In his article, Charles Rubin discusses the case of Victoria E. Dieringer’s estate which included a majority stake in a real property management corporation that was left to a private foundation. He explores the circumstance in which a property is transferred to a charitable organization and the tax deduction is reduced.
Here is his opinion:
Decedent died and left a majority stake in a real property management corporation to a private foundation. The estate tax value of the stock was $14.182M.
After the decedent’s death, but before the stock was transferred to the foundation, certain things happened, including:
a. The corporation elected Subchapter S status;
b. The corporation redeemed from the decedent’s trust a large portion of the company shares for a value far less than the estate tax value.
At least part of the difference in value was attributed to changes in business climate after the date of death and before the 7th month date after death when the stock was appraised for the redemption. The Tax Court, however, found that there was insufficient evidence to support the large decrease in value. There was also concern that the redemption price was calculated on a minority basis even though the decedent owned a majority interest in the company.
Both parties acknowledged that the value of the charitable contribution deduction is based on the date-of-death value of the contributed property.
The Tax Court indicated because of the intrafamily transactions involved in this circumstance (including that family members may have benefited from the reduced transfer to charity), the transaction was subject to hightened scrutiny. It further noted that Congress did not intend “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.” The court further noted that this concept finds support in the regulations which provide 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. 20.2055-2(b)(1), Estate Tax Regs. Finding that the decedent’s testamentary plan was thwarted by altering the date-of-death value of the intended donation through the redemption, the court reduced the amount of the charitable deduction.
The Tax Court did not say that a mere decline in value of contributed property prior to post-death funding is going to reduce the charitable deduction. What it is saying that in circumstances where a diversion of the property going to the charity is effectively undertaken, then in that circumstance the deduction is subject to reduction.
Estate of Victoria E. Dieringer, et al., 146 T.C. No. 8 (2016)
Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal