Daughter's Faulty Disclaimer Results in Loss of Estate Tax Charitable Deduction for Charitable Lead Trust, Estate of Helen Christiansen et. al. v. Commissioner, 130 T.C. No. 1; No. 13190-05
Helen Christiansen's will left the bulk of her asset—comprised primarily of family limited partnership interests holding the family businesses—to her daughter, Christine. The will anticipated the possibility Christine would disclaim and directed 25% of any disclaimed property would pass to a private foundation and 75% would pass to a 7% charitable lead annuity trust. The charitable lead trust paid the annuity amount to the private foundation for 20 years and distributed the remainder to Christine at termination. Christine disclaimed all but $6.35 million of the estate in a complicated fractional formula but did not specifically disclaim the contingent remainder from the lead trust. On audit, the IRS challenged the value of the family limited partnership assets, and denied the charitable deduction for the disclaimed property passing to the lead trust and the private foundation. The parties agreed to a 35% increase in the partnership interests prior to trial. In this ruling, the Tax Court allowed the estate to take a charitable deduction for the disclaimed property passing to the private foundation (including the augmented amount resulting from the valuation increase) but denied the deduction for the transfer to the charitable lead trust finding Christine’s failure to disclaim her contingent remainder interest resulted in a non-qualified disclaimer for that portion. Although Christine’s disclaimer contained a broad savings clause, the Court found this was not sufficient to revive the charitable deduction.
Letter Rulings Provide Tutorial in Using a Sprinkling Power to Allocate Charitable Remainder Trust’s Annual Distribution Among Charitable and Non-Charitable Beneficiaries, Letter Rulings 200813023, 200813006
Two recent rulings provide insight into drafting options and considerations when sprinkling income among the income beneficiaries of a charitable remainder unitrust (CRUT). In the facts of the first ruling, the CRUT distributed 50% of the annual income amount to the grantor, and directed a Special Trustee to allocate the remaining 50% among the taxpayer or a charitable organization selected by a Special Trustee. In the facts of the second ruling, the document directed the trustee to distribute 25% of the annual income distribution to the grantor and his wife, and gave a Special Trustee the discretion to allocate the remaining 75% of the income amount to a group comprised of the grantor, the grantor’s spouse, or charitable entities selected by the Special Trustee. In both instances, the grantors reserved the right to replace the Special Trustee, the document specified neither the grantor nor an individual related to or subordinate to the grantor could be named as the original or Special Trustee, and the trusts distributed to a qualified charity at termination. The Service held both trusts qualified as CRUTs, the Special Trustees were Independent, and the trusts would not be treated as grantor trusts.
Tax Court Denies Charitable Deduction Expressing Skepticism About the Quality of the Donor’s Charitable Receipt, Diane Burkley et vir v. Commissioner; T. C. Summ. Op. 2008-20; No. 13748-04S
In this Summary Opinion, the Tax Court detailed numerous problems with the taxpayers’ return including a charitable deduction substantiated by an unsigned receipt on the letterhead of the
Revenue Ruling Clarifies S Corporation Shareholders May Claim Charitable Deduction in Excess of Basis of Stock for Gifts of Appreciated Property in 2006 and 2007, Rev. Rul. 2008-16; 2008-11 IRB 1
The Pension Protection Act of 2006 allowed S Corporations to adjust the S Corporation stock basis to reflect the market value of charitable gifts of appreciated property made in 2006 and 2007. This ruling clarified that an S Corporation shareholder may claim a charitable income tax deduction for a charitable gift of appreciated assets exceeding the shareholder’s basis. (See the ruling for the complex calculation of the deduction value.) In these facts involving an S Corporation gift of appreciated real estate, the IRS stated “the basis limitation rule in section 1366(d)(1) does not apply to a contribution of appreciated property to the extent the shareholder’s pro rata share of the contribution exceeds the shareholder’s pro rata share of the adjusted basis of the contributed property.” Although this provision expired December 31, 2007, it is included in the current extender bills as well as in the Treasury’s 2009 Blue Book, making it possible it could be extended or become permanent.