Decision will be entered for respondent.
Decedent's (D) will directed that the residue of her estate,
which included income in respect of a decedent, be left to charity. The estate (E) took a charitable contribution deduction pursuant to
At the time of her death, D owned a condominium in which her brother (B) resided. During the protracted administration of the estate, B took a variety of legal actions and asserted a life tenancy interest in the condominium. B was subsequently awarded a life tenancy in the condominium. Because of the cost of litigation over the condominium, E no longer had sufficient funds to pay the amount previously deducted as a charitable contribution.
144 T.C. 84">*84 RUWE,
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference.
Eileen S. Belmont (decedent) resided in Ohio at the time of her death. Diane M. Sater, the executrix of decedent's estate, was a resident of Ohio at the time the petition was filed.
Decedent died testate on April 1, 2007. At the time of her death decedent's only2015 U.S. Tax Ct. LEXIS 7">*8 heirs were a brother, David Belmont (David), who lived in California and a half-sister in Ohio. On April 5, 2007, a proceeding to administer decedent's estate was opened in the Franklin County, Ohio Probate Court (Ohio Probate Court). James G. Flaherty is an attorney who prepared decedent's last will and testament (will) and represented the estate in the Ohio Probate Court.2
Decedent signed her will on February 11, 1994. The will instructs that decedent's real, personal, and intangible property--with the exception of two "Swedish tiles" bequeathed to a friend--be left to her mother (Wilma) if she were still alive at the time of decedent's death. Because Wilma predeceased decedent,32015 U.S. Tax Ct. LEXIS 7">*9 the will provides that decedent's real and personal property become part of the estate's residue and be distributed as follows: (1) $50,000 to David and (2) "the rest, residue, and remainder" to the Columbus Jewish Foundation (foundation). The foundation is a recognized
At the time of her death decedent was the titled owner of two pieces of real property: (1) her primary residence in Westerville, Ohio (Ohio residence), and (2) a condominium in Santa Monica, California (Santa Monica condo), which she purchased on January 2, 2003. The estate sold the Ohio residence on February 29, 2008, for $217,900.4 Decedent also 144 T.C. 84">*86 maintained a retirement account with the State Teachers Retirement Pension Fund of Ohio (STRPF). Following decedent's death the STRPF distributed $243,463 to the estate. The $243,463 distribution was income in respect of a decedent pursuant to
On April 8, 2008, the estate filed a first partial fiduciary's account with the Ohio Probate Court detailing the receipts and disbursements of the estate from April 1, 2007, to March 31, 2008. The account reported2015 U.S. Tax Ct. LEXIS 7">*10 total receipts of $426,557 and total disbursements of $141,548 by the estate. As of March 31, 2008, the estate had $285,009 remaining in its checking account.
On July 17, 2008, the estate filed a Form 1041, U.S. Income Tax Return for Estates and Trusts, for its taxable period ending March 31, 2008. At the time the estate filed its Form 1041 there were no income-producing assets remaining in the estate. Certified public accountant (C.P.A.) Connie Becker prepared the Form 1041. The estate did not inform Ms. Becker of any claims against the Santa Monica condo. In the Form 1041 the estate reported income of $241,184, consisting of: the $243,463 STRPF distribution, $721 of interest income, and a $3,000 long-term capital loss. After claiming deductions for taxes, return preparation fees, and other miscellaneous fees and expenses totaling $21,604, the estate claimed a $219,5805 charitable contribution deduction. The estate claimed the $219,580 charitable contribution deduction on the basis of decedent's will leaving the residue of her estate to the foundation. As of July 17, 2008 (the date the estate filed the Form 1041), the $219,580 charitable contribution had not been paid to the foundation.2015 U.S. Tax Ct. LEXIS 7">*11 The estate did not segregate the $219,580 from the other funds 144 T.C. 84">*87 in its checking account which were used to pay claims and administrative expenses.
On June 1, 2009, the estate filed a second partial fiduciary's account with the Ohio Probate Court detailing the receipts and disbursements of the estate from April 1, 2008, to March 31, 2009. The balance remaining in the estate's checking account as of March 31, 2009, was $272,675.
In July 1986 Wilma purchased and took title to a house in Santa Monica, California (5th Street residence). David resided in the 5th Street residence until August 2000, when the house was sold and he moved back to Ohio to assist decedent in caring for Wilma. As previously mentioned, Wilma died on October 13, 2001.
After Wilma's death decedent purchased the Santa Monica condo on January 2, 2003, for $285,000. To facilitate the purchase of the Santa Monica condo, decedent made a downpayment of approximately $100,000 and took out a $185,250 mortgage.2015 U.S. Tax Ct. LEXIS 7">*12 In 2004 decedent paid in full the mortgage encumbering the Santa Monica condo. Although the record before the Court does not provide the exact date, sometime in mid-2006 decedent permitted David to move into the Santa Monica condo. David resided at the Santa Monica condo for approximately nine months until decedent's unexpected death on April 1, 2007. David apparently continued to reside in the Santa Monica condo rent free until he was awarded a life estate in January 2012.
In order to complete the administration of decedent's estate, the estate was required to open an ancillary estate in California to administer the Santa Monica condo. In late 2007 the estate retained the services of a prominent California probate administration law firm, Hoffman, Sabban & Watenmaker, to handle the ancillary estate administration in California. The decision by the estate to hire Hoffman, Sabban & Watenmaker was made after the law firm was referred to the foundation by the Los Angeles Jewish Foundation. Hoffman, Sabban & Watenmaker charged the estate a preset statutory fee of "around $13,000" to handle the ancillary estate administration and advised the estate that it could be billed between $350 and2015 U.S. Tax Ct. LEXIS 7">*13 $450 per hour for any "extras" related to potential litigation or an appeal. On February 14, 2008, the estate opened an ancillary estate with 144 T.C. 84">*88 the Los Angeles County Probate Court to administer the Santa Monica condo.
Following decedent's death David discussed with Mr. Flaherty the possibility of exchanging his $50,000 bequest with the foundation for a life tenancy interest in the Santa Monica condo. On February 14, 2008--the same date the ancillary estate was opened in California--Ms. Sater mailed to David a letter (1) advising him that he could not purchase a life tenancy in the Santa Monica condo because the foundation did "not desire to hold real estate as an investment" and (2) requesting that he vacate the Santa Monica condo by March 21, 2008, in exchange for a "$10,000 stipend" from the foundation. David did not vacate the Santa Monica condo in exchange for the $10,000 stipend.
On April 2, 2008, David filed a creditor's claim with the Los Angeles County Probate Court claiming an alleged breach of contract on the basis that an oral agreement (agreement) existed between him, decedent, and their mother, giving him a life tenancy interest in the Santa Monica condo despite the agreement2015 U.S. Tax Ct. LEXIS 7">*14 not being reflected in decedent's will. Peter Gelblum, a prominent California attorney, represented David pro bono. David was a client of a local mental health organization in California where Mr. Gelblum is a member of the board of directors.6 On April 24, 2008, David filed a Lis Pendens, Notice of Pendency of Action (lis pendens) with the California Recorder's Office and the Los Angeles County Probate Court to alert third parties of potential action against the Santa Monica condo.
The estate rejected David's creditor's claim on May 13, 2008. On May 30, 2008, David filed an 850 Petition to Confirm Interest in Real Property (850 petition) with the Los Angeles County Probate Court, asserting a life tenancy interest in the Santa Monica condo on the basis of a "resulting trust" theory. In his 850 petition David claimed, inter alia, that his resulting trust from the sale of the 5th Street residence in 2000, along with his services to Wilma before her death in 2001, provided at least part of the purchase price for decedent's acquisition of the Santa Monica condo in 2003. On July 25, 2008, the estate filed its objections to2015 U.S. Tax Ct. LEXIS 7">*15 David's 850 petition. In its objections the estate 144 T.C. 84">*89 argued that David: (1) did not contribute to the purchase of the 5th Street residence in 1986; (2) had no interest in the 5th Street residence when it was sold in 2000; (3) had no interest in Wilma's estate; and (4) had no ownership interest in the funds decedent used to purchase the Santa Monica condo or in the Santa Monica condo itself.
On October 10, 2011, a trial was held in the Los Angeles County Probate Court to determine whether David had an interest in the Santa Monica condo. A judgment was entered in favor of David on January 26, 2012, and the estate appealed the decision on March 12, 2012. In an unpublished opinion filed February 28, 2013, the California appellate court upheld the decision of the Los Angeles County Probate Court and affirmed David's life tenancy interest in the Santa Monica condo.72015 U.S. Tax Ct. LEXIS 7">*16
The estate incurred various expenses as a result of the probate litigation and subsequent appeal concerning the Santa Monica condo. In order to pay these expenses as well as the continuing administrative costs of the estate, the estate depleted some of the $219,580 that it had ostensibly set aside for the foundation.
At the time of trial before this Court on September 11, 2013, the estate had approximately $185,000 remaining in its checking account.
The issue is whether the estate is entitled to a $219,580 charitable contribution deduction for purposes of computing its income tax for the taxable period ending March 31, 2008. The estate contends that during the taxable year ending March 31, 2008, it permanently set aside $219,580 of its gross income for the benefit of the foundation and thus is entitled to a charitable contribution deduction for that amount pursuant to
As a general rule, the Commissioner's determination in the notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is in error.
Charitable contribution deductions from income are allowed under In the case of an estate * * * there shall also be allowed as a deduction in computing its taxable income any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, permanently set aside for a purpose specified in
An amount will not be deemed "permanently set aside" for a charitable purpose under
144 T.C. 84">*91 Thus, for an estate to properly claim a charitable contribution deduction pursuant to
The estate argues that there was no "reasonably foreseeable possibility" that it would incur "unanticipated costs associated with litigating * * * [David]'s claims on the California condominium". Respondent argues that "there was a substantial possibility of a prolonged and expensive legal fight which would have required the estate to dip into the funds it allegedly 'set aside' for charity in order to not only pay for the litigation, but to also pay additional administrative costs for the estate as the probate proceedings dragged on for years and years." Respondent2015 U.S. Tax Ct. LEXIS 7">*20 concludes that "the [e]state was clearly on notice that a prolonged legal fight was more than just a remote possibility at the time they claimed the charitable deduction and it should have known that there was more than a 'negligible chance' that it would have to apply some of the funds received from the STR[PF] * * * in order to cover the administrative costs of the estate as the probate proceedings continued."
The parties cite no previous Tax Court opinions that directly address the issue. Although this Court has not had occasion to consider the "so remote as to be negligible" standard in the context of
Respondent argues that it is appropriate to consider David's legal claims, all of which were instituted before the estate filed its Form 1041 on July 17, 2008. The estate does not dispute that the information it received between April 1 and July 17, 2008, is relevant to the analysis. Instead, the estate argues that the facts known to it before the filing of its Form 1041 on July 17, 2008, did not create more than a negligible possibility that litigation would require the depletion of its charitable set-aside.
The information that was known or reasonably knowable to the estate when it filed its Form 1041 on July 17, 2008, indicates that David's claim to a life tenancy interest in the Santa Monica condo was a2015 U.S. Tax Ct. LEXIS 7">*22 serious claim based on alleged events that predated the end of the taxable year ending March 31, 2008.
The responsibility of the estate in claiming a charitable contribution deduction pursuant to
The facts and circumstances known to the estate when it filed its Form 1041 on July 17, 2008, were sufficient to put the estate on notice that the possibility of an extended and expensive legal fight--and consequently the dissipation of funds set aside for the foundation--was more than "so remote as to be negligible". To begin with, the estate was aware of its financial situation. As of March 31, 2008, after subtracting the funds that had been ostensibly set aside for the foundation, there was "approximately $65,000" remaining in the estate's residue to cover the remaining expenses associated with the estate administration. When the estate filed its Form 1041 on July 17,2015 U.S. Tax Ct. LEXIS 7">*23 2008, there were no income-producing assets remaining in the estate. From the amount remaining in its residue, the estate was responsible for various expenses. First, the estate was responsible for paying homeowners association fees and property taxes associated with the Santa Monica condo. Second, because the estate administration in Ohio could not be closed until the ancillary proceeding in California was concluded, the estate was responsible for attorney's fees to Mr. Flaherty. The attorney's fees paid to Mr. Flaherty for his work on the Ohio estate administration were not insignificant. For example, from April 1, 2008, to March 23, 2009, the estate paid Mr. Flaherty $29,548.15. Finally, the estate was responsible for attorney's fees to Hoffman, Sabban & Watenmaker for the administration of the ancillary estate in California. These fees included an upfront fee of $13,000 and approximately $350 to $450 per hour for any extra legal services related to potential litigation or an appeal.
The estate faced the possibility that David would engage in prolonged and expensive litigation over his interest in the Santa Monica condo. David's actions leading up to the estate filing its Form 10412015 U.S. Tax Ct. LEXIS 7">*24 on July 17, 2008, provided information indicating that he would put up a litigious fight. First, David did not vacate the Santa Monica condo and did not agree to the request made in Ms. Sater's letter dated February 14, 2008, to vacate the Santa Monica condo in exchange for a "$10,000 stipend". Second, on April 2, 2008, David filed a 144 T.C. 84">*94 creditor's claim with the Los Angeles County Probate Court asserting information supporting his claim to a life tenancy interest in the Santa Monica condo. Third, on April 24, 2008, David filed a lis pendens action with the California Recorder's Office and the Los Angeles County Probate Court. Fourth, David filed an 850 petition with the Los Angeles County Probate Court on May 30, 2008, asserting the basis for his claims. The estate was aware of these claims and filed its objections. Finally, David retained a prominent California attorney, pro bono, to represent his interests in the Santa Monica condo. All of these events occurred and were known to the estate before July 17, 2008, when the estate claimed a $219,580 charitable contribution deduction on its Form 1041. These facts and circumstances provided an indication to the estate that the possibility2015 U.S. Tax Ct. LEXIS 7">*25 of David litigating his alleged interest in the Santa Monica condo was more than negligible. Nevertheless, the estate failed to inform Ms. Becker--the C.P.A. who prepared the return in question--of David's claims against the Santa Monica condo.10
The estate contends that David's claims against the Santa Monica condo had no reasonably foreseeable impact on the amount set aside for the foundation at the time that the estate took the deduction. The estate relies on
We are not persuaded by the estate's attempt to analogize its situation to that of the estate in
The estate also seeks support for its position from the Court of Appeals for the Ninth Circuit's opinion in
The estate attempts to distinguish its case from
In reaching2015 U.S. Tax Ct. LEXIS 7">*29 our decision, we have considered all arguments made by the parties, and to the extent not mentioned or addressed, they are irrelevant or without merit.
To reflect the foregoing,
1. All section references are to the Internal Revenue Code (Code) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All monetary values have been rounded to the nearest dollar.↩
2. On September 6, 2013, Mr. Flaherty filed a motion to withdraw as counsel for the estate because he was to be a witness in the trial before this Court. The Court granted his motion on September 11, 2013.↩
3. Wilma passed away on October 13, 2001.
4. Proceeds from the sale of the Ohio residence were received by the estate before the closing of the taxable period ending March 31, 2008.↩
5. There is a slight discrepancy between the $219,117 STRPF distribution and the $219,580 charitable contribution deduction the estate claimed on its Form 1041. Neither party disagrees that the deduction at issue is $219,580.↩
6. David apparently had long suffered from unspecified mental problems.↩
7. The original judgment of the Los Angeles County Probate Court ordered the estate to provide David a life tenancy in the Santa Monica condo and to transfer the remainder interest to the foundation upon his death. This would have required decedent's estate to remain open until David's death. To resolve this issue, the California appellate court modified the original judgment, ordering the estate to execute a life estate deed to David and a remainder deed to the foundation.
8. The deduction under
9. The Commissioner has interpreted the "so remote as to be negligible" standard from a quantitative perspective in the estate tax context, requiring at least a 95% probability that a bequest will pass to a qualifying charity before a deduction is permitted.
10. Mr. Flaherty testified that the estate's decision to take the
11. The statute at issue in
