Dieringer v. Comm., (CA9 3/12/2019) 123 AFTR 2d ¶2019-500
Following its Ahmanson decision, the Ninth Circuit affirmed the Tax Court’s 2016 holding that an estate’s charitable deduction was based on the value of property actually received by the charity, and not the property’s date-of-death value, where the trustee of a trust that inherited all of a decedent’s property engaged in post-death transactions resulting in the charity actually receiving property worth less than its estate tax value.
Background. Under Code Sec. 2032, property includible in the gross estate is included at its fair market value (FMV) on the date of the decedent’s death unless the executor elects alternate valuation. (Reg. § 20.2031-1(b)) In calculating a decedent’s taxable estate a deduction for bequests made to charitable organizations is generally allowed (Reg. § 20.2055-1(a)) for the value of property included in the decedent’s gross estate and transferred by the decedent during her lifetime or by will to or for the use of a corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. (Code Sec. 2055(a)(2), Reg. § 20.2055-1(a)(2))
The date-of-death value generally determines the amount of the charitable contribution deduction, which is based on the value of property transferred to the charitable organization. Code Sec. 2055(d) provides that the amount of the charitable contribution deduction can’t exceed the value of the transferred property required to be included in the gross estate. However, if a trustee is empowered to divert the property to a use or purpose that would have rendered it, to the extent subject to that power, not deductible had it been bequeathed directly, the deduction is limited to that portion, if any, of the property or fund that is exempt from an exercise of the power. (Reg. § 20.2055-2(b)(1))
In Ahmanson Foundation v. U.S., (1981, CA9) 48 AFTR 2d 81-6317, however, the Ninth Circuit concluded that the value of an item in the gross estate does not necessarily determine its value a charitable deduction. In that case, shares were discounted for their lack of voting power for charitable deduction purposes, despite their not being discounted in determining the value of decedent’s gross estate. The estate’s charitable deduction was limited to the value to the charity of the property it actually received.
Facts. Ms. Dieringer (D) and some family members owned DPI, a closely held real property management corporation. D was a majority shareholder in DPI, owning 425 out of 525 voting shares and 7,736.5 out of 9,920.5 nonvoting shares. During her life, D established Trust (T) and Foundation (F). Her son E was executor of her estate, and the sole trustee of T and F. D’s will left her entire estate to T. The trust agreement provided that her DPI stock would be distributed to F.
An appraisal determined the date-of-death FMV of D’s voting stock at $1,824 per share with no discount. The nonvoting stock was valued at $1,733 per share, including a 5% discount to reflect its lack of voting power.
After D’s death but before her bequeathed property was transferred to F, DPI elected S corporation status, and agreed to redeem all 425 voting shares and 5,600.5 nonvoting shares. At the same time as the redemption, pursuant to subscription agreements, three of D’s sons, including E, purchased additional shares in DPI. Before her untimely death, D knew of and assented to early discussions of the share redemption plan. There were valid business reasons for these transactions.
All of the post-death transactions were based on an appraisal done one year after D’s death, which valued her DPI shares at $916 per voting share and $870 per nonvoting share. The appraisal discounted the voting shares 15% for lack of control and 35% for lack of marketability; the nonvoting shares received lack-of-control and marketability discounts plus an additional 5% discount for the lack of voting power. These discounts were based on E’s instruction to the appraiser that D’s bequeathed shares should be valued as a minority interest, even though the trust agreement provided that a majority of the shares were to be bequeathed to F.
All of these transactions resulted in F receiving significantly less value than it would have had it received all of D’s DPI shares.
Tax Court: The Tax Court held that the estate’s charitable deduction should be based on what F actually received: the FMV of the notes plus the value of the DPI shares it actually received, at their discounted value. (Estate of Dieringer, (2016) 146 TC 117, see Charitable deduction was reduced where charity received substituted property.) Although there were valid business reasons for the redemption and subscription transactions, the record did not support a substantial decline in DPI’s per-share value. The court rejected E’s testimony that the precipitous drop in the value of the DPI shares was the result of a poor business climate. It found that the reported decline in per-share value was primarily due to E’s instruction to value D’s majority interest as a minority one.
Ninth Circuit affirms: The Ninth Circuit said that Ahmanson compelled it to affirm the Tax Court. It found that D structured her estate so as not to donate her DPI shares directly to a charity, but to the trust. She enabled E “to commit almost unchecked abuse of the Estate by setting him up to be executor of the Estate, trustee of the Trust, and trustee of the Foundation,” in addition to his corporate and shareholder roles. It agreed with the Tax Court that E improperly directed the appraiser to determine the redemption value of the DPI shares by applying a minority interest valuation, when he knew a majority interest applied and the estate had claimed a charitable deduction based upon a majority interest valuation. Through these actions F received only a fraction of the charitable deduction claimed by the estate.
The appellate court rejected the estate’s argument Ahmanson is limited to situations where the testamentary plan itself diminishes the value of the charitable property. It said that Ahmanson extends to situations where the testator would be able to produce an artificially low valuation by manipulation, “which includes the present situation.” D’s testamentary plan laid the groundwork for E’s manipulation by concentrating power in his hands—in his roles as executor of the estate and trustee of the trust and foundation—even after she knew of and assented to early discussions of the share redemption plan.
References: For valuation of estate tax charitable deduction, see FTC 2d/FIN ¶ R-5788; United States Tax Reporter Estate & Gift ¶ 20,554.