Estate of Helen Christiansen, Christine Christiansen Hamilton, Personal Representative v. Commissioner , 130 T.C. No. 1 ( 2008 )

130 T.C. No. 1
UNITED STATES TAX COURT
ESTATE OF HELEN CHRISTIANSEN, DECEASED, CHRISTINE CHRISTIANSEN
HAMILTON, PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15190-05. Filed January 24, 2008.
H was the only legatee of her mother’s will.
H disclaimed the portion of the gross estate that had a
fair market value of more than $6,350,000. The will
provided that any disclaimed portion would pass in part
to a charitable foundation and in part to a charitable
trust that would pay an annuity to the foundation. H
did not disclaim a contingent remainder in the property
passing to the charitable trust. On the estate’s tax
return, it deducted as charitable contributions the
disclaimed property passing to the foundation and--to
the extent of the present value of the annuity interest
--the disclaimed property passing to the charitable
trust. The parties stipulated to a value of the estate
higher than that originally reported on the return.
Held: No deduction is allowed for any of the
property passing to the trust because the partial
disclaimer of that property is not a qualified
disclaimer under sec. 2518, I.R.C.
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Held, further: The entire value of the property
passing to the foundation--including the increased
amount passing to the foundation because of the
increased valuation of C’s gross estate--is deductible
because the disclaimer of that property is a qualified
partial disclaimer under section 2518, and because no
public policy bars increasing the amount of that
deduction.
John W. Porter and J. Graham Kenney, for the estate.
Trent D. Usitalo, for respondent.
HOLMES, Judge:1 Helen Christiansen’s will left everything
to her only child, Christine Hamilton. The will anticipated that
Hamilton would disclaim a part of her inheritance, and directed
that any disclaimed property would go in part to a charitable
trust and in part to a charitable foundation that Christiansen
had established. The trust would last for 20 years, and pay an
annuity of 7 percent of the corpus’s net fair market value at the
time of Christiansen’s death to the foundation. At the end of
the 20 years, if Hamilton were still alive, the property left in
the trust would go to her.
The parties settled the issue of the estate’s value--
increasing it substantially over what was reported on the
estate’s tax return. There are two questions presented. The
first is whether the estate can claim a charitable deduction for
1
The Chief Judge reassigned this case to Judge Holmes from
Judge Kroupa.
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the present value of that 7 percent annuity from the trust to the
foundation. This depends on whether Hamilton’s undisclaimed
contingent-remainder interest in the trust requires disallowance
of that deduction. The second question is whether the estate can
claim an increased charitable deduction for the increased value
of the disclaimed property passing directly to the foundation.
FINDINGS OF FACT2
Helen Christiansen, a lifelong South Dakotan, led a long and
remarkable life. She was one of the first women lawyers in her
state and practiced there until the late 1950s, when she married
and became a full-time farmer. She and her husband had one
child, Christine Christiansen Hamilton. Hamilton remains, as she
was when she filed the petition, a South Dakota resident. Her
mother was domiciled in the state when she died.
The Christiansens each owned and operated their own farming
and ranching businesses in central South Dakota for many years.
When her husband died in 1986, Christiansen added his operations
to her own. Christiansen’s daughter, like her mother, became
well educated, graduating from Smith College and then earning an
MBA from the University of Arizona. And like her mother, she
decided on a life back home in South Dakota. She married a
2
The parties stipulated to most of the key facts and
exhibits, and insofar as they are relevant to our analysis, we
have adopted the trial Judge’s findings of fact on the others.
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professor at South Dakota State University, and began helping to
run the family farm.
Both Christiansen and Hamilton were deeply involved in their
community, and Hamilton to this day serves on the boards of many
charitable organizations. She and her mother had also long
wanted to use some of their wealth to benefit their home state.
The family had already donated parkland to Kimball, South Dakota
in 1998, but mother and daughter wanted some way to permanently
fund projects in education and economic development. After
meeting with a local law firm in the late 1990s, they decided to
organize a charitable foundation as part of Christiansen’s estate
plan.
The Matson, Halverson, Christiansen Foundation and the Helen
Christiansen Testamentary Charitable Lead Trust were at the
center of this plan. Christiansen and Hamilton expected that
part of Christiansen’s estate would find its way to the
Foundation, and part would find its way to the Trust. The
Foundation would fund charitable causes at a rate they hoped
would be about $15,000 annually--in the Foundation’s application
to the IRS for recognition of exempt status, Hamilton stated:
The initial source of funding for the
foundation will be $50,000 from the Helen
Christiansen Estate providing a 5 percent
income stream annually. Additionally, there
will be annual funding from a 7 percent
charitable lead annuity trust equaling
$12,500.
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The Trust3 has a term of 20 years running from the date of
Christiansen’s death, and the Trust agreement provides for
payments to the Foundation of 7 percent of the Trust’s initial
corpus. Any remaining assets in the Trust at the end of 20
years will go to Hamilton; if she dies before then, they will go
to the Foundation. Hamilton and her husband, plus a family
friend, are the Foundation’s directors, and by early 2002, the
Foundation was qualified as a charitable organization under
section 501(c)(3).
Hamilton has contributed some of her own money to the
Foundation and it has already begun its work, distributing a
total of almost $22,000 through the end of 2004, including a
donation for playground equipment to a local city park, and a
grant to help buy food and supplies for the “Gathering and
Healing of Nations,” a series of bipartisan conferences sponsored
3
The Trust is a “charitable lead annuity trust.” A
charitable trust is one whose beneficiaries are charities. Sec.
2522(a)(2). A charitable lead trust is a charitable trust whose
income beneficiaries are charities, but whose remaindermen are
not. Sec. 25.2702-1(c)(5), Gift Tax Regs. And a charitable lead
annuity trust is a charitable lead trust whose charitable income
beneficiary is guaranteed an annuity fixed as a percentage of the
trust’s initial assets and paid for a term of years. Sec.
26.2642-3(b), GST Tax Regs.; sec. 25.2522(c)-3(c)(2)(vi), Gift
Tax Regs.
Unless otherwise noted, all section references are to the
Internal Revenue Code and regulations, and Rule references are to
the Tax Court Rules of Practice and Procedure.
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by former Senator Tom Daschle and South Dakota State government
that brings Indians and non-Indians together.
The problems that gave rise to this case can be traced to
some particularly complex wrinkles that Christiansen agreed to as
part of her estate planning. The first was to reorganize the
Christiansen farming and ranching businesses--which for decades
had been run as sole proprietorships--as two limited
partnerships: MHC Land and Cattle, Ltd., and Christiansen
Investments, Ltd. Christiansen kept a 99 percent limited-
partnership interest in each, with the rest going to Hamilton
Investments, L.L.C. Hamilton Investments also became the general
partner of both MHC Land and Cattle and Christiansen Investments,
and Christiansen’s daughter and son-in-law became its members.
Such family limited partnerships (or FLPs) are fairly common,
though often challenged, estate-planning devices and the
structure Christiansen chose is not new to this Court. See
Estate of Strangi v. Commissioner, 115 T.C. 478, 484 (2000),
revd. on other grounds 293 F.3d 279 (5th Cir. 2002).
In January 2000, Christiansen executed her last will and
testament, which named Hamilton personal representative.4 This
is where the second wrinkle showed: Instead of simply dividing
4
We note that Christiansen's estate planners therefore did
not have the opportunity to review and take account of Walshire
v. United States, 288 F.3d 342 (8th Cir. 2002), upholding the
validity of the regulation that is key to this case.
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her estate among Hamilton, the Foundation, and the Trust,
Christiansen’s lawyers wrote the will to pass everything (after
payments of any debts and funeral expenses) to Hamilton. But the
will also provided that if Hamilton disclaimed any part of the
estate, 75 percent of the disclaimed portion would go to the
Trust and 25 percent to the Foundation.
Christiansen died in April 2001, and her will was admitted
to probate. Hamilton was named personal representative, and as
planned, executed a partial disclaimer. The disclaimer’s
language is central to this case, and we reproduce the relevant
portion here:
A. Partial Disclaimer of the Gift:
Intending to disclaim a fractional portion of
the Gift, Christine Christiansen Hamilton
hereby disclaims that portion of the Gift
determined by reference to a fraction, the
numerator of which is the fair market value
of the Gift (before payment of debts,
expenses and taxes) on April 17, 2001, less
Six Million Three Hundred Fifty Thousand and
No/100 Dollars ($6,350,000.00) and the
denominator of which is the fair market value
of the Gift (before payment of debts,
expenses and taxes) on April 17, 2001 (“the
Disclaimed Portion”). For purposes of this
paragraph, the fair market value of the Gift
(before payment of debts, expenses and taxes)
on April 17, 2001, shall be the price at
which the Gift (before payment of debts,
expenses and taxes) would have changed hands
on April 17, 2001, between a hypothetical
willing buyer and a hypothetical willing
seller, neither being under any compulsion to
buy or sell and both having reasonable
knowledge of relevant facts for purposes of
Chapter 11 of the [Internal Revenue] Code, as
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such value is finally determined for federal
estate tax purposes.
The $6,350,000 that Hamilton retained was an amount she and her
advisers carefully determined would allow the family business to
continue, as well as to provide for her and her own family’s
future.
But note especially the final phrase: “as such value is
finally determined for federal estate tax purposes.” And add to
it another shield strapped on to the disclaimer--a “savings
clause.” This clause said that to
the extent that the disclaimer set forth
above in this instrument is not effective to
make it a qualified disclaimer, Christine
Christiansen Hamilton hereby takes such
actions to the extent necessary to make the
disclaimer set forth above a qualified
disclaimer within the meaning of section 2518
of the Code.
Consider how these insertions of uncertainty as to the amount
actually being donated might come into play should the estate
assign an unusually low value to the property being disclaimed.
In such a scenario, Hamilton would take (and the estate tax would
be paid on) her $6.35 million. But the residue would be divided
between the Foundation and the Trust. Should it turn out that
the estate underreported that value, Hamilton’s failure to
disclaim her remainder interest in the Trust would mean that she
would capture much of the value of that underreporting as she
herself approached retirement age in 20 years’ time. And if one
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took an especially skeptical view of the situation, the final
quoted phrase in the disclaimer and the savings clause meant that
the Commissioner would face an interesting choice if he thought
the estate was lowballing its own value--any success in
increasing the value of the estate might only increase the
charitable deduction that the estate would claim. Which would
presumably reduce the incentive of the Commissioner to challenge
the value that the estate claimed for itself.
And that, more or less, is the Commissioner’s view of what
was going on here.5 As we noted, Christiansen owned 99 percent
limited-partnership interests in both MHC Land and Cattle and
Christiansen Investments when she died. She also owned $219,000
of real property, and over $700,000 in cash and other assets.
The estate obtained appraisals of the limited-partnership
interests, including a 35 percent discount for being a “minority
interest,” and reported on its estate-tax return that the 99
percent limited-partnership interest in MHC Land and Cattle had a
fair market value of $4,182,750, and that the 99 percent limited-
5
We do note that Hamilton and her husband had no children
of their own--Christiansen’s estate plan should not be viewed as
a way to keep a great deal of property in the family with only a
veneer of charitable intent. But the combination of the Trust,
the Foundation, and the disclaimer embodied both charitable and
estate-planning purposes. In this case, we analyze the legal
consequences of those instruments, not the factual issue of the
motivation behind them.
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partnership interest in Christiansen Investments had a fair
market value of $1,330,700.
The estate’s tax return used these values to report a total
gross estate value of slightly more than $6.5 million. When read
in conjunction with the disclaimer’s reservation to Hamilton of
$6.35 million worth of property, this meant that only $40,555.80
would pass to the Foundation and $121,667.20 to the Trust. The
estate deducted the entire amount passing to the Foundation, and
the part passing to the Trust that was equal to the present value
of 7 percent of $121,667.20 per annum for 20 years. The total
came to about $140,000. It is important to note that the estate
did not deduct the value of Hamilton’s contingent-remainder
interest in the Trust’s corpus. See sec. 20.2055-2(b)(1), Estate
Tax Regs.
The Commissioner determined that the fair market values of
Christiansen’s 99 percent FLP interests should be increased and
that Hamilton’s disclaimer did not “qualify”--a term we discuss
later--to make any part of the estate’s property passing to
either the Trust or the Foundation generate a charitable
deduction. The estate timely filed a petition, and trial was
held in St. Paul, Minnesota.
The parties settled the valuation question before trial by
stipulating that the fair market value of the Christiansen’s
interest in Christiansen Investments was $1,828,718.10, an
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increase of more than 35 percent over its reported value. They
also agreed that her interest in MHC Land and Cattle was worth
$6,751,404.63, an increase of more than 60 percent over its
reported value. This means that the total value of the gross
estate was $9,578,895.93 instead of $6,512,223.20.
If the disclaimer were applied to this increased value,
property with a fair market value of $2,421,671.95 would pass to
the Trust and property with a fair market value of $807,223.98
would pass to the Foundation.6 The estate asserts that this
increase in value entitles it to an increase in the charitable
deduction--both for the entire part passing to the Foundation
and also the increased value of the Trust’s annuity interest.
The Commissioner concedes one point--he is now willing to
allow the estate the $40,555.80 reported on the return as going
to the Foundation. But he still objects to any deduction for the
property passing to the Trust, and now he contests any increase
in the deduction for the property passing to the Foundation.
OPINION
I. The Disclaimer in Favor of the Trust
We begin with the basics. Under the Trust agreement, the
Foundation has the right to guaranteed annuity payments for the
6
The lawyer hired to handle the estate’s administration
testified at trial that he will file a petition with the probate
court after the resolution of this case. That petition will
describe what happened here, and only then will he ask the
probate court to approve distributions to the beneficiaries.
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20-year term of the Trust and, if Hamilton survives that term,
she has the right to any trust property then remaining. She thus
has a contingent-remainder interest in the Trust’s property.7
Hamilton did not disclaim this contingent remainder, which
makes her disclaimer a “partial disclaimer.” The Code and
regulations’ treatment of partial disclaimers is quite complex,
so we begin our analysis with some background on estate-tax
deductions, followed by a close reading of the regulation
governing partial disclaimers, its exceptions, and the effect of
the savings clause on Hamilton’s disclaimer.
A. Deductions and Disclaimers Under the Estate Tax
The Code taxes the transfer of the taxable estate of any
decedent who is a U.S. citizen or resident. Sec. 2001(a). The
taxable estate is the value of the decedent’s gross estate less
applicable deductions. Secs. 2031(a) and 2051. A deduction for
bequests made to charitable organizations is one of the
deductions allowed in calculating a decedent’s taxable estate.
Sec. 2055(a)(2). But Christiansen did not bequeath any of her
7
We need not decide whether the burden of proof shifts to
respondent under section 7491(a) because the case is mostly
determined by applying the law to undisputed facts. Where there
were disputed facts, both parties met their burden of production,
and findings were based on a preponderance of the evidence. See
Deskins v. Commissioner, 87 T.C. 305, 322-23 n.17 (1986); Payne
v. Commissioner, T.C. Memo. 2003-90. Both parties “have
satisfied their burden of production by offering some evidence,
* * * [so] the party supported by the weight of the evidence will
prevail.” Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th
Cir. 2005), affg. T.C. Memo. 2003-212.
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property to the Foundation or the Trust or any other charity.
Instead, she left it all to her daughter. And this created the
first problem in this case, because charitable deductions are
allowed for the value of property in a decedent’s gross estate
only if transferred to a charitable donee “by the decedent during
his lifetime or by will.” Sec. 20.2055-1(a), Estate Tax Regs.
Courts have repeatedly declined to permit deductions where the
amount given to charity turned upon the actions of a decedent’s
beneficiary or an estate’s executor or administrator. See, e.g.,
Estate of Engelman v. Commissioner, 121 T.C. 54, 70-71 (2003).
And it was Hamilton--not Christiansen--who might be regarded as
transferring that property to the Foundation and Trust by
executing the disclaimer.
This means that we must turn to section 2518, the Code’s
section that governs transfers by disclaimer. Section 2518 is
important because a disclaimer that meets that section’s test
will cause the bequest to the disclaimant to be treated as if it
had never been made. Sec. 2518(a). Without this provision, the
Government might serve itself a second helping of tax by treating
the disclaimed property as if it went from the estate to the
disclaimant followed by a transfer from the disclaimant to
another recipient, thus potentially piling gift tax onto estate
tax. Walshire, 288 F.3d at 346.
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B. Partial Disclaimers
Hamilton’s disclaimer is further complicated because it is a
“partial disclaimer.” The Code recognizes and allows partial
disclaimers. Sec. 2518(c)(1); sec. 25.2518-3(a), Gift Tax Regs.
But, whether partial or full, a disclaimer is a “qualified
disclaimer”--meaning that the Code will treat the disclaimed
property as if it had never gone to the disclaimant--only if it
meets four requirements. Sec. 2518(b). It must be in writing.
Sec. 2518(b)(1). It must (with some exceptions not relevant
here) be received by the personal representative of the estate no
later than nine months after the date of the transfer creating
the disclaimant’s interest. Sec. 2518(b)(2). It must not allow
the disclaimant to accept the disclaimed property or any of its
benefits. Sec. 2518(b)(3). And, finally, the disclaimed
interest must pass “without any direction on the part of the
person making the disclaimer and * * * to a person other than the
person making the disclaimer.” Sec. 2518(b)(4).
It’s the fourth requirement--and only part of the fourth
requirement8--that the parties are fighting over here: Did
Hamilton’s retention of the contingent-remainder interest in the
8
The requirement that the disclaimed property pass without
any direction on the part of the disclaimant is met here because
Christiansen directed in her will that, if Hamilton did disclaim
any of the property left to her, the disclaimed portion would be
split between the Trust and the Foundation in specified
percentages.
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Trust’s property mean that the property being disclaimed was not
going “to a person other than the person making the disclaimer?”
The Commissioner argues that the disclaimed property did not pass
(or, to be more precise, pass only) to a person other than
Hamilton. See sec. 2518(b)(4); sec. 25.2518-2(e)(3), Gift Tax
Regs.
The applicable regulation is section 25.2518-2(e)(3), Gift
Tax Regs., and the key provision is this one:
(3) Partial failure of disclaimer. If a
disclaimer made by a person other than the
surviving spouse is not effective to pass
completely an interest in property to a
person other than the disclaimant because-–
(i) The disclaimant also has a right to
receive such property as an heir at law,
residuary beneficiary, or by any other means;
and
(ii) The disclaimant does not
effectively disclaim these rights, the
disclaimer is not a qualified disclaimer with
respect to the portion of the disclaimed
property which the disclaimant has a right to
receive * * *.
If the regulation stopped here, the estate would win--
everyone agrees that the partial disclaimer’s carveout of a
contingent remainder means that the estate can’t deduct the value
of that remainder interest. But the regulation doesn’t stop
there. Instead, it continues:
If the portion of the disclaimed interest in
property which the disclaimant has a right to
receive is not severable property or an
undivided portion of the property, then the
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disclaimer is not a qualified disclaimer with
respect to any portion of the property.
Thus, for example, if a disclaimant who is
not a surviving spouse receives a specific
bequest of a fee simple interest in property
and as a result of the disclaimer of the
entire interest, the property passes to a
trust in which the disclaimant has a
remainder interest, then the disclaimer will
not be a qualified disclaimer unless the
remainder interest in the property is also
disclaimed.
It’s the language we’ve italicized that seems to resolve this
issue. Hamilton: (a) is not a surviving spouse, (b) received a
specific bequest of a fee simple interest in her mother’s
property under the will, (c) as a result of the disclaimer that
property passed to a trust in which Hamilton had a remainder
interest, and (d) Hamilton did not disclaim that remainder
interest.
The consequences of this “partial failure of disclaimer” are
severe: not only does the estate not get a deduction for the
value of the remainder interest that might go to Hamilton (which,
we again note, it has never claimed), but it doesn’t get a
deduction for “any portion” of the property ending up in the
Trust.9 That’s what the sentence immediately preceding the
9
The property going directly to the Foundation under the
disclaimer doesn’t have this retained-interest problem, and so
its value is entirely deductible as a disclaimer of an “undivided
portion of an interest.” Sec. 2518(c)(1); sec. 25.2518-3(b),
Gift Tax Regs. (characterizing disclaimer of fractional interest
of “each and every substantial interest or right owned by the
disclaimant”). This is presumably why the Commissioner has
(continued...)
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italicized language says: “If the portion of the disclaimed
interest in property which the disclaimant has a right to receive
is not severable property or an undivided portion of the
property, then the disclaimer is not a qualified disclaimer with
respect to any portion of the property.” (Emphasis again added.)
The estate thus has to counterattack by arguing that
Hamilton’s remainder interest is either “severable property” or
“an undivided portion of the property.” But what do these two
terms mean?
C. Severable Property and Undivided Portions
“Severable property” is a defined term. Section 25.2518-
3(a)(1)(ii), Gift Tax Regs., states: “Severable property is
property which can be divided into separate parts each of which,
after severance, maintains a complete and independent existence.
For example, a legatee of shares of corporate stock may accept
some shares of the stock and make a qualified disclaimer of the
remaining shares.” This definition is a bit like the definition
of a molecule--“the smallest particle of a substance that retains
the properties of that substance.”10 Thus, a block of stock can
9
(...continued)
conceded that the estate’s return position--taking a deduction
for the full amount of the property passing to the Foundation--
was right. The Commissioner now aims only at the much larger
increase in that deduction triggered by the stipulated increase
in the value of the gross estate. See infra pp. 22-29.
10
Webster’s New Collegiate Dictionary 741 (8th ed. 1974).
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be disclaimed share by share, but not by a general severance of
the right to receive dividends from a right to vote the shares
from a right to exercise any preemptive rights. By this
definition, Hamilton could disclaim a particular number of
partnership units but not, as she did with those passing to the
Trust, disclaim their present enjoyment but keep a remainder
interest in all of them.11
“An undivided portion of the property” is likewise defined,
in section 25.2518-3(b), Gift Tax Regs.:
An undivided portion of a disclaimant’s
separate interest in property must consist of
a fraction or percentage of each and every
substantial interest or right owned by the
disclaimant in such property and must extend
over the entire term of the disclaimant’s
interest in such property and in other
property into which such property is
converted. A disclaimer of some specific
rights while retaining other rights with
respect to an interest in the property is not
a qualified disclaimer of an undivided
portion of the disclaimant’s interest in
property. Thus, for example, a disclaimer
11
“Severability” is a concept that shows up as well in two
sections of the regulations that govern transfers of remainder
interests for the purpose of calculating the amount of charitable
deductions for estate and gift taxes. These regulations, sec.
20.2055-2(a), Estate Tax Regs., and sec. 25.2522(c)-3, Gift Tax
Regs., both talk about a remainder interest in property as
severable if it is “ascertainable”, which in context means “has
an ascertainable value.” The definition of “severability” that
we have to apply is the one for “severable property,” not
“severable interest.” That definition, sec. 25.2518-3(a)(1)(ii),
Gift Tax Regs., looks to whether each piece of a property
“maintains a complete and independent existence” after
severance--not whether each piece is capable of being valued
separately.
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made by the devisee of a fee simple interest
in Blackacre is not a qualified disclaimer if
the disclaimant disclaims a remainder
interest in Blackacre but retains a life
estate.
But for Hamilton’s retaining a remainder interest and giving
up present enjoyment instead of the reverse, the example
describes this case. The Court of Appeals for the Eighth Circuit
explained the distinction by comparing it to horizontal and
vertical slices. Disclaiming a vertical slice--from meringue to
crust--qualifies; disclaiming a horizontal slice--taking all the
meringue, but leaving the crust--does not. Walshire, 288 F.3d at
347. The only difference that we can see between Walshire and
this case is that Walshire disclaimed a remainder interest and
kept the income, while Hamilton tried to do the reverse--but no
matter how you slice it, the cases are indistinguishable.12 We
are left with the conclusion that her disclaimer is “not a
qualified disclaimer with respect to any portion of the
property.” Sec. 25.2518-2(e)(3), Gift Tax Regs.
The dissent reaches a different result by focusing on a
different sort of property--the annuity interest created under
the Trust agreement--and asking whether it is severable property.
We agree that section 20.2055-2(e)(2)(vi), Estate Tax Regs.,
allows the severance of a guaranteed annuity interest from a
12
To be technically precise, Hamilton was giving up an
annuity interest rather than an income interest, but the
distinction makes no difference.
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remainder interest, and would allow a deduction for (a transfer
of) the value of the annuity interest that the Trust would pay to
the Foundation. But the problem for the estate is that this
section of the regulations applies only to interests passing from
the decedent directly. See sec. 20.2055-2(e)(1), Estate Tax
Regs. When the interest is created by operation of a
disclaimer,13 as it was in this case, section 20.2055-2(c)(1) of
the estate tax regulations tells us to look to the disclaimer
rules: “The amount of a * * * transfer for which a deduction is
allowable under section 2055 includes an interest which falls
into the bequest, devise or transfer as the result of * * * (i) A
qualified disclaimer (see section 2518 and the corresponding
regulations for rules relating to a qualified disclaimer).”
Because Hamilton’s disclaimer is not, under that regulation, a
qualified disclaimer as to any portion of the property passing to
the Trust, none of the property transferred to the Trust
generates a charitable deduction.
13
The dissent relies on examples 8 and 11 in section
25.2518-(3)(d), Gift Tax Regs., see infra pp. 47-48, as showing
that a disclaimant may make a qualified disclaimer of income
only, or of corpus only, and keep the rest. This is true--but
only if the decedent herself carved out income or corpus
interests in her will, not if the disclaimant is trying to do so
through the disclaimer. As the regulation carefully notes, “in
general, each interest in property that is separately created by
the transferor is treated as a separate interest.” Sec. 25.2518-
3(a)(1), Gift Tax Regs. (emphasis added). In this case, Hamilton
was bequeathed all her mother’s property in fee simple and was,
through the disclaimer, trying to carve it up in tax-advantaged
ways by herself.
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D. Effect of the Savings Clause
That leaves the savings clause as the only obstacle to the
Commissioner’s prevailing. That clause says that Hamilton--at
the time she signed the disclaimer--“hereby takes such actions to
the extent necessary to make the disclaimer set forth above a
qualified disclaimer.” Hamilton argues that she intended to do
whatever it took to qualify the transfer to the Trust for the
charitable deduction--and if that means she has to disclaim her
contingent-remainder interest, then this clause suffices to
disclaim it. This would be a paradox, since it was this same
partial disclaimer excluding the contingent remainder from its
scope that would, on her reading of the savings clause, end up
including it after all.
The parties to-and-fro on whether this kind of clause
violates public policy, but we don’t think we have to decide this
question at that level of generality. The savings clause works
in one of two ways. If read as a promise that, once we enter
decision in this case, Hamilton will then disclaim her contingent
remainder in some more of the property that her mother left her,
it fails as a qualified disclaimer under section 2518(b)(2) as
one made more than nine months after her mother’s death. See
sec. 25.2518-2(c)(3)(i), Gift Tax Regs. If it’s read as somehow
meaning that Hamilton disclaimed the contingent remainder back
when she signed the disclaimer, it fails for not identifying the
-22-
property being disclaimed and not doing so unqualifiedly, see
sec. 2518(b), because its effect depends on our decision. Such
contingent clauses--contingent because they depend for their
effectiveness on a condition subsequent--are as ineffective as
disclaimers as they are for revocable spousal interests, see
Estate of Focardi v. Commissioner, T.C. Memo. 2006-56, and gift
adjustment agreements, see Ward v. Commissioner, 87 T.C. 78, 110-
11 (1986).
II. The Disclaimer in Favor of the Foundation
In the notice of deficiency, the Commissioner had no problem
with the possibility of an increased charitable deduction for
property going directly to the Foundation:
In the event that it is determined that the
“partial disclaimer” * * * is a “qualified
disclaimer” then the transfer reported as
passing to the [Foundation] * * * is in an
amount that cannot be ascertained with
certainty at this time. However, when the
other issues are finally resolved, this
calculation can be made and a deduction
allowed for the proper amount.
Not content with denying the estate a deduction for any
portion of the disclaimed property passing to the Trust, the
Commissioner now challenges the increased charitable deduction
that the estate seeks (because the parties have agreed on a much
higher value of the gross estate) for the transfer of property to
the Foundation directly. This would have the remarkable effect
of greatly increasing the estate tax due because more valuable
-23-
property is passing to a charity, even though Hamilton is keeping
no interest at all in that property.
The Commissioner has two arguments: (1) that any increase in
that amount was contingent on a condition subsequent; i.e., the
Commissioner’s challenge to the value of the gross estate, and
(2) that the disclaimer’s adjustment phrase--that the fair market
value of the disclaimed property will be “as such value is
finally determined for federal estate tax purposes”--is void as
contrary to public policy.
A. The Contingency of the Amount Transferred to the
Foundation
The Commissioner argues that the deductibility of a
“testamentary charitable contribution hinges upon whether the
amount that the charity will receive is ascertainable at the
decedent’s date of death.” And he can point to section 20.2055-
2(b)(1), Estate Tax Regs., which states that if
as of the date of a decedent’s death, a
transfer for charitable purposes is dependent
upon the performance of some act or the
happening of a precedent event in order that
it might become effective, no deduction is
allowable unless the possibility that the
charitable transfer will not become effective
is so remote as to be negligible.
The first problem with this argument is that the transfer of
property to the Foundation was not a “testamentary charitable
contribution”--it was the result of a disclaimer. And
disclaimers are in a special category, governed not by section
-24-
20.2055-2(b)(1), but by section 20.2055-2(c). All disclaimers
are by definition executed after a decedent’s death, but under
section 2518 the transfer that a qualified disclaimer triggers
relates back to the date of death, and the interest disclaimed
passes as if it had been a bequest in the decedent’s will. As
we’ve already noted, see supra note 9, the disclaimer regulation
characterizes the property going directly to the Foundation as a
qualified disclaimer of an "undivided portion of an interest"
because Hamilton didn’t keep any remainder interest. See sec.
2518(c)(1); sec. 25.2518-3(b), Gift Tax Regs.
The Commissioner argues, however, that the increased
charitable deduction like the one the estate is claiming here--
for “such value [as has through settlement been] finally
determined for federal estate tax purposes”--is contingent not
just because it depended on a disclaimer, but because it occurred
only because the IRS examined the estate’s return and challenged
the fair market value of its assets. We disagree. The
regulation speaks of the contingency of “a transfer” of property
passing to charity. The transfer of property to the Foundation
in this case is not contingent on any event that occurred after
Christiansen’s death (other than the execution of the disclaimer)
--it remains 25 percent of the total estate in excess of
$6,350,000. That the estate and the IRS bickered about the value
of the property being transferred doesn’t mean the transfer
-25-
itself was contingent in the sense of dependent for its
occurrence on a future event. Resolution of a dispute about the
fair market value of assets on the date Christiansen died depends
only on a settlement or final adjudication of a dispute about the
past, not the happening of some event in the future. Our Court
is routinely called upon to decide the fair market value of
property donated to charity--for gift, income, or estate tax
purposes. And the result can be an increase, a decrease, or no
change in the IRS’s initial determination.14
B. Public Policy Concerns
The Commissioner finally argues that the disclaimer’s
adjustment clause is void on public policy grounds because it
would, at the margins, discourage the IRS from examining estate
tax returns because any deficiency in estate tax would just end
up being offset by an equivalent additional charitable deduction.
It is true that public policy considerations sometimes
inform the construction of tax law as they do other areas of law.
For example, section 178 of the Restatement (Second) of Contracts
(1981) has a multifactor test for when a promise or a contractual
14
The estate also quite pointedly notes that the
Government itself uses the contested phrase: The charitable
annuity trust regulations make an interest determinable even if
the amount to be paid is expressed “in terms of a fraction or a
percentage of the net fair market value, as finally determined
for Federal estate tax purposes, of the residue of the estate on
the appropriate valuation date.” Sec. 20.2055-2(e)(2)(vi)(a),
Estate Tax Regs.; see also, e.g., sec. 26.2632-1(b)(2), (d)(1)
GST Regs.; Rev. Proc. 64-19, 1964-1 C.B. (Part 1) 682.
-26-
term is unenforceable because of public policy considerations,
and lists numerous illustrations in the comments ranging from
illegality to unreasonable restraints on trade. Other casebook
examples disallow deductions for fines, Tank Truck Rentals, Inc.
v. Commissioner, 356 U.S. 30, 36 (1958), or bribes, Rugel v.
Commissioner, 127 F.2d 393, 395 (8th Cir. 1942), affg. 1941 WL
9990 B.T.A. 1941. But Commissioner v. Tellier, 383 U.S. 687, 694
(1966), warns us of the narrowness of this aid in statutory
construction--the public policy being frustrated must be shown by
a governmental declaration, and the frustration that would be
caused by allowing the contested deduction must be severe and
immediate. Our caution has deep roots: “Public policy is a very
unruly horse, and when once you get astride it you never know
where it will carry you. It may lead you from the sound law. It
is never argued at all, but when other points fail.” E. Allan
Farnsworth, Contracts, 326 (3d ed. 1999), citing Burrough, J., in
Richardson v. Mellish, 130 Eng. Rep. 294, 303 (Ex. 1824).
The disclaimer in this case involves a fractional formula
that increases the amount donated to charity should the value of
the estate be increased. We are hard pressed to find any
fundamental public policy against making gifts to charity--if
anything the opposite is true. Public policy encourages gifts to
charity, and Congress allows charitable deductions to encourage
-27-
charitable giving. United States v. Benedict, 338 U.S. 692, 696-
97 (1950).
The Commissioner nevertheless analogizes the contested
phrase to the one analyzed in Commissioner v. Procter, 142 F.2d
824 (4th Cir. 1944). In Procter v. Commissioner, a Memorandum
Opinion of this Court dated July 6, 1943 (1943 WL 9169), the
Fourth Circuit was faced with a trust indenture clause specifying
that a gift would be deemed to revert to the donor if it were
held subject to gift tax. Id. at 827. The court voided the
clause as contrary to public policy, citing three reasons:
(1) The provision would discourage collection of tax, (2) it
would render the court’s own decision moot by undoing the gift
being analyzed, and (3) it would upset a final judgment.
This case is not Procter. The contested phrase would not
undo a transfer, but only reallocate the value of the property
transferred among Hamilton, the Trust, and the Foundation. If
the fair market value of the estate assets is increased for tax
purposes, then property must actually be reallocated among the
three beneficiaries. That would not make us opine on a moot
issue, and wouldn’t in any way upset the finality of our decision
in this case.
We do recognize that the incentive to the IRS to audit
returns affected by such disclaimer language will marginally
decrease if we allow the increased deduction for property passing
-28-
to the Foundation. Lurking behind the Commissioner’s argument is
the intimation that this will increase the probability that
people in Hamilton’s situation will lowball the value of an
estate to cheat charities. There’s no doubt that this is
possible. But IRS estate-tax audits are far from the only
policing mechanism in place. Executors and administrators of
estates are fiduciaries, and owe a duty to settle and distribute
an estate according to the terms of the will or law of intestacy.
See, e.g., S.D. Codified Laws sec. 29A-3-703(a) (2004).
Directors of foundations--remember that Hamilton is one of the
directors of the Foundation that her mother created--are also
fiduciaries. See S.D. Codified Laws sec. 55-9-8 (2004). In
South Dakota, as in most states, the state attorney general has
authority to enforce these fiduciary duties using the common law
doctrine of parens patriae.15 Her fellow directors or
beneficiaries of the Foundation or Trust can presumably enforce
their observance through tort law as well.16 And even the
Commissioner himself has the power to go after fiduciaries who
misappropriate charitable assets. The IRS, as the agency charged
with ruling on requests for charitable exemptions, can discipline
15
George Gleason Bogert & George Taylor Bogert, The Law of
Trusts and Trustees, sec. 411 (rev. 2d ed. 1991).
16
See for example Zastrow v. Journal Communications, Inc.,
718 N.W.2d 51, 63 (Wis. 2006), where the Supreme Court of
Wisconsin held that a breach of the fiduciary duty of loyalty is
always an intentional tort.
-29-
abuse by threatening to rescind an exemption. The famed case of
Hawaii’s Bishop Estate shows how effectively the IRS can use the
threat of the loss of exempt status to curb breaches of fiduciary
duty. See Brody, “A Taxing Time for the Bishop Estate: What Is
the I.R.S. Role in Charity Governance?”, 21 U. Haw. L. Rev. 537
(1999). The IRS also has the power to impose intermediate
sanctions for breach of fiduciary duty or self-dealing. See sec.
4958.
We therefore hold that allowing an increase in the
charitable deduction to reflect the increase in the value of the
estate’s property going to the Foundation violates no public
policy and should be allowed.
Decision will be entered under
Rule 155.
Reviewed by the Court.
COLVIN, COHEN, WELLS, FOLEY, VASQUEZ, THORNTON, MARVEL,
HAINES, and GOEKE, JJ., agree with this majority opinion.
HALPERN, J., did not participate in the consideration of
this opinion.
-30-
HAINES and GOEKE, JJ., concurring: We join in the majority
opinion but write separately to elaborate on why Hamilton’s
remainder interest in the trust and the foundation’s 20-year
annuity are not severable property for purposes of qualifying the
disclaimer with respect to the portion of the disclaimed property
that will pass to the trust.
Because disclaimers result in gratuitous transfers of
property, the gift tax generally applies to transfers resulting
from disclaimers. See sec. 2511(a). Section 2518 provides an
exception which allows a disclaimant to avoid the second transfer
tax for a transfer of an interest in property resulting from a
qualified disclaimer. Walshire v. United States, 288 F.3d 342,
349 (8th Cir. 2002). A disclaimer is not a qualified disclaimer
if the disclaimant has accepted the interest or any of its
benefits, sec. 2518(b)(3), or if the interest passes to the
disclaimant and the disclaimant is not the surviving spouse of
the decedent, sec. 2518(b)(4).
Although section 2518(b)(3) disqualifies a disclaimer if the
disclaimant has accepted the interest or any of its benefits,
section 2518(c) permits a putative transferee to make a qualified
disclaimer of an undivided portion of an interest in property
provided the disclaimer meets the requirements of section
2518(b); i.e., a disclaimer of an undivided interest will not be
disqualified just because the disclaimant has retained the
remaining undivided portion of the property. The transferee,
-31-
however, is not allowed “to partition the interest bequeathed to
him in any manner he chooses” and make a qualified disclaimer of
a part of the interest. Walshire v. United States, supra at 347
(a disclaimer of an undivided portion of an interest in property
“requires a vertical division of the property”). To do so would
ignore the limitation in section 2518(c) that only an “undivided
portion” of an interest may be disclaimed. Id. Section
25.2518-3(b), Gift Tax Regs., specifically disqualifies a
disclaimer of a remainder interest by the transferee of a fee
simple interest.
Section 2518 allows a transferee to make a qualified
disclaimer only of all or an undivided portion of an interest in
property, but it does not require all interests in property given
to the transferee to be treated as one interest; e.g., if T
devises Blackacre and Whiteacre to A, A may keep Whiteacre and
make a qualified disclaimer of Blackacre. Sec. 25.2518-2(e)(5),
Example (10), Gift Tax Regs.
Section 25.2518-3, Gift Tax Regs., provides guidance in
identifying separate interests in property for which qualified
disclaimers may be made and allows a transferee of property to
make a qualified disclaimer of all or an undivided portion of any
separate interest in the property even if the disclaimant has
another interest in the same property. Section 25.2518-
3(a)(1)(i) and (ii), Gift Tax Regs., recognizes that a transferor
may transfer separate interests in the same property (separate
-32-
transferor-created interests) or an interest in severable
property that comprises multiple property interests which may be
severed (severable property interests). Generally, each separate
transferor-created interest and each severable property interest
is treated as a separate property interest. Id.
Section 25.2518-3(a)(1)(ii), Gift Tax Regs., defines
severable property as “property which can be divided into
separate parts each of which, after severance, maintains a
complete and independent existence.” For example, if under A’s
will B is to receive “personal effects consisting of paintings,
home furnishings, jewelry, and silver”, B may make a qualified
disclaimer of the paintings and retain the furnishings, jewelry,
and silver. Sec. 25.2518-3(d), Example (1), Gift Tax Regs.
Section 25.2518-3(c), Gift Tax Regs., allows a disclaimer of a
specific pecuniary amount to qualify under section 2518. In
effect the regulation treats a disclaimer of a specific pecuniary
amount as a disclaimer of a severable property interest.
The distinction between qualified disclaimers of separate
transferor-created interests and qualified disclaimers of
severable property is subtle, as shown by the following examples.
Assume T devised the income from a farm to A for life, then to B
for life, with the remainder interest to A’s estate. A’s life
estate and remainder interest in the farm are separate
transferor-created interests. A could make a qualified
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disclaimer of all or an undivided portion of either the income
interest or the remainder. See sec. 25.2518-3(a)(1)(i), Gift Tax
Regs. Although the life estate and the remainder are separate
transferor-created interests, neither is severable property.
Thus, A could not make a qualified disclaimer of the income from
the property for a term of years. Sec. 25.2518-3(a)(ii), Gift
Tax Regs.
By contrast, assume T devised a fee simple in the farm to A.
Neither a life estate nor a remainder interest in the farm is a
separate transferor-created interest, nor are they severable
property interests. See sec. 25.2518-3(b), Gift Tax Regs. Thus,
A could make a qualified disclaimer of all or an undivided
portion of the farm but could not retain a life estate and make a
qualified disclaimer of the remainder. See id.; see also
Walshire v. United States, supra at 349.
If the farm consists of 500 acres of land and 500 head of
cattle, the farm is severable property with respect to the land
and the cattle; i.e., if the cattle are severed from the land,
the existence of the cattle will be complete and independent of
the land and the existence of the land will be complete and
independent of the cattle. Thus, A could retain the land and
make a qualified disclaimer of the cattle or retain the cattle
and make a qualified disclaimer of the land. Further, the land
and the cattle each may be divided into two or more parts, each
-34-
of which, after severance, would maintain a complete and
independent existence. Thus, A could make a qualified disclaimer
of 300 identified acres of the 500 acres, see sec. 25.2518-3(d),
Example (3), Gift Tax Regs., and a qualified disclaimer of 300
head of the cattle, see id. Example (1).
Christensen bequeathed to Hamilton a fee simple in the
estate property, and Hamilton disclaimed a pecuniary amount of
$3,228,904.98. As a result of Hamilton’s disclaimer, under the
terms of Christensen’s will, $2,421,671 (75 percent of the
pecuniary amount) passes to the trust and $807,233.98 (25 percent
of the pecuniary amount) passes to the foundation. Under the
terms of the trust, the foundation receives a 20-year annuity,
valued at $1,987,515. Both Hamilton and the foundation receive
contingent remainders, the values of which total $434,156.
Hamilton’s disclaimer is not effective to pass the entire
disclaimed property to a person other than herself because she
has the right to receive a contingent remainder of the trust by
means of Christensen’s will. However, the foundation’s interest
in the disclaimed property and the trust’s interest in the
disclaimed property are separate undivided interests. Hamilton
retains no interest in the amount that passes outright to the
foundation. Therefore, Hamilton’s disclaimer is a qualified
disclaimer with respect to the $807,233.98 that passes outright
to the foundation.
-35-
Hamilton did not disclaim her right to receive the remainder
of the portion of the disclaimed property that passes to the
trust. Consequently, the disclaimer is not a qualified
disclaimer with respect to Hamilton’s contingent remainder
interest. See sec. 25.2518-2(e)(3), Gift Tax Regs.
Hamilton’s contingent remainder is an interest in the
$2,421,671 portion of the disclaimed property that passes to the
trust. That contingent remainder is not an undivided portion of
the disclaimed property that passes to the trust. Consequently,
unless Hamilton’s remainder interest is a severable property
interest, her disclaimer is not a qualified disclaimer with
respect to the entire interest passing to the trust. See id.
In order to be treated as severable property, the
foundation’s guaranteed annuity and Hamilton’s remainder, after
severance, must maintain “a complete and independent existence.”1
See sec. 25.2518-3(a)(1)(ii), Gift Tax Regs. In the dissenting
portion of his opinion, Judge Swift posits that in assessing
whether the interests have a separate and independent existence,
one key factor is whether each interest, taken separately, has an
ascertainable value. Judge Swift quotes the first sentence of
section 20.2055-2(a), Estate Tax Regs., which provides:
1
“[I]ndependent” is defined as: “not requiring or relying
on something else (as for existence, operation, efficiency): not
contingent: not conditioned”. Webster’s Third New International
Dictionary 1148 (2002).
-36-
If a trust is created or property is transferred for
both a charitable and a private purpose, deduction may
be taken of the value of the charitable beneficial
interest only insofar as that interest is presently
ascertainable, and hence severable from the
noncharitable interest. * * *
Judge Swift concludes that because the foundation’s annuity
interest is presently ascertainable, it is severable from
Hamilton’s remainder interest for purposes of qualifying
Hamilton’s disclaimer under section 2518.
Whether an interest has an ascertainable value is not the
proper standard to apply in determining whether that interest is
severable for purposes of making qualified disclaimers under
section 2518. Indeed, the present values of annuities, life
estates, terms of years, remainders, and reversionary interests
are all ascertainable for purposes of transfer taxes on the basis
of recognized valuation principles. See, e.g., sec. 20.2031-7,
Estate Tax Regs. The second sentence of section 20.2055-2(a),
Estate Tax Regs., following the sentence quoted by Judge Swift,
provides:
Thus, in the case of decedents dying before January 1,
1970, if money or property is placed in trust to pay
the income to an individual during his life, or for a
term of years, and then to pay the principal to a
charitable organization, the present value of the
remainder is deductible. * * *
A remainder following a life estate or a term of years is
ascertainable and thus “severable” as the term is used in section
20.2055-2(a), Estate Tax Regs. However, a remainder following a
-37-
life estate or a term of years or an annuity is not severable as
the term is used for purposes of determining whether a disclaimer
is a qualified disclaimer under section 2518. Sec. 25.2518-3(d),
Example (2), Gift Tax Regs.
In the dissenting portion of her opinion, Judge Kroupa
argues that the foundation’s annuity interest in the trust and
Hamilton’s remainder interest in the trust are independent
because the foundation can do nothing to affect the contingent
remainder and Hamilton can do nothing to affect the annuity.
Control by the “holder” of the beneficial interest is not
relevant; the holder of the income interest in a trust and the
holder of the remainder interest in that trust generally cannot
affect each other’s interest; yet those interests are not
severable.
Although it is possible for the trustee of a trust to affect
either the income interest or the remainder through investment
decisions, the trustee has a fiduciary duty to balance the
interest of the income beneficiary with that of the remainderman
in making investment decisions. During the life of the income
beneficiary or the term of years, the distribution of the income
(usually cash dividends and/or interest) to the income
beneficiary does not diminish the value of the remainder
interest. Similarly, the gain or loss that might accrue in the
corpus is not affected by the income earned and distributed to
-38-
the income beneficiary. Essentially, the income beneficiary gets
the fruit during his life or term, and the remainderman gets the
tree at the end of the life or term.
By contrast, where the present interest is a fixed annuity,
the annuitant may receive only income, only corpus, or a
combination of income and corpus, depending on the amount of
income, if any, the trust investments have produced.
Furthermore, that mixture may change in any given year. The
value of the annuity is computed on the assumption that the trust
assets will produce income equal to an assumed interest rate.
See sec. 20.2031-7(d)(2)(iv)(A), Estate Tax Regs. The fixed
annual payment may be greater than or less than the anticipated
income. In the event the investments produce less income than
expected, the corpus of the trust may be depleted beyond the
expectations of the parties, reducing the value of the remainder
interest. Conversely, in the event the investments produce more
income than expected, the corpus of the trust may grow beyond the
expectations of the parties, increasing the value of the
remainder.
In this way, the remainder is entirely dependent on the
annuity in that it is affected by the amounts distributed to the
annuitant, and by the source of those distributions, either from
income or corpus. In contrast, a remainder interest is less
dependent on an income interest as the payments to the income
-39-
beneficiary will never include corpus. Thus, an annuity interest
and a remainder interest are more dependent on each other than an
income interest and a remainder interest.
While the values of an annuity interest and a remainder
interest may be ascertained, if separated they do not maintain a
complete and independent existence in the way that 300 head of
cattle are independent of the remaining 200. Therefore, the
annuity interest and the remainder interest are not severable
within the meaning of section 25.2518-3(a)(1)(ii), Gift Tax Regs.
Section 25.2518-2(e)(3), Gift Tax Regs., provides that if
the portion of the disclaimed property which the disclaimant has
a right to receive (Hamilton’s remainder interest) is not
severable property or an undivided portion of property, the
disclaimer is not qualified with respect to any portion of the
property (the $2,421,671 that passes to the trust). As explained
above, Hamilton’s remainder interest is not severable property or
an undivided portion of property. Therefore, the disclaimer is
not a qualified disclaimer with respect to the $2,421,671 passing
to the trust.
COHEN, FOLEY, THORNTON, MARVEL, WHERRY, and HOLMES, JJ.,
agree with this concurring opinion.
- 40 -
SWIFT, J., concurring in part and dissenting in part:
On the public policy argument, I agree with the majority
opinion.
As to the technical disclaimer issue under section 2518
relating to the trust annuity, I believe the regulations, read
carefully and properly, along with a number of IRS private letter
rulings, would treat the disclaimer Hamilton made in favor of the
trust annuity as a qualifying disclaimer.
Section 25.2518-2(e)(3), Gift Tax Regs., describes in the
flush sentence and in subdivision (i) exactly the partial failure
that is applicable to Hamilton’s disclaimer, as follows:
§ 25.2518-2. Requirements for a qualified disclaimer.--
* * * * * * *
(e) Passage without direction by the disclaimant of
beneficial enjoyment of disclaimed interest.--
* * * * * * *
(3) Partial failure of disclaimer. If a
disclaimer made by a person other than the surviving
spouse is not effective to pass completely an interest
in property to a person other than the disclaimant
because--
(i) The disclaimant also has a right to receive
such property as an heir at law, residuary beneficiary,
or by any other means; and
(ii) The disclaimant does not effectively disclaim
these rights * * *
- 41 -
Because Hamilton did not also disclaim her contingent
remainder interest in the trust property (valued by petitioner
and by respondent under respondent’s annuity tables at
$434,1561), under the above regulatory provision there occurred a
partial failure of Hamilton’s disclaimer.
The next clause in section 25.2518-2(e)(3), Gift Tax Regs.,
describes the effect that the partial failure of Hamilton’s
disclaimer has on the interest in the trust property, as follows:
(3) Partial failure of disclaimer.--
* * * * * * *
the disclaimer is not a qualified disclaimer with
respect to the portion of the disclaimed property which
the disclaimant has a right to receive. * * *
[Emphasis added.]
The portion which Hamilton has a right to receive is only
the contingent remainder interest and therefore, under the above
clear and express language of the regulations, it is only that
portion or interest that is to be treated as disqualified.
Only under the second sentence of the above subparagraph (3)
could the trust annuity interest (which Hamilton does not have a
right to receive) be tainted and also be treated as disqualified.
1
For purposes of this side opinion, I disregard the
relatively small value of the foundation’s contingent remainder
interest in the trust that stands behind Hamilton’s contingent
remainder interest therein should Hamilton die during the 20-year
term of the trust.
- 42 -
The second sentence of section 25.2518-2(e)(3), Gift Tax Regs.,
provides as follows:
(3) Partial failure of disclaimer.
* * * * * * *
If the portion of the disclaimed interest in property
which the disclaimant has a right to receive is not
severable property or an undivided portion of the
property, then the disclaimer is not a qualified
disclaimer with respect to any portion of the property.
* * * [Emphasis added.]
Thus, all of the $2,421,671 passing to the trust (i.e., not
only the $434,156 reflecting the agreed 18-percent value of the
retained contingent remainder but also the $1,987,515 reflecting
the agreed 82-percent value of the annuity) is to be treated as
disqualifed only if the disqualified contingent remainder is not
severable from the annuity.
With regard to severability, section 25.2518-3(a)(1)(ii),
Gift Tax Regs., provides that to be treated as severable property
the separate interests must maintain “a complete and independent
existence.” I see no reason the fixed annuity and the remainder
before us could not and would not be treated as independent of
each other.
The severable nature of a fixed dollar, fixed term annuity
such as that involved herein and a remainder are well established
by the Commissioner’s own regulations and ruling position. See
section 20.2055-2(a), Estate Tax Regs., and section 25.2522(c)-
- 43 -
3(a), Gift Tax Regs., both of which expressly state with regard
to remainder and other interests that the key to whether property
interests are to be treated as severable interests is whether
separate values for each property interest are presently
ascertainable.2 See IRS private letter rulings Priv. Ltr. Rul.
2000-27-014 (Mar. 31, 2000), Priv. Ltr. Rul. 1999-27-010 (Apr. 6,
1999), Priv. Ltr. Rul. 96-35-018 (May 29, 1996), Priv. Ltr. Rul.
96-31-021 (May 3, 1996), each of which treats, in the case of
charitable remainder trusts, the remainder as having an
ascertainable value, as severable, and as deductible; and in the
case of charitable lead trusts, the fixed annuity as having an
ascertainable value, as severable, and as deductible.
Accordingly, the $1,987,515 value of the trust annuity that
Hamilton did disclaim is to be treated as severable from the
$434,156 value of the contingent remainder interest not
disclaimed. Judge Kroupa’s dissenting opinion persuasively
explains this point further.
2
For example, sec. 20.2055-2(a), Estate Tax Regs., provides
as follows:
§ 20.2055-2. Transfers not exclusively for charitable
purposes.--(a) Remainders and similar interests.--If a trust
is created or property is transferred for both a charitable
and a private purpose, deduction may be taken of the value
of the charitable beneficial interest only insofar as that
interest is presently ascertainable, and hence severable
from the noncharitable interest. * * *
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For the reasons stated, I dissent as to part I of the
majority opinion.
KROUPA, J., agrees with this concurring in part, dissenting
in part opinion.
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KROUPA, J., concurring in part and dissenting in part:
I do not dispute any of the findings of fact used by the
majority in its analysis. As the trial Judge who was able to
weigh the credibility of the witnesses, however, I found
Christiansen and her daughter’s charitable intent compelling.
They both intended to use their wealth to benefit the people of
South Dakota and improve the economic and social conditions
there. Unfortunately, the majority gives lip service to these
important charitable objectives in part I to deny the estate the
benefit of a charitable contribution deduction because of the
majority’s flawed interpretation of the regulation. I would hold
that the estate is entitled to deduct the amounts passing to the
Trust to the extent of the annuity portion.
I do agree with the majority, however, that we should allow
a deduction for the amounts passing directly to the Foundation
and therefore concur with part II of the majority opinion.
I. Analysis of the Regulation on Partial Disclaimers
Now to the several reasons I disagree with the majority’s
holding that the estate is not entitled to deduct the value of
the disclaimed property that passed, at Christiansen’s direction,
to the Trust. We are dealing with the annuity portion of the
Trust as the parties do not dispute, nor has the estate claimed,
a deduction for the amount attributable to the contingent
remainder.
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A. Overly Broad Interpretation
The majority disallows the disclaimer on the grounds that
Christiansen’s daughter retained a contingent remainder in the
Trust. The majority interprets the example in section 25.2518-
2(e)(3), Gift Tax Regs., to mean that retaining any remainder in
a trust that receives disclaimed property will always disqualify
the disclaimer. The majority relies upon the italicized sentence
in the example in section 25.2518-2(e)(3), Gift Tax Regs., to
conclude that this italicized sentence “seems to resolve this
issue.”1 See majority op. p. 16. It seems to me that the
majority ignores the other sentences in this section including
the immediately preceding sentence that focuses on whether the
property is severable. The majority disregards any
severable/nonseverable analysis to disqualify the disclaimer.
This interpretation is inconsistent with several other important
provisions of the regulation.
First, had the drafters of this regulation intended to
establish such a broad rule, the drafters would not have included
the severable/nonseverable language immediately before the
italicized sentence. The sentence upon which the majority relies
is simply an illustration to distinguish the consequences of
1
The majority italicized this sentence in its reproduction
of sec. 25.2518-2(e)(3), Gift Tax Regs. The italics do not
appear in the regulation itself.
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severable property from those of nonseverable property. The
remainder in the example must be viewed as nonseverable property
to give effect to the rest of the regulation.2 Indeed, the
sentence in the regulation, immediately before the italicized
sentence, provides:
If the portion of the disclaimed interest in property which
the disclaimant has a right to receive is not severable
property or an undivided portion of the property, then the
disclaimer is not a qualified disclaimer with respect to any
portion of the property * * *
Sec. 25.2518-2(e)(3), Gift Tax Regs. (emphasis added). The
majority’s interpretation simply disqualifies the entire
disclaimer if the disclaimant has a right to receive any
disclaimed property, severable or not, in the form of a trust
remainder.
The majority’s interpretation is difficult to reconcile with
some of the examples in section 25.2518-3(d), Gift Tax Regs. The
examples turn on whether the property is severable or
nonseverable. Sometimes the disclaimer is qualified (i.e., if
the property is severable).3 See sec. 25.2518-3(d), Examples
2
The example in sec. 25.2518-2(e)(3), Gift Tax Regs., was
not in the proposed regulations. 45 Fed. Reg. 48928 (July 22,
1980). The example was added in the final regulations, released
6 years later. There is no discussion of this example in the
Treasury Decision accompanying the final regulations. T.D. 8095,
1986-2 C.B. 160.
3
The Commissioner’s ruling positions also support this
premise. See, e.g., Tech. Adv. Mem. 96-10-005 (Nov. 9, 1995);
Priv. Ltr. Rul. 98-52-034 (Sept. 29, 1998).
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(8), (11), Gift Tax Regs. Sometimes the disclaimer is not
qualified (i.e., if the property is nonseverable). See sec.
25.2518-3(d), Example (10), Gift Tax Regs. The majority
interpretation does not account for the different results in
these examples.
The majority relies on a decedent’s creation of the interest
in a will, not a trust, to differentiate Examples (8) and (11) of
section 25.2518-3(d), Gift Tax Regs., from the italicized
sentence. The distinction of whether the separate interest is
created in a will or in a trust is irrelevant. We should not
interpret the regulation to require the interest to be created in
a will. The transferor, not the disclaimant, must create the
separate interests, but it is of no moment how they were created.
Sec. 25.2518-3(a)(1), Gift Tax Regs. Consistent with the
regulation, Christiansen, the transferor, not her daughter,
created the annuity and contingent remainder interests when
Christiansen created the Trust. These interests are thus
separate interests. Id. I would find that Christiansen, not her
daughter, was the transferor. There is no requirement in the
regulation that the interest be created in a will.
All Christiansen’s daughter did was to disclaim a fractional
portion of the property passing to her in the will. She did not
create or carve out a particular interest for herself and
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disclaim the rest. The majority’s implication otherwise is
wrong.
B. Contingent Nature of Remainder
I am also not convinced that section 25.2518-2(e)(3), Gift
Tax Regs., controls. That section turns on whether the
disclaimant has the “right to receive” the disclaimed property.
A remainder is merely one example of a right to receive the
property. The contingent remainder that Christiansen’s daughter
retained, however, does not give her the unequivocal right to
receive the property. She will receive the property only if she
is alive at the end of the Trust’s 20-year term. Under South
Dakota law, a contingent remainder does not provide a fixed or
certain right to future enjoyment of property and does not vest
until a condition precedent has occurred. S.D. Codified Laws
sec. 43-3-11 (2004); Rowett v. McFarland, 394 N.W.2d 298, 306
(S.D. 1986).
Where the disclaimant has an unequivocal right to receive
the property, a disclaimer would allow the benefit of avoiding a
second level of tax without the disclaimant really giving up
anything. On the other hand, if the disclaimant has only a
contingent remainder, it is uncertain whether the disclaimant
will ever receive the property. We should not read the
regulation to disqualify a disclaimer because of a vague or
distant possibility the disclaimant could receive the property
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sometime in the future. The regulation speaks in terms of a
right to receive property, and the rights Christiansen’s daughter
has are uncertain at best.
II. Severable Property
The majority hedges its bets after concluding that the
italicized sentence in section 25.2518-2(e)(3), Gift Tax Regs.,
“seems to resolve this issue.” The majority goes on to discuss
whether the contingent remainder Christiansen’s daughter retained
is severable property or an undivided portion of property,
reaching the perfunctory conclusion that the remainder is
nonseverable. I respectfully disagree with this conclusion.
As previously stated, proper application of section 25.2518-
2(e)(3), Gift Tax Regs., considers whether the disclaimed
property that the disclaimant has the right to receive is
severable. Severable property is property that can be divided
into separate parts, each of which maintains a complete and
independent existence after severance. Sec. 25.2518-3(a)(1)(ii),
Gift Tax Regs.
The majority mischaracterizes the interests in concluding
that they are nonseverable. Christiansen’s daughter did not
disclaim an income interest in the Trust. Instead,
Christiansen’s daughter effectively disclaimed an annuity
interest. An annuity is a commonly purchased financial interest
that gives its holder the right to a certain stream of payments
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over a fixed period, not full present enjoyment of the whole
property as might be found in, for example, a life estate. See,
e.g., Abeid v. Commissioner, 122 T.C. 404, 408-409 (2004)
(describing differences in the definition of annuity between
section 7520 and the U.S.-Israel income tax treaty). To adopt
the pastry analogy of the majority, an annuity interest is a
separate cupcake.
The majority implies several times that Christiansen’s
daughter disclaimed an income interest, or present enjoyment, in
the Trust and kept a remainder. In reality, however,
Christiansen’s daughter did no such thing. It was pursuant to
Christiansen’s will that any amount her daughter disclaimed would
go 75 percent to the Trust and 25 percent to the Foundation. If
we accepted the majority’s implication that Christiansen’s
daughter disclaimed a portion and retained a remainder, those
facts here would fit squarely within Examples (8) and (11) of
section 25.2518-3(d), Gift Tax Regs. The disclaimer in each of
these examples is qualified, as should be the disclaimer at issue
here.
The majority’s mischaracterization of the type of interest
passing to the Foundation pursuant to the Trust as an income
interest or present enjoyment rather than an annuity also leads
to the majority’s faulty reliance on Walshire v. United States,
288 F.3d 342 (8th Cir. 2002). The majority says that Walshire is
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indistinguishable. See majority op. p. 19. Not so. There are
many key differences.
The disclaimant in Walshire disclaimed a remainder interest
in property but retained the right to the income and use of the
property during his lifetime. Walshire v. United States, supra
at 347. The disclaimant thus divided the property into parts
that did not maintain a complete and independent existence and
were therefore not severable property. See sec. 25.2518-
3(a)(1)(ii), Gift Tax Regs. For example, if the disclaimant in
Walshire had significantly used the property under the retained
life estate, the corresponding value of the remainder might have
been affected.4
The thoughtful analysis of the U.S. Court of Appeals for the
Eighth Circuit in concluding that the disclaimer in Walshire was
not qualified is markedly different from the majority’s analysis
here. The majority errs to suggest that the distinction between
an annuity interest and an income interest “makes no difference.”
See majority op. note 12. The annuity and the contingent
remainder in this case are truly complete and independent from
one another and are therefore severable property. See sec.
4
The property in Walshire v. United States, 288 F.3d 342
(8th Cir. 2002), consisted of certificates of deposit (CDs). Had
the disclaimant, for example, pledged the CDs as security for a
loan and then failed to satisfy his obligations under the loan,
the CDs could have been cashed early, and the resulting penalty
would have diminished the size of the principal left to the
remainderman.
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25.2518-3(a)(1)(ii), Gift Tax Regs. The Foundation, as the
holder of the annuity, can do nothing to affect the contingent
remainder. Similarly, Christiansen’s daughter, as the holder of
the contingent remainder, cannot do anything to affect the fixed
7 percent of the corpus to be paid annually under the annuity.
The two separate parts are in no way dependent on one another,
contrary to the majority’s holding.
The majority also fails to consider another key distinction
between Walshire and this case. The disclaimant in Walshire
unilaterally created the interests, and the disclaimant retained
the life estate that he had personally created in the property.
Walshire v. United States, supra at 344-345. The disclaimant
thus retained the life estate because of his decision to carve
the property into separate interests, not because the property he
disclaimed passed to a trust in which the disclaimant happened to
hold an interest. On the other hand, Christiansen, not her
daughter, created the separate interests in the Trust. See sec.
25.2518-3(a)(1), Gift Tax Regs. Christiansen’s daughter did not
create any property interest whatsoever. She merely disclaimed a
fraction of the property passing to her under the will.5
5
There is also a theoretical distinction between Walshire v.
United States, supra, and this case. A disclaimer permits a
beneficiary to step back and allow property to be passed to a
third party without incurring another level of tax. The
situation in Walshire, where the disclaimant disclaimed a
remainder in property left to him but kept a life estate, is akin
(continued...)
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The majority seems to imply that Christiansen’s daughter
should be treated as having constructively created and funded the
Trust when she made her disclaimer.6 This is not the right
approach. To treat Christiansen’s daughter as having created the
Trust when she made the disclaimer would involve a series of
convoluted steps, each of which either never occurred or violates
5
(...continued)
to a testamentary gift. Such a testamentary gift ordinarily
would be subject to estate tax. To treat the disclaimer in
Walshire as qualified would enable the avoidance of tax on this
transfer. Unlike Walshire, however, the situation here does not
afford an opportunity to avoid tax. The estate has never
disputed its obligation to pay tax on the amount attributable to
the contingent remainder held by Christiansen’s daughter. The
estate seeks a deduction only for the fixed-value annuity to be
used for charitable purposes. This is not akin to a testamentary
gift where tax would be avoided. Moreover, in the event
Christiansen’s daughter does not outlive the term of the Trust,
the corpus will also pass to the Foundation to be used for
charitable purposes. The estate is thus paying tax on the
transfer of some property that ultimately may go to charity.
6
The Trust was unfunded at the time of trial and would only
be funded from the disclaimed funds. The estate’s counsel
testified, however, that it is common estate planning practice
not to distribute funds from the estate until matters have been
resolved.
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the main concepts of section 2518.7 I refuse to rely upon her
disclaimer to invalidate her disclaimer.
III. Differing Treatments in Wills and Disclaimers
Finally, there is little dispute that the estate would have
been allowed to deduct the present value of the annuity portion
of the Trust if Christiansen had made the bequest to the Trust in
her will. The Trust would be treated as a charitable lead
annuity trust, and the annuity interest would be a guaranteed
annuity interest. See sec. 20.2055-2(e)(1) and (2)(vi), Estate
Tax Regs. Guaranteed annuity interests are considered to be
7
First, we would have to treat Christiansen’s daughter as
receiving the disclaimed property from her mother. This in fact
had not occurred as of the time of trial. Moreover, under sec.
2518(a), Christiansen’s daughter is treated as if the property
had never been transferred to her. Second, despite step one, we
would then have to treat Christiansen’s daughter as having
disclaimed the property she never received. Third, we would then
have to treat Christiansen’s daughter as having directed this
property that she hypothetically disclaimed into a trust in order
to fund it. The funding of this trust had not yet occurred as of
the time of trial. Further, under sec. 2518(b)(4), a disclaimant
cannot direct how the interest passes. Finally, after
hypothetical steps one through three above, that have not yet
occurred or never will occur, we would then invalidate the
disclaimer because the now-invalidated disclaimer funded the
trust.
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ascertainable and therefore severable and deductible.8 See sec.
20.2055-2(a), (e)(1) and (2)(vi), Estate Tax Regs.
I am not convinced that a different result is warranted
merely because the estate plan funded the Trust through a
disclaimer rather than directly in the will. I acknowledge the
slight textual distinction in the definitions of “severable
property” under the Gift Tax Regs., and “severable interest”
under the Estate Tax Regs.9, but do not find that it dictates a
different result.
The majority’s conclusion is even more anomalous when
considered in light of the general premise of disclaimers: a
disclaimant should be able to step back and be treated as never
having received the property. See sec. 2518(a). The majority’s
conclusion subverts gifts to charity simply because they were
made as a result of disclaimers rather than directly in the will.
8
The majority’s statement in note 12 that the distinction
between an annuity interest and an income interest “makes no
difference” is especially troubling in light of the different
treatments prescribed for these interests. While a guaranteed
annuity interest is treated as ascertainable, severable and
deductible, an income interest is not a deductible interest under
these rules. See sec. 20.2055-2(e)(2), Estate Tax Regs.
9
A remainder must be ascertainable to be considered
severable under the estate tax regulations. Sec. 20.2055-2(a),
Estate Tax Regs. As described supra part II, property must have
a complete and independent existence to be severable under the
Gift Tax Regulations we are considering. Sec. 25.2518-
3(a)(1)(ii), Gift Tax Regs.
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IV. Conclusion
Christiansen’s daughter made a qualified disclaimer of the
property passing to the Trust. The contingent remainder she
retained in the Trust was not a right to receive the property and
also was severable from the annuity interest the Foundation held.
The estate would have been entitled to deduct the amounts passing
to the Trust to the extent of the annuity portion as well as the
amounts passing to the Foundation. For the foregoing reasons, I
respectfully dissent as to part I of the majority opinion and
concur in the result of part II.
SWIFT, J., agrees with this concurring in part, dissenting
in part opinion.