The Stonehill estate's demands ranged from a high of $7.5 million before May 1, 2006, to a low of $2.5 million in July 2007. The Saunders estate's offers ranged from a low of $250,000 in May 2006 to a high of $2.6 million in June 2007.

On May 28, 2007, a jury trial commenced in the Hawaii State court. The trial lasted approximately 6 weeks. The jury found that Saunders had breached his fiduciary duty of...