In Estate of Victoria E. Dieringer v. Commissioner,1 the Internal Revenue Service prevailed against an executor who diverted assets away from the intended charitable recipient through a series of post-death transactions. The court upheld a reduction in the estate tax charitable deduction and imposed a 20 percent accuracy-related penalty for negligence.
At the time of her death on April 14, 2009, Victoria Dieringer owned and controlled Dieringer Properties, Inc., a family-owned real estate firm (the Company). The Company had two classes of shares outstanding: voting and non-voting. Her sons Eugene and Patrick owned minority interests, while another brother, Timothy, owned no shares. Eugene served as executor of the estate.
The decedent’s will poured all her estate into a trust (the Trust), which distributed personal effects to her children, gave cash to several charities and distributed the remainder to a family foundation (the Foundation). Eugene served as sole trustee of the Trust, as well as trustee of the Foundation.
On July 12, 2010, the estate filed its federal estate tax return. Eugene, as executor, obtained a date-of-death appraisal of the decedent’s interest in the Company. The appraisal applied a 5 percent discount to the non-voting shares, but otherwise applied no discounts.
The April 14, 2009 date-of-death appraisal, which was used to determine the value of the estate tax charitable deduction, valued each voting share at $1,824 and each non-voting share at $1,733.
Eugene and his brothers then carried out a plan in which the Company: (1) redeemed most of its shares from the Trust in exchange for promissory notes, and (2) issued new shares to the brothers for cash. Effective Nov. 30, 2009, the Company redeemed all the Trust’s voting shares and some of its non-voting shares, and Eugene, Patrick and Timothy all purchased shares of the Company. This time, Eugene instructed the appraiser to value the Trust’s shares as a minority interest. As a result, the appraisal included a 35 percent lack of marketability discount and a 15 percent lack of control discount. The Nov. 30, 2009 appraisal also accounted for several changes to the Company, including an S election.
The Nov. 30, 2009 appraisal, which was used to determine the price at which the Company redeemed its shares from the Trust, as well as the price at which the brothers purchased shares from the Company, valued each voting share at $916 and each non-voting share at $870.
Notice of Deficiency
On Sept. 17, 2013, the IRS issued a notice of deficiency. The IRS argued that the value of the charitable contribution should be determined not by reference to the April 14, 2009 date-of-death appraisal, but instead by reference to the Nov. 30, 2009 redemption-agreement appraisal, because that appraisal more accurately reflected the amount passing to charity. The IRS argued that the manner in which Eugene solicited the two appraisals, as well as the redemption of the decedent’s controlling interest at a minority interest discount, indicated that Eugene and his brothers never intended to effect the decedent’s testamentary plan. The IRS argued for application of a 20 percent penalty based on Eugene’s negligence in instructing the appraiser to value the Trust’s interest in the Company as a minority interest.
Court Favors Redemption Agreement Appraisal
The court agreed with the IRS that an estate tax charitable deduction should be based on the value the charity actually received, especially when the reduced value appeared to divert assets from the charity. As the court noted, “[t]he reported decline in per share value was primarily due to the specific instruction to value the decedent’s majority interest as a minority interest with a 50% discount.” The court felt that Congress, in enacting IRC Section 2055, didn’t intend “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.”2 Under IRC Section 2055(d), the court reasoned, the value of assets for purposes of the estate tax charitable deduction needn’t equal the value of those same assets as included in the gross estate. The court embraced the reasoning in Ahmanson Foundation v. U.S., in which the Ninth Circuit stated, “[IRC Section 2055] does not ordain equal valuation as between an item in the gross estate and the same item under the charitable deduction.”3 Finding itself free to mandate different values, the court agreed with the IRS that that the amount of the charitable deduction should be based not on the date-of-death appraisal, but instead on the Nov. 30, 2009 appraisal.
Turning to the accuracy-related penalty for negligence, the court described negligence to include “any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws, to exercise due care, or to do what a reasonable and prudent person would do under the circumstances.4 The court agreed that Eugene, as executor, was negligent, because he “not only failed to inform the appraiser that the redemption was for a majority interest, but also instructed the appraiser to value the redeemed [Company] stock as a minority interest.”5 The estate argued that it had reasonable cause for the error because it relied on an attorney. The court found, however, that the estate failed to actually rely on the attorney because the attorney’s advice regarding the charitable deduction was based on an errant appraisal.
1. Estate of Victoria E. Dieringer v. Commissioner, 146 T.C. 8 (March 30, 2016).
3. Ahmanson Foundation v. U.S., 674 F.2d 761, 772 (9th Cir. 1981).
4. See IRC Section 6662(c).
5. Supra note 1, at 11.