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Volume XII, Number 279

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Ninth Circuit Upheld Tax Court's Determination that Litigation was not "Ascertainable with Reasonable Certainty" at the Time of Decedent's Death and so "Hazard of Litigation" Valuation Discount Did Not Apply

Estate of Foster v. Commissioner (2014-1 U.S.T.C. 60,675 (C.A. 9, March 26, 2014)

At the time of her death, the decedent was the defendant in several lawsuits in her capacity as trustee of three marital trusts established under her husband's estate. The executors of the decedent's estate had the marital trusts appraised, and the appraisal included a 29% discount attributable to the hazards of litigation presented by the lawsuits against decedent in her capacity as trustee. The Service denied the "hazards of litigation" discount. Subsequent to the decedent's death, the suits were settled.

The Tax Court upheld the Service's denial of the "hazards of litigation" discount because the litigation was not "ascertainable with reasonable certainty" at the time of the decedent's death. In preparation for the trial at the Tax Court level, the executors obtained a second appraisal, which determined only a 12.9% to 17.2% discount (the difference between the two appraisals was approximately $8.1 million). The Tax Court used this discrepancy as proof there was a lack of reasonable certainty with respect to the litigation.

This is an interesting case in light of Estate of Saunders v. Commissioner (U.S. 9th Circuit, No. 12-70323 (March 12, 2014)), where the Ninth Circuit considered valuation discounts for litigation pending at the time of decedent's death. The Court noted that unlike the taxpayers' experts in Saunders, the experts in Foster could not reasonably opine that the amounts they suggested would ever actually be paid by the Estate. In fact, one of the lawsuits against the decedent had been decided in her favor before her death (the experts had noted in their appraisal that an appeal was pending with respect to that particular litigation).

It is important to note that in both Saunders and Foster, the Court applied the Section 2053 regulations prior to the 2009 changes. Prior to 2009, in order to deduct the estimated amount of a claim against the estate, the estate had to show that the amount of the claim was ascertainable with reasonable certainty and the estimated amount is deductible only if the amount will be paid. Under new Treas. Reg. § 20.2053-4(d)(1), generally no estate tax deduction can be taken for claims against the estate while the claim is merely potential or unmatured. If a claim later matures, it can be deducted in connection with a timely refund claim. In order to preserve the estate's right to claim a refund for claims that mature and become deductible after the expiration of the period for filing a refund claim, the estate should file a protective claim for refund.

© 2022 Proskauer Rose LLP. National Law Review, Volume IV, Number 135
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About this Author

Albert W Gortz, Proskauer Rose Law Firm, Personal Planning Attorney
Partner

Albert W. Gortz is a Partner in the Personal Planning Department and has been with the firm since 1970 and in the Florida office since he opened it in 1977.

561-995-4700
George D Karibjanian, Proskauer Rose Law Firm, Personal Planning Attorney
Senior Counsel

George D. Karibjanian is a Senior Counsel in the Personal Planning Department, resident in the Boca Raton office. George is Board Certified by the Florida Bar in Wills, Trusts & Estates and is a Fellow in the American College of Trust and Estate Counsel.

561-995-4780
David Pratt, Personal Planning Attorney, Proskauer Rose Law Firm,
Partner

David Pratt is a Partner in the Personal Planning Department and head of the Boca Raton office. His practice is dedicated exclusively to the areas of trusts and estates, estate, gift and generation-skipping transfer, fiduciary and individual income taxation and fiduciary litigation. He has extensive experience in estate planning and post-mortem tax planning. He has been asked to serve as an expert witness on several occasions, and has been referred to as a “seasoned trusts and estates lawyer” in a Florida Third District Court of Appeals Opinion

561-995-4777
Mitchell M Gaswirth, Proskauer Rose Law Firm, Tax Attorney
Partner

Mitchell M. Gaswirth is a Partner in the Tax Department. His practice focuses primarily on income, gift and estate tax and related business planning. Mitchell counsels individuals, entrepreneurs and business entities in connection with the various income and other tax issues which arise in sophisticated business transactions.

310-284-5693
Andrew M Katzenstein, Proskauer Law Firm, Personal Planning Attorney
Partner

Andrew M. Katzenstein is a Partner in the Personal Planning Department in the Los Angeles office where he assists high net worth individuals, companies and charitable organizations with all aspects of tax and estate planning. He focuses his practice on tax planning matters, which include estate, gift and generation-skipping tax planning, as well as income tax of trust planning, probate and trust administration matters, resolving disputes between fiduciaries and beneficiaries, and charitable planning

310-284-4553
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