Attorney-at-Law

BACK FROM THE GRAEV

In Uncategorized on 02/19/2015 at 16:27

It’s an estate tax case, but the principle involved is our old friend from the façade wars, “so remote as to be negligible.” This is the test in Section 642(c)(2) for set-asides permitting an estate to take a charitable deduction even when it hasn’t actually spent the money.

The case is Estate of Eileen S. Belmont, Deceased, Diane Sater, Executrix, 144 T. C. 6, filed 2/19/15.

The late Eileen wanted the residuum of her estate to go to a genuine 501(c)(3), but the part of the cash therein included was income in respect of a decedent (a pension plan distribution), and wasn’t paid when the 1041 return was due, so the estate’s CPA, filing the 1041, took the deduction anyway, even though the cash was in an unsegregated checking account.

So the “permanently set aside for the purpose” is at issue, with the savings clause from the Regs: “…’unless under the terms of the governing instrument and the circumstances of the particular case the possibility that the amount set aside, or to be used, will not be devoted to such purpose or use is so remote as to be negligible.’ Sec. 1.642(c)-2(d), Income Tax Regs.” 144 T. C. 6, at p. 12.

There is no Tax Court learning on this point, but Judge Ruwe finds plenty from our old chum Larry Graev, Esq. Remember Larry and Lorna? No? Then check out my blogpost “Money-Back Guarantee”, 6/24/13.

The money for the charity has to come from gross income (OK, pension plan distribution is income), must be made pursuant to a governing instrument (Eileen had a will, duly probated, executor qualified), and must be set aside. Or maybe any chance that the gift would be defeated must be “so remote as to be negligible”.

Judge Ruwe draws on Larry’s case and cases therein cited.

When the 1041 was filed, unbeknownst to the CPA who filed it, there was protracted litigation in the offing. The late Eileen’s brother claimed a resulting trust, giving him a life estate in Eileen’s Santa Monica condo. He claims he took care of their mother until her death, and lived in the condo for a while. He wins in the CA courts ultimately, but the legal backing-and-filling depleted the estate’s cash, so the charitable donation never got paid.

I’ll spare you any mention of Dead Man’s Statutes; apparently it never got raised in the condo litigation, and maybe CA doesn’t have one or it is inoperative.

Howbeit, brother eventually wins. The estate claims “so remote as to be negligible”.

The test is “…‘a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction’. In Briggs v. Commissioner, 72 T.C. 646, 657 (1979), aff’d without published opinion, 665 F.2d 1051 (9th Cir. 1981), we construed the standard as being ‘a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance. With these interpretations in mind, we will consider the facts and circumstances of the matter sub judice to determine whether the possibility that the estate would invade the money set aside for the foundation was ‘so remote as to be negligible’.” 144 T. C. 6, at pp. 14-15. (Footnote omitted, but read it; the magic number for estates is a 95% win probability).

Judge Ruwe finds that brother’s claim was known to all hands, bar the CPA who filed it, before the 1041 was filed. Brother was represented pro bono by a CA lawyer of substantial credentials. When the executor tried to buy out brother, he refused. His attorney filed a Lis Pendens, started a lawsuit, and appeared ready for battle.

The executor never told the CPA all this.

So no non-negligible possibility of defeasance, so not permanently set aside, so no deduction.

Takeaway– Tell your preparer, please.

 

 

 

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  1. […] Lew Taishoff focused on the failure to clue in the tax preparer on the contingency. […]

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