Post-death events taken into account in property valuation.
Victoria Evelyn Dieringer was married to Robert Dieringer, who predeceased her in 2007. Evelyn and her husband had owned a retail grocery store. Evelyn and some of her family members also owned Dieringer Properties Inc. (DPI), a closely held real property management corporation that manages a combination of commercial and residential properties in Portland, Ore. DPI also owns and manages a Wendy's restaurant property in Texas. DPI primarily earns rental income with ancillary income generated from loans provided to developers or builders. Evelyn was a majority shareholder in DPI, owning 425 out of 525 voting shares and 7,736% out of 9,920% nonvoting shares.
During her life, Evelyn established the Victoria Evelyn Dieringer Trust and the Bob and Evelyn Dieringer Family Foundation, which qualified as a tax-exempt private foundation under Secs. 501(c)(3) and 509(a). Her son Eugene was sole trustee of the trust and foundation, and her son Patrick was an advisory trustee of the trust. Evelyn's will left her entire estate to the trust. Pursuant to the terms of the trust agreement, $600,000 went to various charitable organizations, and her children received minor amounts of her personal effects. The remainder of her estate, consisting primarily of DPI stock, was to be distributed to the acting trustee of the foundation to be administered in accordance with the terms of the trust agreement.
An appraisal for purposes of determining the date-of-death fair market value (FMV) of Evelyn's property valued her DPI nonvoting and voting shares at $14,182,471. The appraisal valued the voting stock at $1,824 per share with no applicable discount. The nonvoting stock was valued at $1,733 per share, including a 5% discount to reflect the lack of voting power at shareholder meetings.
Numerous events occurred after Evelyn's death but before the estate transferred her bequeathed property to the foundation. Seven months after her death, DPI elected S corporation status. DPI also agreed to redeem all of her bequeathed shares from the trust. DPI and the trust amended and modified the redemption agreement, with DPI agreeing to redeem all 425 of the voting shares but only 5,600% of the nonvoting shares. In exchange for the redemption, the 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 Evelyn's sons, including Eugene, Patrick, and Timothy, purchased additional shares in DPI. The foundation later reported that it had received three noncash contributions consisting of the short-term and long-term promissory notes (as amended) plus nonvoting DPI shares.
An appraisal of Evelyn's DPI stock for purposes of the redemption and subscription agreements determined that her DPI voting shares had an FMV of $916 per share and the nonvoting shares had an FMV of $870 per share. The appraisal of the voting stock included discounts of 15% for lack of control and 35% for lack of marketability. The appraisal of the nonvoting stock included the lack of control and marketability discounts plus an additional 5% discount for the lack of voting power at stockholder meetings.
Evelyn's estate, of which Eugene was the executor, and the IRS disputed the amount of the charitable contribution for the transfer to the foundation. The estate argued that the charitable contribution should not depend upon or be measured by the value of the property received by the foundation, so the charitable contribution deduction should equal the FMV of the property on Evelyn's date of death. The IRS argued that the post-death events should be taken into account in determining the amount of the charitable contribution.
Because the IRS found that the value of the estate's charitable contribution was lower than what was reported on its Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return, it determined that additional estate tax was due, as well as an accuracy-related penalty for an underpayment attributable to negligence or disregard of rules or regulations. The estate challenged the IRS's determination in Tax Court.
The Tax Court's Decision
The Tax Court held that the valuation of the property the estate transferred to the foundation should take into account the numerous events that occurred after Evelyn's death that changed the nature and reduced the value of the property that the estate actually transferred to the foundation. Taking these events into account, the court found that the estate did not transfer the shares Evelyn bequeathed nor their date-of-death value to the foundation, so the estate was not entitled to the full charitable deduction it claimed.
The estate contended that the proper valuation date for determining the value of the charitable contribution was the date of death because it did not elect an alternative date pursuant to Sec. 2032. The estate also argued that the charitable contribution deduction should not depend upon or be measured by the value of the property received by the charitable organization. It contended that consideration of post-death events that might alter the valuation of property would not truly reflect the FMV of a decedent's assets. In its specific case, the estate further maintained that there was neither a plan of redemption nor any other precondition or contingency that affected the value of Evelyn's charitable bequest.
The IRS argued that the value of the charitable contribution should be determined by taking into account the post-death events. The IRS asserted that actions taken after Evelyn's death by Eugene, Patrick, and Timothy were taken to thwart her intent to bequeath all of her majority interest in DPI or the equivalent value of the stock to the foundation. Specifically, the IRS claimed that the manner in which Eugene solicited the two appraisals, as well as the redemption of Evelyn's controlling interest at a minority interest discount, indicated that Eugene, Patrick, and Timothy never intended to effect Evelyn's testamentary plan of leaving most of her assets to charity.
The Tax Court explained that, as is commonly known, the value of property in an estate is the FMV of the property on the decedent's date of death or the alternate valuation date if elected. Normally, the value of an estate's charitable contribution deduction for a contribution of property to a charitable organization is the date-of-death (or alternate-valuation-date) value of the property transferred to the charitable organization. However, the court noted "[t]here are circumstances, however, where the appropriate amount of a charitable contribution deduction does not equal the contributed property's date-of-death value" (slip op. at 23, citing Ahmanson Found., 674 F.2d 761, 772 (9th Cir. 1981)).
The Tax Court found that the numerous events instigated by Eugene and his brothers that occurred after Evelyn's death, but before the estate property was transferred, changed the nature and reduced the value of the estate's charitable contribution. While the court admitted that there were valid business reasons for the redemption and subscription transactions, it determined that the record did not show that, as the estate claimed, the lower value of the property eventually transferred to the foundation was a result of extraneous business conditions. Rather, the court found that the lower value was due to the lower appraisal value for the DPI stock in the second appraisal and that this lower appraisal value was "primarily due to the specific instruction to value decedent's majority interest as a minority interest with a 50% discount" (slip op. at 26).
The court stated that Eugene, who controlled DPI, the trust, and the foundation, with only his brother Patrick as an advisory trustee of the trust, without any independent and outside oversight, had redeemed the trust's shares in DPI for a fraction of their value. By altering the date-of-death value of Evelyn's intended donation through the redemption of a majority interest in DPI as a minority interest, Eugene, Patrick, and Timothy had thwarted Evelyn's testamentary plan, as the IRS claimed.
Thus, the court concluded that the estate was not entitled to the full charitable deduction it claimed on its return, stating "[w]e 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" (slip op. at 27). The court stated that this was consistent with the principle in Regs. Sec.
20.2055-2(b)(1), which disallows an estate's charitable contribution deduction for a contribution to the extent that the trustee had the power to divert the contribution to a use or purpose for which a deduction would not be allowable.
The Tax Court did what it could to punish Evelyn's sons for their plan to circumvent their mother's charitable intentions to benefit themselves. It held the estate liable for a Sec. 6662(a) 20% penalty for an underpayment attributable to negligence or disregard of rules or regulations. The court found that the estate (which was essentially Eugene, Patrick, and Timothy working in concert) was negligent because it not only failed to inform the appraiser that the redemption was for a majority interest, but also instructed the appraiser to value the redeemed DPI stock as a minority interest. The court concluded that the good-faith exception to the penalty did not apply because the estate did not rely on counsel and was aware that its position relied on an errant appraisal, and the relevant case law did not support the estate's position.
Estate of Dieringer, 146 T.C. No. 8 (2016)
Author: James A. Beavers, J.D., LL.M., CPA, CGMA
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|Author:||Beavers, James A.|
|Publication:||The Tax Adviser|
|Date:||Jun 1, 2016|
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