Thursday, May 24, 2012

Estate of Christiansen -- A Reprieve for Defined Value?

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A long-simmering dispute between taxpayers and the IRS came into view with the Eighth Circuit’s decision in Estate of Christiansen v. Commissioner (Docket No. 08-3844, 11/13/09).  Helen Christiansen’s will left her entire estate to her daughter Christine, but with a gift over to a charitable foundation and a charitable lead trust to the extent Christine disclaimed any portion of the estate. Because hard-to-value family limited partnership interests comprised a significant portion of the estate, Christine did not disclaim specific property in the estate, but instead disclaimed that portion of the estate that exceeded $6.35 million, as finally determined for federal estate tax purposes. 

The IRS examined the estate tax return and the estate agreed to a higher value for the partnership interests. But, due to the formula disclaimer, the increase in value passed entirely to the charitable entities. This allowed the estate to claim an increased charitable deduction, resulting in no net increase in estate tax. 

The IRS declined to allow the increased charitable deduction. First, it argued that the disclaimer was unqualified with respect to the 75% that passed to the charitable lead trust, because Christine was a remainder beneficiary of the trust. Second, the IRS claimed that the allowance of any increased charitable deduction was contrary to public policy because the formula disclaimer, coupled with the gift over to charity, was a disincentive to examine the return.  In the Tax Court, the estate lost on the first issue, but was successful on the second, allowing the estate to deduct the value of the 25% of the disclaimed property that passed to the foundation. 

The IRS appealed its loss on the second issue to the Eighth Circuit, reviving its public policy argument.  As noted by the court, “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.”   

The court showed little patience with this line of reasoning. The court said that “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.”  With little hesitation, it affirmed the Tax Court. 

Until now, the leading defined-value decision has been Succession of McCord, a taxpayer-favorable decision from the Fifth Circuit. The defined value clause in McCord had also provided that any increase in the value of transferred partnership interests was to pass to charity, effectively eliminating any increase in tax and discouraging IRS audits.  Interestingly, the IRS did not raise the public policy argument in the McCord appeal, so Christiansen may be a preview of how other circuits will address the issue. 

Harold W. Pskowski, Managing Editor for Estates, Gifts and Trusts

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