Substantial Compliance Argument Fails as Tax Court Denies Deductions for Family Limited Partnership Gifts, Rhett Rance Smith et us. et al. v. Commissioner, T.C. Memo 2007-368; Nos. 11902-05, 13225-05, 13226-05, 13227-05, 13228-05 (December 17, 2007)
In this series of rulings the Tax Court denied deductions for family limited partnership gifts due to the taxpayer's failure to adequately comply with gift substantiation requirements. The taxpayers--related individuals--contributed a majority of their shares in a family-owned C Corporation to three family limited partnerships and then transferred the majority of those family limited partnership interests to charities over a six year period. The appraisals substantiating the gifts were prepared by two different appraisers over the period, neither of whom met the requirements for a "qualified appraiser." In addition, the taxpayers' tax returns and Form 8283s had errors (including the absence of an appraiser's signature on some of the forms) and the taxpayers had not maintained adequate records. In this appeal to the Tax Court, the taxpayers argued the deductions should be allowed based on their substantial compliance with the gift substantiation requirements. The Court disagreed and denied the deductions finding the taxpayers did not provide sufficient information or documentation to constitute substantial compliance.
Another Substantial Compliance Argument Fails as Seventh Circuit Affirms Tax Court's Denial of Charitable Deduction, Estate of Anthony J. Tamulis v. Commissioner, No 06-4141 (November 29, 2007)
This appeal from a Tax Court case (reported in the Fall 2006 newsletter) involved a testamentary trust established by a Roman Catholic priest benefiting his brother and his brother's wife, other individuals receiving lifetime income, and ultimately the Catholic Diocese. Although the executor began the work of reforming the trust, he did not obtain the necessary signatures or file a judicial reformation proceeding within the time proscribed by the Internal Revenue Code and the IRS denied the charitable deduction on the estate's tax return. In this appeal, the executor argued the estate had substantially complied with the reformation requirements. The Seventh Circuit affirmed the Tax Court's position rejecting that argument and denying the deduction.
Non-Qualified Charitable Trust with Hybrid Charitable Remainder and Lead Provisions Successfully Reformed to Create Deduction for Lead Annuity Interest, Ltr. Rul. 200746010 (November 16, 2007)
The decedent's will created a residual trust which: 1) paid a fixed sum (at least 5% of the trust's original market value) to be divided among three individuals for their joint lives; 2) divided the excess income (if any) among twelve charities; and 3) continued in trust after the death of the three individuals for the benefit of the twelve charities. As structured, the trust arrangement was not a qualified charitable remainder trust or charitable lead interest. The executor filed a judicial reformation action to: 1) pay an annual annuity amount (.38% of the trust's initial market value) to the three individuals, or the survivor of them or for their joint lives or a term, whichever occurs first; 2) pay an annual annuity amount (4.62% of the trust's initial market value) to the 12 charities over this term; and 3), at the end of the term, hold the trust for the exclusive benefit of the 12 charities. The executor asked for and received a ruling that the charitable lead interest was reformable, and once reformed through judicial action, would qualify for an estate tax charitable deduction.
Lawyer's Deduction for Gift of Trial Documents Denied Because Documents Belonged to Defendant Under State Law, Sherrel Jones et vir v. Commissioner, 129 T.C. No. 16, No. 20253-04
Leslie Stephen Jones served as Timothy McVeigh's defense attorney in his trial for the bombing of the Oklahoma City federal building. On August 27, 1997, the day he withdrew as McVeigh's attorney, he offered tens of thousands of photocopied trial documents from the case files--such as witness statements, FBI notes, medical examiner's reports, crime scene photographs, correspondence between McVeigh and his family, and government documents--to the University of Texas at Austin. Jones and his wife had the documents appraised for $294,877, claiming the deduction on their 1997 return and carrying forward the unused amounts in the following three years. The IRS denied the deduction and the taxpayers appealed. The Tax Court determined the contributed files were in Jones' possession through the "unique fiduciary relationship" of an attorney and client and that McVeigh owned the files under Oklahoma law. Since Jones was not the property's owner, he was not entitled to a deduction for the gift.