In the recent case of Estate of Miriam Ward v. Commissioner, T.C. Memo. 2021-017 (Feb.18,2021), the Tax Court ruled that a charitable deduction to charities was valued at a discount even though 100% of the charitable amount was given to charities.
Thomas (“Tom”) and Miriam Ward (“Miriam”) created a Family Trust in the 1980s which ultimately became a holder of LLCs holding interests in real estate leases and holding companies. After Tom’s death, Miriam was the trustee of the Family Trust and managing partner of the LLC. She gave some LLC interests to her children and grandchildren in 2012, but did not file gift tax returns. Miriam died in 2014.
After her death, the estate representative filed the gift tax returns and the estate tax return on which the estate took a 100% charitable deduction for assets distributed 75% to charity and 25% to a family foundation.
The Internal Revenue Service (“IRS”) issued deficiency notices for the valuation of the gifts of the LLCs on the gift tax return and assessed penalties for the late gift tax returns. The IRS also decreased the charitable deduction for the gifts to charity on the estate tax return.
The Tax Court ultimately agreed with the Estate’s valuation appraiser . However, even though 100% of an LLC interest was given to a charity and a family foundation, the Tax Court held the charitable deduction had to be valued with respect to what the charity and the family foundation received. Since the charity only received 75% of the LLC interest, the discount was 4% and since the family foundation only received 25% of the LLC interest, the discount was 27%. Thus, the charitable deduction was reduced.
ADVICE: The IRS has used discounts to “whipsaw” a taxpayer before, usually with the martial deduction and taking a discount for a share of a closely held entity contributed to a marital trust (thus not allowing a full marital deduction). Consider those discounts when transferring such assets that may qualify for a deduction. Discounts can cut both ways.
WORD OF THE WEEK: The terms, Family Foundation (“Foundation”), “private foundation”, and “family private foundation” are often used interchangeably but the family foundation is actually a private foundation run by a family. The IRS classifies every section 501(c)(3) organization as either a private foundation or a public charity. Similar to a public charity, such as the Clearwater Marine Aquarium, the American Red Cross, the Humane Society and the like, a Foundation is given tax-exempt status, and contributions to the Foundation are tax deductible but to a lesser extent that contributions to a public charity. A Foundation is also subject to more stringent tax laws and regulations than public charities.
A Foundation is typically established by an individual or family and must disperse at least five percent of assets every year for charitable purposes. The Bill & Melinda Gates Foundation is a well-known example. A board of directors or trustees oversees the Foundation and is responsible for receiving charitable contributions, managing and investing charitable assets, and making grants to other charitable organizations. It is also responsible for filing tax returns and other administrative reporting requirements.
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