• Estate Loses Charitable Contribution Set-aside Deduction
  • April 28, 2015 | Author: Thomas N. Lawson
  • Law Firm: Loeb & Loeb LLP - Los Angeles Office
  • The Tax Court recently denied an estate the charitable contribution set-aside deduction allowed under IRC Section 642(c)(2). Under certain circumstances an estate is allowed a form of charitable contribution deduction that is not available to individuals or other types of entities. An estate may take a charitable contribution deduction for amounts that the governing instrument, typically a will, require to be permanently set aside for certain charitable purposes. These amounts are not required to actually be paid to a charity in the same tax year for which the deduction is claimed. The applicable regulations require that in order to claim this deduction “the possibility that the amount set aside will not be devoted to such [charitable] purpose or use is so remote as to be negligible.”

    In the recent case of Estate of Belmont (Tax Court, February 19, 2015), Ms. Belmont died and her will provided that, except for a small specific gift to her brother, all of the income and principal of her estate was to go to a charitable organization. The brother filed a lawsuit against the estate, alleging that he was entitled to receive a condominium owned by the estate in which he was living at the time of Ms. Belmont’s death. While the litigation was pending, the estate filed an income tax return claiming a deduction in the amount of $220,000 pursuant to the charitable set-aside provision. The amount deducted represented the estate’s net income for that tax year. The brother ultimately prevailed in the litigation and the estate had to expend significant sums for legal fees and to satisfy the judgment. As a result, it was not able to transfer to the charitable foundation the $220,000 that had been deducted in 2008.

    Upon audit, the IRS disallowed the estate’s charitable contribution deduction on the basis that the estate should have been aware of the very real possibility that the litigation would prevent it from honoring its commitment to the charitable foundation. The Tax Court agreed with the IRS and repeated a standard it had applied in a previous case. The court said that for a contingency to be “so remote as to be negligible,” it had to be such that persons generally would “regard it as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction.” For purposes of preparing its return, the estate should have made a judgment regarding the possibility that the funds set aside would have to be used for another purpose. Consequently, the Tax Court denied the estate’s charitable contribution set-aside deduction.