Victoria Dieringer v. Cir ( 2019 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
VICTORIA E. DIERINGER, Deceased; No. 16-72640
EUGENE DIERINGER, Executor,
Petitioners-Appellants, Tax Ct. No.
21992-13
v.
COMMISSIONER OF INTERNAL OPINION
REVENUE,
Respondent-Appellee.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted May 15, 2018
Portland, Oregon
Filed March 12, 2019
Before: M. Margaret McKeown and Richard A. Paez,
Circuit Judges, and Cynthia A. Bashant, * District Judge.
Opinion by Judge Paez
*
The Honorable Cynthia A. Bashant, United States District Judge
for the Southern District of California, sitting by designation.
2 DIERINGER V. CIR
SUMMARY **
Tax
The panel affirmed the Tax Court’s decision sustaining
a deficiency against an estate for overstating the amount of
a charitable deduction, and sustaining an accuracy-related
penalty.
Petitioner, the estate executor and heir of the decedent,
declared a large charitable deduction based on the value of
certain estate property at the time of death. The charity
received less than the amount of the claimed deduction, and
the estate received a tax windfall in the process. Petitioner
contended that the Tax Court should have taken into account
events that occurred after the decedent’s death in
determining the value of the charitable deduction.
In light of this court’s holding in Ahmanson Foundation
v. United States, which underscored “the principle that the
testator may only be allowed a deduction for estate tax
purposes for what is actually received by the charity,”
674 F.2d 761, 772 (9th Cir. 1981), the panel affirmed the
Tax Court’s decision upholding the reduction of the
charitable deduction and the deficiency assessment. The
panel found no clear error in the Tax Court’s finding that
there was no evidence of a significant decline in the
economy that would have decreased the value of the
property being donated. The panel also found no error in the
Tax Court’s upholding of the accuracy-related penalty.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
DIERINGER V. CIR 3
COUNSEL
W. Michael Gillette (argued), Sara Kobak, and Marc K.
Sellers, Schwabe Williamson & Wyatt, P.C., Portland,
Oregon, for Petitioners-Appellants.
Douglas Campbell Rennie (argued), Jennifer M. Rubin, and
Joan I. Oppenheiner, Attorneys; David A. Hubbert, Acting
Assistant Attorney General; Tax Division, United States
Department of Justice, Washington, D.C.; for Respondent-
Appellee.
OPINION
PAEZ, Circuit Judge:
I.
In this estate tax case, the Internal Revenue Service
Commissioner (“Commissioner”) assessed a deficiency
against the decedent’s estate for overstating the amount of a
charitable contribution. The estate executor and heir
declared a large charitable deduction based on the value of
estate property at the time of death, only to manipulate the
property for personal gain, deliver assets to the charity worth
substantially less than those claimed as a deduction, and
receive a tax windfall in the process. The Tax Court
sustained the deficiency. We affirm in light of our holding
in Ahmanson Foundation v. United States, where we
underscored “the principle that the testator may only be
allowed a deduction for estate tax purposes for what is
actually received by the charity.” 674 F.2d 761, 772 (9th
Cir. 1981). We also affirm the Tax Court’s ruling sustaining
an accuracy-related penalty under I.R.C. § 6662.
4 DIERINGER V. CIR
A.
This case involves the Victoria E. Dieringer Estate
(“Estate”). Victoria and her late husband Robert E.
Dieringer (“Robert”) had twelve children together, including
Eugene Dieringer (“Eugene”), Patrick Dieringer (“Patrick”),
and Timothy Dieringer (“Timothy”).
The Dieringer family owns Dieringer Properties, Inc.
(“DPI”), a closely held corporation that manages
commercial and residential properties in Portland, Oregon,
as well as a Wendy’s restaurant in Texas. After Robert
passed away and before Victoria’s death, Eugene was the
president of DPI, Patrick was the executive vice-president
and secretary, Victoria was the vice-president, and Timothy
was the office manager. DPI’s Board of Directors (“Board”)
consisted of Victoria as chairperson, and Eugene, Patrick,
Timothy, and Thomas Keepes (“Keepes”), who is unrelated
to the Dieringers, as directors. None of the other nine
Dieringer children were involved in DPI in any capacity.
Before Victoria’s death, the only shareholders of DPI
were Victoria, Eugene, and Patrick. Victoria owned 425 out
of 525 voting shares and 7,736.5 out of 9,220.5 nonvoting
shares. Eugene owned the remaining 100 voting shares, and
Eugene and Patrick each owned 742 nonvoting shares.
According to Victoria’s will, dated November 10, 2000,
upon her death all of her Estate would pass to the Victoria
Evelyn Dieringer Trust (“Trust”). The Trust, as amended on
April 22, 2005, provided for Victoria’s children to receive
some personal effects, but no other proceeds from her estate.
The Trust also provided for $600,000 in donations to various
charitable organizations. Any assets remaining in the Estate
would then pass to the Bob and Evelyn Dieringer Family
Foundation (“Foundation”), an I.R.C. § 501(c)(3)
DIERINGER V. CIR 5
organization, as a charitable contribution. Under Victoria’s
estate plan, Eugene was appointed as the sole trustee of both
the Trust and the Foundation. Patrick and Keepes served as
advisory trustees of the Foundation.
Prior to Victoria’s death, the DPI Board had preliminary
discussions about purchasing Victoria’s DPI shares as part
of ongoing succession planning. A November 24, 2008
Board resolution reported that the issue had been discussed
and that the Board resolved to “periodically purchase”
Victoria’s shares based on terms acceptable to all parties.
Victoria was “completely agreeable” to such a plan. At a
February 13, 2009 Board meeting, Victoria reiterated her
potential interest in having DPI purchase her shares. In
anticipation of entering a purchase agreement for Victoria’s
shares, DPI paid the Trust $45,000 prior to Victoria’s death.
When Victoria unexpectedly died on April 14, 2009, there
were no specific redemption agreements in place. 1
When Victoria died, Eugene was appointed executor of
the Estate. To determine the value of Victoria’s DPI shares
for Estate administration purposes, the Estate’s law firm
requested that Lewis Olds & Associates perform an
independent appraisal of the net asset value of DPI. The
appraisal determined that the value of DPI as of the date of
1
In addition to the Board resolutions that reflect conversations about
redemption of Victoria’s stock in 2008 and 2009, the record reflects that
as early as 2000 Victoria and Robert contemplated a buy/sell agreement
that would require DPI or Eugene to purchase all of Victoria or Robert’s
shares upon the later death of the two of them.
6 DIERINGER V. CIR
Victoria’s death was $17,777,626 and that Victoria’s shares
in DPI were worth $14,182,471. 2
Effective November 20, 2009, DPI’s Board converted
the corporate structure from a C corporation to an
S corporation on the advice of Keepes. The DPI Board made
this change in corporate structure to accomplish its long-
term tax planning goals and to avoid certain adverse tax
consequences under I.R.C. § 1374. As a result of electing
S corporation status, the DPI Board decided that it should
also redeem Victoria’s DPI shares that were to pass to the
Foundation. 3
The Board entered into an agreement with the Trust to
redeem Victoria’s shares, prior to the shares “pouring over”
into the Foundation. Initially, DPI agreed to redeem all of
Victoria’s shares for $6,071,558, effective November 30,
2009. This amount was based on a 2002 appraisal, since the
date-of-death appraisal had not yet been completed. As a
result, the redemption agreement provided that the stated
price would be “reconciled and adjusted retroactively” to
reflect the fair market value of the shares as of November 30,
2009. DPI executed two promissory notes payable to the
2
Victoria’s voting shares had a market value of $1,824.19 per share
and her nonvoting shares had a market value of $1,732.97 per share.
3
The DPI Board put forth a number of business rationales for the
decision to redeem the Trust’s DPI shares. These included concerns
about the tax consequences of the Foundation owning shares in an
S corporation, that the DPI shares did not provide enough liquidity for
the Foundation to distribute five percent of its funds annually as required
by I.R.C. § 4942, and that freezing the value of the Foundation’s DPI
shares into a promissory note could prevent future decline in the value
of DPI shares given the poor economic climate. The Tax Court did not
question any of these rationales.
DIERINGER V. CIR 7
Trust in exchange for the DPI shares. 4 Eugene, Patrick, and
Timothy entered into separate subscription agreements to
purchase additional DPI shares, in order to provide funding
for DPI to meet the required payments on the promissory
notes. 5 At the later Tax Court trial, the court found that there
were appropriate business purposes for these subscription
agreements.
At the direction of DPI, Lewis Olds & Associates
performed another appraisal of the value of Victoria’s DPI
shares as of November 30, 2009, for the purpose of
redemption (“redemption appraisal”). The redemption
appraisal valued Victoria’s DPI shares at $916 per voting
share and $870 per nonvoting share. Lewis Olds testified,
and the Tax Court found, that Eugene (through his lawyer)
instructed him to value Victoria’s DPI shares as if they were
a minority interest in DPI for the purposes of this appraisal,
and that he would not have done so without these
instructions. Olds’s appraisal therefore included a
15-percent discount for lack of control and a 35-percent
discount for lack of marketability. As a result, Victoria’s
4
One of the promissory notes was a short-term note for $2,250,000.
The other was a long-term note for $3,776,558. Each note was payable
to the Trust, included interest, and was retroactively adjustable
depending on the new appraisal value.
5
These separate subscription agreements provided that voting
shares would cost $779 per share and nonvoting shares would cost
$742 per share, subject to a retroactive price adjustment. Initially, the
subscription agreements provided that Eugene would purchase
2,695 nonvoting shares; Patrick would purchase 86 voting shares and
2,695 nonvoting shares; and Timothy would purchase 25 voting shares
and 108 nonvoting shares. These amounts were later modified. See infra
fn. 7.
8 DIERINGER V. CIR
DPI shares were valued significantly less in the redemption
appraisal than in the date-of-death appraisal. 6
DPI determined that it could not afford to redeem all of
Victoria’s shares at the new valuation price. The redemption
agreement was then amended, and consequently DPI
redeemed all 425 voting shares and 5,600.5 nonvoting shares
for a total purchase price of $5,263,462. 7 The balance on the
long-term promissory note was amended to reflect the
changes in the number and price of shares under the
amended redemption agreement. After the redemption
agreement was implemented, the distribution of DPI shares
was as follows: (1) the Trust owned 2,136 nonvoting shares;
(2) Eugene owned 200 voting shares and 2,932 nonvoting
shares; (3) Patrick owned 65 voting shares and
893 nonvoting shares; and (4) Timothy owned 25 voting
shares and 108 nonvoting shares. 8
In January 2011, the Trust distributed the promissory
notes and the remaining DPI shares to the Foundation. The
6
Lewis Olds & Associates worked on producing the appraisals
simultaneously; they are dated March 24, 2010, and March 25, 2010.
7
Correspondingly, the subscription agreements also were modified.
Under the modified agreements, Eugene purchased 100 voting shares
and 2,190 nonvoting shares, Patrick purchased 65 voting shares and
86 nonvoting shares, and Timothy purchased 25 voting shares and
108 nonvoting shares.
8
There are minor discrepancies between the number of shares
indicated in the parties’ stipulation and those indicated in the Tax Court’s
opinion. For instance, the number of nonvoting shares owned by Patrick
differs between the parties’ stipulation (893) and the Tax Court’s opinion
(828). We use the number of shares to which the parties stipulated, but
the analysis is the same regardless.
DIERINGER V. CIR 9
state probate court approved the redemption agreement and
indicated that the redemption agreement and promissory
notes would not be prohibited self-dealing under I.R.C.
§ 4941. 9 For the 2011 tax year, the Foundation reported the
following contributions on its Form 990-PF, Return of
Private Foundation: (1) a noncash contribution of DPI shares
with a fair market value of $1,858,961; (2) a long-term note
receivable with a fair market value of $2,921,312; and (3) a
short-term note receivable with a fair market value of
$2,250,000. The Trust reported a capital loss of $385,934
for the sale of the 425 voting shares and $4,831,439 for the
sale of 5,600.5 nonvoting shares for the taxable year ending
in December 31, 2009, on its Form 1041 Tax Return. The
Estate filed its Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return on July 12, 2010,
reporting no estate tax liability. The Estate claimed a
charitable contribution deduction of $18,812,181, based on
the date-of-death value of Victoria’s DPI shares.
B.
In June 2013, the Commissioner issued a notice of
deficiency to the Estate based on its July 2010 tax return
(Form 706). The notice stated that there was a deficiency of
$4,124,717 and imposed an accuracy-related penalty of
$824,943 under I.R.C. § 6662 for error and negligence in
using the date-of-death appraisal as the value of the
charitable contribution of Victoria’s DPI shares.
Upon receiving the notice of deficiency, the Estate filed
a timely petition in the Tax Court challenging the
9
I.R.C. § 4941 allows the Commissioner to impose a tax on certain
transactions between a private foundation and a “disqualified person” as
defined by I.R.C. § 4946(a)(1).
10 DIERINGER V. CIR
Commissioner’s deficiency notice and penalty assessment.
The Estate argued that it correctly used the date-of-death
appraisal to determine the value of Victoria’s DPI shares for
the purpose of the charitable contribution deduction. The
Commissioner responded that post-death events should be
considered in determining the value of the charitable
contribution, as the actions by Eugene, Patrick, and Timothy
reduced the value of Victoria’s contribution to the
Foundation.
Following trial, the Tax Court issued a decision
upholding the Commissioner’s reduction of the Estate’s
charitable deduction and the deficiency assessment. The
Tax Court found that the redemption was not part of
Victoria’s estate plan and there were valid business reasons
for many of the transactions that took place after her death.
The Tax Court also concluded, however, that post-death
events—primarily Eugene’s decision to apply a minority
interest discount to the redemption value of Victoria’s DPI
shares—reduced the value of the contribution to the
Foundation and therefore reduced the value of the Estate’s
charitable deduction. But the evidence did not support the
conclusion that a poor business climate caused the reported
decline in share values, as the Estate argued. Further, the
Tax Court affirmed the Commissioner’s determination that
the Estate was liable for a penalty under I.R.C. § 6662(a).
After denying the Estate’s motion for reconsideration, the
Tax Court entered a final decision in favor of the
Commissioner, which sustained an estate tax deficiency of
$4,124,717 and an accuracy-related penalty of $824,943.
The Estate timely appealed.
II.
We review de novo the Tax Court’s legal conclusions,
see DJB Holding Corp. v. Comm’r, 803 F.3d 1014, 1022 (9th
DIERINGER V. CIR 11
Cir. 2015), as well as the Tax Court’s interpretation of the
Internal Revenue Code, see Metro One Telecomms., Inc. v.
Comm’r, 704 F.3d 1057, 1059 (9th Cir. 2012). We review
for clear error the Tax Court’s factual findings. See DJB
Holding Corp., 803 F.3d at 1022. Under clear error review,
if the Tax Court’s interpretation of the evidence is plausible,
we must uphold it. See Leslie v. Comm’r, 146 F.3d 643, 646
(9th Cir. 1998).
Where the Tax Court sustains an accuracy-related
penalty, we review for clear error the Tax Court’s finding of
negligence. Hansen v. Comm’r, 471 F.3d 1021, 1028 (9th
Cir. 2006). We review de novo whether substantial authority
supported the taxpayer’s position, but we review for clear
error whether the taxpayer acted with reasonable cause and
in good faith. DJB Holding Corp., 803 F.3d at 1022.
III.
The Estate challenges the Tax Court’s final decision on
three grounds. First, it argues that the Tax Court erred by
taking into account events that occurred after Victoria’s
death in determining the value of the charitable deduction.
Instead, the Estate argues that the charitable deduction
should have been valued as of Victoria’s date of death.
Second, the Estate argues that even if post-death events
could be considered, the Tax Court erred by not accounting
for a decline in value of Victoria’s shares caused by
economic forces. Third, the Estate argues that the Tax Court
erred by upholding the accuracy-related penalty under I.R.C.
§ 6662. We reject all three arguments.
A.
At the center of the parties’ dispute is whether the
Estate’s charitable deduction should be valued at the time of
12 DIERINGER V. CIR
Victoria’s death, or whether the post-death events that
decreased value of the property delivered to charity should
be considered.
The Estate Tax and Charitable Deductions
It is well established that the “estate tax is a tax on the
privilege of transfer[r]ing property” after one’s death.
Propstra v. United States, 680 F.2d 1248, 1250 (9th Cir.
1982). The estate tax “is on the act of the testator not on the
receipt of the property by the legatees.” Estate of Simplot v.
Comm’r, 249 F.3d 1191, 1194 (9th Cir. 2001) (citing Ithaca
Tr. Co. v. United States, 279 U.S. 151, 155 (1929)).
Because the estate tax is a tax on the decedent’s bequest
of property, the valuation of the gross estate is typically done
as of the date of death. See I.R.C. § 2031; Tr. Servs. of Am.,
Inc. v. United States, 885 F.2d 561, 568–69 (9th Cir. 1989).
The pertinent statute provides that “[t]he value of the gross
estate of the decedent shall be determined by including to the
extent provided for in this part, the value at the time of his
death of all property . . . wherever situated.” I.R.C.
§ 2031(a); see also id. § 2033 (mandating that property in
which the decedent had an interest be valued on the date of
decedent’s death); Treas. Reg. § 20.2031-1(b) (requiring the
valuation of property at the “fair market value at the time of
the decedent’s death” unless an exception applies). Except
in some limited circumstances, such as when the executor
elects to use an alternative valuation under I.R.C. § 2032,
post-death events are generally not considered in
determining the estate’s gross value for purposes of the
estate tax. The parties agree that the executor did not use the
alternative valuation method in this case.
A related provision allows for deductions from the value
of the gross estate for transfers of assets to qualified
DIERINGER V. CIR 13
charitable entities. I.R.C. § 2055(a). This deduction
generally is allowed “for the value of property included in
the decedent’s gross estate and transferred by the decedent
. . . by will.” Treas. Reg. § 20.2055-1(a). Congress’s
allowance for a charitable deduction was a “liberalization[]
of the law in the taxpayer’s favor.” Helvering v. Bliss,
293 U.S. 144, 151 (1934). Yet, as we have recognized,
deductions are acts of “legislative grace.” Comm’r v.
Shoong, 177 F.2d 131, 132 (9th Cir. 1949). “[T]he purpose
of the charitable deduction [is] to encourage gifts to charity.”
Ahmanson, 674 F.2d at 772; see also Underwood v. United
States, 407 F.2d 608, 610 (6th Cir. 1969) (“The purpose of
allowing charitable deductions is to encourage testators to
make charitable bequests, not to permit executors and
beneficiaries to rewrite a will so as to achieve tax savings.”).
Valuing the Charitable Deduction
Deductions are valued separately from the valuation of
the gross estate. See Ahmanson, 674 F.2d at 772 (“The
statute does not ordain equal valuation as between an item in
the gross estate and the same item under the charitable
deduction.”). Separate valuations allow for the
consideration of post-death events, as required by Ahmanson
and provisions of the tax code.
We addressed valuation of a charitable deduction in
Ahmanson. There, the decedent’s estate plan provided for
the voting shares in a corporation to be left to family
members and the nonvoting shares to be left to a charitable
foundation. Id. at 765–66. We held that when valuing the
charitable deduction for the nonvoting shares, a discount
should be applied to account for the fact that the shares
donated to charity had been stripped of their voting power.
Id. at 772. That a discount was not applied to the value of
the nonvoting shares in the gross estate did not impact our
14 DIERINGER V. CIR
holding. Id. Importantly, we recognized that a charitable
deduction “is subject to the principle that the testator may
only be allowed a deduction for estate tax purposes for what
is actually received by the charity.” Id.
In contrast, the Estate argues the charitable deduction
must be valued as of the date of Victoria’s death, in keeping
with the date-of-death valuation of an estate. We disagree.
Although the Supreme Court and our court have applied that
valuation method where the remainder of an estate is
donated to charity after a post-death contingency, there is no
uniform rule for all circumstances. Ithaca Trust, 279 U.S. at
154; Wells Fargo Bank & Union Tr. Co. v. Comm’r,
145 F.2d 132 (9th Cir. 1944). In Ithaca Trust, the decedent
left the remainder of his estate to his wife for her life, with
any assets remaining after her death to be donated to charity.
279 U.S. at 154. The decedent’s wife unexpectedly died
only six months after the decedent. Id. at 155. The Court
considered whether the charitable deduction should reflect
the amount actually given to charity after the wife’s
premature death, but ultimately determined that the
deduction should instead reflect a valuation based on
mortality tables for the wife on the date of the decedent’s
death. Id.We applied Ithaca Trust in Wells Fargo, where the
decedent had created a trust with instructions that the trust’s
income be paid to the decedent’s sister from the date of the
decedent’s death to the date of the sister’s death, and after
the sister’s death that the corpus of the trust be given to
charity. 145 F.2d at 133. Due to commingling of assets after
the decedent’s death and an unrelated tax dispute, part of the
corpus of the trust was used to support the decedent’s sister,
which reduced the amount that went to charity upon her
death. Id. The Tax Court relied on these payments to
DIERINGER V. CIR 15
disallow part of the charitable deduction, but we reversed,
concluding that the charitable deduction must be determined
from data available at the time of death. Id.; see also Estate
of Van Horne v. Comm’r, 720 F.2d 1114, 1117 (9th Cir.
1983) (relying on Ithaca Trust to “hold that legally
enforceable claims valued by reference to an actuarial table
meet the test of certainty for estate tax purposes” when
valuing spousal support obligation).
Neither Ithaca Trust nor Wells Fargo, however, set in
stone the date of death as the date of the valuation of assets
for purposes of a deduction. See Shedd’s Estate v. Comm’r,
320 F.2d 638, 639 (9th Cir. 1963) (“Congress did not intend
to make events at the date of death invariably determinative
in computing the federal estate tax obligation.”). Nor could
they. Certain deductions not only permit consideration of
post-death events, but require them. For example, I.R.C.
§ 2053(a) authorizes a deduction for funeral expenses and
estate administration expenses—costs that cannot accrue
until after the death of the testator. Similarly, I.R.C.
§ 2055(c) specifies that where death taxes are payable out of
a charitable bequest, any charitable deduction is limited to
the value remaining in the estate after such post-death tax
payment. Still another provision of the tax code, I.R.C.
§ 2055(d), prohibits the amount of a charitable deduction
from exceeding the value of transferred property included in
a gross estate—but, by negative implication, permits such a
deduction to be lower than the value of donated assets at the
moment of death. The Third Circuit also recognized that
valuations of the gross estate and a charitable deduction are
separate and may differ. In Re Sage’s Estate, 122 F.2d 480,
484 (3d Cir. 1941) (“[W]hile a decedent’s gross estate is
fixed as of the date of his death, deductions claimed in
determining the net estate subject to tax may not be
16 DIERINGER V. CIR
ascertainable or even accrue until the happening of events
subsequent to death.”).
Indeed, “[t]he proper administration of the charitable
deduction cannot ignore such differences in the value
actually received by the charity.” Ahmanson, 674 F.2d at
772; accord Irving Tr. Co. v. United States, 221 F.2d 303,
306 (2d Cir. 1955); Thompson’s Estate v. Comm’r, 123 F.2d
816, 817 (2d Cir. 1941); In Re Sage’s Estate, 122 F.2d at
484. This rule prohibits crafting an estate plan or will so as
to game the system and guarantee a charitable deduction that
is larger than the amount actually given to charity.
Ahmanson, 674 F.2d at 772.
Applying Ahmanson’s Rule
Ahmanson compels affirming the Tax Court’s ruling
here. Victoria structured her Estate so as not to donate her
DPI shares directly to a charity, or even directly to the
Foundation, but to the Trust. Victoria enabled Eugene to
commit almost unchecked abuse of the Estate by setting him
up to be executor of the Estate, trustee of the Trust, and
trustee of the Foundation, in addition to his roles as
president, director, and majority shareholder of DPI. As the
Tax Court found, Eugene improperly directed Lewis Olds to
determine the redemption value of the DPI shares by
applying a minority interest valuation, when he knew a
majority interest applied and the Estate had claimed a
charitable deduction based upon a majority interest
valuation. Through his actions, Eugene manipulated the
charitable deduction so that the Foundation only received a
fraction of the charitable deduction claimed by the Estate.
The Estate attempts to evade Ahmanson by arguing that
it is limited to situations where the testamentary plan
diminishes the value of the charitable property. Read in
DIERINGER V. CIR 17
context, Ahmanson is not limited to abuses in the four
corners of the testamentary plan. Id. Ahmanson extends to
situations where “the testator would be able to produce an
artificially low valuation by manipulat[ion],” which includes
the present situation. Id. Moreover, Victoria’s testamentary
plan laid the groundwork for Eugene’s manipulation by
concentrating power in his hands—in his roles as executor
of the Estate and trustee of the Trust and Foundation—even
after she knew of and assented to early discussions of the
share redemption plan.
The Tax Court correctly considered the difference
between the deduction and the property actually received by
the charity due to Eugene’s manipulation of the redemption
appraisal value. 10
B.
The Estate argues that any consideration of post-death
events also requires finding that the decline in value of DPI
stock was due, at least in part, to market forces. The Tax
Court, however, found that “[t]he evidence does not support
a significant decline in the economy that resulted in a large
decrease in value in only seven months.” The Tax Court
acknowledged that the adjusted net asset value of the DPI
stock decreased from $17,777,626 at the date of Victoria’s
death to $16,159,167 at the date used for the redemption
appraisal. 11 Still, the Tax Court found, “[t]he reported
10
The Commissioner argues in the alternative that the events in this
case fall under the exception in Treas. Reg. § 20.2055-2(b)(1). In light
of our holding that Ahmanson compels affirmance, we need not address
this argument.
11
The Estate suggests that this change in adjusted net asset value is
entirely attributable to a changed real estate market. This argument
18 DIERINGER V. CIR
decline in per share value was primarily due to the specific
instruction to value decedent’s majority interest as a
minority interest with a 50% discount.” We find nothing in
the record—nor does the Estate point to anything in the
record—that suggests the Tax Court’s findings were clearly
erroneous.
C.
Finally, the Estate challenges the accuracy-related
penalty that was imposed pursuant to I.R.C. § 6662(a).
Section 6662(a) imposes a penalty of 20 percent of the
amount of the underpayment attributable to either
negligence or disregard of rules or regulations. A penalty
will not be imposed if the taxpayer can show “that there was
a reasonable cause [for the underpayment] and that the
taxpayer acted in good faith.” I.R.C. § 6664(c)(1). The
Commissioner bears the initial burden of production
regarding the applicability of the penalty, but once this
burden is met, the taxpayer bears the burden of persuasion
as to defenses to the penalty. Id. § 7491(c); Higbee v.
Comm’r, 116 T.C. 438, 446–47 (2001).
The Tax Court first found that the Estate acted
negligently. Section 6662(c) defines negligence as “any
failure to make a reasonable attempt to comply” with the
I.R.C. See also Allen v. Comm’r, 925 F.2d 348, 353 (9th Cir.
1991) (defining negligence as a “lack of due care or the
failure to do what a reasonable and prudent person would do
under similar circumstances”). The Tax Court found that the
Estate was negligent because it “not only failed to inform the
misses the point. The Estate claimed an $18,205,476 charitable
deduction largely based on the value of assets earmarked for the
Foundation—but the Foundation only received assets worth $6,434,578.
DIERINGER V. CIR 19
appraiser that the redemption was for a majority interest, but
also instructed the appraiser to value the redeemed DPI stock
as a minority interest.” We agree; the Tax Court did not
clearly err in finding negligence.
The Tax Court next found that the Estate did not have
reasonable cause and good faith for its negligent act. “The
determination of whether a taxpayer acted with reasonable
cause and in good faith is made on a case-by-case basis,
taking into account all pertinent facts and circumstances.”
Treas. Reg. § 1.6664-4(b)(1). The most important factor “is
the extent of the taxpayer’s effort to assess the taxpayer’s
proper tax liability.” Id. A reliance on professional advice
may be used to show reasonable cause and good faith, but
only if the professional advice meets certain requirements.
Id. (instructing that “the circumstances under which the
appraisal was obtained” are considered in determining
whether there was reasonable cause and good faith).
The record evidence supports the Tax Court’s finding
that the Estate did not rely in good faith on its attorney’s
judgment. The redemption appraisal was inaccurate because
of instructions from Eugene on behalf of the Estate.
Therefore, the Estate “knew” that Eugene and his brothers
were acquiring the DPI stock at a discount. Further, the
appraiser’s credible testimony that he was instructed to
undertake a minority interest valuation, which he ordinarily
would not have done in this situation, demonstrates the lack
of good faith. See id. On these facts we find no error in the
Tax Court’s holding that the Commissioner properly
imposed the accuracy-related penalty under I.R.C.
§ 6662(a).
20 DIERINGER V. CIR
IV.
The Estate claimed an $18,205,476 charitable deduction
based on the value of assets earmarked for the Foundation,
but the Foundation received assets worth only $6,434,578.
The Estate, at Eugene’s direction, claimed a large charitable
deduction representing that such assets would be delivered
to the Foundation. Eugene then revalued and delivered
assets—promissory notes and DPI shares—worth far less
than the claimed charitable deduction. By doing so, the
Estate—and various Dieringer family entities—ended up
avoiding $4.1 million in taxes. We agree with the Tax
Court’s decision upholding the Commissioner’s reduction of
the Estate’s charitable deduction and the deficiency
assessment. To hold otherwise would only “invite abuse.”
Ahmanson, 674 F.2d at 768.
AFFIRMED.