On February 1, 2008, Steve R. Akers, Associate Fiduciary Counsel, Bessemer Trust, Dallas, Texas, circulated by email the summary of his article entitled "Estate of Christiansen v. Commissioner: Formula Disclaimer That Operates Much Like A Defined Value Transfer Clause Does Not Violate Public Policy", together with a link for his full analysis.
The Memorandum Opinion of the U. S. Tax Court, issued January 24, 2008 in this case, is available online. See: Estate of Helen Christiansen, deceased v. Commissioner of Internal Revenue, Docket No. 15190-05, 130 T.C. No. 1 (PDF, 57 pages).
In short, the Tax Court upheld the effectiveness, for purposes of a federal estate tax charitable deduction, of a "savings clause" (in this case, a formula disclaimer) that caused an increase in the value of the gross estate on audit to pass to a charity, which was exempt from application of the tax.
With his permission, I repost Steve's summary observations about the Christiansen case.
To read Steve's more detailed analysis of the Christiansen case, click here (PDF, 6 pages; January, 2008), or contact him at: Akers@bessemer.com.Estate of Christiansen v. Commissioner:
Formula Disclaimer That Operates
Much Like A Defined Value Transfer Clause
Does Not Violate Public Policy
Copyright © 2008 by Bessemer Trust Company, N.A. All rights reserved.
In Estate of Christiansen v. Commissioner, 130 T.C. No. 1 (January 24, 2008), the full Tax Court renders what may become a bellwether case for defined value clauses.
The case involves a formula disclaimer. The decedent’s daughter made a “formula disclaimer” of everything in the estate in excess of $6.35 million. The excess passed to a foundation and a charitable lead annuity trust.
A technical disclaimer issue prevented the disclaimer from being effective as to the CLAT, but that technical issue did not apply to the amount disclaimed to the foundation. But for the technical disclaimer problem, if all of the disclaimed assets had passed directly to the foundation or another charity in a manner that qualified for the estate tax charitable deduction, the IRS would not have collected any additional estate tax no matter what value it placed on the gross estate, because all of the excess value over $6.35 million would have been offset by a charitable deduction.
The IRS argued that the disclaimer to the foundation should not be recognized on the same grounds that it has objected to defined value transfer clauses: (1) the disclaimer was subject to a condition subsequent, and (2) the disclaimer should be invalid on public policy grounds.
Every Tax Court judge who participated in this opinion agreed that neither of those arguments invalidated the formula disclaimer. The Tax Court in McCord seemed to go out of its way to avoid the issue of whether a defined value gift transfer violated public policy. While the court’s specific reasoning arguably might not cover all defined value transfers, the Christiansen case suggests that the Tax Court will likely reject the IRS’s public policy argument when it arises again in the context of a defined value transfer.
Although the Fifth Circuit gave effect to a defined value transfer in McCord, the court did not address the public policy issue (the IRS did not make that argument before the Fifth Circuit, perhaps because it perceived the Fifth Circuit as a taxpayer friendly Circuit and it did not want its public policy issue being decided first in that Circuit).
A major uncertainty after McCord is how courts will respond to the public policy issue, and perhaps Christiansen represents the first domino to fall. Time will tell.
For Steve's earlier discussion about the McCord case, see: PA Elder, Estate & Fiduciary Law Blog posting "McCord: 5th Circuit Respects Defined Value Clause & Allows New Type of Gift" (09/08/06).