January 04, 2008
In general, section 2055(e)(2) disallows an estate tax charitable deduction for the transfer of an interest in property in which part of the interest passes to a charitable entity and part of the interest passes to a non-charitable entity unless: (1) in the case of a remainder interest, the interest passes to a trust that is a charitable remainder trust or a pooled income fund, or (2) in the case of any other interest, such interest is in the form of a guaranteed annuity or unitrust amount. In cases where an interest in property does not qualify for the estate tax charitable deduction because it is not in a form described in section 2055(e)(2), section 2055(e)(3) allows certain reformable interests to be reformed in order to meet the requirements in section 2055(e)(2). If the interest is not a reformable interest, section 2055(e)(2)(C)(iii) allows an interest that is modified by a state court proceeding to meet the definition of a reformable interest as long as the proceeding is commenced not later than the 90th day after the estate is required to file its estate tax return (including extensions).
In Tamulis v. Commissioner, Docket No. 06-4141 (Nov. 29, 2007), the decedent's revocable trust (which became irrevocable upon his death) established a trust upon the decedent's death in which the income from the trust would be paid to various family members and, upon termination, the remaining assets would be paid to charity. One of the requirements of a CRT in section 664(d) is that the lead interest in the CRT be in the form of an annuity or unitrust amount. Because the interest passing to the various family members was not in the form of an annuity or unitrust amount, the estate was not entitled to an estate tax deduction for the remainder interest passing to charity.
Aware of the fact that the income interest in the trust was not in proper form, the trustee of the trust prepared a petition to reform the interest to a reformable. The petition, however, was never filed because one of the beneficiaries of the trust failed to sign it (a requirement under local law). The executor of the estate claimed an estate tax charitable deduction for the remainder interest passing to charity and, upon IRS audit, argued that the estate had substantially complied with section 2055(e)(2).
The 7th Circuit, affirming the Tax Court (T.C. Memo. 2006-183 (Aug. 29, 2006)), ruled that substantial compliance could not be relied upon where the statute to comply is clear and unambiguous. Section 2055(e)(2)(C)(iii) provides a clear deadline for commencing reformation proceedings and failure to meet the deadline is fatal, especially in a case where the trustee or executor had no excuse for failing to commence the reformation proceeding. Accordingly, the court denied the estate a deduction for the interest passing to charity.