DocketNumber: No. 15190-05
Citation Numbers: 130 T.C. 1, 2008 U.S. Tax Ct. LEXIS 1, 130 T.C. No. 1
Judges: \"Holmes, Mark V.\"
Filed Date: 1/24/2008
Status: Precedential
Modified Date: 1/13/2023
Decision was entered under U.S. Tax Ct. R. 155.
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.
John W. Porter and J. Graham Kenney, for the estate.
*2 HOLMES,
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 the present value of that 7 percent annuity from the trust to the foundation. This depends *3 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 FACT 2
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*4 and then earning an MBA from the University of Arizona. And like her mother, she decided on a life back *3 home in South Dakota. She married a 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 *5 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.
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 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, *7 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
In January 2000, Christiansen executed her last will and testament, which named Hamilton personal representative. 4*8 This is where the second wrinkle showed: Instead of simply dividing 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.
*5 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.
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
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 *11 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 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 *12 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
*7 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 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 *13 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.
OPINION
We begin with the basics. Under the Trust agreement, the Foundation has the right to guaranteed annuity payments for the 20-year term of the Trust and, if Hamilton survives that term, she has the right to any trust property then *8 remaining. She thus has a contingent-remainder interest in the Trust's property. *14 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.
The Code taxes the transfer of the taxable estate of any decedent who is a U.S.*15 citizen or resident.
This means that we must turn to
B.
Hamilton's disclaimer is further complicated because it is a "partial disclaimer." The Code recognizes and allows partial disclaimers.
It's the fourth requirement--and only part of the fourth requirement 8--that the parties are fighting over here: Did Hamilton's retention of the contingent-remainder interest in the 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
The applicable regulation is
*10 (3) (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 disclaimer is not a qualified disclaimer with respect to any portion of the property. Thus, for example, if a
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 italicized language says: "If the portion of the disclaimed *11 interest in property which the disclaimant has a right to receive is not severable *20 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?
"Severable property" is a defined term.
"An undivided portion of the property" is likewise defined, in
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 *12 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, *23 for example, a disclaimer 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.
The *24 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
D.
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 *26 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
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 *28 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 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 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
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 *29 it might become effective, no deduction is allowable *15 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
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 *30 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 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 *16 purposes. And the result can be an increase, a decrease, or no change in the IRS's initial *31 determination. 14
B.
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,
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 *33 policy against making gifts to charity*17 --if anything the opposite is true. Public policy encourages gifts to charity, and Congress allows charitable deductions to encourage charitable giving.
The Commissioner nevertheless analogizes the contested phrase to the one analyzed in
This case is not
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 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.,
We therefore hold that allowing an increase in the charitable *36 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.
Reviewed by the Court.
COLVIN, COHEN, WELLS, FOLEY, VASQUEZ, THORNTON, MARVEL, HAINES, and GOEKE,
HALPERN,
HAINES and GOEKE,
Because disclaimers result in gratuitous transfers of property, the gift tax generally applies to transfers resulting from disclaimers. See
Although
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 *40 a qualified disclaimer of all or an undivided portion of either the income interest or the remainder. See
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
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, *21 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. *41 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 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
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 *42 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.
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
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 *22 with respect to the entire interest passing to the trust. See
In order to be treated as severable property, the *43 foundation's guaranteed annuity and Hamilton's remainder, after severance, must maintain "a complete and independent existence." 1*44 See
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. * * *
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
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. * * *
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 *46 not affected by the income earned and distributed to 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
In this way, the remainder is entirely dependent on the *47 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 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
COHEN, FOLEY, THORTON, MARVEL, WHERRY, and HOLMES,
SWIFT,
As to the technical disclaimer issue under
*25
25.2518-2. * * * * * * * (e) * * * * * * * (3) (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 * * *
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 $434,156 1), under the above regulatory provision there occurred a partial failure of Hamilton's disclaimer.
The next clause in
(3) * * * * * * * the disclaimer is not a qualified disclaimer
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.
The second sentence of
*26 (3) * * * * * * * If the portion of the disclaimed interest in property which the disclaimant has a right to receive
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 disqualified only if the disqualified contingent remainder is not severable from *51 the annuity.
With regard to severability,
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
For the reasons stated, I dissent as to part I of the majority opinion.
KROUPA,
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, *53 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.
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.
The majority disallows the disclaimer on the grounds that Christiansen's daughter retained a contingent remainder in *28 the Trust. The majority interprets the example in
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 severable property from those of nonseverable *55 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 * * *
The majority's interpretation is difficult to reconcile with some of the examples in
The majority relies on a decedent's creation of the interestin a will, not a trust, to differentiate
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 disclaim the rest. The majority's implication otherwise is wrong.
I am also not convinced that
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 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.
The majority hedges its bets after concluding that the italicized sentence in
As previously stated, *59 proper application of
The majority mischaracterizes the interests in concluding that they are nonseverable. Christiansen's daughter did not disclaim an
The majority implies several times that Christiansen's daughter disclaimed an income interest, or present enjoyment, *60 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
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
The disclaimant in
The thoughtful analysis of the U.S. Court of Appeals for the Eighth Circuit in concluding that the disclaimer in
The majority also fails to consider another key distinction between
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 *33 never occurred or violates the main concepts of
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
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 *67 back and be treated as never having received the property. See
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,
1. The Chief Judge reassigned this case to Judge Holmes from Judge Kroupa↩.
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.↩
3. The Trust is a "charitable lead annuity trust." A charitable trust is one whose beneficiaries are charities.
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.↩
4. We note that Christiansen's estate planners therefore did not have the opportunity to review and take account of
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.↩
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.↩
7. We need not decide whether the burden of proof shifts to respondent under
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.↩
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."
10. Webster's New Collegiate Dictionary 741 (8th ed. 1974).↩
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,
12. To be technically precise, Hamilton was giving up an annuity interest rather than an income interest, but the distinction makes no difference.↩
13. The dissent relies on
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."
15. George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees, sec 411 (rev. 2d ed. 1991).↩
16. See for example
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).
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.↩
2. For example,
1. The majority italicized this sentence in its reproduction of
2. The example in
3. The Commissioner's ruling positions also support this premise. See, e.g.,
4. The property in
5. There is also a theoretical distinction between
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.↩
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
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 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
9. A remainder must be ascertainable to be considered severable under the estate tax regulations.
Commissioner of Internal Revenue v. Procter , 142 F.2d 824 ( 1944 )
Estate of Albert Strangi, Deceased, Rosalie Gulig, ... , 293 F.3d 279 ( 2002 )
Diane S. Blodgett v. Commissioner of Internal Revenue , 394 F.3d 1030 ( 2005 )
Thomas J. Walshire, of the Estate of Edward M. Walshire ... , 288 F.3d 342 ( 2002 )
Rugel v. Commissioner of Internal Revenue , 127 F.2d 393 ( 1942 )
United States v. Benedict , 70 S. Ct. 472 ( 1950 )
Tank Truck Rentals, Inc. v. Commissioner , 78 S. Ct. 507 ( 1958 )