Both experts lose as Tax Court sidesteps subsequent events question

Two new decisions by the U.S. Tax Court, in opinions written on the same day (April 28, 2011) by Judge Cohen, suggest that “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” on the valuation date.  In other words, the wide divergence between experts worked to the disadvantage of both.

Substantial amounts were at stake in both cases. In Estate of Saunders v. Comm’r, 136 T.C. No. 18, the decedent’s estate claimed a $30 million deduction related to litigation pending at the time of death, against which the IRS claimed a $14.4 million deficiency. In Estate of Foster v. Comm’r, T.C. Memo. 2011-95, the IRS sought nearly the same amount ($14.6 million) against discounted values (up to 32%) by the estate for contingent litigation claims. In both cases, the litigation was settled several years after the death of the decedent, largely in favor of the estates.

To what extent should the subsequent resolution of claims determine their deductibility? The Saunders court acknowledged the wide disagreement among federal circuit courts on the application of subsequent events—but specifically declined to enter that legal “minefield.” Instead, it found that “stark” differences” in values asserted not only by both sides but also by the taxpayers’ three different appraisers was a “prima facie indication of the lack of reasonable certainty” of the claims at stake. Likewise, the Foster court cited Saunders for the proposition that a “sharp discrepancy” among opinions for the same as well as the opposing side can establish a “lack of reasonable certainty in the values they suggest.” Read the complete digest of both cases in the July 2011 Business Valuation Update; the courts’ opinions will be posted soon at BVLaw.