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Estate of Saunders v. Commissioner of Internal Revenue

United States Court of Appeals, Ninth Circuit

March 12, 2014

ESTATE OF GERTRUDE H. SAUNDERS, Deceased; RICHARD RIEGELS, Co-Executor; WILLIAM SAUNDERS, Co-Executor, Petitioners-Appellants,

Argued and Submitted February 13, 2014, San Francisco, California

Page 954

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 10957-09.

Thomas R. Daniel, Esq. (argued), Gelber, Gelber & Ingersoll, Honolulu, Hawaii, for Petitioners-Appellants.

Kathryn Keneally, Jonathan S. Cohen, and Jennifer M. Rubin (argued), Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellee.

Before: Consuelo M. Callahan and Milan D. Smith, Jr., Circuit Judges, and Alvin K. Hellerstein, Senior District Judge.[*] Opinion by Judge Milan D. Smith, Jr.


Page 955

M. SMITH, Circuit Judge.

In this appeal from the tax court, we consider whether the Estate of Gertrude Saunders (the Estate) properly claimed a $30 million deduction on its estate tax return for a lawsuit pending at the time of Gertrude Saunders' death (the Stonehill Claim, or the Claim), even though the suit ultimately settled for a smaller sum. The Commissioner of Internal Revenue (the Commissioner) disallowed the $30 million deduction. Because the estimated value of the Stonehill Claim at the time of Gertrude Saunders' death was not ascertainable with reasonable certainty, the tax court properly upheld the Commissioner's disallowance of the $30 million deduction, but allowed a deduction in the amount for which the Claim settled. We therefore affirm the decision of the tax court.


William Saunders, Sr., an attorney residing in Hawaii, died on November 2, 2003. His wife, Gertrude Saunders, died

Page 956

slightly more than one year later, on November 27, 2004.

I. The Stonehill Claim

Prior to his death, William Saunders represented Harry S. Stonehill. On September 24, 2004--after the deaths of both Stonehill and William Saunders--Stonehill's estate filed suit in Hawaii state court against the estate of William Saunders. Stonehill's estate asserted that William Saunders committed legal malpractice, breach of confidence, breach of the duty of loyalty, and fraudulent concealment in connection with his representation of Stonehill. Specifically, Stonehill's estate alleged that William Saunders provided damaging information about Stonehill to the Internal Revenue Service, thereby breaching the fiduciary duty he owed to Stonehill, and allegedly exposing Stonehill to considerable tax liability. Stonehill's estate sought to recover damages of at least $90 million.[1]

A jury trial on the Stonehill Claim began on May 28, 2007--several years after Gertrude Saunders' death--and the jury delivered its verdict about six weeks later. While the jury determined that William Saunders had breached his duties to Stonehill, it also concluded that William Saunders' misconduct did not cause any damages to Stonehill or his estate. The Stonehill estate appealed. Thereafter, while the appeal was pending, the parties to the Stonehill Claim settled their dispute. Under the terms of the settlement, William Saunders' estate agreed to pay $250,000 in exchange for a complete release from liability.

II. The Challenged Deduction

At the time of Gertrude Saunders' death on November 27, 2004, the Stonehill Claim remained pending and contested. On February 23, 2006, her Estate filed its Form 706 estate tax return. In connection with that return, the Estate deducted $30 million for the estimated date-of-death value of the Stonehill Claim. The Estate based the amount of its deduction for the Stonehill Claim on an August 30, 2005 appraisal letter prepared by attorney John Francis Perkin.[2]

On February 10, 2009, the Commissioner issued a Notice of Deficiency to the Estate. In that Notice, the Commissioner asserted that the Estate had improperly deducted $30 million for the Stonehill Claim, and that its return therefore reflected an estate tax deficiency of $14.4 million.[3]

III. Prior Proceedings

On May 8, 2009, the Estate petitioned in tax court for redetermination of the deficiency claimed by the Commissioner. To support their respective positions, the ...

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