In Saunders, a malpractice claim for $90,000,000 was filed against the decedent’s predeceased husband’s estate, alleging a breach of fiduciary duty by the decedent’s husband. The Plaintiff in the malpractice claim accused the decedent’s husband, who was an attorney, of having revealed client confidential information to the IRS. On the decedent’s estate tax return, a deduction for $30,000,000 was claimed based on an appraisal of the value of the malpractice claim. During the jury trial, the jury found that the breach of duty by the decedent’s husband was not a legal cause of injury to the Plaintiff. Although the Plaintiff appealed this verdict, the claim was ultimately settled for $250,000.
The Tax Court noted that Treasury Regulation § 20.2053-1(b)(3) (as in effect at the decedent’s death in 2004) provided that a claim against an estate was deductible if the value of the claim was “ascertainable with reasonable certainty, and will be paid.” In determining whether the value of the claim was “ascertainable with reasonable certainty,” the Tax Court did not consider the actual settlement amount paid. The Tax Court, however, determined that the value of the claim was not “ascertainable with reasonable certainty” because there were at least four appraisals of the value of the claim and these appraisals varied in amount by almost $11,000,000 (i.e., the values reported were $30,000,000, $25,000,000, $19,300,000 and $22,500,000). Additionally, the Tax Court noted that none of the appraisals indicated that the claim would actually be paid. Accordingly, only the amount actually paid (i.e., $250,000) was deductible by the decedent’s estate.