Attorney-at-Law

POST-MORTEM ESTATE PLANNING

In Uncategorized on 03/30/2016 at 16:08

A favored CLE topic proves the undoing of Estate of Victoria E. Dieringer, Deceased, Eugene Dieringer, Executor, 146 T. C. 8, filed 3/30/16.

Judge Kerrigan has this case study.

Old Vic had the majority of the voting and non-voting shares in the family real estate management C Corp. Old Vic set up an inter vivos trust, which got all Old Vic’s property poured over when Old Vic bowed out. In addition, Old Vic set up a charitable foundation, which was supposed to get the C Corp stock when Ex’r Gene doled out the goodies.

The 706, of course, reported the FMV of the stock, voting and non-voting, and took a charitable deduction for payment to the foundation, based on a DoD appraisal.

Simple so far, right?

But the post-mortem estate planners stepped in, and here’s where it gets interesting. I’ll let Judge Kerrigan summarize.

“Numerous events occurred after [Old Vic’s] death but before …bequeathed property was transferred to [foundation].  Seven months after [Old Vic’s] death [C Corp] elected S corporation status.  [C Corp] also agreed to redeem all of [Old Vic’s] bequeathed shares from [trust].  [C Corp, now S Corp] and [trust] amended and modified the redemption agreement, with [C Corp, now S Corp] agreeing to redeem all… of the voting shares but only 5,600.5 of the nonvoting shares.  In exchange for the redemption, [trust] received a short-term promissory note for $2,250,000 and a long-term promissory note for $2,968,462 (as amended).  At the same time as the redemption, pursuant to subscription agreements, three of [Old Vic’s] sons, including Ex’r Gene, purchased additional shares in [C Corp, now S Corp].  [Foundation] later reported that it had received three noncash contributions consisting of the short-term and long-term promissory notes (as amended) plus nonvoting [C Corp, now S Corp] shares.” 146 T. C. 8, at p. 3.

Now we all know that valuation of estates are deemed settled, so far as can be, at DoD or DoD+6. And Ex’r Gene never elected DoD+6.  So Ex’r Gene claims the worth of the charitable deduction of the stock that went to foundation is determined at DoD. And this notwithstanding that Ex’r Gene got a new appraisal at redemption time, that valued the stock way less and gave foundation the aforementioned promissory notes instead of the stock it was supposed to get.

But IRS claims the abovedescribed post-mortem finagling (to use a technical term) reduced the worth of what foundation actually got.

OK, says Judge Kerrigan. “Normally, absent a section 2032 election, the date-of-death value determines the amount of the charitable contribution deduction, which is based on the value of property transferred to the charitable organization.  See generally sec. 2055(d) (the amount of the charitable contribution deduction ‘shall not exceed the value of the transferred property required to be included in the gross estate’); sec. 2055(g)(1).  There are circumstances, however, where the appropriate amount of a charitable contribution deduction does not equal the contributed property’s date-of-death value.  See, e.g., Ahmanson Found., 674 F.2d at 772 (‘The statute does not [necessarily] ordain equal valuation as between an item in the gross estate and the same item under the charitable deduction.’).’ 146 T. C. 8, at p. 23.

Moreover, Ex’r Gene had valid nontax business reasons for the finagling aforesaid. Ex’r Gene claims he wanted to avoid Section 1374 BIG, and could freeze the value of the stock via the promissory notes, so as to avoid future declines in value. Likewise, redeeming the stock made foundation a preferred creditor of trust, giving it priority over Ex’r Gene and Bros.

Not good enough, guys.

“Even though there were valid business reasons for the redemption and subscription transactions, the record does not support a substantial decline in [Corp’s] per share value.  Ex’r Gene testified that the precipitous drop in the value of the … shares was the result of a poor business climate.  The evidence does not support a significant decline in the economy that resulted in a large decrease in value in only seven months.” 146 T. C. 8, at p. 26.

The real reason was that the post-mortem appraisal downgraded the worth of the stock as a minority interest, notwithstanding it was truly a majority interest per the DoD appraisal.

When an intrafamily is on the screen, it gets a really close look. Ex’r Gene was all hats and all cattle. He was all over the deal on every which side.

Ex’r Gene stood Old Vic’s estate plan on its head, shortchanging foundation to enrich himself and Bros. Judge Kerrigan is not amused.

“We do not believe that Congress intended to allow as great a charitable contribution deduction where persons divert a decedent’s charitable contribution, ultimately reducing the value of property transferred to a charitable organization.  This conclusion comports with the principle that if a trustee ‘is empowered to divert the property * * * to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed * * * the deduction will be limited to that portion, if any, of the property, or fund which is exempt from an exercise of the power.”  Sec. 20.20552(b)(1), Estate Tax Regs.  Eugene and his brothers thwarted decedent’s testamentary plan by altering the date-of-death value of decedent’s intended donation through the redemption of a majority interest as a minority interest.” 146 T. C. 8, at p. 27.

20% chop? You betcha. Although Corp’s lawyer had represented Old Vic and the Corp for 30 years and had plenty of credentials, the appraisal of the stock was finagled at the behest of Ex’r Gene and Bros.

“The date-of-death appraisal and the redemption appraisal–performed only seven months apart–differed substantially in value. The estate knew that a significant percentage of the value of decedent’s  bequeathed shares was not passing to the foundation and that Eugene and his brothers were acquiring a majority interest in DPI at a discount.

“The estate’s position is also not amply supported by caselaw.  None of the cases the estate cites in its briefs stand for the principle that an estate may deduct as a charitable contribution the date-of-death value of assets that are not actually transferred to the charitable organization.  The estate has not shown that it had reasonable cause or acted in good faith.” 146 T. C. 8, at pp. 30-31.

Ex’r Gene and Bros get the 20% chop, but they also get a Taishoff “good try, third class.”

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