Taxation & Estate Planning

FORMULA DISCLAIMERS

By Fox Rothschild

In a fully reviewed opinion, the United States Tax Court in the  Estate of Christiansen v. Commissioner, 130 TC  No.1 (2008) rendered what may become a landmark case dealing with “formula disclaimers.”

The decedent’s daughter made a formula disclaimer of everything in the estate in excess of $6,350,000.00.  The excess passed to a charitable lead trust and a foundation.  (As to the part passing to the trust, the charitable deduction was disallowed by the court on the ground that the disclaimant had an interest in the trust which itself was not disclaimed, violating Reg. § 25.2518-2(c) and  §25.2518-3(a)(b)).

The specific formula disclaimer clause provided “intending to disclaim a fraction or portion of the Gift, … 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 … less $6,350,000.00, and the denominator of which is the Fair Market Value of the Gift….”  Fair Market Value was defined as the value as finally determined for Federal Estate Tax purposes.  The disclaimer clause also had a savings clause in which the disclaimant “…hereby takes such actions to the extent necessary to make the disclaimer…a qualified disclaimer.”

The Commissioner challenged the disclaimer as not being effective to pass the property to the foundation on two grounds:  (1)  The amount was subject to a contingency - as a conditioned subsequent and (2) the clause was void as contrary to public policy.  As to the condition subsequent argument, the court held that the regulation (§ 20.2055-2(b)(1) which disallows a charitable deduction if the Gift is dependent upon the performance of an act precedent) does not apply.  As the court noted, the transfer to the foundation occurred at the time of the disclaimer and was not contingent upon any event that occurred after the decedent’s death. 

As to the public policy discussion, the Commissioner cited the often-cited case of  Commmissioner. V. Procter, 142 F.2d 824 (4^th Cir. 1944).  In Procter, the court voided a clause as contrary to public policy in that the clause would discourage collection of tax, would render the court’s own decision as moot by undoing the gift, and would upset a final judgment.  Here, the Tax Court stated  “This case is not Procter.  The contested phrase would not undo a transfer, but only reallocate the value of the property transferred…”  The court concluded that an increase in the charitable deduction to reflect the increase of the property passing to the charity “violates no public policy.”

Full post as published by Tax Litigation Blog on February 07, 2008 (boomark / email).