Court Opinion

ID: 3047956
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:22:55.828287+00
Date Added: 2024-06-11T12:46:39.336732
License: Public Domain

United States Court of Appeals
                           FOR THE EIGHTH CIRCUIT
                                    ___________

                                    No. 08-3844
                                    ___________

Estate of Helen Christiansen, Deceased, *
Christine Christiansen Hamilton,        *
Personal Representative,                *
                                        *
             Petitioner-Appellee,       *
                                        *   Appeal from the United States
       v.                               *   Tax Court.
                                        *
Commissioner of Internal Revenue,       *
                                        *
             Respondent-Appellant.      *
                                  ___________

                              Submitted: September 22, 2009
                                 Filed: November 13, 2009 (Corrected: 11/18/09)
                                  ___________

Before MELLOY, BEAM, and GRUENDER, Circuit Judges.
                           ___________

MELLOY, Circuit Judge.

       The Tax Court1 held that a partial disclaimer was valid at least as to an amount
that subsequently passed to a foundation that Helen Christiansen (“Christiansen”)
named as a contingent beneficiary in her will. The Tax Court also held that
Christiansen’s estate was entitled to a charitable deduction for this amount. The
Commissioner of Internal Revenue appeals, and we affirm.

      1
       The Honorable Mark V. Holmes, United States Tax Court Judge, writing for
a unanimous en banc Tax Court.
       Christine Christiansen Hamilton (“Hamilton”), Christiansen’s only child and
executor of Christiansen’s estate, disclaimed her interest in the estate “as finally
determined for federal estate tax purposes” as to all amounts over $6.35 million. As
relevant to this appeal, Christiansen’s will provided that twenty-five percent of any
disclaimed amounts were to go to a charitable foundation. The Commissioner
challenged both the validity of the disclaimer and the amount reported as the estate’s
overall value.

      The parties eventually settled regarding a substantially increased valuation for
the estate based largely on adjustments to marketability discounts the estate had
claimed for limited partnership interests in a family ranching enterprise. This resulted
in a corresponding increase in the valuation of the contribution to the charitable
foundation. The Commissioner, however, denied the estate an increased charitable
deduction. The Commissioner argued that the act of challenging the estate’s return
and the resulting adjustment to the estate’s value served as post-death, post-disclaimer
contingencies that disqualified the disclaimer under 26 U.S.C. § 2518 and Treasury
Regulation § 20.2055-2(b)(1). The estate appealed to the United States Tax Court and
the Tax Court rejected the Commissioner’s arguments.

       On appeal to our court, the Commissioner presents two purely legal arguments.
As to these issues, our review of the Tax Court is de novo. Blodgett v. Comm’r, 394
F.3d 1030, 1035 (8th Cir. 2005) (“[A] tax court’s legal conclusions and mixed
questions of law and fact are subject to de novo review.”). First, the Commissioner
argues that because the overall value of the estate was not finally determined at the
time of Helen’s death, but only after the Commissioner’s partially successful
challenge, the transfer to the foundation was, ultimately, “dependent upon the
performance of some act or the happening of a precedent event” in violation of
Treasury Regulation § 20.2055-2(b)(1). The Commissioner identifies as the purported
“precedent event” or contingency the challenge mounted against the estate’s initial
return and the ultimate process of settling the estate’s value.

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       As a second argument, the Commissioner asserts policy concerns related to the
incentives and disincentives that exist regarding the decision to conduct audits in any
given case. In particular, the Commissioner argues that we should disallow fractional
disclaimers that have a practical effect of disclaiming all amounts above a fixed-dollar
amount. According to the Commissioner, such disclaimers fail to preserve a financial
incentive for the Commissioner to audit an estate’s return. With such a disclaimer,
any post-challenge adjustment to the value of an estate could consist entirely of an
increased charitable donation. Because this scenario would provide no possibility of
enhanced tax receipts as an incentive for the Commissioner to audit the return and
ensure accurate valuation of the estate, the Commissioner argues such disclaimers
should be categorically disqualified as against public policy.

       Regarding the first argument, we are unable to accept the Commissioner’s
interpretation of Treasury Regulation § 20.2055-2(b)(1). The regulation is clear and
unambiguous and it does not speak in terms of the existence or finality of an
accounting valuation at the date of death or disclaimer. Rather, it speaks in terms of
the existence of a transfer at the date of death. See Treas. Reg. § 20.2055-2(b)(1) (“If,
as of the date of a decedent’s death, a transfer for charitable purposes is dependent
upon the performance of some act or the happening of a precedent event in order that
it might become effective, no deduction is allowable unless the possibility that the
charitable transfer will not become effective is so remote as to be negligible.”); see
also 26 U.S.C. § 2518(a) (providing that a qualifying disclaimer relates back to the
time of death by allowing disclaimed amounts to pass as though the initial transfer had
never occurred); S.D. Codified Laws § 29A-2-801 (b) (same). Here, all that remained
uncertain following the disclaimer was the valuation of the estate, and therefore, the
value of the charitable donation. The foundation’s right to receive twenty-five percent
of those amounts in excess of $6.35 million was certain.

      In pressing his current argument, the Commissioner fails to distinguish between
events that occur post-death that change the actual value of an asset or estate and

                                          -3-
events that occur post-death that are merely part of the legal or accounting process of
determining value at the time of death. The Commissioner cites several cases in
which courts disallowed deductions because future contingent events might have
defeated a transfer or a charitable contribution. See Comm’r v. Sternberger’s Estate,
348 U.S. 187, 199 (1955) (deduction disallowed where bequest to charity was
dependent upon testator’s daughter dying without descendants); Henslee v. Union
Planters, 335 U.S. 595, 600 (1949) (deduction disallowed where a bequest to charity
was the remainder of trust and where the trust’s primary beneficiary had the right to
invade the trust corpus, therefore making not only the value of the bequest contingent,
but making the existence of the charitable bequest non-ascertainable); Bookwalter v.
Lamar, 323 F.2d 664, 669–70 (8th Cir. 1963) (marital deduction disallowed where
surviving spouse’s continued survival was a condition upon disposition of the estate,
thus creating “a ‘terminable interest’ within the meaning of § 2056 of the 1954
[Internal Revenue] Code.”). In each cited case, however, the actual contingencies
under scrutiny were outside the legal or accounting process of determining a date-of-
death value for the estate or an asset. None of these cases stand for the proposition
that deductions are to be disallowed if valuations involve lengthy or disputed appraisal
efforts or if the Commissioner’s actions in challenging a return result in determination
of an adjusted value. As stated by the Tax Court below:

      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 existence 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.

       In fact, in a different subsection of the regulation, the agency itself recognizes
that references to values “as finally determined for Federal estate tax purposes” are
sufficiently certain to be considered “determinable” for purposes of qualifying as a
guaranteed annuity interest. Treas. Reg. § 20.2055-2(e)(2)(vi)(a). In doing so, the

                                          -4-
agency expressly uses the above-quoted language to distinguish fixed determinable
amounts from fluctuating formulas that depend upon future conditions for their
determination. The regulation provides:

      An amount is determinable if the exact amount which must be paid under
      the conditions specified in the instrument of transfer can be ascertained
      as of the appropriate valuation date. For example, the amount to be paid
      may be a stated sum for a term of years, or for the life of the decedent’s
      spouse, at the expiration of which it may be changed by a specified
      amount, but it may not be redetermined by reference to a fluctuating
      index such as the cost of living index. In further illustration, the amount
      to be paid may be 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,
      or it may be expressed in terms of a fraction or percentage of the cost of
      living index on the appropriate valuation date.

Id. (Emphasis added). It seems clear, then, that references to value “as finally
determined for estate tax purposes” are not references that are dependent upon post-
death contingencies that might disqualify a disclaimer. Because the only uncertainty
in the present case was the calculation of value to be placed on a right to receive
twenty-five percent of the estate in excess of $6.35 million, and because no post-death
events outside the context of the valuation process are alleged as post-death
contingencies, the disclaimer was a “qualified disclaimer.” 26 U.S.C. § 2518(a). We
find no support for the Commissioner’s assertion that his challenge to the estate’s
return and the ultimate valuation process and settlement are the type of post-death
events that may disqualify a partial disclaimer.

       Regarding the second argument, we agree with the Commissioner that the Tax
Court’s ruling in this case may marginally detract from the incentive to audit estate
returns. It is possible that in some hypothetical case involving a fixed-dollar-amount
partial disclaimer, a post-challenge correction to an estate’s value could result in a

                                         -5-
charitable deduction equal to the increase in the estate, resulting in no increased estate
tax.2 The Commissioner argues that a policy supporting audits as a means to enforce
accurate reporting requirements mandates that we disallow fixed-dollar-amount partial
disclaimers because of the potential moral hazard or untoward incentive they create
for executors and administrators to undervalue estates.

       For several reasons, we disagree with the Commissioner’s argument that we
must interpret the statute and regulations in an effort to maximize the incentive to
audit. First, we note that the Commissioner’s role is not merely to maximize tax
receipts and conduct litigation based on a calculus as to which cases will result in the
greatest collection. Rather, the Commissioner’s role is to enforce the tax laws. See
26 U.S.C. § 7801 (a)(1) (“[T]he administration and enforcement of [the Tax Code]
shall be performed by or under the supervision of the Secretary of the Treasury.”);
id. § 7803(a)(2) (“The Commissioner shall have such duties and powers as the
Secretary may prescribe, including the power to (A) administer, manage, conduct,
direct, and supervise the execution and application of the internal revenue laws or
related statutes and tax conventions to which the United States is a party . . . .”).

     Second, we find no evidence of a clear Congressional intent suggesting a policy
to maximize incentives for the Commissioner to challenge or audit returns. The

      2
       As a practical matter, that is not the case with Christiansen’s estate.
Christiansen’s will provided that in the event of a disclaimer, 75% of the disclaimed
amount would go to a charitable lead annuity trust and 25% would go the foundation.
The Commissioner found the disclaimer invalid for other reasons as to the 75%
passing to the charitable lead annuity trust, and the estate does not appeal as to that
amount. Accordingly, the present case involves only 25% of the amount that
Hamilton initially attempted to disclaim. As a result, for every dollar of increase in
the finally determined value of the estate, the estate, in fact, seeks only a $0.25
charitable deduction. In other words, although we reject the Commissioner’s policy-
based argument as a matter of law, those arguments are not entirely applicable to the
present, undisputed facts.

                                           -6-
relevant policy in the present context is clear, and it is a policy more general in nature
than that articulated by the Commissioner: Congress sought to encourage charitable
donations by allowing deductions for such donations. See 26 U.S.C. § 2055(a)(2);
Sternberger’s Estate, 348 U.S. at 190 n.3 (“The purpose of the deduction is to
encourage gifts to the named uses.”). Allowing fixed-dollar-amount partial
disclaimers supports this broad policy.

       Third, and importantly, even if we were to find a general congressional intent
regarding a need to maximize the incentive-to-audit, no corresponding rule of
construction would be necessary in the present context to promote accurate reporting
of estate values. The Commissioner premises his policy argument on the assumption
that executors and administrators will purposefully undervalue assets in order to take
advantage of his marginally decreased incentive to audit. In the present context,
however, there are countless other mechanisms in place to ensure that fiduciaries such
as executors and administrators accurately report estate values. State laws impose
personal liability on fiduciaries, and state and federal laws impose financial liability
or, in some circumstances criminal sanctions, upon false statements, fraud, and
knowing misrepresentations. See, e.g., S.D. Codified Laws § 29A-3-703(a) (“A
personal representative is a fiduciary . . . .”); id. § 55-9-5 (providing that the attorney
general is the representative of beneficiaries of charitable foundations and has a duty
to enforce their rights in court actions); 18 U.S.C. 1001 et seq. (criminalizing various
acts of fraud and knowing misrepresentations); Ward v. Lange, 553 N.W.2d 246, 250
(S.D. 1996) (“[T]he fiduciary has a ‘duty to act primarily for the benefit’ of the
other.”) (quoting High Plains Genetics Research, Inc. v. J K Mill-Iron Ranch, 535
N.W.2d 839, 842 (S.D. 1995)).

      In addition, with a fixed-dollar-amount partial disclaimer, the contingent
beneficiaries taking the disclaimed property have an interest in ensuring that the
executor or administrator does not under-report the estate’s value. Such beneficiaries,

                                           -7-
therefore, have an interest in serving a watchdog function.3 Further, in this case
Hamilton was not only the primary beneficiary who made the contested partial
disclaimer, she was the executor of the estate and a board member for the foundation.
Because she owed a fiduciary obligation to both the estate and the foundation, any
self-dealing in this instance would be a clear violation of her general state-law
fiduciary obligation to put the interests of the foundation above her own interests and
possibly a violation of state and federal statutory prohibitions on certain forms of self
dealing. See Ward, 553 N.W.2d at 250; S.D. Codified Laws § 55-9-8 (“The trustee
of a trust described in § 55-9-7 shall not engage in any act of self-dealing which would
give rise to any liability for the tax imposed by section 4941 (a) of the Internal
Revenue Code.”); id. § 55-9-7 (defining trusts to include private foundations). In
general, and on the specific facts of the present case, then, there are sufficient
mechanisms in place to promote and police the accurate reporting of estate values
beyond just the threat of audit by the Commissioner, thereby undercutting the
Commissioner’s policy-based argument.

      We affirm the judgment of the Tax Court.
                      ______________________________

      3
        The parties have not briefed, and we do not address the question of whether
such beneficiaries have standing to intervene in tax disputes between the
Commissioner and an estate. We note simply that in the context of disclaimers of the
type at issue in this case, the Commissioner’s interest in ensuring accurate reporting
of estate values is aligned with the interests of the contingent beneficiaries.

                                          -8-