Case Name: Estate of Helen Christiansen, Deceased, Christine Christiansen Hamilton, Personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 2008-01-24
Citations: 130 T.C. 1
Docket Number: Docket No. 15190-05
Parties: Estate of Helen Christiansen, Deceased, Christine Christiansen Hamilton, Personal Representative, Petitioner v. Commissioner of Internal Revenue, Respondent
Judges: Colvin, Cohen, Wells, Foley, Vasquez, Thornton, Marvel, Haines, and Goeke, JJ., agree with this majority opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 130
Pages: 1–34

Head Matter:
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.
John W. Porter and J. Graham Kenney, for the estate.
Trent D. Usitalo, for respondent.

Opinion:
Holmes, Judge:
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 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 FACT
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 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.
The Trust 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 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. 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.
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 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 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. 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-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 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. 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 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.
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), 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 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-l(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.
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 9 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 requirement — 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 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 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. That's what the sentence immediately preceding the italicized language says: "If the portion of the dis claimed 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." Thus, a block of stock can 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.
"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 spe cific 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 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. 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 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, 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.
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 9 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 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. Commis sioner, 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 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 allow able 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 20.2055-2(b)(1), Estate Tax Regs., but by section 20.2055-2(c), Estate Tax Regs. 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 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.
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 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). 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." 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 char ity — if anything the opposite is true. Public policy encourages gifts to charity, and Congress allows charitable deductions to encourage 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, 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 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. Her fellow directors or beneficiaries of the Foundation or Trust can presumably enforce their observance through tort law as well. 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 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.
The Chief Judge reassigned this case to Judge Holmes from Judge Kroupa.
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.
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.
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.
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.
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.
We need not decide whether the burden of proof shifts to respondent under sec. 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.
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.
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 conceded that the estate's return position — talcing 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. 14-18.
Webster's New Collegiate Dictionary 741 (8th ed. 1974).
"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)(l)(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.
To be technically precise, Hamilton was giving up an annuity interest rather than an income interest, but the distinction malees no difference.
The dissent relies on Examples (8) and (11) in sec. 25.2518-(3)(d), Gift Tax Regs., see infra pp. 28-29, 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.
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.
Bogert & Bogert, The Law of Trusts and Trustees, sec. 411 (rev. 2d ed. 1991).
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.