Christiansen v. Comm'r of Internal Revenue (In re Estate of Christiansen) , 15190–05.

• Citation: 130 T.C. 1,130 T.C. No. 1
• Decision Date: 24 January 2008
• Docket Number: No. 15190–05.,15190–05.
• Parties: ESTATE OF Helen CHRISTIANSEN, Deceased, Christine Christiansen Hamilton, Personal Representative, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

130 T.C. 1

130 T.C. No. 1

ESTATE OF Helen CHRISTIANSEN, Deceased, Christine Christiansen Hamilton, Personal Representative, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 15190–05.

United States Tax Court.

Jan. 24, 2008.

H was the only legatee of her mother's will. H disclaimed the portion of the gross estate that had a fair market value of more than $6,350,000. The will provided that any disclaimed portion would pass in part to a charitable foundation and in part to a charitable trust that would pay an annuity to the foundation. H did not disclaim a contingent remainder in the property passing to the charitable trust. On the estate's tax return, it deducted as charitable contributions the disclaimed property passing to the foundation and—to the extent of the present value of the annuity interest—the disclaimed property passing to the charitable trust. The parties stipulated to a value of the estate higher than that originally reported on the return.

Held: No deduction is allowed for any of the property passing to the trust because the partial disclaimer of that property is not a qualified disclaimer under sec. 2518, I.R.C.

Held, further: The entire value of the property passing to the foundation—including the increased amount passing to the foundation because of the increased valuation of C's gross estate—is deductible because the disclaimer of that property is a qualified partial disclaimer under section 2518, and because no public policy bars increasing the amount of that deduction.

John W. Porter and J. Graham Kenney, for the estate.

Trent D. Usitalo, for respondent.

HOLMES, J.¹

Helen Christiansen's will left everything to her only child, Christine Hamilton. The will anticipated that Hamilton would disclaim a part of her inheritance, and directed that any disclaimed property would go in part to a charitable trust and in part to a charitable foundation that Christiansen had established. The trust would last for 20 years, and pay an annuity of 7 percent of the corpus's net fair market value at the time of Christiansen's death to the foundation. At the end of the 20 years, if Hamilton were still alive, the property left in the trust would go to her.

The parties settled the issue of the estate's value—increasing it substantially over what was reported on the estate's tax return. There are two questions presented. The first is whether the estate can claim a charitable deduction for the present value of that 7 percent annuity from the trust to the foundation. This depends on whether Hamilton's undisclaimed contingent-remainder interest in the trust requires disallowance of that deduction. The second question is whether the estate can claim an increased charitable deduction for the increased value of the disclaimed property passing directly to the foundation.

FINDINGS OF FACT ²

Helen Christiansen, a lifelong South Dakotan, led a long and remarkable life. She was one of the first women lawyers in her state and practiced there until the late 1950s, when she married and became a full-time farmer. She and her husband had one child, Christine Christiansen Hamilton. Hamilton remains, as she was when she filed the petition, a South Dakota resident. Her mother was domiciled in the state when she died.

The Christiansens each owned and operated their own farming and ranching businesses in central South Dakota for many years. When her husband died in 1986, Christiansen added his operations to her own. Christiansen's daughter, like her mother, became well educated, graduating from Smith College and then earning an MBA from the University of Arizona. And like her mother, she decided on a life back home in South Dakota. She married a professor at South Dakota State University, and began helping to run the family farm.

Both Christiansen and Hamilton were deeply involved in their community, and Hamilton to this day serves on the boards of many charitable organizations. She and her mother had also long wanted to use some of their wealth to benefit their home state. The family had already donated parkland to Kimball, South Dakota in 1998, but mother and daughter wanted some way to permanently fund projects in education and economic development. After meeting with a local law firm in the late 1990s, they decided to organize a charitable foundation as part of Christiansen's estate plan.

The Matson, Halverson, Christiansen Foundation and the Helen Christiansen Testamentary Charitable Lead Trust were at the center of this plan. Christiansen and Hamilton expected that part of Christiansen's estate would find its way to the Foundation, and part would find its way to the Trust. The Foundation would fund charitable causes at a rate they hoped would be about $15,000 annually—in the Foundation's application to the IRS for recognition of exempt status, Hamilton stated:

The initial source of funding for the foundation will be $50,000 from the Helen Christiansen Estate providing a 5 percent income stream annually. Additionally, there will be annual funding from a 7 percent charitable lead annuity trust equaling $12,500.

The Trust ³ has a term of 20 years running from the date of Christiansen's death, and the Trust agreement provides for payments to the Foundation of 7 percent of the Trust's initial corpus. Any remaining assets in the Trust at the end of 20 years will go to Hamilton; if she dies before then, they will go to the Foundation. Hamilton and her husband, plus a family friend, are the Foundation's directors, and by early 2002, the Foundation was qualified as a charitable organization under section 501(c)(3).

Hamilton has contributed some of her own money to the Foundation and it has already begun its work, distributing a total of almost $22,000 through the end of 2004, including a donation for playground equipment to a local city park, and a grant to help buy food and supplies for the “Gathering and Healing of Nations,” a series of bipartisan conferences sponsored by former Senator Tom Daschle and South Dakota State government that brings Indians and non-Indians together.

The problems that gave rise to this case can be traced to some particularly complex wrinkles that Christiansen agreed to as part of her estate planning. The first was to reorganize the Christiansen farming and ranching businesses—which for decades had been run as sole proprietorships—as two limited partnerships: MHC Land and Cattle, Ltd., and Christiansen Investments, Ltd. Christiansen kept a 99 percent limited-partnership interest in each, with the rest going to Hamilton Investments, L.L.C. Hamilton Investments also became the general partner of both MHC Land and Cattle and Christiansen Investments, and Christiansen's daughter and son-in-law became its members. Such family limited partnerships (or FLPs) are fairly common, though often challenged, estate-planning devices and the structure Christiansen chose is not new to this Court. See Estate of Strangi v. Commissioner, 115 T.C. 478, 484 (2000), revd. on other grounds 293 F.3d 279 (5th Cir.2002).

In January 2000, Christiansen executed her last will and testament, which named Hamilton personal representative.⁴ This is where the second wrinkle showed: Instead of simply dividing her estate among Hamilton, the Foundation, and the Trust, Christiansen's lawyers wrote the will to pass everything (after payments of any debts and funeral expenses) to Hamilton. But the will also provided that if Hamilton disclaimed any part of the estate, 75 percent of the disclaimed portion would go to the Trust and 25 percent to the Foundation.

Christiansen died in April 2001, and her will was admitted to probate. Hamilton was named personal representative, and as planned, executed a partial disclaimer. The disclaimer's language is central to this case, and we reproduce the relevant portion here:

A. Partial Disclaimer of the Gift: Intending to disclaim a fractional portion of the Gift, Christine Christiansen Hamilton hereby disclaims that portion of the Gift determined by reference to a fraction, the numerator of which is the fair market value of the Gift (before payment of debts, expenses and taxes) on April 17, 2001, less Six Million Three Hundred Fifty Thousand and No/100 Dollars ($ 6,350,000.00 ) and the denominator of which is the fair market value of the Gift (before payment of debts, expenses and taxes) on April 17, 2001 (“the Disclaimed Portion”). For purposes of this paragraph, the fair market value of the Gift (before payment of debts, expenses and taxes) on April 17, 2001, shall be the price at which the Gift (before payment of debts, expenses and taxes) would have changed hands on April 17, 2001, between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts for purposes of Chapter 11 of the [Internal Revenue] Code, as such value is finally determined for federal estate tax purposes.

The $6,350,000 that Hamilton retained was an amount she and her advisers carefully determined would allow the family business to continue, as well as to provide for her and her own family's future.

But note especially the final phrase: “as such value is finally determined for federal estate tax purposes.” And add to it another shield strapped on to the disclaimer—a “savings clause.” This clause said that to

the extent that the disclaimer set forth above in this instrument is not effective to make it a qualified disclaimer, Christine Christiansen Hamilton hereby takes such actions to the extent necessary to make the disclaimer set forth above a qualified disclaimer within the meaning of section 2518 of the Code.

Consider how these insertions of uncertainty as to the amount actually being donated might come into play should the estate assign an unusually low value to the property being disclaimed. In such a scenario, Hamilton would take (and the estate tax would be paid on) her $6.35 million. But the...