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02/22/2012

Naify v. U.S. - Taxpayer Loses Appeal to Value Contingent Claim Without Looking to Post-Death Event

Marshall Naify Revocable Trust v. U.S., No. 10-17358 D.C. No. 3:09-cv-01604-CRB

U.S. Court of Appeals for the Ninth Circuit, February 15, 2012

By David M. Eckstein, CFA *

Three contingent liability estate tax cases were decided between September 2010 and April 2011. One has now been affirmed on appeal. All three cases were governed by Treas. Reg. §20.2053 as it existed before its amendment in 2009[1], but appear to be consistent with the post-amendment regulation. All three original decisions and the appellate decision are favorable to the IRS in that they look to post-death settlements of the liabilities at amounts lower than the taxpayers expected as of the date of death. The recent appellate decision includes a detailed review of the Ninth Circuit's position on looking to post-death events to determine value.

In the original Naify case[2], the Naify Trust argued that a contingent tax liability should be valued at $47 million based on the date-of-death probability of losing a $62 million income tax controversy, rather than at the subsequent $26 million settlement value, as argued by the Government. The District Court granted the Government's Rule 12(c) motion for judgment on the pleading after determining that the Naify Trust's complaint did not meet the test of showing that the tax claim was "ascertainable with reasonable certainty" as the date of death. Our prior Valuation Alert summarizes and analyzes the original District Court case.

The two subsequent contingent liability cases, Foster[3] and Saunders[4], also rejected taxpayer valuations based on date-of-death expectations because the claims against the estates were not "ascertainable with reasonable certainty" as the date of death. Our article on Foster (which also discusses Saunders) includes a detailed review of the case and implications for planning under post-amendment Treas. Reg. §20.2053 with regard to contingent liabilities as well as contingent assets

In affirming the District Court's opinion in Naify, the Appellate Court summarized its findings with regard to the "ascertainable-with-reasonable-certainty" standard: "the expert's opinion, along with the Trust's own allegations, actually show that the claim was contingent and had a range of possible values between $0 and $62 million." Thereafter, the Appellate Court provided a detailed review of prior opinions to support its position that Ninth Circuit precedent consistently supports "considering post-death events when valuing a disputed or contingent claim." The Appellate Court cited the following Supreme Court and Ninth Circuit cases:

  • Ithaca Trust Co. v. U.S., 279 U.S. 151 (1929), "allowing a court to consider post-death events when valuing a disputed or contingent claim against an estate."
  • Estate of Shedd v. Comm'r, 320 F.2d 638, 639-40 (9th Cir. 1963) aff'g 37 T.C. 394 (1961), "considering post-death events when evaluating deduction for disputed and contingent claim."
  • Estate of DuVal v. Comm'r, 152 F2d 103, 104 (9th Cir. 1945) aff'g 4 T.C. 722, "considering post-death events when evaluating deduction for contingent claim."
  • Propstra, 680 F2d at 1253, "distinguishing certain and enforceable claims from disputed or contingent claims."
  • Estate of Van Horne, 720 F.2d at 1116-17, same as Propstra.

In Naify, Foster and Saunders the courts rejected arguments that the values of the claims (based on probability-weighted estimated outcomes) were "ascertainable with reasonable certainty" in favor of arguments that the amounts of claims (based on the amounts that would be paid) were not "ascertainable with reasonable certainty." Such distinctions are somewhat moot under amended Treas. Reg. §20.2053, which generally precludes the use of date-of-death expectations to value contingent liabilities, in favor of post-death events. However, there are some exceptions, and contingent assets are still valued based on date-of-death expectations, as discussed in greater detail in our article on Foster.

* David M. Eckstein, CFA is a Managing Director and co-founder of FMV Opinions, Inc. with offices in New York, San Francisco, Irvine, Chicago, and Dallas. Mr. Eckstein also heads up the San Francisco office. If you would like to contact David directly you can do so at deckstein@fmv.com.

[1] The 2009 amendment applies to estates involving a date of death after October 20, 2009, and clarifies that contested and contingent claims are not ascertainable with reasonable certainty, so that they must be valued based on subsequent events.

[2] Marshall Naify Revocable Trust v. U.S.; No. 3:09-cv-01604, U.S. District Court for the Northern District of California, September 8, 2010.

[3] Estate of Ellen D. Foster v. Commissioner T.C. Memo. 2011-95 (April 28, 2011).

[4] Estate of Gertrude H. Saunders v. Commissioner, 136 T.C. No. 18 (April 28, 2011).

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