ADVANCED CHARITABLE PLANNING TECHNIQUES

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ADVANCED CHARITABLE PLANNING TECHNIQUES Powered By Docstoc
					RECENT CHARITABLE PLANNING STRATEGIES

    FOR FAMILIES IN UNCERTAIN TIMES




  Southern Arizona Estate Planning Council
              December 2010




           TURNEY P. BERRY
     WYATT, TARRANT & COMBS, LLP
              2800 PNC Plaza
         500 West Jefferson Street
        Louisville, Kentucky 40202
              (502) 589-5235
           (502) 589-0309 – FAX
        (502) 562-7505 - Direct Dial
          tberry@wyattfirm.com
        The focus of the presentation will be on making charitable gifts in ways that minimize the
economic loss to the donor and the donor‘s family. What are the economics of transgenerational
charitable giving?

       A.     The Charitable Lead Trust. What Do You Do When You Have No Income
Producing Property? We will explore the traditional use of a charitable lead trust with income
producing assets, plus how to create income producing assets when a family doesn‘t have them.

        How valuable are testamentary lead trusts (the difference between a no-brainer and a
half-brainer, perhaps)?

       B.      Disclaimers to Charitable Funds. With Malice Towards None and Charity to
Some. We will explore the benefits of multigenerational charitable funds. We will consider the
reasons grandparents and parents do not create them and ways to inspire their creation. We will
compare such funds in the private foundation, community foundation, and supporting
organization contexts.

        C.      Using Charitable Allocation Clauses. Does Something That Limits Value Have
Unlimited Value? What if every gift you made was audit proof? What if there were no
downside to GRITs, GRATs, FLPs and DIGTs? We can imagine such a world but is it real? We
will explore whether clauses that allocate excess value away from family gifts and towards
charitable gifts work, when they should be used and how they should be used.

       D.      Other Interesting Ideas for Discussion and Comment

       E.      Recent Cases and Rulings of Interest in Estate Planning




Appendices:

1.     Charitable Lead Trusts

2.     Proposed Regulations - - Substantiation and Appraisal Requirements
A.      Charitable Lead Trust.

        1.     In General.

               A charitable lead trust is the converse of a charitable remainder trust. The charity
receives payments, for a term, and the remainder is paid to non-charitable beneficiaries. See the
attached outline for more details.

        2.     Shark-Fin CLAT.

               a.      I Create an 81 year CLAT.

                       Suppose I create a CLAT within the window to use a 7520 rate of 3.4%. I
fund the CLAT with $1,000,000. The term is 81 years. During the first 80 years the CLAT pays
$1,000 per year to Worthy Charity at the end of the year. In year 81 the CLAT pays $15,000,000
to Worthy Charity and pays whatever amount remains to my children. My children are the
trustees.

        I have not made a gift to my children because the IRS believes that $15,000,000 in 81
years is worth $1,000,000 this year. [1.034^81 = 15.0025]. Actually the $15,000,000 balloon
may be somewhat lower taking into consideration the $1000 per year payments.

        The IRS sample forms specifically allow back-loaded annuities, unlike with, say a
Grantor Retained Annuity Trust. If you were to graph payments that started low and went up at
the end it would look like a shark‘s fin, hence the common name of these, Shark-Fin CLAT.

               b.      My Children Approach the Charity.

                       My children, being clever souls, look at the calendar and conclude that - -
despite excellent health habits - - they are unlikely to survive 81 years and thus are unlikely ever
to see a benefit from my largesse. Being extra-clever souls they hit upon a plan. They do not
discuss the plan with me and I know nothing of it until it is completed.

        My children approach Worthy Charity with calculator in hand and inquire of its
development and finance department what they think $15,000,000 will be worth in 81 years.
Worthy Charity expects that it can earn 7% a year over the next 81 years so in fact it believes



                                                 3
that $15,000,000 then is worth a paltry $62,518 now.                     [$15,000,000/ (1.07^81) =
$15,000,000/239.9308 = $62,518]

       My children do not want to take advantage of Worthy Charity. What might the present
value be if you earned less, perhaps 5% a year for 81 years?                      About $288,000.
[$15,000,000/(1.05^81) = $15,000,000/52.0395 = $288,000]

       My children decide to make Worthy Charity an offer it cannot refuse: $330,000 today for
Worthy Charity‘s interest in the CLAT. That is an assumed earnings rate of about 4.8% a year
over the term. After a few minutes of cogitation, Worthy Charity takes the offer and transfers its
interest to my children.

       My children are elated: they have bought $1,000,000 for $330,000. Ought they to be
elated or is there something faulty here? Does the trust terminate with the purchase of the
interests from Worthy Charity? That would seem desirable and, depending on the wealth of my
children, may be necessary.

               c.      Is Anyone Going To Jail, Metaphorically or Actually?

                       Has Worthy Charity done anything wrong? Given the numbers, might
Worthy Charity do something ―wrong‖ if it does not agree to sell? (Does that mean a charity that
is the beneficiary of a CLAT ought be seeking buyers for its interest?)

       Is this a prohibited transaction, perhaps self-dealing. CLTs are subject to the self-dealing
rules. Do those prohibit a charity from selling its interest in a CLT?

       Is this a commutation and if so is it prohibited? Rev. Rul. 88-27 prohibits the trustee
from having the power to commute the charitable interest. The Ruling states:

               If the trustee has the discretion to commute and prepay the
               charitable ―lead‖ annuity interest prior to the expiration of the
               specified term of the annuity, the interest does not qualify, as a
               guaranteed annuity interest under section 2522(c)(2)(B) of the
               Code, and under section 2522(a), no deduction is allowed for the
               amount of the transfer to charity.




                                                 4
               The result would be the same even if the trust instrument provided
               that the prepayment amount were to be calculated using the
               discount rate and methodology used to calculate the present value
               of annuity payments under the Code and regulations in effect on
               the date the annuity was established, because the exact amount
               payable to charity can not be determined as of the date of the gift.

       Treas. Reg. §25.2522(c)-3(c)(2)(vi)(a) states in part:

               An amount is determinable if the exact amount which must be paid
               under the conditions specified in the instrument of transfer can be
               ascertained as of the date of gift. For example, the amount to be
               paid may be a stated sum for a term of years, or for the life of the
               donor, at the expiration of which it may be changed by a specified
               amount, but it may not be redetermined by reference to a
               fluctuating index such as the cost of living index. In further
               illustration, the amount to be paid may be expressed as a fraction
               or percentage of the cost of living index on the date of gift.

               d.      Going Forward.

                       The point of this illustration is not to inspire you to go out and create 81
year Shark-Fin CLATS but rather that you begin to think about the low section 7520 rate versus
the likely experience of charitable investments. (The 81 year illustration came about when the
section 7520 rate was 2.0% in February 2009 because the math was really simple - - in 81 years a
trust quintupled in value.)

       Suppose the term is 50 years. The 50 year balloon payment would be $5,321,000. If
Worthy Charity expects to earn 5% then that $5,321,000 would be worth $464,047 now so my
children would pay, say, $500,000 and net $500,000. If Worthy Charity expects to earn 7% then
that $5,321,000 would be worth $180,636 so my children would pay, say, $220,000 and net
$780,000.

       There is leverage even at shorter terms. At 25 years the balloon payment would be
$2,306,800 and the 5% equivalent would be $681,209 and the 7% equivalent would be $425,000.




                                                5
                e.      Don’t Some People Suggest That Life Insurance Be Owned in a
                        Shark-Fin CLAT? Any other planning tips?

                        Yes. Folks who sell life insurance. The theory is that if I have a 25 year
life expectancy the life insurance will pay off and furnish the money to make the balloon
payment. Life insurance in this context is an investment and it is either good or bad. However,
it limits your ability to pay-off the charity early.

        A CLAT may either pay its own income taxes - - and receive an income tax deduction
only for distributions it makes to charity - - or all the income can be taxed every year to the
grantor in which case the grantor gets an income tax deduction in the first year for the amount
with which the CLAT is funded (e.g. $1,000,000 in my example). The first is more typical.
Consideration should be given to having mini-balloon payouts every few years to ―clear out‖
accumulated capital gains.

                f.      What’s In A Name?

                        Why the name? Jaws. Chief Brody goes out to get the shark. His boat
sinks, he‘s bloodied, heck he‘s almost eaten, but he survives and paddles back to shore.

        If music helps you think like it does me … Flatt & Scruggs and The Beverly Hillbillies ...

        hum along the first verse and then choose the second verse you are happier with:

                      Come and listen to my story about a man named Fred,
                      He wasn’t ‘specially poor but he sure hated the Feds.
                          One day while looking at his portfolio, all flat,
                        Someone came along and suggested he try a CLAT.
               (Not Just Any CLAT. A Shark-Fin CLAT With Chief Brody Option)

                   Well the next thing you know ole Fred’s passed all his wealth,
                             And he’s done it, with almost total stealth.
                      Along come his children who appear to be all grateful,
                           And in fact they promise always to be faithful.
                 (The kids will visit. Bring mac & cheese. Occasionally Sudoku.)




                                                       6
                                                OR

                   Well the next thing you know ole Fred’s passed all his wealth,
                             And he’s done it, with almost total stealth.
                   He’s pretty pleased until that day he gets a notice in the mail,
                      And Fred finds out he’s gonna spend some time in jail.
                 (The kids will visit. Bring mac & cheese. Occasionally Sudoku.)

B.     Disclaimer to a Charitable Fund.

                 The idea of creating a charitable fund over which descendants have control has
long been used in planning for the wealthiest families. However, recently the idea has been
refined to become more useful for families of more moderate wealth.

       The issue confronting the parent and the descendant is, would the descendant be better
off with a charitable fund, unreduced by estate or gift taxes, or with a personal fund from which
estate or gift taxes have been paid. At the 45% bracket, a parent must begin with over $182,000
in order to set aside $100,000 for a child‘s use. Is the child better off with a charitable fund of
$182,000 or a personal fund of $100,000? Similarly, in order to generate $100,000 in a personal
trust for a grandchild, a grandparent must begin with about $263,637 in order to pay estate tax of
about $118,636 and generation skipping tax of about $45,000. Would the grandchild be better
off with a charitable fund of $263,637 or a personal fund of $100,000?

       The answer to these questions will depend in large part, of course, on the economic
circumstances of the family. If the child or grandchild will inherit only the assets in question,
then a personal fund will almost certainly be more desirable, but if the assets in question are only
a small part of the total inheritance then a charitable fund becomes more attractive. The position
of the child or grandchild in the community, the family situation of the child or grandchild, and
perhaps the economic circumstances of the spouse of the child or grandchild are other factors to
be considered.

       A major impediment to creation of such charitable funds is the concern on the part of
parents (and grandparents) that descendants be treated fairly. Where one descendant, or group of
descendants, might like a charitable fund but another would not, a charitable fund is often not




                                                 7
created.   This ―lowest common denominator‖ estate planning can be combated through a
charitable fund created by disclaimer.

       Suppose parent or grandparent provides for a sum to be set aside for the child or
grandchild which will bear its own estate and generation skipping taxes (if any). If the child or
grandchild disclaims the sum, the sum would pass into a charitable fund to be named for the
child or grandchild the income from which can be ―used‖ on an annual basis for charitable
giving. The child or grandchild has a choice: accept the sum as a bequest or disclaim it into a
charitable fund (or disclaim only part). If the child or grandchild disclaims, then the amount
disclaimed passes into the charitable fund free of estate or generation skipping tax. If the child
or grandchild accepts the bequest then all applicable estate and generation skipping taxes are
paid from the bequest.

       Each child or grandchild may make his or her own decision and each decision affects the
child or grandchild alone. A disclaimer is a formal legal document that must be executed within
nine months after the death of the parent or grandparent, and prior to executing the disclaimer the
child or grandchild must not have received any benefits from the amount disclaimed. For this
reason, establishing a specific sum as to which the disclaimer may apply is often a good idea—
the child or grandchild may receive income from the general assets of the estate during the initial
nine month period without jeopardizing the disclaimer.

       The charitable fund may be created either in a private foundation or as a donor advised
fund in a community foundation. The latter mechanism is more flexible because of a special rule
having to do with disclaimers, namely that the disclaiming party may not direct the ultimate
disposition of the disclaimed funds. Where the disclaimed assets pass to a private foundation, the
child or grandchild who has disclaimed must ensure that he or she does not control the
distribution of the assets or the income from them. The Internal Revenue Service has discussed
the limited role the disclaiming party may play in PLR 9320008.

       On the other hand, where the charitable fund is created as a donor advised fund in a
community foundation, the problems are greatly minimized.               Because the community
foundation, through its board of directors, has ultimate authority over the distribution of the



                                                8
assets and the income, the disclaiming party does not have control. The IRS has required that the
disclaiming party not vote as a member of the board of the community foundation on any
distribution from the charitable fund created with the disclaimed assets. See PLR 9532027 for a
discussion of these issues.

C.     Using Charitable Allocation Clauses: Does Something That Limits Value Have
       Unlimited Value.

               A charitable allocation clause is an attempt to minimize the negative effects that
can result from the audit adjustment by the Internal Revenue Service of the value of
noncharitable gifts. The donor makes annual exclusion gifts or adjusted taxable gifts, or both, to
a trust that contains a charitable allocation clause. The clause directs the trustee to allocate
contributed assets having a certain value to a fund for the benefit of the donor‘s noncharitable
beneficiaries, and to allocate all contributed assets having value in excess of the certain value to
charity.

       To illustrate, parents with two unused gift tax exemptions could contribute $3,150,000 in
marketable securities to a partnership that has 100 general partnership units and 9900 limited
partnership units. Parents could give the 9900 limited units to a trust at an appraised value of
$2,027,000 (a 35% discount). The trust could provide that the first $2,000,000 of contributed
assets be allocated to a fund for the benefit of parents‘ children, grandchildren and other
descendants (a family fund), with the remaining contributed assets being allocated to the parent‘s
donor advised fund at the local community foundation (or to other designated charitable
organizations). The Trustee would review the appraisal of the limited units and would provide a
copy to the local community foundation. Assuming the appraisal were in good order, the
community foundation would agree that it should receive $27,000 worth of units from the
transfer but no more.

               a.       Benefits.

       The benefits of a charitable allocation clause would seem to be two-fold.              First,
presumably the IRS would be reluctant to audit gifts made to a trust containing such a clause
because gift or estate tax could be collected. Second, if the IRS did audit a gift made to such a
trust, and increased the value of gifts, all that would result would be the reallocation of assets


                                                 9
from the non-charitable fund to the designated charity. If that charity were a donor advised fund
at a community foundation, the funds could be said to remain ―available‖ for the benefit of the
family.

                 b.      Drafting the Clause.

                 Such a clause could be drafted like a traditional formula marital deduction —
exemption equivalent funding clause so that the maximum amount of a donor‘s $1,000,000
exemption is used. However, a simpler clause would simply specify a sum. For testamentary
transfers the flexibility of a clause that is tied to the amount that can be disposed of without
generating estate tax is desirable. Such flexibility is less useful for inter vivos gifts.

                 c.      Role of the Independent Charity.

                 The charity must act independently of the donor and the donor‘s family. The
trustee should notify the charity of the arrangement. Once the trustee obtains an appraisal of the
gift the trustee should notify the charity of the amount the charity is to receive, if anything, and
should furnish the charity a copy of the appraisal. The charity should not be asked to consent to
having received all it is entitled to but rather should retain the option of an action against the
trustee to receive additional assets.

          In many instances a reasonable charity will be uncomfortable as the certifying recipient if
it receives nothing. Thus, having ―too much‖ added to the trust, so that some assets are allocated
to the charity would seem to be valuable. The charity receives assets today for its time and
trouble and the trust appears to work because assets actually went to charity.

          May the donor‘s private foundation be the beneficiary? In principle the answer is yes.
However, the purpose of the clause is to reduce IRS challenges.                If the donor‘s private
foundation is the potential recipient then not only may the IRS claim that no independent party
valued the gift, but also that the private foundation improperly surrendered its legal right to
collect from the trust thereby making a gift to a disqualified person, which would be an act of
self-dealing.




                                                   10
               d.       Contrast with Marital Allocation Clause; IRS View.

               A marital deduction clause may be considered as an alternative to the charitable
allocation clause. The reason is the avoid any assets going outside the family. If such a clause is
used the spouse may be charged by the IRS with making a gift if the value of the assets has been
incorrectly determined. In addition, if the trust is to be a QTIP trust a QTIP election will need to
be made on the donor‘s next gift tax return, which must be timely filed, in order to avoid a tax.
The filing may be avoided by using a general power of appointment marital trust.

       The purpose of the charitable allocation clause is to avoid an IRS audit by having
evidence that an independent party has looked at the values and that no increase in value will
result in any gift tax. The marital deduction alternative would not appear to accomplish but the
second of these objectives. In Rev. Rul. 84-105, 1984-2 C.B. 197, the IRS determined that the
surviving spouse made a gift by acquiescing to the under funding of a pecuniary marital bequest.

       In TAM 200245053 (discussed in detail below) the IRS distinguished charitable
allocation clauses generally from marital deduction allocations:

               Taxpayer also argues that the Service has sanctioned the use of valuation
               formula clauses in other situations. For example, testamentary marital deduction
               formula clauses pursuant to which the amount of the marital bequest (and the
               amount of the marital deduction allowable under §§ 2056) fluctuates depending
               on the value of the gross estate as finally determined for estate tax purposes, are
               widely used, in order to take maximum advantage of the marital deduction and
               the unified credit available under §§ 2010.

                                                     ***

               However, in order for most estates to take maximum advantage of the marital
               deduction and unified credit, as intended by Congress, utilization of a funding
               formula clause (either for the marital bequest or the ―credit shelter ― trust) is a
               necessity. That is, full utilization of these benefits is dependent on the value of
               the testator‘s property as determined for estate tax purposes on the date of death
               or alternate valuation date. A testator cannot anticipate when he or she will die
               or the value of the property at the time of death. Further, in the case of certain
               assets, such as an interest in a closely-held business, opinions can reasonable
               differ as to value. It is not feasible to continuously redraft testamentary
               instruments each time asset values change, or to account for differences of
               opinion that may arise in the valuation process. Thus, utilization of a
               testamentary marital deduction or credit shelter valuation formula clause is the
               only practical way a testator can take full advantage of these Congressionally
               authorized benefits.




                                                      11
                 e.       Income Tax Deduction.

                 There appears to be no reason why a charitable allocation clause would not result
in an income tax deduction for the donor. All other rules – e.g. an appraisal – would need to be
followed.

       The IRS could argue that the gift was of a partial interest. That argument was made in
McCord, discussed in detail below, with a different type of clause.                            Here the donor has
prescribed the required formula and the trustee is obligated to implement it. With respect to the
initial allocation to charity, if any, it should be clear that the donor mandated the distribution. A
stronger negative argument may be made with respect to future allocations to charity if values
are increased.

                 f.       Authorities.

                 The IRS takes a dim view of arrangements that limit its ability to change values
and collect tax. For instance, a donor may not give assets to a donee with the proviso that assets
having a value in excess of $X will be returned to the donor. On the other hand, marital
deduction-exemption equivalent clauses have been used for decades, as have testamentary
formula clauses of various types (e.g. a formula that zeros out charitable lead trust gifts). Which
analysis is more appropriate for charitable allocation clauses? Any analysis must distinguish
among types of clauses: those that call for a retransfer to the donor if ―too much‖ is transferred
originally; those that call for the donee to pay, or to pay more, if otherwise the donor would have
transferred ―too much;‖ those that purport to transfer only an amount which is not ―too much;‖
and those that allocate the excess, if ―too much‖ is transferred, to a third party such as a charity
or a marital deduction trust.

       The key case is Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944), cert. denied 323
U.S. 756 (1944). The applicable provision that was struck down in that case read as follows:

                 Eleventh: The settlor is advised by counsel and satisfied that the present transfer
                 is not subject to Federal gift tax. However, in the event it should be determined
                 by final judgment or order of a competent federal court of last resort that any
                 part of the transfer in trust hereunder is subject to gift tax it is agreed by all the
                 parties hereto that in that event the excess property hereby transferred which is
                 decreed by such court to be subject to gift tax shall automatically be deemed not



                                                          12
               to be included in the conveyance in trust hereunder and shall remain the sole
               property of Frederic W. Procter free from the trust hereby created.

       In Rev. Rul. 86-41, 1986-1 C. B. 300, the IRS dealt with a Proctor type clause. By deed
the donor transferred one-half of a tract of land to the donee but, the deed provided, if the one-
half exceeded $10,000 in value then the share allocated to the donee would be diminished so that
the transferred fraction was valued at $10,000. The ruling states that the only purpose of the
clause ―was not to preserve or implement the original, bona fide intent of the parties‖ but rather
to recharacterize the transaction so as to discourage gift tax audit. The ruling distinguished a
clause requiring a reallocation on account of an independent audit as sometimes occurs in an
arms-length sale. The ruling reaches the identical conclusion for a defined value clauses.

       The Tax Court considered a price adjustment savings clause in a private annuity situation
in Estate of McClendon v. C.I.R., T.C. Memo. 1993-459. In a reasonably comprehensive
review of the case-law in this area up to that time the court stated:

               The private annuity agreement includes a paragraph allowing for an adjustment
               to the amount to be paid to Gordon in the event that a higher value is assigned to
               the remainder interest through a settlement with the Internal Revenue Service or
               as a result of a final decision of this Court. The paragraph in question states:

               The parties hereto recognize that the valuation of many of the assets set out on
               attached Exhibit A are, by their nature, as determined by the best judgment of
               the parties and independent consultants engaged to assist in the valuation
               process and may be subject to differing opinions. Therefore, the parties agree
               that, to the extent any of the values on the attached Exhibit A are changed
               through a settlement process with the Internal Revenue Service, or a final
               decision of the United States Tax Court, the purchase price hereunder shall be
               adjusted accordingly, with interest on said adjustment at the rate of ten percent
               (10%) from the date hereof until said final determination of value, and the
               annuity payments due and payable hereunder shall likewise be adjusted to
               reflect any such change in valuation.

                                                     ***

               The court in Proctor went on to point out that the adjustment clause should be
               viewed as contrary to public policy on the grounds that: (1) Public officials
               would be discouraged from attempting to collect the tax since the only effect
               would be to defeat the gift; (2) the adjustment provision would tend to obstruct
               the administration of justice by requiring the court to address a moot case; and
               (3) the provisions should not be permitted to defeat a judgment rendered by the
               court. Id.

               We followed Procter in Ward v. Commissioner, supra [87 T.C. 78 (1986)]. In
               the latter case, the taxpayers, husband and wife, each transferred 25 shares of
               stock to each of their three sons. At the time of the gifts the taxpayers and their


                                                      13
               sons executed a ―gift adjustment agreement‖ that was intended to ensure that the
               taxpayers‘ gift tax liability for the stock transfers would not exceed the unified
               credit against gift tax that the taxpayers were entitled to at that time. Id. at 87-88.
               In particular, the agreement stated that if it should be finally determined for
               Federal gift tax purposes that the fair market value of the transferred stock either
               was less than or greater than $2,000 per share, an adjustment would be made to
               the number of shares conveyed so that each donor would have transferred
               $50,000 worth of stock to each donee. Id. We concluded that the fair market
               value of the stock exceeded $2,000 per share for each of the years in issue. Id. at
               109. In rejecting the taxpayers‘ position in Ward, we first noted that honoring
               the adjustment agreement would run counter to the policy concerns articulated
               in Procter. Id. at 113.

               In addition, we were not persuaded by the taxpayers‘ argument that the mere
               possibility of the application of the Federal estate tax to the excess gift was
               sufficient to distinguish Procter. Finally, we concluded that upholding the
               adjustment agreement would result in unwarranted interference with the judicial
               process, stating:

               Furthermore, a condition that causes a part of a gift to lapse if it is determined
               for Federal gift tax purposes that the value of the gift exceeds a given amount, so
               as to avoid a gift tax deficiency, involves the same sort of ―trifling with the
               judicial process‖ condemned in Procter. If valid, such condition would compel
               us to issue, in effect, a declaratory judgment as to the stock‘s value, while
               rendering the case moot as a consequence. Yet, there is no assurance that the
               petitioners will actually reclaim a portion of the stock previously conveyed to
               their sons, and our decision on the question of valuation in a gift tax suit is not
               binding upon the sons, who are not parties to this action. The sons may yet
               enforce the gifts.

               Based upon our review of Procter and Ward, the adjustment clause at issue in
               the instant case does not merit consideration for purposes of determining
               petitioner‘s gift tax liability, and we so hold. In our view, it makes little sense to
               expend precious judicial resources to resolve the question of whether a gift
               resulted from the private annuity transaction only to render that issue moot.
               Equally important, our determination that the private annuity agreement resulted
               in a taxable gift is not directly binding on Bart or the McLendon Family Trust
               who are not parties to this case. See Ward v. Commissioner, supra at 114.
               Consequently, there being no assurance that the terms of the adjustment clause
               will be respected, it shall have no impact on this case.

               Petitioner‘s reliance on King v. United States, 545 F.2d 700 (10th Cir.1976) is
               misplaced. That case involved a sale of stock which the court found to be an
               arm‘s-length transaction, free from any donative intent. Like that in Ward v.
               Commissioner, 87 T.C. 78, 116 (1986), however, the transaction at issue in the
               instant case was not an arm‘s-length deal, and thus we distinguish the King case
               on this basis. Further, we have previously questioned the factual findings
               supporting the holding in King. See Harwood v. Commissioner, 82 T.C. 239,
               271 n. 23 (1984).

       In TAM 200245053 the clause was phrased as a fractional share of partnership interests.
The specific facts of the transaction were:



                                                        14
On Date 2, Taxpayer as Trustee of Trust B of Family Trust (Trust B), and
Taxpayer‘s three children, Child 1, Child 2, and Child 3, formed Partnership.
The Partnership agreement states that Taxpayer as Trustee of Trust B transferred
$F ($A in cash, $B in publicly traded securities, and $C in real estate) in
exchange for a 0.85 percent general partnership interest and a 99 percent limited
partnership interest. Child 1, Child 2, and Child 3 each transferred $D in cash
(of which roughly $E was gifted to each child by Taxpayer) in exchange for a
0.05 percent general partnership interest.

Also on Date 2, the following transactions occurred. Taxpayer created
Irrevocable Trust for the benefit of Taxpayer‘s lineal descendants. Taxpayer is
designated as trustee. The trust provides that during the term of the trust, trust
income and principal is to be distributed in such amounts and at such times as
the trustee deems appropriate for the health, support, maintenance or education
of any of taxpayer‘s descendants selected by the trustee. The Taxpayer‘s
children are granted the right to substitute property in exchange for trust assets
of equivalent value.

As trustee of Trust B, Taxpayer assigned a 0.1 percent limited partnership
interest in Partnership to herself as trustee of Irrevocable Trust. In addition,
Taxpayer, as trustee of Trust B, executed a Sale and Purchase Agreement (Sales
Agreement) pursuant to which Taxpayer as trustee of Trust B (Seller) sold to
herself, as trustee of Irrevocable Trust (Purchaser), a fractional share of the 98.9
percent limited partnership interest in Partnership owned by Trust B. Sales
Agreement describes the fractional share subject to the sale as follows:

         The numerator of such fraction shall be the Purchase Price, and the
         denominator of such fraction shall be the fair market value of [the 98.9
         percent limited partnership interest]. The fair market value of [the 98.9
         percent limited partnership interest] shall be such value as finally
         determined for federal gift tax purposes based upon other transfers of
         limited partnership interests in the Partnership by Seller as of [Date 2],
         in accordance with the valuation principles set forth in Regulation
         Section 25.2512-1 as promulgated by the United States Treasury under
         Section 2512 of the Internal Revenue Code of 1986, as amended.

(Emphasis added.) Under the Sales Agreement, the ―Purchase Price‖ is defined
as the value determined by an appraisal of the 98.9 percent limited partnership
interest made as soon as practicable after Date 2.

In payment of the ―Purchase Price,‖ Taxpayer as trustee of Irrevocable Trust
executed a promissory note in the amount of $X (identified in the note as the
Purchase Price under the Sales Agreement) with interest at the rate of 6.2
percent compounded annually. Interest is payable annually and the note
principal is due 9 years less one day after Date 2. The note may be prepaid in
whole or in part at any time within the term.

Under a security agreement, the promissory note was secured by all of
Irrevocable Trust‘s interests in Partnership, whenever acquired by the trust.
Child 1, Child 2, and Child 3 executed a guarantee, guaranteeing payment on the
note.




                                        15
       Subsequently, the parties agreed that the charity should be bought out at a stated price.
They entered into an agreement which provided:

               [T]he parties hereto agree that the Assignment effected a transfer of a
               ninety-eight and nine tenths percent (98.9%) limited partnership interest in the
               Partnership from Seller to Purchaser, and that the books and records of the
               Partnership shall reflect this Agreement.

               The parties acknowledge that this Agreement is subject to modification if within
               the statute of limitations applicable to the Assignment it shall be determined that
               the Assignment actually conveyed a different percentage than that set forth
               above. The parties agree that if there shall be such a determination, the
               ownership interests in the Partnership and distributions previously made from
               the Partnership shall be adjusted.

       The IRS applied Procter and Ward to ignore the effect of the charitable allocation. The
TAM states:

               We see no difference between the effect of the adjustment clauses at issue in
               Ward and Rev. Rul. 86-41, and the adjustment provision in this case. In the
               instant case, Spouse, as trustee of Trust B, transferred the entire 98.9 percent
               limited partnership to the Irrevocable Trust pursuant to the Sales Agreement and
               The Agreement. However, if the Service adjusts the value of the gift of the 0.1
               percent limited partnership interest transferred by the Spouse on Date 2, then
               under the formula in the Sales Agreement, the denominator of the fraction must
               be adjusted, but not the numerator, thereby reducing the fractional portion of the
               98.9 percent interest subject to the sale and compelling a retransfer of a portion
               of the 98.9 percent interest back to Trust B. Thus, we believe the case is
               indistinguishable from the facts presented in Ward and Situation 1 of Rev. Rul.
               86-41. In all three situations, under the adjustment clause at issue, if the Service,
               or the courts, determined that the property subject to the transfer exceeds the
               value initially placed on the property by the donor, then a portion of the property
               sufficient to eliminate the imposition of any additional tax liability is transferred
               back to the transferor. As the court noted in Ward v. Commissioner, if in the
               instant case the condition is given effect, there would be no incentive for the
               Commissioner to challenge the value of the limited partnership interest subject
               to the sale, because any adjustment to value would be rendered moot. Similarly,
               any attempt by a court to opine on the value of the interests would also be
               rendered moot. Further, as was the case in Ward, there is no assurance that the
               agreement would be enforced and any excess partnership interest transferred
               back.

       The taxpayer argued that the IRS expressly allows formula clauses in the marital
deduction context and with respect to grantor retained annuity trusts. The TAM distinguishes
both of those situations:

               Taxpayer also argues that the Service has sanctioned the use of valuation
               formula clauses in other situations. For example, testamentary marital deduction
               formula clauses pursuant to which the amount of the marital bequest (and the


                                                       16
amount of the marital deduction allowable under §§ 2056) fluctuates depending
on the value of the gross estate as finally determined for estate tax purposes, are
widely used, in order to take maximum advantage of the marital deduction and
the unified credit available under §§ 2010. Similarly, §§ 25.2702-3(b)(ii)(B)
provides that the retained annuity in a grantor retained annuity trust may be a
specified fraction or percentage of the initial fair market value of the trust ―as
finally determined for federal tax purposes.‖ Taxpayer argues that these clauses,
that adjust the value of a testamentary or inter vivos gift based on the transfer
tax value of the property as finally determined, have the same operative effect as
the clause at issue in this case.

However, in order for most estates to take maximum advantage of the marital
deduction and unified credit, as intended by Congress, utilization of a funding
formula clause (either for the marital bequest or the ―credit shelter ― trust) is a
necessity. That is, full utilization of these benefits is dependent on the value of
the testator‘s property as determined for estate tax purposes on the date of death
or alternate valuation date. A testator cannot anticipate when he or she will die
or the value of the property at the time of death. Further, in the case of certain
assets, such as an interest in a closely-held business, opinions can reasonable
differ as to value. It is not feasible to continuously redraft testamentary
instruments each time asset values change, or to account for differences of
opinion that may arise in the valuation process. Thus, utilization of a
testamentary marital deduction or credit shelter valuation formula clause is the
only practical way a testator can take full advantage of these Congressionally
authorized benefits.

Similarly, the formula for defining a retained annuity contained in §§
25.2702-3(b)(ii)(B) sanctions a practical method which, when utilized in a bona
fide manner, enables a donor to take advantage of a Congressionally approved
mechanism for transferring a remainder interest in trust property, in situations
where assets that may be difficult to value, such as real estate or stock in a
closely held business, are transferred to the trust. Further, this regulation should
not be viewed as sanctioning the utilization of the formula to ―zero-out‖ a gift,
as is the case in the situation presented here. The preamble accompanying the
promulgation of this regulation explicitly expresses concern regarding the use of
grantor retained annuity trusts that are structured such that the value of the
remainder interest (and thus, the amount of the gift) is zero or of nominal value
relative to the total amount transferred to the trust. The preamble states that the
Service and Treasury view these gift arrangements as contrary to the principles
of §§ 2702. See, Preamble to T.D.8395, 1992-1 C.B. 316, 319.

We believe the legitimate and accepted uses of formula clauses as a practical
way to implement Congressionally sanctioned tax benefits are in stark contrast
to the situation presented in the instant case. The creation of the partnership and
the use of the valuation formula clause in the sale of the partnership interests are
all part of an integrated transaction the primary purpose of which is to transfer
assets to the natural objects of Taxpayer‘s bounty at a discounted value, while
foreclosing any realistic opportunity to challenge the transaction. The Taxpayer
created and funded the limited partnership primarily, if not solely, to generate
valuation discounts, with the goal of enabling her irrevocable trust to acquire the
interests at a reduced purchase price. Taxpayer employed the formula clause as
part of the transaction in an attempt to ameliorate any adverse consequences if
the Service challenged the transaction and thereby to discourage any such
challenge. The clause does not serve a legitimate purpose, such as ensuring that
the purchase price accurately reflects fair market value. Rather, the clause


                                        17
               recharacterizes the nature of the transaction in the event of a future adjustment
               to the value of the partnership interests by the Service. Under these
               circumstances the adjustment clause should not be effective for gift tax
               purposes.

       The Service also ignored the fact that an increase in the value of the partnership did in
fact increase the value of the gift because the increase was de minimis:

               In this case, the gift of the 0.1 percent interest and the sale to Irrevocable Trust
               were part of an integrated transaction. The Taxpayer has placed an insignificant
               portion of the transaction at issue in order to circumvent well-established case
               law that has developed regarding savings clauses. We do not believe the courts
               would permit these decisions to be so easily avoided. For example, in Procter,
               under the clause at issue, the gift was revoked to the extent it was finally
               determined that the gift was subject to gift tax. The court determined that the
               savings clause ―device‖ was contrary to public policy. It is doubtful that the
               court would have reached a contrary conclusion, if the gift was revoked in its
               entirety but for $1.00, thus creating the potential for a nominal deficiency, in the
               event the Service contests the matter. Such a provision would have the same
               effect of discouraging the collection of tax by public officials, and would
               constitute the same ―trifling with the judicial process,‖ as the actual clause
               involved in Procter. Accordingly, we do not believe the clause at issue is in any
               meaningful way distinguishable from those presented in Procter and Ward.

       The Tax Court attempted to deal with this area in Charles T. McCord v. Commissioner,
120 T. C. No. 13 (2003). In addition to the majority opinion there was a concurrence, two partial
dissents, and a full dissent. The case is important for what it says about partnership valuation as
well as charitable allocations. The Fifth Circuit reversed the Tax Court, at 98 A.F.T.R.2d 2006-
6147 (5th Cir. 2006) as discussed below. The specific facts are important and were described by
the majority opinion in the Tax Court as follows:

               On November 20, 1995, petitioners assigned their respective class A limited
               partnership interests in MIL [the family partnership] to the Hazel Kytle
               Endowment Fund of The Southfield School Foundation (the foundation)
               pursuant to an Assignment of Partnership Interest and Addendum Agreement
               (the Southfield agreement). The recitals to the Southfield agreement provide that
               ―all of the partners of the Partnership desire that Assignee become a Class A
               Limited Partner of the Partnership upon execution of this Assignment of
               Partnership Interest‖ and ―all consents required to effect the conveyance of the
               Assigned Partnership Interest and the admission of Assignee as a Class A
               Limited Partner of the Partnership have been duly obtained and are evidenced by
               the signatures hereto‖. All of the initial MIL partners executed the Southfield
               agreement.

               Further Assignments

               On January 12, 1996 (the valuation date), petitioners, as assignors, entered into
               an assignment agreement (the assignment agreement) with respect to their class



                                                       18
B limited partnership interests in MIL. The other parties to the assignment
agreement (the assignees) were the children, four trusts for the benefit of the
children (the trusts), and two charitable organizations — Communities
Foundation of Texas, Inc. (CFT) and Shreveport Symphony, Inc. (the
symphony). By the assignment agreement, petitioners relinquished all dominion
and control over the assigned partnership interests and assigned to the assignees
all of their rights with respect to those interests. The assignment agreement does
not contain language similar to that quoted above from the Southfield agreement
regarding the admission of the assignees as partners of the partnership, and two
of the partners of the partnership, McCord Brothers Partnership and the
foundation, did not execute the assignment agreement in any capacity. The
interests that petitioners assigned to the assignees by way of the assignment
agreement (collectively, the gifted interest) are the subject of this dispute.

Under the terms of a ―formula clause‖ contained in the assignment agreement
(the formula clause), the children and the trusts were to receive portions of the
gifted interest having an aggregate fair market value of $6,910,933; if the fair
market value of the gifted interest exceeded $6,910,933, then the symphony was
to receive a portion of the gifted interest having a fair market value equal to such
excess, up to $134,000; and, if any portion of the gifted interest remained after
the allocations to the children, trusts, and symphony, then CFT was to receive
that portion (i.e., the portion representing any residual value in excess of
$7,044,933). The children (individually and as trustees of the trusts) agreed to be
liable for all transfer taxes (i.e., Federal gift, estate, and generation-skipping
transfer taxes, and any resulting State taxes) imposed on petitioners as a result of
the conveyance of the gifted interest.

The assignment agreement leaves to the assignees the task of allocating the
gifted interest among themselves; in other words, in accordance with the
formula clause, the assignees were to allocate among themselves the
approximately 82-percent partnership interest assigned to them by petitioners. In
that regard, the assignment agreement contains the following instruction
concerning valuation (the valuation instruction):

         For purposes of this paragraph, the fair market value of the Assigned
         Partnership Interest as of the date of this Assignment Agreement shall
         be the price at which the Assigned Partnership Interest would change
         hands as of the date of this Assignment Agreement between a
         hypothetical willing buyer and a hypothetical willing seller, neither
         being under any compulsion to buy or sell and both having reasonable
         knowledge of relevant facts. Any dispute with respect to the allocation
         of the Assigned Partnership Interests among Assignees shall be
         resolved by arbitration as provided in the Partnership Agreement.

The Confirmation Agreement

In March 1996, the assignees executed a Confirmation Agreement (the
confirmation agreement) allocating the gifted interest among themselves ...

                                      * * *

The assignees based that determination on an appraisal report, dated February
28, 1996, prepared at the behest of the children‘s counsel by Howard Frazier
Barker Elliott, Inc. (HFBE). That report (the 1996 HFBE appraisal report)



                                        19
               concludes that, taking into account discounts for lack of control and lack of
               marketability, the fair market value of a 1-percent ―assignee‘s interest in the
               Class B Limited Partnership Interests‖ on the valuation date was $89,505.

               Representatives of CFT and the symphony, respectively (including their
               respective outside counsel), reviewed the 1996 HFBE appraisal report and
               determined that it was not necessary to obtain their own appraisals. Furthermore,
               under the terms of the confirmation agreement, CFT and the symphony (as well
               as the other assignees) agreed not to seek any judicial alteration of the allocation
               in the confirmation agreement and waived their arbitration rights granted under
               the assignment agreement.

               MIL‘s Exercise of the Call Right

               On June 26, 1996, MIL exercised the call right with respect to the interests held
               by the symphony and CFT. It did so pursuant to a document styled ―Agreement
               — Exercise of Call Option By McCord Interests, Ltd., L.L.P.‖ (the exercise
               agreement). The purchase price for the redeemed interests was based on a
               two-page letter from HFBE (the HFBE letter) previewing an updated appraisal
               report to be prepared by HFBE. The HFBE letter concludes that the fair market
               value of a 1-percent ―assignee‘s interest in the Class B Limited Partnership
               Interests‖ as of June 25, 1996 was $93,540. CFT and the symphony raised no
               objections to the value found in the HFBE letter and accepted $338,967 and
               $140,041, respectively, in redemption of their interests.

       The Tax Court majority went on to discuss the effect of the assignment agreement with
respect to the charitable allocation:

               By way of the assignment agreement, petitioners transferred to CFT the right to
               a portion of the gifted interest. That portion was not expressed as a specific
               fraction of the gifted interest (e.g., one-twentieth), nor did petitioners transfer to
               CFT a specific assignee interest in MIL (e.g., a 3-percent assignee interest).
               Rather, CFT was to receive a fraction of the gifted interest to be determined
               pursuant to the formula clause contained in the assignment agreement. The
               formula clause provides that CFT is to receive that portion of the gifted interest
               having a fair market value equal to the excess of (1) the total fair market value
               of the gifted interest, over (2) $7,044,933. The formula clause is not self-
               effectuating, and the assignment agreement leaves to the assignees the task of
               (1) determining the fair market value of the gifted interest and (2) plugging that
               value into the formula clause to determine the fraction of the gifted interest
               passing to CFT.

               Petitioners argue that, because the assignment agreement defines fair market
               value in a manner that closely tracks the definition of fair market value for
               Federal gift tax purposes, see sec. 25.2512-1, Gift Tax Regs., the assignment
               agreement effects a transfer to CFT of a portion of the gifted interest
               determinable only by reference to the fair market value of that interest as finally
               determined for Federal gift tax purposes. We do not believe that the language of
               the assignment agreement supports petitioners‘ argument. The assignment
               agreement provides a formula to determine not only CFT‘s fraction of the gifted
               interest but also the symphony‘s and the children‘s (including their trusts‘)
               fractions.44 Each of the assignees had the right to a fraction of the gifted interest
               based on the value of that interest as determined under Federal gift tax valuation


                                                        20
               principles. If the assignees did not agree on that value, then such value would be
               determined (again based on Federal gift tax valuation principles) by an arbitrator
               pursuant to the binding arbitration procedure set forth in the partnership
               agreement. There is simply no provision in the assignment agreement that
               contemplates the allocation of the gifted interest among the assignees based on
               some fixed value that might not be determined for several years. Rather, the
               assignment agreement contemplates the allocation of the gifted interest based on
               the assignees‘ best estimation of that value. Moreover, each of the assignees‘
               percentage interests was determined exactly as contemplated in the assignment
               agreement (without recourse to arbitration), and none can complain that they got
               any less or more than petitioners intended them to get.45 Had petitioners
               provided that each donee had an enforceable right to a fraction of the gifted
               interest determined with reference to the fair market value of the gifted interest
               as finally determined for Federal gift tax purposes,46 we might have reached a
               different result. However, that is not what the assignment agreement provides.

               Of course, the assignees‘ determination of the fair market value of the gifted
               interest, while binding among themselves for purposes of determining their
               respective assignee interests, has no bearing on our determination of the Federal
               gift tax value of the assignee interests so allocated.

       Footnote 46 states:

               See, e.g., sec. 1.664-2(a)(1)(iii), Income Tax Regs. (providing that a sum certain
               may be expressed as a fraction or percentage of the value of property ―as finally
               determined for Federal tax purposes‖, but requiring that actual adjusting
               payments be made if such finally determined fair market value differs from the
               initially determined value); sec. 20.2055-2(e)(2)(vi)(a), Estate Tax Regs.
               (similar); sec. 25.2702-3(b)(1)(ii)(B), Gift Tax Regs. (similar); Rev. Proc. 64-19,
               1964-1 C. B. 682 (discussing conditions under which the Federal estate tax
               marital deduction may be allowed where, under the terms of a will or trust, an
               executor or trustee is empowered to satisfy a pecuniary bequest or transfer in
               trust to a decedent‘s surviving spouse with assets at their value as finally
               determined for Federal estate tax purposes).

       The Tax Court majority opinion found it significant that the value of what each party
received was based on what they agreed, or what an arbitrator determined if they failed to agree,
were the values of the various interests, determined in the same manner as for federal gift tax
purposes.   Footnote 46 suggests that the lack of an ―enforceable right‖ by the charity is
ultimately the problem with the assignment.

       Judge Chiechi, concurring in part and dissenting in part, disagreed that there was no
―enforceable right‖ under the clause:

               As can be seen from reading the foregoing paragraph, the purported valuation
               instruction consists of a paragraph in the assignment agreement which defines
               the term ―fair market value‖. Petitioners required the donees to use that
               definition when they allocated among themselves the respective portions of the



                                                      21
               gifted interest which petitioners transferred to them under the assignment
               agreement. The definition of the term ―fair market value‖ for that purpose is the
               same definition used for Federal gift tax purposes. See sec. 25.2512-1, Gift Tax
               Regs. The last sentence of the above-quoted paragraph merely requires that any
               dispute with respect to the allocation of the gifted interest among the donees be
               resolved by arbitration as provided in the partnership agreement. Nothing in that
               paragraph mandates that if the fair market value of the gifted interest to which
               the various donees agreed is ultimately determined not to be the fair market
               value of that interest, no adjustment may be made to the respective assignee
               percentage interests allocated to CFT and the other donees, as set forth in the
               confirmation agreement. I believe that the majority opinion‘s construction of the
               above-quoted paragraph is strained, unreasonable, and improper and leads to
               illogical results.

               In essence, the majority opinion concludes that the donees of the gifted interest
               made a mistake in determining the fair market value of that interest and that
               petitioners are stuck with that mistaken value solely for purposes of determining
               the respective assignee percentage interests transferred to the donees under that
               agreement.

               The majority opinion states that:

                         the assignment agreement contemplates the allocation of the gifted
                         interest based on the assignees‘ best estimation of that value. Moreover,
                         each of the assignees‘ percentage interests was determined exactly as
                         contemplated in the assignment agreement (without recourse to
                         arbitration), and none can complain that they got any less or more than
                         petitioners intended them to get. * * * [Majority op. p. 63.]

               The assignment agreement does not ―contemplate‖, as the majority opinion
               states, that the allocation of the gifted interest be ―based on the assignees‘ best
               estimation of that [fair market] value.‖ Id. Under the assignment agreement,
               petitioners transferred to the donees specified portions of the gifted interest
               determined by reference to the fair market value of such portions, as defined in
               that agreement, and not upon some ―best estimation of that value.‖

               The assignment agreement required that the allocation be based upon fair market
               value as defined in that agreement, which the majority opinion acknowledges is
               the same definition of that term for Federal gift tax purposes. The majority
               opinion has found that the donees did not make the allocation on the basis of
               that definition. The donees thus failed to implement the donors‘ (i.e.,
               petitioners‘) mandate in the assignment agreement when they arrived at amounts
               which they believed to be the respective fair market values of the specified
               portions of the gifted interest that petitioners transferred to them but which the
               majority opinion has found are not the fair market values of such portions.

       Judge Foley, in concurrence and dissent, went further in support of the taxpayer, stating
that the IRS did not prove a substance over form argument and that the allocation clause did not
violate public policy:

               Respondent contended that formation of the limited partnership, assignment of
               partnership interests, confirmation of the assignment, and redemption of the



                                                       22
charities‘ partnership interests were all part of an integrated transaction where
petitioners intended to transfer all of their assets to their sons and the trusts.
Respondent simply failed to meet his burden.

Courts have employed the substance over form doctrine where a taxpayer,
intending to avoid the gift tax, transfers property to an intermediary who then
transfers such property to the intended beneficiary.7 In some instances the
intermediary was used to disguise the transferor. See Schultz v. United States,
493 F.2d 1225, 1226 (4th Cir. 1974) (finding that brothers planned to avoid gift
taxes through repeated reciprocal gifts to each others‘ children); Griffin v.
United States, 42 F. Supp. 2d 700, 707 (W.D. Tex. 1998) (finding that husband
and wife engaged in a scheme where the wife ―was merely the intermediary
through which the stock passed on its way to the ultimate beneficiary‖); Estate
of Murphy v. Commissioner, T.C. Memo. 1990-472 (disregarding an intrafamily
stock transfer where the Court found an informal family agreement to control
the stock collectively). In Heyen v. United States, 945 F.2d 359 (10th Cir. 1991)
(disregarding as shams 27 transfers of stock to intermediate beneficiaries who
then transferred the stock to the original transferor‘s family), however, the
intermediary was used in an attempt to disguise the transferee. Respondent,
relying on Heyen, asserts that the Symphony and CFT were merely
intermediaries in petitioners‘ plan to transfer their MIL interests to their sons
and the trusts.

In Heyen, a taxpayer, seeking to avoid the gift tax by taking advantage of the
annual gift tax exclusion, transferred stock to 29 intermediate recipients, all but
two of whom made blank endorsements of the stock, which the issuing bank
subsequently reissued to the intended beneficiaries. The court stated:

         The [intermediate] recipients either did not know they were receiving a
         gift of stock and believed they were merely participating in stock
         transfers or had agreed before receiving the stock that they would
         endorse the stock certificates in order that the stock could be reissued to
         decedent‘s family. [ Id. at 361.]

The court further stated:

         The evidence at trial indicated decedent intended to transfer the stock to
         her family rather than to the intermediate recipients. The intermediary
         recipients only received the stock certificates and signed them in blank
         so that the stock could be reissued to a member of decedent‘s family.
         Decedent merely used those recipients to create gift tax exclusions to
         avoid paying gift tax on indirect gifts to the actual family member
         beneficiaries. [ Id. at 363.]

In order for us to ignore petitioners‘ allocation in the assignment agreement,
respondent must establish that petitioners coordinated, and the charities colluded
in or acquiesced to, a plan to avoid petitioners‘ gift taxes by undervaluing the
transferred interests and intended to divert CFT‘s interest to their sons and the
trusts. See Heyen v. United States, supra; Schultz v. United States, supra; Griffin
v. United States, supra; Estate of Murphy v. Commissioner, supra. Respondent
did not present the requisite evidence for us to invoke the substance over form
doctrine.




                                        23
Respondent stated on brief that, after execution of the assignment agreement,
petitioners ―washed their hands‖ of the transaction, and the donees took over.
Petitioners‘ sons‘ involvement in the subsequent allocation of the transferred
interests does not affect the petitioners‘ gift tax liability, particularly in the
absence of a showing that petitioners retained some control over the subsequent
allocation. See sec. 25.2511-2(a), Gift Tax Regs. (stating that the gift tax is
measured by the value of the property passing from the donor). Petitioners‘ sons
and the estate planner made all the arrangements relating to the valuation. This
Court, however, will not impute to petitioners an intent to avoid the gift tax
merely from the appraiser‘s valuation of the transferred partnership interests, the
sons‘ involvement in the planning process, or the hiring of an estate planner
charged with tax minimization. See Estate of Strangi v. Commissioner, 115 T.C.
478, 484-485 (2000) (―Mere suspicion and speculation about a decedent‘s estate
planning and testamentary objectives are not sufficient to disregard an
agreement in the absence of persuasive evidence‖), revd. on other grounds 293
F.3d 279 (5th Cir. 2002); Hall v. Commissioner, 92 T.C. 312 (1989).

Respondent failed to establish that the Symphony or CFT participated,
knowingly or otherwise, in a plan to facilitate petitioners‘ purported avoidance
of gift tax. Indeed, the testimony and evidence established that the Symphony
and CFT acted independently. CFT did not hire its own appraiser because it had
confidence in the appraiser hired by petitioners‘ sons. While in hindsight (i.e.,
after this Court‘s valuation) it was imprudent for the charitable organizations to
forgo an independent appraisal,8 these organizations were not sham
intermediaries. Prior to signing the confirmation agreement, the Symphony and
CFT could have independently valued MIL, forced arbitration, and thwarted any
purported plan to avoid the gift tax. Cf. Compaq v. Commissioner, 277 F.3d
778, 784 (5th Cir. 2001) (declining, in an income tax case, to disregard a
transaction that involved even a minimal amount of risk and was conducted by
entities separate and apart from the taxpayer), revg. 113 T.C. 214 (1999).

There is no evidence of an implicit or explicit agreement, between petitioners
and either the Symphony or CFT, that the Symphony or CFT would accept less
than that which petitioners transferred to each organization. In fact, respondent
stipulated that ―Before the call right was exercised, there was no agreement
among Mr. or Mrs. McCord, the McCord brothers, the Symphony or CFT as to
when such a buyout would occur or to the price at which the buyout would
occur.‖

In sum, respondent failed to establish that the undervaluation of MIL,
reallocation of MIL interests, and subsequent transfer of a portion of CFT‘s MIL
interest to the sons and the trusts, were parts of a plan by petitioners to avoid the
gift tax. CFT‘s retention of a much smaller interest (i.e., 3.62376573 percent)
than petitioners transferred, pursuant to the assignment agreement, has no effect
on the value of the transferred property on January 12, 1996, the date the gift
became complete.

III. Formula Clause Does Not Violate Public Policy

Relying primarily on Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944),
respondent contended that petitioners‘ formula clause was against public policy,
and therefore void, because such clause ―is a ‗poison pill‘ created to discourage
audit of the gifts and to fabricate phantom charitable gift and income tax
deductions.‖



                                        24
               In Commissioner v. Procter, supra, the court considered a clause causing a gift
               to revert to the donor if a court determined that the gift was taxable. The court
               held that such a clause ―is clearly a condition subsequent and void because
               contrary to public policy.‖ Id. at 827. The court reasoned that the clause would
               discourage the collection of tax because attempted collection would defeat the
               gift, the clause would ―obstruct the administration of justice by requiring the
               courts to pass upon a moot case‖, and the clause, if allowed to stand, would
               defeat the judgment of a court. Id. Likewise, in Ward v. Commissioner, 87 T.C.
               78 (1986), a clause allowed the taxpayer to revoke a gift of stock if it was
               determined that, for gift tax purposes, the fair market value of such stock
               exceeded $2,000 per share. The Court similarly concluded that such a clause
               was a condition subsequent and void because it was against public policy.

               Contrary to the valuation clauses in Commissioner v. Procter, supra, and Ward
               v. Commissioner, supra, which adjusted the amount transferred based upon a
               condition subsequent, petitioners‘ valuation clause defined the amount of
               property transferred. Simply put, petitioners‘ gift does not fail upon a judicial
               redetermination of the transferred property‘s value. Petitioners made a legally
               enforceable transfer of assignee interests to CFT, with no provision for the gift
               to revert to petitioners or pass to any other party on the occurrence of adverse
               tax consequences. CFT merely failed to protect its interest adequately. Procter
               and Ward are distinguishable. Petitioners‘ formula clause was not against public
               policy.

       Going the other way, in dissent Judge Laro stated that the clause should be ignored
because it violates public policy and no increased charitable deduction should be allowed:

               To reach the result that the majority desires, the majority decides this case on the
               basis of a novel approach neither advanced nor briefed by either party and
               concludes that the Court need not address respondent‘s arguments as to public
               policy and integrated transaction. Majority op. p. 64 note 47. Specifically, under
               the majority‘s approach (majority‘s approach), the term ―fair market value‖ as
               used in the assignment agreement denotes simply the value ascertained by the
               parties to that agreement (or, in certain cases by an arbitrator) and not the actual
               amount determined under the firmly established hypothetical willing
               buyer/hypothetical willing seller test that has been a fundamental part of our
               Federal tax system for decades on end. Majority op. p. 64 note 47; see also
               United States v. Cartwright, 411 U.S. 546, 550-551 (1973) (―The willing
               buyer-willing seller test of fair market value is nearly as old as the federal
               income, estate, and gifts taxes themselves‖). Whereas the majority ostensibly
               recognizes that firmly established test in its determination of the fair market
               value of the subject property, majority op. p. 64 note 46, the majority essentially
               holds that the parties to the assignment agreement are not bound by that test
               when they themselves ascertain the fair market value of that property, id. at
               61-64.

               As I understand the majority‘s rationale, the parties to the assignment agreement
               are not bound by that test because the assignment agreement only uses the
               phrase ―fair market value‖ and not the phrase ―fair market value as finally
               determined for Federal gift tax purposes‖. To my mind, the subject property‘s
               fair market value is its fair market value, notwithstanding whether fair market
               value is ascertained by the parties or ―finally determined for Federal gift tax
               purposes‖. I know of nothing in the tax law (nor has the majority mentioned



                                                       25
anything) that provides that property such as the subject property may on the
same valuation date have one ―fair market value‖ when ―finally determined‖ and
a totally different ―fair market value‖ if ascertained beforehand.1 The majority‘s
interpretation of the assignment agreement is at odds with the interpretation
given that agreement by not only the trial Judge, but by both parties as well.

The majority allows petitioners an increased charitable contribution that would
be disallowed under either the public policy or integrated transaction doctrine. In
that both of these doctrines are fundamental to a proper disposition of this case,
it is incumbent upon the Court to address one or both of them. The majority
inappropriately avoids discussion of these doctrines by relying on the principle
that the Court ―may approve a deficiency on the basis of reasons other than
those relied upon by the Commissioner‖. Majority op. p. 64 note 47. The
majority, however, fails to recognize that the majority is not approving
respondent‘s deficiency in full but is rejecting a portion of it. In fact, the
majority even acknowledges that ―the application of respondent‘s integrated
transaction theory would result in an initial increase in the amount of petitioners‘
aggregate taxable gift by only $90,011‖. Id. Whereas the majority attempts to
downsize the significance of a $90,011 adjustment by recharacterizing it as
―only‖ and ―less than 1 percent‖, id., the fact of the matter is that the dollar
magnitude of a $90,011 increase is significant to the fisc (as well as to most
people in general) notwithstanding that it may constitute a small percentage of
the aggregate taxable gift as found by the majority.2 I know of no principle of
tax law (nor has the majority cited one) that provides that an adjustment
otherwise required by the tax law is inappropriate when it is a small percentage
of a base figure such as aggregate taxable gifts.

2. Increased Charitable Deduction Is Against Public Policy

Allowing petitioners to deduct as a charitable contribution the increase in value
determined by the Court is against public policy and is plainly wrong. No one
disputes that CFT will never benefit from the approximately $45,000 that each
petitioner is entitled to deduct as a charitable contribution pursuant to the
majority opinion. Nor does anyone dispute that the only persons benefiting from
the increased value are petitioners and that the only one suffering any detriment
from the increased value is the fisc. I do not believe that Congress intended that
individuals such as petitioners be entitled to deduct charitable contributions for
amounts not actually retained by a charity. See Hamm v. Commissioner, T.C.
Memo. 1961-347 (charitable contribution under sec. 2522 requires ―a reasonable
probability that the charity actually will receive the use and benefit of the gift,
for which the deduction is claimed‖), affd. 325 F.2d 934 (8th Cir. 1963).

                                      * * *

All of the steps which were taken to effect the transfer of petitioners‘ partnership
interests to their sons (inclusive of the trusts) were part of a single integrated
transaction. The purpose of that transaction was to transfer the interests with an
avoidance of Federal gift taxes, while, at the same time, discouraging audit of
the transfer and manufacturing phantom charitable gift and income tax
deductions in the event that the value of the transfer was later increased. I reach
my conclusion in light of the following facts which were found by the trial judge
or are reasonable inferences therefrom: (1) Petitioners were seeking expert
advice on the transfer of their wealth with minimal tax consequences, (2) the
transaction contemplated that the charities would be out of the picture shortly



                                        26
               after the gift was made, (3) the transfers of the partnership interests to the
               charities were subject to a call provision that could be exercised at any time, (4)
               the call provisions were exercised almost contemporaneously with the transfers
               to the charities, (5) the call price was significantly below fair market value, (6)
               the charities never obtained a separate and independent appraisal of their
               interests (including whether the call price was actually the fair market value of
               those interests), (7) neither charity ever had any managerial control over the
               partnership, (8) the charities agreed to waive their arbitration rights as to the
               allocation of the partnership interests, and (9) petitioners‘ sons were at all times
               in control of the transaction. I also query as to this case why a charity would
               ever want to receive a minority limited partnership interest, but for an
               understanding that this interest would be redeemed quickly for cash, and find
               relevant that the interest was subject to the call provision that could be exercised
               at any time.

       Judge Swift wrote a concurrence that is most interesting. Essentially he argued that the
taxpayers‘ gift to charity failed to qualify for the gift tax charitable deduction because it was a
partial interest. In particular, Judge Swift focused on the rights that the charitable donee did not
receive because it only received an assignee interest; his discusses this issue as follows:

               Focusing on the gift to the fourth level charitable donee (the gift to CFT),
               petitioners themselves allege (in order to beef up the valuation discounts they
               seek) and the majority opinion finds, majority op. pp. 19-24, that the gifted MIL
               partnership interest transferred to CFT included only certain ―economic rights‖
               with regard to the gifted interest and did not consist of all of the donors‘ rights
               as limited partners in that particular limited partnership interest. Upon
               petitioners‘ transfer and upon CFT‘s receipt of the gifted interest in the MIL
               partnership, petitioners retained, and CFT never received, the following rights
               associated with petitioners‘ interest in MIL (references are to the MIL amended
               partnership agreement):

                        (1)      The right to vote on MIL partnership matters (section 3.10);

                        (2)      The right to redeem the MIL partnership interest (section
                                 9.02(b));

                        (3)      The right to inspect financial and other pertinent information
                                 relating to MIL (section 3.09(d)(i)-(v));

                        (4)      The right to access any properties or assets owned by MIL
                                 (section 3.09(d)(vi)); and

                        (5)      The right to veto early liquidation of MIL, unless such
                                 liquidation is required by State law (section 10.01).

               Under section 7.02 of the Texas Revised Limited Partnership Act, a partnership
               agreement may, but is not required to, limit the partnership rights that may be
               transferred when a partner transfers or assigns an interest in a partnership. In this
               case, petitioners made their retention of the above rights (and the nonreceipt
               thereof by CFT) explicit by the terms of the MIL partnership agreement that
               they adopted. Section 8.03 of the MIL partnership agreement, discussing the



                                                       27
                  transfer of a limited partnership interest to an assignee, is set forth, in part,
                  below:

                           [A]n Assignee shall be entitled only to allocations of Profits and Losses
                           * * * and distributions * * * which are attributable to the Assigned
                           Partnership Interests held by the Assignee and shall not be entitled to
                           exercise any Powers of Management nor otherwise participate in the
                           management of the Partnership nor the control of its business and
                           affairs. * * *

                  As explained, the above limitations on the charitable gift transferred by
                  petitioners to CFT are the basis for petitioners‘ claimed characterization and
                  valuation of the gift to CFT as an assignee interest in MIL, as distinguished from
                  an MIL partnership interest, and (as petitioners themselves contend) they would
                  appear to constitute substantive and significant limitations.

       Such limitations would necessarily make the gifts partial interests, according to Judge
Swift, based in part on Rev. Rul. 81-282, 1981-2 C. B. 78, which disallowed a charitable
deduction for corporate stock where the donor retained the right to vote the stock. Judge Swift‘s
opinion states:

                  As stated, the retained rights involved in Rev. Rul. 81- 282, 1981-2 C.B. 78,
                  appear to be analogous to the rights retained by petitioners herein. By providing
                  in the MIL partnership agreement limitations on transfers of MIL partnership
                  interests and by transferring to CFT only an assignee interest in MIL, petitioners
                  retained the voting and the other rights in the MIL limited partnership associated
                  with the assignee interest transferred to charity. Because the rights retained by
                  petitioners with regard to their MIL limited partnership interest would be treated
                  as substantial, under section 170(f)(3)(B)(ii) the portion thereof transferred to
                  CFT would appear not to qualify as an undivided portion of petitioners‘ entire
                  MIL limited partnership interest.

                  I would reiterate that it is the perceived substantial significance of petitioners‘
                  retained rights on which petitioners themselves, petitioners‘ valuation experts,
                  and the majority opinion rely to justify assignee status and increased valuation
                  discounts for the gifted interest.

                  It would appear that for the above analysis not to apply to the gift involved in
                  the instant case, petitioners‘ MIL limited partnership interest would have to be
                  interpreted as consisting of two separate and distinct interests (an economic
                  interest and a noneconomic interest) with petitioners transferring to CFT an
                  undivided portion of the separate economic interest.

                  I submit that the correct interpretation would be to treat petitioners‘ MIL limited
                  partnership interest as one interest consisting of both economic and
                  noneconomic rights, with petitioners having transferred to CFT only their
                  economic rights therein. Under this interpretation, it would appear that
                  petitioners should be regarded as having made a charitable gift to CFT of a
                  partial interest in their MIL limited partnership interest, which charitable gift
                  would be subject to the gift tax disallowance provision of section 2522(c)(2).




                                                         28
       The Fifth Circuit ignored Judge Swift‘s concerns, and Judge Laro‘s, instead focusing, and
largely adopting, Judge Foley‘s opinion.              The court specifically noted that on appeal the
government did not raise substance over form or public policy objections to the clause, and thus
the court did not address them. Instead, the court found that the Tax Court had used post-gift
events to determine gift tax value, which it found impermissible. The opinion states:

               The Majority's holdings for the Commissioner were not, however, based on any
               of the overarching equitable doctrines that the Commissioner had advanced at
               trial. Instead, the Majority crafted its own interpretation of the Assignment
               Agreement and gave controlling effect to the post-gift Confirmation Agreement,
               all based entirely on a theory that the Commissioner had never espoused. At the
               core of the novel methodology thus conceived and implemented, sua sponte, by
               the Majority is the consistently rejected concept of postponed determination of
               the taxable value of a completed gift -- postponed here until, two months after
               the Taxpayers gifts were completed, the donees decided among themselves
               (with neither actual nor implied participation of or suasion by the donors) how
               they would equate the dollars-worth of interest in MIL given to them on January
               12, 1996, with percentages of interests in MIL decided two months later by the
               donees in the Confirmation Agreement. Stated differently, the Majority in
               essence suspended the valuation date of the property that the Taxpayers donated
               in January until the date in March on which the disparate donees acted, post hoc,
               to agree among themselves on the Class B limited partnership percentages that
               each would accept as equivalents of the dollar values irrevocably and
               unconditionally given by the Taxpayers months earlier. As shall be seen, we
               hold that the Majority's unique methodology violated the immutable maxim that
               post-gift occurrences do not affect, and may not be considered in, the appraisal
               and valuation processes.

               Under the instant circumstances, the ultimate-valuation "fact" is at most a mixed
               question of fact and law, and thus a legal conclusion.25 Particularly when, as
               here, the determination of the fair market value for gift tax purposes requires
               legal conclusions, our review is de novo.26 Indeed, it is settled in this circuit and
               others that a trial court's methodology in resolving fact questions is a legal issue
               and thus reviewable de novo on appeal.27

               The Majority's key legal error was its confecting sua sponte its own
               methodology for determining the taxable or deductible values of each donee's
               gift valuing for tax purposes here. This core flaw in the Majority's inventive
               methodology was its violation of the long-prohibited practice of relying on post-
               gift events.28 Specifically, the Majority used the after-the-fact Confirmation
               Agreement to mutate the Assignment Agreement's dollar-value gifts into
               percentage interests in MIL. It is clear beyond cavil that the Majority should
               have stopped with the Assignment Agreement's plain wording. By not doing so,
               however, and instead continuing on to the post-gift Confirmation Agreement's
               intra-donee concurrence on the equivalency of dollars to percentage of interests
               in MIL, the Majority violated the firmly-established maxim that a gift is valued
               as of the date that it is complete; the flip side of that maxim is that subsequent
               occurrences are off limits.29




                                                       29
In this respect, we cannot improve on the opening sentence of Judge Foley's
dissent:

         Undaunted by the facts, well-established legal precedent, and
         respondent's failure to present sufficient evidence to establish his
         determinations, the majority allow their olfaction to displace sound
         legal reasoning and adherence to the rule of law. [footnote omitted;
         bold in original]

Judge Foley's "facts" are those stipulated and those adduced (especially the
experts' testimony) before him as the lone trial judge, including the absence of
any probative evidence of collusion, side deals, understandings, expectations, or
anything other than arms-length, unconditional completed gifts by the Taxpayers
on January 12, 1996, and arm's-length conversions of dollars into percentages by
the donees alone in March. Judge Foley's "well-established legal precedent"
includes, without limitation, constant jurisprudence that has established the
immutable rule that, for inter vivos gifts and post-mortem bequests or
inheritances alike, fair market value is determined, snapshot-like, on the day that
the donor completes that gift (or the date of death or alternative valuation date in
the case of a testamentary or intestate transfer).31 And, Judge Foley's use of
"olfaction" is an obvious, collegially correct synonym for the less-elegant
vernacular term, "smell test," commonly used to identify a decision made not on
the basis of relevant facts and applicable law, but on the decision maker's "gut"
feelings or intuition. The particular olfaction here is the anathema that Judge
Swift identifies pejoratively in his concurring opinion as "the sophistication of
the tax planning before us." 32 The Majority's election to rule on the basis of this
olfaction is likewise criticized by Judge Laro, dissenting in part, as the

Majority Appl[ying] Its Own Approach:

         To reach the result that the majority desires, the majority decides this
         case on the basis of a novel approach neither advanced nor briefed by
         either party. . . .33

Judge Foley also disagrees with the Majority -- and rightly so, we conclude --
for basing its holding on an interpretation of the Assignment Agreement and an
application of the Confirmation Agreement that the Commissioner never raised.
To this criticism we add that the Majority not only made a contractual
interpretation of the Assignment Agreement that rests in part on the non sequitur
that it uses the term "fair market value" without including the modifying
language "as finally determined for tax purposes," 34 but also indicated a palpable
hostility to the dollar formula of the defined value clause in that donation
agreement. This is exacerbated by the Majority's lip service to, but ultimate
disregard of, the immutable principal that value of a gift must be determined as
of the date of the gift. The Majority violates this doctrine when it relies in
principal part on the post-gift actions of the donees in their March 1996
execution of the Confirmation Agreement. Judge Foley correctly notes that the
Majority erred in conducting

         [A] tortured analysis of the [A]ssignment [A]greement that is,
         ostensibly, justification for shifting the determination of transfer tax
         consequences from the date of the transfer [January 12, 1996] . . . to
         March 1996 (i.e., the date of the [C]onfirmation [A]greement). The
         majority's analysis of the [A]ssignment [A]greement requires that



                                        30
                       [Taxpayers] use the Court's valuation to determine the [dollar] value of
                       the transferred interests, but the donees' appraiser's valuation to
                       determine the [percentages of] interests transferred to the charitable
                       organizations. There is no factual, legal, or logical basis for this
                       conclusion.35

               We obviously agree with Judge Foley's unchallenged baselines that the gift was
               complete on January 12, 1996, and that the courts and the parties alike are
               governed by § 2512(a). We thus agree as well that the Majority reversibly erred
               when, "in determining the charitable deduction, the majority rely on the
               [C]onfirmation [A]greement without regard to the fact that [the Taxpayers] were
               not parties to this agreement, and that this agreement was executed by the
               donees more than 2 months after the transfer." 36 In taking issue with the
               Majority on this point, Judge Foley cogently points out that "[t]he Majority
               appear to assert, without any authority, that [the Taxpayers'] charitable
               deduction cannot be determined unless the gifted interest is expressed in terms
               of a percentage or a fractional share." 37 As implied, the Majority created a
               valuation methodology out of the whole cloth. We too are convinced that
               "[r]egardless of how the transferred interest was described, it had an
               ascertainable value" on the date of the gift.38 That value cannot, of course, be
               varied by the subsequent acts of the donees in executing the Confirmation
               Agreement. Consequently, the values ascribed by the Majority, being derived
               from its use of its own imaginative but flawed methodology, may not be used in
               any way in the calculation of the Taxpayers' gift tax liability.

       The Fifth Circuit decision in McCord is helpful but not determinative with respect to
defined value or charitable allocation clauses because the court did not confront head-on the
Procter type public policy issue. Nonetheless, what the opinion clearly states is that at least one
circuit court is sympathetic to taxpayer claims where the taxpayer makes a gift and leaves it up to
others to determine the specific donees.

       Judge Holmes authored the majority opinion in the reviewed decision, Estate of Helen
Christiansen v. Commissioner, 130 T. C. No. 1 (2008). Most of the opinion dealt with the
disclaimer of assets into a charitable lead annuity trust, but of interest with respect to charitable
allocation clauses is the Court‘s determination that a disclaimer of assets to a private foundation
would be given effect for estate tax purposes even when estate values were adjusted upward on
audit. Helen Christiansen died leaving everything to her only child, Christine Hamilton. Any
amounts Christine Hamilton disclaimed would go 75% to a charitable lead annuity trust and 25%
to a private foundation. Ms. Hamilton disclaimed a fraction of the estate the numerator of which
was the fair market value of the estate, before payment of debts, expenses, and taxes, less
$6,350,000, and the denominator of which was the fair market value of the estate, before
payment of debts, expenses, and taxes. Fair market value was defined using the willing buyer,


                                                     31
willing seller formula and referencing the value as finally determined for Federal estate tax
purposes. The estate included some cash and real estate but also 99% interests in two limited
partnerships. The estate tax return reported a total value of $6,512,223.20; in the litigation the
parties agreed that the value of the estate was $9,578,895.93.

       The government argued that the disclaimer to the Foundation should generate an estate
tax charitable deduction only for the amount originally set forth on the estate tax return, not the
amount agreed to after audit. The Court disagreed.                   The government first argued that the
increase amount passed as a result of a contingency - - the IRS audit increasing the value of the
estate - - but the Court noted that merely because ―the estate and the IRS bickered about the
value of the property being transferred doesn‘t mean the transfer itself was contingent in the
sense of dependent for its occurrence on a future event.‖

       The government also argued public policy, Procter like, grounds for disallowing an
increased charitable deduction. The Court rejected that contention holding:

               This case is not Procter. The contested phrase would not undo a transfer, but
               only reallocate the value of the property transferred among Hamilton, the Trust,
               and the Foundation. If the fair market value of the estate assets is increased for
               tax purposes, then property must actually be reallocated among the three
               beneficiaries. That would not make us opine on a moot issue, and wouldn‘t in
               any way upset the finality of our decision in this case.

               We do recognize that the incentive to the IRS to audit returns affected by such
               disclaimer language will marginally decrease if we allow the increased
               deduction for property passing to the Foundation. Lurking behind the
               Commissioner‘s argument is the intimation that this will increase the probability
               that people in Hamilton‘s situation will lowball the value of an estate to cheat
               charities. There‘s no doubt that this is possible. But IRS estate-tax audits are
               far from the only policing mechanism in place. Executors and administrators of
               estates are fiduciaries, and owe a duty to settle and distribute an estate according
               to the terms of the will or law of intestacy. See, e.g., S.D. Codified Laws sec.
               29A-3-703(a) (2004). Directors of foundations--remember that Hamilton is one
               of the directors of the Foundation that her mother created--are also fiduciaries.
               See S.D. Codified Laws sec. 55-9-8 (2004). In South Dakota, as in most states,
               the state attorney general has authority to enforce these fiduciary duties using
               the common law doctrine of parens patriae. Her fellow directors or beneficiaries
               of the Foundation or Trust can presumably enforce their observance through tort
               law as well. And even the Commissioner himself has the power to go after
               fiduciaries who misappropriate charitable assets. The IRS, as the agency
               charged with ruling on requests for charitable exemptions, can discipline abuse
               by threatening to rescind an exemption. The famed case of Hawaii‘s Bishop
               Estate shows how effectively the IRS can use the threat of the loss of exempt
               status to curb breaches of fiduciary duty. See Brody, ―A Taxing Time for the



                                                       32
               Bishop Estate: What Is the I.R.S. Role in Charity Governance?‖, 21 U. Haw. L.
               Rev. 537 (1999). The IRS also has the power to impose intermediate sanctions
               for breach of fiduciary duty or self-dealing. See sec. 4958.

       The disclaimer issue generated various concurrences and dissents but the disclaimer to
the private foundation holding of the majority obtained unanimous approval by the Tax Court.

       The Eighth Circuit upheld the formula allocation in 586 F.3d 1061 (8th Cir. 2009). There
were two issues. First, that having the amount of the disclaimer ―float‖ based on audit values the
amount going to charity was subject to a ―precedent event‖. The opinion states:

               Regarding the first argument, we are unable to accept the Commissioner's
               interpretation of Treasury Regulation § 20.2055-2(b)(1). The regulation is clear
               and unambiguous and it does not speak in terms of the existence or finality of an
               accounting valuation at the date of death or disclaimer. Rather, it speaks in terms
               of the existence of a transfer at the date of death. See Treas. Reg. § 20.2055-
               2(b)(1) ("If, as of the date of a decedent's death, a transfer for charitable
               purposes is dependent upon the performance of some act or the happening of a
               precedent event in order that it might become effective, no deduction is
               allowable unless the possibility that the charitable transfer will not become
               effective is so remote as to be negligible."); see also 26 U.S.C. § 2518(a)
               (providing that a qualifying disclaimer relates back to the time of death by
               allowing disclaimed amounts to pass as though the initial transfer had never
               occurred); S.D. Codified Laws § 29A-2-801 (b) (same). Here, all that remained
               uncertain following the disclaimer was the valuation of the estate, and therefore,
               the value of the charitable donation. The foundation's right to receive twenty-
               five percent of those amounts in excess of $6.35 million was certain.

               In pressing his current argument, the Commissioner fails to distinguish between
               events that occur post-death that change the actual value of an asset or estate and
               events that occur post-death that are merely part of the legal or accounting
               process of determining value at the time of death. The Commissioner cites
               several cases in which courts disallowed deductions because future contingent
               events might have defeated a transfer or a charitable contribution. See Comm'r
               v. Sternberger's Estate, 348 U.S. 187, 199 (1955) (deduction disallowed where
               bequest to charity was dependent upon testator's daughter dying without
               descendants); Henslee v. Union Planters, 335 U.S. 595, 600 (1949) (deduction
               disallowed where a bequest to charity was the remainder of trust and where the
               trust's primary beneficiary had the right to invade the trust corpus, therefore
               making not only the value of the bequest contingent, but making the existence of
               the charitable bequest non-ascertainable); Bookwalter v. Lamar, 323 F.2d 664,
               669-70 (8th Cir. 1963) (marital deduction disallowed where surviving spouse's
               continued survival was a condition upon disposition of the estate, thus creating
               "a 'terminable interest' within the meaning of § 2056 of the 1954 [Internal
               Revenue] Code."). In each cited case, however, the actual contingencies under
               scrutiny were outside the legal or accounting process of determining a date-of-
               death value for the estate or an asset. None of these cases stand for the
               proposition that deductions are to be disallowed if valuations involve lengthy or
               disputed appraisal efforts or if the Commissioner's actions in challenging a




                                                      33
              return result in determination of an adjusted value. As stated by the Tax Court
              below:

              That the estate and the IRS bickered about the value of the property being
              transferred doesn't mean the transfer itself was contingent in the sense of
              dependent for its existence on a future event. Resolution of a dispute about the
              fair market value of assets on the date Christiansen died depends only on a
              settlement or final adjudication of a dispute about the past, not the happening of
              some event in the future.

              In fact, in a different subsection of the regulation, the agency itself recognizes
              that references to values "as finally determined for Federal estate tax purposes"
              are sufficiently certain to be considered "determinable" for purposes of
              qualifying as a guaranteed annuity interest. Treas. Reg. § 20.2055-2(e)(2)(vi)(a).
              In doing so, the agency expressly uses the above-quoted language to distinguish
              fixed determinable amounts from fluctuating formulas that depend upon future
              conditions for their determination. The regulation provides:

                       An amount is determinable if the exact amount which must be paid
                       under the conditions specified in the instrument of transfer can be
                       ascertained as of the appropriate valuation date. For example, the
                       amount to be paid may be a stated sum for a term of years, or for the
                       life of the decedent's spouse, at the expiration of which it may be
                       changed by a specified amount, but it may not be redetermined by
                       reference to a fluctuating index such as the cost of living index. In
                       further illustration, the amount to be paid may be expressed in terms of
                       a fraction or a percentage of the net fair market value, as finally
                       determined for Federal estate tax purposes, of the residue of the estate
                       on the appropriate valuation date, or it may be expressed in terms of a
                       fraction or percentage of the cost of living index on the appropriate
                       valuation date.

              Id. (Emphasis added). It seems clear, then, that references to value "as finally
              determined for estate tax purposes" are not references that are dependent upon
              post-death contingencies that might disqualify a disclaimer. Because the only
              uncertainty in the present case was the calculation of value to be placed on a
              right to receive twenty-five percent of the estate in excess of $6.35 million, and
              because no post-death events outside the context of the valuation process are
              alleged as post-death contingencies, the disclaimer was a "qualified disclaimer."
              26 U.S.C. § 2518(a). We find no support for the Commissioner's assertion that
              his challenge to the estate's return and the ultimate valuation process and
              settlement are the type of post-death events that may disqualify a partial
              disclaimer.

       The second argument was that fractional disclaimers which discourage audits are per se
bad. The Eighth Circuit rejected the IRS contention with helpful language for the taxpayer:

              Regarding the second argument, we agree with the Commissioner that the Tax
              Court's ruling in this case may marginally detract from the incentive to audit
              estate returns. It is possible that in some hypothetical case involving a fixed-
              dollar-amount partial disclaimer, a post-challenge correction to an estate's value
              could result in a charitable deduction equal to the increase in the estate, resulting
              in no increased estate tax.2 The Commissioner argues that a policy supporting


                                                      34
audits as a means to enforce accurate reporting requirements mandates that we
disallow fixed-dollar-amount partial disclaimers because of the potential moral
hazard or untoward incentive they create for executors and administrators to
undervalue estates.

For several reasons, we disagree with the Commissioner's argument that we
must interpret the statute and regulations in an effort to maximize the incentive
to audit. First, we note that the Commissioner's role is not merely to maximize
tax receipts and conduct litigation based on a calculus as to which cases will
result in the greatest collection. Rather, the Commissioner's role is to enforce the
tax laws. See 26 U.S.C. § 7801 (a)(1) ("[T]he administration and enforcement of
[the Tax Code] shall be performed by or under the supervision of the Secretary
of the Treasury."); id. § 7803(a)(2) ("The Commissioner shall have such duties
and powers as the Secretary may prescribe, including the power to (A)
administer, manage, conduct, direct, and supervise the execution and application
of the internal revenue laws or related statutes and tax conventions to which the
United States is a party. . . .").

Second, we find no evidence of a clear Congressional intent suggesting a policy
to maximize incentives for the Commissioner to challenge or audit returns. The
relevant policy in the present context is clear, and it is a policy more general in
nature than that articulated by the Commissioner: Congress sought to encourage
charitable donations by allowing deductions for such donations. See 26 U.S.C. §
2055(a)(2); Sternberger's Estate, 348 U.S. at 190 n.3 ("The purpose of the
deduction is to encourage gifts to the named uses."). Allowing fixed-dollar-
amount partial disclaimers supports this broad policy.

Third, and importantly, even if we were to find a general congressional intent
regarding a need to maximize the incentive-to-audit, no corresponding rule of
construction would be necessary in the present context to promote accurate
reporting of estate values. The Commissioner premises his policy argument on
the assumption that executors and administrators will purposefully undervalue
assets in order to take advantage of his marginally decreased incentive to audit.
In the present context, however, there are countless other mechanisms in place
to ensure that fiduciaries such as executors and administrators accurately report
estate values. State laws impose personal liability on fiduciaries, and state and
federal laws impose financial liability or, in some circumstances criminal
sanctions, upon false statements, fraud, and knowing misrepresentations. See,
e.g., S.D. Codified Laws § 29A-3-703(a) ("A personal representative is a
fiduciary. . . ."); id. § 55-9-5 (providing that the attorney general is the
representative of beneficiaries of charitable foundations and has a duty to
enforce their rights in court actions); 18 U.S.C. 1001 et seq. (criminalizing
various acts of fraud and knowing misrepresentations); Ward v. Lange, 553
N.W.2d 246, 250 (S.D. 1996) ("[T]he fiduciary has a 'duty to act primarily for
the benefit' of the other.") (quoting High Plains Genetics Research, Inc. v. J K
Mill-Iron Ranch, 535 N.W.2d 839, 842 (S.D. 1995)).

In addition, with a fixed-dollar-amount partial disclaimer, the contingent
beneficiaries taking the disclaimed property have an interest in ensuring that the
executor or administrator does not under-report the estate's value. Such
beneficiaries, therefore, have an interest in serving a watchdog function.3
Further, in this case Hamilton was not only the primary beneficiary who made
the contested partial disclaimer, she was the executor of the estate and a board
member for the foundation. Because she owed a fiduciary obligation to both the



                                        35
               estate and the foundation, any self-dealing in this instance would be a clear
               violation of her general state-law fiduciary obligation to put the interests of the
               foundation above her own interests and possibly a violation of state and federal
               statutory prohibitions on certain forms of self dealing. See Ward, 553 N.W.2d at
               250; S.D. Codified Laws § 55-9-8 ("The trustee of a trust described in § 55-9-7
               shall not engage in any act of self-dealing which would give rise to any liability
               for the tax imposed by section 4941 (a) of the Internal Revenue Code."); id. §
               55-9-7 (defining trusts to include private foundations). In general, and on the
               specific facts of the present case, then, there are sufficient mechanisms in place
               to promote and police the accurate reporting of estate values beyond just the
               threat of audit by the Commissioner, thereby undercutting the Commissioner's
               policy-based argument.

       The Tax Court approved a charitable allocation clause in Estate of Anne Y. Petter et al. v.
Commissioner, T.C. Memo. 2009-280. Mrs. Petter created the Petter Family, LLC (PFLLC) and
funded it with UPS stock. Mrs. Petter then gave units to two grantor trusts, sold additional units
to those trusts, and made a gift to two community foundations of still more units. The transfers
were by formula:

               "Transferor wishes to assign 940 Class T Membership Units in the Company
               (the "Units") including all of the Transferor's right, title and interest in the
               economic, management and voting rights in the Units as a gift to the
               Transferees." Donna's document is similar, except that it conveys Class D
               membership units. Section 1.1 of Terry's transfer document reads:

                        Transferor * * *

                        1.1.1 assigns to the Trust as a gift the number of Units described in
                        Recital C above that equals one-half the minimum dollar amount that
                        can pass free of federal gift tax by reason of Transferor's applicable
                        exclusion amount allowed by Code Section 2010(c). Transferor
                        currently understands her unused applicable exclusion amount to be
                        $907,820, so that the amount of this gift should be $453,910; and

                        1.1.2 assigns to The Seattle Foundation as a gift to the A.Y. Petter
                        Family Advised Fund of The Seattle Foundation the difference between
                        the total number of Units described in Recital C above and the number
                        of Units assigned to the Trust in Section 1.1.1.

               The gift documents also provide in section 1.2:

                        The Trust agrees that, if the value of the Units it initially receives is
                        finally determined for federal gift tax purposes to exceed the amount
                        described in Section 1.1.1, Trustee will, on behalf of the Trust and as a
                        condition of the gift to it, transfer the excess Units to The Seattle
                        Foundation as soon as practicable.

               The Foundations similarly agree to return excess units to the trust if the value of
               the units is "finally determined for federal gift tax purposes" to be less than the
               amount described in section 1.1.1.



                                                      36
                                              ***

       Recital C of the sale documents reads: "Transferor wishes to assign 8,459 Class
       T [or Class D] Membership Units in the Company (the "Units") including all of
       the Transferor's right, title and interest in the economic, management and voting
       rights in the Units by sale to the Trust and as a gift to The Seattle Foundation."
       Section 1.1 reads:

                Transferor * * *

                1.1.1 assigns and sells to the Trust the number of Units described in
                Recital C above that equals a value of $4,085,190 as finally determined
                for federal gift tax purposes; and

                1.1.2 assigns to The Seattle Foundation as a gift to the A.Y. Petter
                Family Advised Fund of The Seattle Foundation the difference between
                the total number of Units described in Recital C above and the number
                of Units assigned and sold to the Trust in Section 1.1.1.

       Section 1.2 of the sale documents differs slightly from section 1.2 of the gift
       documents. In the sale documents, it reads: "The Trust agrees that, if the value
       of the Units it receives is finally determined to exceed $4,085,190, Trustee will,
       on behalf of the Trust and as a condition of the sale to it, transfer the excess
       Units to The Seattle Foundation as soon as practicable." Likewise, the Seattle
       Foundation agrees to transfer shares to the trust if the value is found to be lower
       than $4,085,190.

The court found no abuse in this sort of formula transfer:

       To reach a reasonable conclusion in this case, we start with two maxims of gift-
       tax law: A gift is valued as of the time it is completed, and later events are off
       limits. Ithaca Trust Co. v. United States, 279 U.S. 151, 155 (1929). And gift tax
       is computed at the value of what the donor gives, not what the donee receives.
       Id.

       The Fifth Circuit held in McCord that what the taxpayer had given was a certain
       amount of property; and that the appraisal and subsequent translation of dollar
       values (what the donor gave each donee) into fractional interests in the gift
       (what the donees got) was a later event that a court should not consider. 461
       F.3d at 627. In Christiansen, we also found that the later audit did not change
       what the donor had given, but instead triggered final allocation of the shares that
       the donees received. 130 T.C. at 15. The distinction is between a donor who
       gives away a fixed set of rights with uncertain value -- that's Christiansen -- and
       a donor who tries to take property back -- that's Procter. The Christiansen
       formula was sufficiently different from the Procter formula that we held it did
       not raise the same policy problems.

       A shorthand for this distinction is that savings clauses are void, but formula
       clauses are fine. But figuring out what kind of clause is involved in this case
       depends on understanding just what it was that Anne was giving away. She
       claims that she gave stock to her children equal in value to her unified credit and
       gave all the rest to charity. The Commissioner claims that she actually gave a




                                               37
                particular number of shares to her children and should be taxed on the basis of
                their now-agreed value.

                Recital C of the gift transfer documents specifies that Anne wanted to transfer
                "940 Class T [or Class D] Membership Units" in the aggregate; she would not
                transfer more or fewer regardless of the appraisal value. 18 The gift documents
                specify that the trusts will take "the number of Units described in Recital C
                above that equals one-half the * * * applicable exclusion amount allowed by
                Code Section 2010(c)." The sale documents are more succinct, stating the trusts
                would take "the number of Units described in Recital C above that equals a
                value of $4,085,190." The plain language of the documents shows that Anne
                was giving gifts of an ascertainable dollar value of stock; she did not give a
                specific number of shares or a specific percentage interest in the PFLLC. Much
                as in Christiansen, the number of shares given to the trusts was set by an
                appraisal occurring after the date of the gift. This makes the Petter gift more like
                a Christiansen formula clause than a Procter savings clause.

                                                        ***

                As in Christiansen, we find that this gift is not as susceptible to abuse as the
                Commissioner would have us believe. Although, unlike Christiansen, there is no
                executor to act as a fiduciary, the terms of this gift made the PFLLC managers
                themselves fiduciaries for the foundations, meaning that they could effectively
                police the trusts for shady dealing such as purposely low-ball appraisals leading
                to misallocated gifts. See Wash. Rev. Code Ann. secs. 25.05.165(1), 25.05.170
                (West 2005). The directors of the Seattle Foundation and the Kitsap Community
                Foundation owed fiduciary duties to their organizations to make sure that the
                appraisal was acceptable before signing off on the gift -- they also had a duty to
                bring a lawsuit if they later found that the appraisal was wrong. See id. sec.
                24.03.127 (West 1986).

                We could envision a situation in which a charity would hesitate to sue a living
                donor, and thus risk losing future donations or the donor's goodwill. However,
                gifts are irrevocable once completed, and the charities' cause of action most
                likely would have been against the trusts, rather than against Anne, since the
                trusts held the additional shares to which the charities laid claim.

                The Commissioner himself could revoke the foundations' 501(c)(3) exemptions
                if he found they were acting in cahoots with a tax-dodging donor. See, e.g., sec.
                503(b). And Washington's attorney general is also charged with enforcing
                charities' rights. See Wash. Rev. Code Ann. secs. 11.110.010, 11.110.120 (West
                2006). We simply don't share the Commissioner's fear, in gifts structured like
                this one, that taxpayers are using charities just to avoid tax. 20 We certainly don't
                find that these kinds of formulas would cause severe and immediate frustration
                of the public policy in favor of promoting tax audits. See Tellier, 383 U.S. at
                694.

        In actual fact, the IRS on audit determined that the PFLLC units were worth more than
the taxpayer‘s appraiser. Thus, additional units were allocated to charity and Mrs. Petter was
eligible for an additional income tax deduction. But, as of what date? The court concluded as of
the date of the original transfer:



                                                        38
Here we have a conundrum, for the events of the gift happened as follows:

         •         March 22, 2002 -- Gift of 940 shares, split between trusts and
                   foundations. Letters of intent to foundations.

         •         March 25, 2002 -- Sale to trusts

         •         April 15, 2002 -- Moss Adams appraisal report

         •         Later in 2002 -- The Seattle Foundation "books" the value of
                   the allocated shares on the basis of the Moss Adams appraisal.
                   The Kitsap Community Foundation's records recognize the
                   A.Y. Petter Family Advised Fund as of December 31, 2002. In
                   May 2003, Richard Tizzano, president of the Kitsap
                   Community Foundation, signed Anne's Form 8283 for 2002,
                   acknowledging receipt of PFLLC units on March 22, 2002.

         •         Fall 2007 -- Bill Sperling [of the Seattle Foundation] notified
                   of new appraisal for PFLLC units and beginning of
                   reallocation.

         •         February 2008 -- Tax Court trial. Reallocation ongoing.

Anne says she should be able to take the entire charitable deduction at the time
of the gift, in 2002. The Commissioner says that only some of the stock went to
the charities in 2002, which means Anne or her estate should take a deduction
for the gift of the rest of the stock in some later year not before us.

Section 25.2511-2(a), Gift Tax Regs., provides: "The gift tax is not imposed
upon the receipt of the property by the donee, nor is it necessarily determined by
the measure of enrichment resulting to the donee from the transfer, nor is it
conditioned upon ability to identify the donee at the time of the transfer." Anne
made a gift for which, at the time of transfer, the beneficiaries could be named
but the measure of their enrichment could not yet be ascertained. The
Commissioner is comfortable with this ambiguity when considering whether the
gift is completed or not, and states that tax treatment should not change simply
because a donee's identity becomes known at a date later than the date of the
transfer. By analogy, we see no reason a donor's tax treatment should change
based on the later discovery of the true measure of enrichment by each of two
named parties, one of whom is a charity. In the end, we find it relevant only that
the shares were transferred out of Anne's name and into the names of the
intended beneficiaries, even though the initial allocation of a particular number
of shares between those beneficiaries later turned out to be incorrect and needed
to be fixed.

                                         ***

The allocation of units based on the Moss Adams appraisal, as an event
occurring after the date of the gift, is outside the relevant date of the transfer, so
anything that worked to change that allocation after the fact is not relevant to our
current inquiry. We also don't consider dispositive the date when the charities
"booked" the value of the units, or the amounts the charities booked at the time
of the initial transfer, both because those actions also occurred after the transfer
and because Anne had no control over the Foundations' internal accounting



                                         39
               practices. We therefore agree with Anne that the appropriate date of the gift for
               tax purposes is March 22, 2002. The parties will submit calculations reflecting
               the amount of the gift and corresponding charitable deduction.

               g.       An Effective Clause?

                        Consider a transfer made in trust pursuant to a clause similar to the
following:

               Upon receipt of assets by gift during the initial taxable year of this trust, Trustee
               will allocate the first $_________ to the trust administered by Article __ for the
               benefit of my descendants and will allocate any additional assets to WORTHY
               CHARITY, INC., to be added to the Mr. and Mrs. Donor fund created
               thereunder (or, if such organization is not in existence or is not described in
               sections 170(b)(1)(A), 170(c), 2055(a), and 2522(a) of the Internal Revenue
               Code, at such time to another organization which is so described selected by
               Trustee within 60 days of such allocation). The allocation will be made as a
               fractional share of all assets added to the Trust by gift and Trustee may make a
               preliminary allocation with subsequent adjustment if desirable. In calculating
               the amount to be allocated hereunder, Trustee will determine fair market value
               in such manner as it would be determined for federal gift tax purposes whether
               or not such tax applies.

       Returning to Judge Swift‘s objections above -- that Worthy Charity would only be an
assignee:    may they be met by providing the partnership agreement that all partners will be
deemed to consent to any allocation to charity required under the provisions of the trust? The
answer would seem to be yes.

               h.       Limitations of the Clause.

                        As described, the charitable allocation clause is useful when making gifts.
Different issues arise in an estate tax context. For example, if assets in a limited partnership are
included in a decedent‘s estate by reason of section 2036, providing that a certain value of
partnership units pass to individuals with any excess to charity will not produce the desired
result. In addition, it may be that the value of interests are different for state law purposes
(which is how the charitable interests would be valued) and for Federal estate tax purposes.




                                                       40
D.     Interesting Ideas For Discussion And Comment

       1.      General Comments.

       The following discussion deals with several kinds of charitable planning concepts. In
each, a transaction is proposed which, the authors believe, most estate planning practitioners
would agree is effective to achieve the purposes intended. The transaction is then progressively
(regressively?) modified until a point at which the authors believe most estate planning
practitioners would agree is not effective to achieve the purposes intended. In reviewing the
transactions the authors believe it is helpful to consider two questions:

               a.      To what degree, if any, does a private benefit taint a transaction?
                       Conversely, to what degree, if any, does benefit to charity protect a
                       transaction which also has non-charitable benefits?

               b.      To what degree, if any, is a charity‘s independent ability to act or refrain
                       from acting relevant to determining the application of the Federal income
                       and transfer tax laws to a transaction? If a transaction creates an economic
                       incentive for a charity to take a certain action when will the law conclude
                       the charity is not truly independent?

       2.      Assumptions.

       In the transactions described, unless stated otherwise, the reader should assume that each
of the parties is independently represented, to the extent required or suggested by applicable state
law, that none of the parties control or influence, in any official capacity, the charity involved,
and all appraisals are independent and are qualified appraisals for section 170 purposes.

       3.      Gifts To and Sales By Charitable Organizations.

               a.      Basic Transaction.

                       i.      Client owns all 10,000 shares, all the same class, of a C
                               corporation which is an operating business worth $10,000,000. In
                               2006 client gives 1,000 shares to client‘s two children, equally, and
                               gives 1,000 shares to a local charity. Client retains an independent
                               appraiser who determines each share is worth $600. Client reports
                               a $600,000 gift to children, and a $600,000 charitable gift, for gift
                               and income tax purposes.

                       ii.     Two years pass without any additional gifts by client and without
                               any material change in the operations of the business. At such


                                                 41
            time, the corporation contacts the charity and offers to purchase the
            shares for then current appraised value. The charity agrees and
            obtains an appraisal that the shares are worth $600 each, for a total
            of $600,000. The corporation redeems the shares from the charity
            for $600,000.

     iii.   After the transaction, there are 9,000 outstanding shares of the
            corporation. The corporation is worth $9,400,000 ($10,000,000 -
            $600,000) thus each share is worth $1,044.44. Client‘s children
            have value of $1,044,444 and client only made a taxable gift of
            $600,000.

b.   First Refinement.

     i.     Suppose the client gave 1,000 shares to the children and 3,000
            shares to each of three charities. Because all the interests were
            minority interests the appraisal for the shares remained $600 per
            share. After two years the shares were reappraised, remained $600
            per share, and each charity was redeemed for $1,800,000 for a total
            of $5,400,000. The 1,000 shares owned by the children now have
            a value of $4,600,000 ($10,000,000 - $5,400,000 = $4,600,000).
            Any difference if it is 1,000 shares to nine different charities?

     ii.    Suppose the corporation were recapitalized with 1,000 voting
            shares and 9,000 non-voting shares. The voting shares were given
            to the children and the non-voting shares were given to the charity.
            The appraiser valued the voting shares at $1,000 per share and the
            non-voting at $600 per share.

c.   Second Refinement.

     i.     Suppose the corporation were a family limited partnership owning
            $10,000,000 in marketable securities with 100 general partnership
            units and 9,900 limited partnership units. Client gives the GP units
            to the children at appraised value ($100,000; no discount) and
            9,900 LP units to charity at appraised value of $5,940,000 (40%
            discount) and takes an income tax deduction for that amount.

     ii.    Two years later the client‘s children offer to purchase from the
            charity the 9,900 LP units. The market has been flat and there is
            no change in the values of the securities or the discount. Thus the
            children pay $5,940,000. The children now own a partnership with
            $10,000,000 in assets for which they paid $5,940,000 through a
            gift by client of $100,000.

     iii.   Suppose the appraised value of the GP included a voting premium
            and the LP units were valued at only a 25% discount?


                             42
           iv.    Suppose the partnership sold the securities during the two year
                  period, and reinvested in other securities. The charity owns 99%
                  of the partnership; does 99% of the gain escape income tax?

           v.     If the partnership owned rental real estate would that affect the
                  analysis?

     d.    Third Refinement.

           i.     Suppose the corporation‘s shares were subject to a stock restriction
                  agreement which creates special rights with respect to shares
                  owned outside the client‘s family. Specifically, any non-family
                  owner has a put to the corporation at a value equal to 20% of the
                  value of the entire corporation.

           ii.    Suppose the agreement gives the corporation a call right at a value
                  less than appraised value (ignoring the call right).

           iii.   Does the agreement effect the transaction whether or not the
                  charity exercises the put or the corporation the call?

4.   Transfer of Remainder Interests by Charity.

     a.    Basic Transaction.

           i.     Client creates a charitable remainder annuity trust for the life of the
                  client with the remainder passing to a charity. Worthy National
                  Bank is trustee. No one may change the identity of the charitable
                  remainderman.

           ii.    Two years after the trust is created and funded, the client‘s children
                  approach the charity and offer to purchase the remainder interest at
                  a fair value. The children furnish the charity with the client‘s
                  health records. The charity reviews the then current value of the
                  trust, makes a determination of the likely investment performance
                  of the trust assets and the likely performance of the charity‘s
                  investments, has a professional review the health records, and
                  names a price. Client‘s children accept and the sale occurs.

           iii.   Worthy National Bank as trustee continues to operate the trust as a
                  charitable remainder trust under section 664.

           iv.    Five years later client unexpectedly dies. The trust is included in
                  the client‘s estate but the estate takes a full charitable deduction
                  because the remainder interest passes to charity. Charity, in turn,
                  informs the trustee that the trust assets should actually be
                  distributed to the client‘s children. In Estate of Blackford v.


                                    43
                               Commissioner, 77 T.C. 1246 (1981) the decedent in her Will
                               granted a life estate in her personal residence to her husband with
                               the residence to be sold at his death and the proceeds given to
                               certain charities. At issue was whether that was the transfer of a
                               remainder interest in a personal residence (§170(f)) and the Tax
                               Court held that it was. The opinion went on to state:

                                       There is no statutory requirement that the charity
                                       must somehow use the property as a personal
                                       residence in order for the gift to give rise to a
                                       deduction. In fact, there is nothing to prevent a
                                       charity from selling its remainder interest long
                                       before the life tenant dies and in that manner
                                       transforming its interest into cash.

               b.      First Refinement.

        Client‘s children‘s offer is based on the value of the remainder using section 7520 to
determine value, using the IRS interest rate and actuarial tables for life expectancy.

               c.      Second Refinement.

        The trust involved is a charitable remainder unitrust. Does it matter for this purpose
whether it is a straight unitrust or a net income (with makeup) unitrust?

               d.      Third Refinement.

        Client is trustee and client‘s children are the successor trustees.

               e.      Fourth Refinement.

        Charity sells all of the remainder interest but the sales price contains a future payment
equal to 20% of any excess appreciation in the trust. That is, if the trust appreciates at a rate
greater than the parties assume, the charity shares in the upside; charity accepts no downside
risk.

               f.      Fifth Refinement.

        The transaction is not a charitable remainder trust but a remainder interest in a personal
residence or farm.

               g.      Sixth Refinement.


                                                  44
       Client may change the identity of the charitable remainderman during client‘s lifetime.
Taking into consideration the possibility that client might make a change, charity agrees to sell
the remainder interest for 50% of the value determined above.

              h.      Seventh Refinement.

                      i.     Client creates a grantor retained income trust. Client is 60 years
                             old and will receive the income from the trust for 10 years. If
                             client dies during the 10 year term client has a general power of
                             appointment over the trust assets. If client outlives the 10 year
                             term charity receives the trust assets. Client makes a taxable gift
                             of 49.3% of the value of the trust, determined pursuant to section
                             7520 . After two years, client‘s children approach charity about
                             purchasing the remainder interest either on the basis of the section
                             7520 rate or as independently determined by the charity so long as
                             the charity takes into consideration the chance that client may die
                             during the term.

                      ii.    Suppose the trust for a 60 year old is for a 40 year term. The
                             amount of the taxable gift under section 7520 is almost zero
                             ($2030 per million).

              i.      Eighth Refinement.

                      i.     Client, a billionaire, executes a Will which provides for 90% of
                             client‘s assets to pass to charity. Sometime later client‘s children
                             approach charity noting that client is notoriously fickle and that the
                             chances charity will actually receive ―the billions‖ is remote.
                             Client‘s children offer to purchase charity‘s expectancy for half a
                             billion dollars today. Charity concludes that half a billion today is
                             worth lots of billions later on and sells. Sometime later client dies
                             and client‘s personal representative wires billions to the charity,
                             taking a full estate tax charitable deduction for the interest.
                             Charity in turn wires billions to the children. Question: do the
                             children have income?

                      ii.    Suppose the children do not have half a billion dollars today.
                             Instead children promise to pay charity when client dies, whether
                             or not client has left anything to charity, half a billion dollars plus
                             interest at 8% between today and whenever client dies.




                                               45
       5.      Assignment of Income Issues.

               a.      Basic Transaction.

                       i.     Client gives 100% of a limited liability company to charity. The
                              LLC owns a warehouse leased to a national tenant on favorable
                              terms (long-term lease, excellent rent, appropriate escalator
                              clauses). Under applicable state law the charity has minimal
                              liability due to the nature of the asset and the LLC structure.

                       ii.    The charity considers whether to hold the warehouse because of its
                              income potential but determines to sell. Client lists the warehouse
                              with a leading real estate agent and some time later sells the
                              warehouse for 90% of the asking price.

               b.      First Refinement.

                       i.     Along with the LLC transfer documents client gives charity a letter
                              from the national tenant offering to purchase the warehouse for a
                              stated price.

                       ii.    Suppose the charity consults a real estate agent and obtains an
                              appraisal and sells the warehouse to the national tenant without
                              placing it ―on the market.‖

               c.      Second Refinement.

       The warehouse is a single-use property and the lease will expire in 18 months. The value
of the warehouse to the national tenant is much greater than its value to any local company. As
client gives offer letter to charity client remarks ―I have been waiting for those folks to buy this
for years and am finally glad they are going to.‖

               d.      Third Refinement.

                       i.     Client gives 60% of the LLC to charity which is the controlling
                              interest.

                       ii.    Suppose client gives 45% to charity but gives charity the right to
                              control a sale.

               e.      Fourth Refinement.

                       i.     The LLC actually owns a tract of undeveloped land.

                       ii.    Suppose the LLC is given in exchange for a gift annuity.


                                                46
               f.      Fifth Refinement.

                       i.      Client owns the majority of a C corporation which, client hopes,
                               will soon be bought by a national company although there is no
                               legal obligation today. Last year client turned down an offer from
                               another national company but knows that company remains
                               interested.

                       ii.     Client transfers the C corporation stock into an LLC and gives
                               99% to charity retaining a 1% interest, which controls all the vote.
                               The LLC will dissolve in one year (purpose of which is the limit
                               the discounts taken by the appraiser when valuing the gift for
                               income tax purposes). Client negotiates with the national company
                               knowing that if this sale falls through the offer from the previous
                               company can be pursued. Either way, client can sell the company.

               g.      Sixth Refinement.

       Client wants a charitable remainder trust to own certain securities if the company is
acquired but not if the acquisition does not occur. Client knows the acquisition is ―in the works‖
but has no control over that transaction. Client has charity prepare a charitable remainder trust
and client‘s attorney prepare a revocable trust naming charity as a 1% beneficiary of the trust
after client has died. Client is trustee of each trust and asks for each trust to be called the
CLIENT‘S 2010 TRUST FOR NAMED CHARITY. Client has securities in certificate form and
assigns them to client as trustee of the CLIENT‘S 2010 TRUST FOR NAMED CHARITY.
Within a few weeks client knows whether the acquisition has occurred and thus knows which
trust was actually funded. If the acquisition did not occur, client has lawyer remove the 1%
charitable interest from the revocable trust.




                                                47
                                                                     PLANNING CHART

   TYPE OF GIFT                      DONOR                           FAMILY                           CHARITY                    PREFERRED TYPE OF CHARITY
                                    BENEFITS                        BENEFITS                          BENEFITS

Outright     Gift       of   Full income tax deduction.       -0-                            Charity receives income and       For cash and marketable securities differences
Undiscounted Assets          No payments to donor.                                           appreciation on the contributed   are minimal. For closely-held and real estate
                                                                                             assets from the date of gift.     assets, private foundation gifts are less
                                                                                                                               desirable.

Outright      Gift     of    Full income tax deduction.       Potential value received       Charity receives income and       Donor advised fund or some supporting
Discounted         Assets    No payments to donor.            by the family through the      appreciation on the contributed   organizations are most desirable. Public charity
followed     by    family    Note that the restrictions on    purchase or redemption of      assets from the date of gift.     is a good donee but may lack experience to
purchase or redemption       the gift could create a future   assets that are discounted     However, enjoyment may be         handle the gift efficiently. Private foundation is
                             interest thus eliminating the    from pro rata value.           postponed if the assets are       undesirable because of self-dealing rules.
                             income tax deduction                                            illiquid.

Defined value / charitable   Full income tax deduction.       Potential for discounted       Charity receives income and       Donor advised fund or some supporting
allocation clause transfer   No payments to donor.            assets to pass to the family   appreciation on the contributed   organizations are most desirable. Public charity
                                                              transferring      additional   assets from the date of gift.     is a good donee but may lack experience to
                                                              value.                         However, enjoyment may be         handle the gift efficiently. Private foundation is
                                                                                             post-poned if the assets are      undesirable because of self-dealing rules.
                                                                                             illiquid.

Bequest                      No income tax deduction.         -0-                            Assets    available    at   an    No substantial differences. Bequests to a
                             No payments to donor.                                           undetermined future date.         private foundation may be ―bought out‖ by the
                                                                                                                               family using the Probate Exception.

Disclaimer to a Charitable   No income tax deduction.         Potential for discounted       Assets    available    at   an    Donor advised fund or some supporting
Fund                         No payments to donor.            assets to pass to the family   undetermined future date.         organizations are most desirable. Public charity
                                                              transferring      additional                                     is a good transferee but may lack experience to
                                                              value.                                                           handle the gift efficiently. Private foundation is
                                                                                                                               undesirable because of self-dealing rules
                                                                                                                               regardless of the probate exception.




                                                                                  48
   TYPE OF GIFT                     DONOR                           FAMILY                           CHARITY                      PREFERRED TYPE OF CHARITY
                                   BENEFITS                        BENEFITS                          BENEFITS

Gift Annuity                Partial    income      tax       -0-                           Assets available immediately,        Public charity is almost always the best choice.
                            deduction.         Annuity                                     subject to an obligation to make
                            payments to donor.                                             annuity payments.

Charitable     Remainder    Partial     income       tax     -0-                           Assets available in the future,      The income tax deduction for gifts to private
Trust                       deduction.     Annuity or                                      date may or may be fixed. Asset      foundations is limited and monetizing the
                            unitrust payments to donor.                                    may be monetized through a fair      interest of a private foundation may be difficult.
                                                                                           market value sale.

Remainder interest     in   Partial     income         tax   If remainder interest is      Assets available in the future at    Private foundations are undesirable recipients.
house or farm               deduction. Donor may use         purchased by the family,      a date that is not fixed. Asset
                            the house or farm for life.      potential for value to        may be monetized through a fair
                                                             transfer depending on the     market value sale.
                                                             appreciation rate of the
                                                             asset and the length of the
                                                             donor‘s life.

Charitable Lead Trust - -   Typically no income tax          Assets available in the       Annuity or unitrust payments to      Any charitable donee. Private foundations do
Constant Annuity            deduction but income is          future, date may or may       charity.                             not have to include the assets of the lead trust
                            removed from the donor‘s         not be fixed.                                                      when calculating the annual 5% distribution.
                            taxable income base. No
                            payments to donor.

Charitable Lead Trust - -   Typically no income tax          Assets available in the       Annuity payment to charity           Private foundations less desirable because the
Increasing Annuity or       deduction but income is          future, date likely to be     largely deferred until the end, or   charitable donee must be free to challenge the
Shark-Fin CLAT              removed from the donor‘s         fixed at the end of a         close to the end, of the trust       investment of trust assets during the term, and
                            taxable income base. No          specified term.               term. Minimal payments until         to ensure that all trustee actions are
                            payments to donor.                                             then.                                independent.




                                                                                49
E.     Recent Cases and Rulings of Interest in Estate Planning

       1.      Making Changes to a Charitable Remainder Trust.

       PLR 201011034 addressed a CRUT that specifically named the deceased
grantor‘s private foundation as a charitable beneficiary but required all beneficiaries to be
described in section 170(b)(1)(A). The trustee and drafter attested to the error and a court
reformed the trust. The IRS determined the reformation did not affect the trusts‘ status
under section 664 and that there was no self-dealing. See also PLR 201016033

       In PLR 200502037 a CRUT was divided incident to a divorce. As part of that
division the grantor renounced the power to revoke the spouse‘s interest in the trust and
charity remained the trustee and beneficiary of each trust. In PLR 200524013 and PLR
200616008 a trust was divided between husband and wife not pursuant to a divorce.

       In PLR 200441019 the IRS gave effect to a state court reformation of a charitable
remainder unitrust. The trust was drafted with a 7% payout but should have been a 5%
payout. The unitrust recipient returned the extra cash which had been distributed to the
trust. Because of the scrivener‘s error, the reformation and repayment was not self-
dealing.    Reformations based on scrivener‘s error are not ―slam-dunks.‖           In PLR
200649027 the IRS refused to approve a reformation of a NIMCRUT to a CRUT where
the taxpayers argued that had the drafting attorney presented the idea of a CRUT, rather
than a NIMCRUT, they would have opted for a CRUT, and, besides, the decline in
interest rates would make a NIMCRUT work poorly.

       A ruling approving the early termination of charitable remainder trust is PLR
200441024. There is no self-dealing but the entire amount received by the settlor of the
trust is long-term capital gain. The IRS position is that the a charitable remainder trust
may not be terminated where the unitrust beneficiary receives a lump-sum payoff (a
commutation) if the remainderman is a private foundation. PLR 200614032 revoked
PLR 200525014 which would have allowed such without imposing a self-dealing
penalty; PLR 200616035 is to the same effect. In PLR 200725044 the calculations of the
remainder value was made using the lesser of the section 7520 rate and 10% where the



                                             50
CRUT was a NUMCRUT with a 10% payout. See also 200733014. This approach is
controversial and may be difficult for the IRS to support.

       In Revenue Ruling 2008-41 the IRS provided guidelines on dividing charitable
remainder trusts. The Ruling deals with two different situations, as follows:

               Situation 1. Trust qualifies as either a charitable remainder annuity trust
               (CRAT) described in §664(d)(1) or a charitable remainder unitrust
               (CRUT) described in § 664(d)(2). Under the terms of Trust, two or
               more individuals (recipients) are each entitled to an equal share of the
               annuity or unitrust amount, payable annually, during the recipient's
               lifetime, and upon the death of one recipient, each surviving recipient
               becomes entitled for life to an equal share of the deceased recipient's
               annuity or unitrust amount. Thus, the last surviving recipient becomes
               entitled to the entire annuity or unitrust amount for his or her life. Upon
               the death of the last surviving recipient, the assets of Trust are to be
               distributed to one or more charitable organizations described in §
               170(c) (remainder beneficiaries).

               Trust has not committed any act (or failure to act) in the past giving rise
               to liability for tax under chapter 42 (Private Foundations and Certain
               Other Tax-Exempt Organizations). Moreover, Trust has made no
               distributions to charitable beneficiaries.

               The state court having jurisdiction over Trust has approved a pro rata
               division of Trust into as many separate and equal trusts as are necessary
               to provide one such separate trust for each recipient living at the time of
               the division, with each separate trust being intended to qualify as the
               same type of CRT (i.e., CRAT, CRUT, net income CRUT with
               makeup) as Trust. Either the court's order or the trust agreement itself
               incorporates the provisions described in these facts that will govern the
               separate trusts.

               The separate trusts may have different trustees. To carry out the
               division of Trust into separate trusts, each asset of Trust is divided
               equally among and transferred to the separate trusts. For purposes of
               determining the character of distributions to the recipient of each
               separate trust, each separate trust upon the division of Trust is deemed
               to have an equal share of Trust's income in each tier described in
               §664(b) and, similarly, on each subsequent consolidation of separate
               trusts by reason of the death of a recipient, the income in each tier of
               the consolidated trust is the sum of the income in that tier formerly
               attributed to the trusts being combined. The recipients pay all the costs
               associated with the division of Trust into separate trusts, including (i)
               legal fees relating to the court proceeding, and (ii) the administrative
               costs of the creation and funding of the separate trusts.

               Each of the separate trusts has the same governing provisions as Trust,
               except that: (i) immediately after the division of Trust, each separate
               trust has only one recipient, and each recipient is the annuity or unitrust
               recipient of only one of the separate trusts (that recipient's separate
               trust); (ii) each separate trust is administered and invested
               independently by its trustee(s); (iii) upon the death of the recipient,

                                                  51
each asset of that recipient's separate trust is to be divided on a pro rata
basis and transferred to the separate trusts of the surviving recipient(s),
and the annuity amount payable to the recipient of each such separate
CRAT is thereby increased by an equal share of the deceased
recipient's annuity amount (the unitrust amount of each separate CRUT
is similarly increased as a result of the augmentation of the CRUT's
corpus, and each separate CRUT incorporates the requirements of §
1.6643(b) of the Income Tax Regulations with respect to the
subsequent computation of the unitrust amount from that trust); and (iv)
upon the death of the last surviving recipient, that recipient's separate
trust (being the only separate trust remaining) terminates, and the assets
are distributed to the remainder beneficiaries.

The remainder beneficiaries of Trust are the remainder beneficiaries of
each of the separate trusts and are entitled to the same (total) remainder
interest after the division of Trust as before. In addition, each recipient
is entitled to receive from his or her separate trust the same annuity or
unitrust amount as the recipient was entitled to receive under the terms
of Trust. Because the annual net fair market value of the assets in each
of the separate trusts may vary from one another due to differing
investment strategies of the separate trusts, in situations where Trust is
a CRUT, the amount of the unitrust payments from each separate
CRUT may vary over time, both from year to year and among the
separate CRUTs. Nevertheless, the unitrust percentage of each separate
CRUT remains the same as each recipient's share of the unitrust
percentage under the terms of Trust, and the recipients and the
remainder beneficiaries are entitled to the same benefits after the
division of Trust as before.

For example, assume Trust is a CRUT. Under the terms of Trust, X, Y,
and Z are entitled to share equally the annual payments of a 15 percent
unitrust amount (5 percent each) while all three are living, and upon the
death of one recipient, the surviving recipients are entitled to the
deceased recipient's share. Thus, if X dies first, the surviving recipients
(Y and Z) are entitled to share equally in the annual payments of the 15
percent unitrust amount (7.5 percent each) while both are living.
Thereafter, if Y predeceases Z, then upon the death of Y, Z is entitled
to receive annual payments of the entire 15 percent unitrust amount for
life. Upon the division of Trust, three separate trusts are created (one
for each of X, Y, and Z) and each of the separate trusts holds one-third
of the assets of Trust. X, Y, and Z are each entitled to annual payments
of a 15 percent unitrust amount from his or her separate trust (15
percent of one-third of the assets is equivalent to 5 percent of all the
assets of Trust). After the division of Trust and upon the death of X,
each asset of X's separate trust is divided on a pro rata basis and
transferred to Y and Z's separate trusts. Y and Z each remain entitled to
annual payments of a 15 percent unitrust amount from his or her
respective separate trust, each of which is now funded with the
equivalent of one-half the assets of Trust (15 percent of one-half of the
assets is equivalent to 7.5 percent of all the assets of Trust). Upon the
death of Y, the assets of Y's separate trust are transferred to Z's separate
trust, and Z remains entitled to annual payments of a 15 percent unitrust
amount from Z's separate trust. These are the same interests to which
X, Y, and Z would have been entitled under the terms of Trust if Trust
had not been divided into separate trusts.


                                    52
       Situation 2. The facts are the same as in Situation 1 except that Trust
       has only two recipients who are U.S. citizens married to each other but
       in the process of obtaining a divorce, and, instead of the provision
       described in (iii) of Situation 1, each separate trust in Situation 2 has
       governing provisions providing that upon the death of the recipient, that
       recipient's separate trust terminates and the assets of that separate trust
       then are distributed to the remainder beneficiaries. Because the
       remainder beneficiaries of Trust (and thus of each separate trust)
       receive a distribution of one-half of the assets of Trust upon the death
       of the first spouse to die and the remaining half of the assets upon the
       death of the surviving spouse (rather than a distribution of all of the
       assets of Trust upon the later death of the surviving recipient), the value
       of the remainder payable to the remainder beneficiaries as a result of
       the division of Trust into separate trusts may be larger than the present
       value of that interest as computed at the creation of Trust; no additional
       charitable deduction is permitted, however.

       Each recipient (spouse) is entitled to receive from his or her separate
       trust the same share of the annuity or unitrust amount as the recipient
       was entitled to receive under the terms of Trust. However, each spouse
       relinquishes all interests in Trust to which he or she would have been
       entitled by reason of having survived the other (survivorship right).

The Ruling addressed the following issues.

       (1)      Does the pro rata division of a trust that qualifies as a
       charitable remainder trust (CRT) under § 664(d) of the Internal
       Revenue Code into two or more separate trusts cause the trust or any of
       the separate trusts to fail to qualify as a CRT under § 664(d)?

                To carry out the division of Trust in Situation 1 and Situation
                2, each asset of Trust is divided on a pro rata basis (in these
                cases, equally) among and distributed to the separate trusts.
                Each of the separate trusts has the same governing provisions
                as Trust, with the exceptions noted above, and the same
                recipients and remainder beneficiaries, collectively, as Trust.
                In Situation 1, after the division of Trust into separate trusts,
                the total annuity amount or unitrust percentage to be paid
                annually by the separate trusts remains the same as under the
                terms of Trust. Each recipient and remainder beneficiary
                essentially has the same beneficial interest after the division as
                before. A transfer of the assets from a deceased recipient's
                separate trust to the separate trust(s) of the surviving
                recipient(s) in Situation 1 is not treated as a transferred
                remainder interest that would violate § 664(d)(1)(C) or §
                664(d)(2)(C), and is not treated as a prohibited additional
                contribution to a CRAT under § 1.664-2(b). In Situation 2,
                after the division of Trust into separate trusts, the total annuity
                amount or unitrust percentage to be paid annually remains the
                same as it was under the terms of Trust, with the exception of
                the survivorship right to the annuity or unitrust payments the
                recipients relinquish. Consequently, in Situation 1 and
                Situation 2, the division of Trust into separate trusts does not
                cause Trust or any of the separate trusts to fail to qualify as a
                CRT under § 664(d).

                                           53
(2)       When a trust that qualifies as a CRT under §664(d) is divided
pro rata into two or more separate trusts, is the basis under §1015 of
each separate trust's share of each asset the same share of the basis of
that asset in the hands of the trust immediately before the division of
the trust, and, under §1223, does each separate trust's holding period for
an asset transferred to it by the original trust include the holding period
of the asset as held by the original trust immediately before the
division?

         Section 1015(b) provides that, if property is acquired by a
         transfer in trust (other than by a transfer in trust by a gift,
         bequest, or devise) after December 31, 1920, the basis shall be
         the same as it would be in the hands of the grantor, increased
         by the amount of gain, or decreased by the amount of loss,
         recognized by the grantor on such a transfer in trust under the
         law applicable to the year in which the transfer was made.
         Section 1.1015-2(a)(1) provides that, if the taxpayer acquired
         property by such a transfer in trust, this basis rule applies
         whether the property is in the hands of the trustee or the
         beneficiary, and whether the property was acquired before,
         upon, or after termination of the trust and distribution of the
         property.

         Section 1223(2) provides that, in determining the period for
         which the taxpayer has held property, however acquired, there
         shall be included the period during which the property was
         held by another person if, under chapter 1 (Normal Taxes and
         Surtaxes), the property has, for purposes of determining gain
         or loss from a sale or exchange, the same basis, in whole or in
         part, in the taxpayer's hands as it would have in the hands of
         the other person.

         In Situation 1 and Situation 2, the pro rata division of Trust
         into separate trusts is not a sale, exchange, or other disposition
         producing gain or loss. Pursuant to § 1015(b), in Situation 1
         and Situation 2, the basis of each separate trust's share of each
         asset immediately after the division of Trust is the same share
         of the basis of that asset in the hands of Trust immediately
         before the division. Furthermore, pursuant to §1223(2), each
         separate trust's holding period of each asset transferred to it by
         Trust includes the holding period of the asset as held by Trust
         immediately before the division. Similarly, upon the death of a
         recipient and the consolidation of the assets of the deceased
         recipient's separate trust into the separate trust(s) of the
         surviving recipient(s) in Situation 1, each separate trust of a
         surviving recipient receives the same share of each asset of the
         deceased recipient's separate trust and of the basis of each
         asset in the hands of the deceased recipient's separate trust
         immediately before the consolidation, and the holding period
         of each asset transferred to a separate trust of a surviving
         recipient includes the holding period of the asset as held by the
         deceased recipient's separate trust immediately before the
         consolidation.

(3)    Does the pro rata division of a trust that qualifies as a CRT
under § 664(d) into two or more separate trusts terminate under

                                   54
§507(a)(1) the trust's status as a trust described in, and subject to, the
private foundation provisions of § 4947(a)(2), and result in the
imposition of an excise tax under §507(c)?

         In Situation 1 and Situation 2, the separate trusts have the
         same governing provisions as Trust, with the exceptions noted
         above, and collectively, the same recipients, remainder
         beneficiaries, and assets as Trust. In addition, each recipient
         and remainder beneficiary is entitled to the same benefits both
         before and after the division of Trust, with the exceptions
         noted above. Further, in both Situation 1 and Situation 2, Trust
         transfers all of its assets to the separate trusts pursuant to a
         transfer described in § 507(b)(2). Thus, in Situation 1 and
         Situation 2, Trust has not terminated its private foundation
         status under § 507(a)(1) as a result of the division of Trust (or
         a subsequent consolidation of the separate trusts arising from
         the death of a recipient in Situation 1), because no notice of
         termination was filed or was required to be filed. See § 1.507-
         1(b)(6). Accordingly, the excise tax imposed under § 507(c)
         does not apply.

         Section 1.507-1(b)(6) generally confirms that, if a private
         foundation transfers all or part of its assets to one or more
         other private foundations pursuant to a transfer described in §§
         507(b)(2) and 1.507-3(c), such transferor foundation will not
         have terminated its private foundation status under §
         507(a)(1).

(4)       When a trust that qualifies as a CRT under §664(d) is divided
pro rata into two or more separate trusts, does the division constitute an
act of self-dealing under §4941?

         In Situation 1 and Situation 2, the recipients might be
         disqualified persons with respect to Trust under § 4946. The
         only interest that the recipients have in Trust is the right to the
         payment of the annuity or unitrust amount under § 664(d)(1)
         or (2), respectively. As a result of the division of Trust in
         Situation 1 and Situation 2, each separate trust holds a pro rata
         (in these cases, equal) share of each asset of Trust, and each
         recipient receives his or her annuity or unitrust payment from
         only one of the separate trusts. The annuity or unitrust
         payments a recipient receives from his or her separate trust
         remains equivalent to the recipient's share of the annuity or
         unitrust payments under the terms of Trust, with the exception
         of the survivorship right to the annuity or unitrust payments
         each recipient relinquishes in Situation 2.

         Thus, upon the division of Trust in Situation 1 and Situation 2,
         the recipients are insulated from selfdealing with respect to
         their annuity or unitrust interests. Because of the pro rata
         (equal) distributions to the separate trusts, none of the
         disqualified persons, if any, receive any additional interest in
         the assets of Trust, and no selfdealing transaction occurs
         within the meaning of § 4941(d). The remainder interest of
         Trust remains preserved exclusively for charitable interests,
         and there is no increase in the annuity or unitrust amount at

                                    55
                        the expense of the charitable interest. Additionally, the pro
                        rata division of the assets of Trust among the separate trusts in
                        Situation 1 and Situation 2 is not a sale or exchange and,
                        therefore, is not a sale or exchange between a private
                        foundation and a disqualified person. All legal and other
                        expenses and costs incident to the division of Trust are paid by
                        the recipients. Situation 1 and Situation 2 involve no other
                        transactions with the recipients that affect the principal of
                        Trust; accordingly, no self-dealing transaction occurs by
                        reason of the division of Trust in either Situation 1 or Situation
                        2, or by reason of a subsequent consolidation of the separate
                        trusts arising from the death of a recipient in Situation 1.

               (5)       When a trust that qualifies as a CRT under §664(d) is divided
               pro rata into two or more separate trusts, does the division constitute a
               taxable expenditure under §4945?

                        The transfers of Trust's assets to the separate trusts in Situation
                        1 and Situation 2 are not expenditures that require expenditure
                        responsibility by Trust, pursuant either to §1.507-3(a)(9) (if
                        Trust and the separate trust are controlled by the same person
                        or persons) or §1.507-3(a)(7) (if Trust and the separate trust
                        are not controlled by the same person or persons). Because
                        Trust made no prior distributions for which expenditure
                        responsibility is required, the separate trusts assume no
                        preexisting expenditure responsibility from Trust under
                        §1.507-3(a)(9). A similar analysis applies regarding a
                        subsequent consolidation of the separate trusts arising from
                        the death of a recipient in Situation 1. Thus, in Situation 1 and
                        Situation 2, Trust is not required to exercise "expenditure
                        responsibility" under § 4945(d) and (h) with respect to the
                        assets transferred to the separate trusts.

       In Notice 2008-99, 2008-47 IRB 1, the IRS identified as a transaction of interest
the purchase of all interests in a CRT by a third party. The facts reviewed are as follows:

                        In one variation of the transaction, Grantor creates a charitable
                        remainder trust (Trust) and contributes appreciated assets
                        (Appreciated Assets) to Trust. Grantor retains an annuity or
                        unitrust interest (term interest) in Trust and designates an
                        organization described in §§ 170(c), 2055(a) and 2522(a)
                        (Charity) as the remainder beneficiary. Charity may, but need
                        not, be controlled by Grantor; Grantor may, but need not,
                        reserve the right to change the Charity designated as the
                        remainder beneficiary. Next, Trust sells or liquidates the
                        Appreciated Assets and reinvests the net proceeds in other
                        assets (New Assets) such as money market funds, marketable
                        securities, and/or other assets, often to acquire a diversified
                        portfolio. Because a charitable remainder trust generally is a
                        tax-exempt entity under § 664, Trust's sale of the Appreciated
                        Assets is exempt from income tax, and Trust's basis in the
                        New Assets is the price Trust pays for those New Assets.
                        Some portion of Trust's ordinary income and capital gains
                        may become taxable to Grantor as the periodic annuity or
                        unitrust payments are made by Trust in accordance with the
                                                   56
rules of § 664 and the regulations thereunder. Next, Grantor
and Charity, in a transaction they claim is described in §
1001(e)(3), sell or otherwise dispose of their respective
interests in Trust to X, an unrelated third party, for an amount
that approximates the fair market value of the assets of the
trust, including the New Assets. Trust then terminates, and the
assets of Trust, including the New Assets, are distributed to X.

Grantor takes the following positions regarding the tax
consequences of this transaction. Grantor claims a charitable
deduction for the portion of the fair market value of the
Appreciated Assets as of the date of their contribution to Trust
that is attributable to the remainder interest. Grantor claims to
recognize no gain from the Trust's sale or liquidation of the
Appreciated Assets. When Grantor and Charity sell their
respective interests in Trust to X, Grantor and Charity take the
position that they have sold the entire interest in Trust within
the meaning of § 1001(e)(3). Because the entire interest in
Trust is sold, Grantor claims that § 1001(e)(1), which
disregards basis in the case of a sale of a term interest, does
not apply to the transaction. Grantor also takes the position
that, under § 1001(a) and related provisions, the gain on the
sale of Grantor's term interest is computed by taking into
account the portion of uniform basis allocable to Grantor's
term interest under § 1.1014-5 and § 1.1015-1(b), and that this
uniform basis is derived from the basis of the New Assets
rather than the basis of the Appreciated Assets.

The transaction may use trusts with circumstances that vary
from the situation described in the facts of this notice. In some
variations, a net income with make-up provision charitable
remainder unitrust (NIMCRUT) may be used as Trust, Trust
may have been in existence for some time prior to the sale of
Trust interests, the Appreciated Assets already may be in Trust
prior to the commencement of the transaction, the recipient
and seller of the term interest may be the Grantor and/or
another person, or Grantor may contribute the Appreciated
Assets to a partnership or other passthrough entity and then
contribute the interest in the entity to Trust.

A result of the claimed tax treatment of the transaction is that
the gain on the sale of the Appreciated Assets is never taxed,
even though the Grantor receives the Grantor's share of the
appreciated fair market value of those assets. The IRS and
Treasury Department are not concerned about the mere
creation and funding of a charitable remainder trust and/or the
trust's reinvestment of the contributed appreciated property,
and such events alone do not constitute the transaction subject
to this notice.

However, the IRS and Treasury Department are concerned
about the manipulation of the uniform basis rules to avoid tax
on gain from the sale or other disposition of appreciated
assets. Accordingly, the type of transaction described in this
notice includes a coordinated sale or other coordinated
disposition of the respective interests of the Grantor or other

                          57
                       noncharitable recipient and the Charity in a charitable
                       remainder trust in a transaction claimed to be described in §
                       1001(e)(3), subsequent to the contribution of appreciated
                       assets and the trust's reinvestment of those assets. In
                       particular, the IRS and Treasury Department are concerned
                       about Grantor's claim to an increased basis in the term interest
                       coupled with the termination of the Trust in a single
                       coordinated transaction under § 1001(e) to avoid tax on gain
                       from the sale or other disposition of the Appreciated Assets.

       2.      Substantiation and Appraisal Requirements for Noncash Charitable
               Contributions.

       See Appendix 2 for a copy of the proposed regulations dealing with the
substantiation and appraisal requirements for noncash charitable contributions.           In
Newton J. Friedman et ux. v. Commissioner, T.C. Memo. 2010-45, the taxpayers were
hammered with penalties for failing to substantiate the contribution of equipment to
charity. The taxpayers claimed $217,500 of deduction in each of 2001 and 2002. The
court described the substantiation of the gifts:

                       To substantiate the 2001 donations petitioners attached to their
                       2001 return three Forms 8283, Noncash Charitable
                       Contributions. These consisted of a Form 8283 for items
                       appraised by Garson P. Shulman (2001 Shulman Form 8283),
                       a Form 8283 for items appraised by Jack LeVan (2001 Jack
                       LeVan Form 8283), and a Form 8283 summarizing the items
                       listed in the two aforementioned Forms 8283 (2001 summary
                       Form 8283). Petitioners included a separate written appraisal
                       report and a receipt from Global Operations only for the items
                       covered by the 2001 Shulman Form 8283.

                       Petitioners included with their 2002 return Forms 8283 for
                       items appraised by John E. LeVan (2002 John E. LeVan Form
                       8283), Jack LeVan (2002 Jack LeVan Form 8283), and David
                       S. Handelman (2002 Handelman Form 8283). Petitioners
                       included a separate written appraisal report and a receipt from
                       Global Operations only for the items covered by the 2002
                       John E. LeVan Form 8283.

                       The taxpayers agreed that they did not comply fully with the
                       substantiation requirements but argued they substantially
                       complied. The court disagreed because the effects were not
                       even close.

                       Under the substantial compliance doctrine, the critical
                       question is whether the requirements relate "'to the substance
                       or essence of the statute.'" Bond v. Commissioner, 100 T.C.
                       32, 4041 (1993) (quoting Sperapani v. Commissioner, 42 T.C.
                       308, 331 (1964)); Taylor v. Commissioner, 67 T.C. 1071,
                       1077-1078 (1977). If so, strict adherence to all statutory and
                       regulatory requirements is mandatory. See Dunavant v.

                                                58
Commissioner, 63 T.C. 316 (1974). However, if the
requirements are procedural or directory in that they are not of
the essence of the thing to be done but are given with a view
to the orderly conduct of business, then they may be fulfilled
by substantial compliance. See id. at 319-320; Columbia Iron
& Metal Co. v. Commissioner, 61 T.C. 5 (1973); Cary v.
Commissioner, 41 T.C. 214 (1963). We have previously held
that the reporting requirements of section 1.170A-13, Income
Tax Regs., are directory and require only substantial
compliance. Bond v. Commissioner, supra at 41-42.

In Bond, the taxpayers donated two blimps to a charitable
organization and in the same month obtained a professional
appraisal of the blimps. Though the appraiser completed an
appraisal summary for inclusion with the taxpayers' return, he
did not provide a separate written report of the appraisal.
Aside from the appraiser's qualifications, the appraisal
summary did, however, contain all of the information required
for a qualified appraisal. The taxpayers promptly provided
those credentials to the Internal Revenue Service at audit.
Because the taxpayers had furnished the Service with all the
information required for a qualified appraisal, we held that
they had substantially complied with the regulation despite the
absence of a separate written appraisal report. Id. at 42.

Petitioners claim they have substantially complied because, as
in Bond, the documents they have submitted contain the
information required for a qualified appraisal and appraisal
summary. We disagree.

Bond is inapplicable because petitioners did not merely fail to
attach evidence of a qualified appraisal; they never obtained
such an appraisal. See Hewitt v. Commissioner, 109 T.C. 258
(1997), affd. without published opinion 166 F.3d 332 (4th Cir.
1998); D'Arcangelo v. Commissioner, T.C. Memo. 1994-572.

Unlike the situation in Bond, petitioners' documents fail to
provide an adequate description of or the condition of the
donated items. The Forms 8283 and the appraisal reports
provide very generic descriptions, stating the items were in
"good working condition" or "operational, clean and in good
saleable condition". An adequate description is necessary
because "Without a more detailed description the appraiser's
approach and methodology cannot be evaluated." O'Connor v.
Commissioner, T.C. Memo. 2001-90.

In fact, petitioners' documents fail to even indicate the
valuation method used or the basis for the appraised values.
We have previously held such information to be essential
because "Without any reasoned analysis, * * * [the appraiser's]
report is useless." See Jacobson v. Commissioner, T.C. Memo.
1999-401.

The court also rejected the taxpayer‘s attempt to let a late
appraisal save a timely appraisal summary. The opinion
states:

                         59
Petitioners also contend that the 2004 and 2006 Handelman
appraisals can be used to supply the missing information
because they validate the values reported on the Forms 8283.
Although those appraisals were untimely, petitioners argue
that an untimely appraisal can be used to supplement a timely-
filed appraisal summary, as demonstrated in Bond v.
Commissioner, 100 T.C. 32 (1993). Petitioners misstate the
holding of Bond. In Bond, the submission of the information
(i.e., the appraiser's credentials) required to prove that a
qualified appraisal had been performed was untimely, but the
performance of the appraisal itself was not. By contrast, in the
instant case the 2004 and 2006 Handelman appraisals were
performed years after the respective due dates of petitioners'
returns. Therefore, petitioners cannot rely on those appraisal
reports to cure the absence of the required information in a
timely fashion.

Importantly, the court also noted that the taxpayers also failed
to get the necessary written acknowledgement:

In addition to their failure to substantially comply with the
regulations, petitioners also failed to demonstrate that they
obtained adequate written acknowledgments for their
contributions as required by section 170(f)(8). Petitioners
argue that the Forms 8283 can also serve as written
acknowledgments because they were signed by the donee.
However, neither the Forms 8283 nor the receipts from Global
Operations contain a statement that no goods or services were
provided by the donee in exchange, as required by section
170(f)(8)(B)(ii). We have previously held that statement
necessary for a charitable contribution deduction. See Kendrix
v. Commissioner, T.C. Memo. 2006-9; Castleton v.
Commissioner, T.C. Memo. 2005-58, affd. 188 Fed. Appx.
561 (9th Cir. 2006).

Petitioners argue that section 170(f)(8)(B)(ii) can be read to
require the statement only when the donee actually furnishes
goods or services to the donor. We disagree.

                        ***

Section 170(f)(8)(B)(ii) plainly states that the written
acknowledgment is sufficient if it includes information as to
"Whether the donee organization provided any goods or
services in consideration, in whole or in part, for any property"
donated by the taxpayer. The language used is clear and
unconditional. There is no reason to read into section
170(f)(8)(B)(ii) the limitation suggested by petitioners.

The returns had been prepared by Reed Spangler, a CPA.
Reliance on the CPA was insufficient to avoid penalties:

Petitioners have not established Mr. Spangler's qualifications
as a tax expert. The mere fact that Mr. Spangler is a C.P.A.
does not necessarily make him a competent tax adviser. See
Mediaworks, Inc. v. Commissioner, T.C. Memo. 2004-177.
                          60
Furthermore, the record indicates that petitioners withheld
information from Mr. Spangler and that their reliance on his
advice was therefore not in good faith. Petitioners claimed
they were unable to provide purchase records for the donated
equipment because they were forced to dispose of those
records due to an approaching fire in 1996, but the record
indicates that most of the items listed on the 2001 Shulman
and 2002 John E. LeVan Forms 8283 were purchased after
that purported fire. Petitioners purchased a total of 26 items of
laboratory equipment on December 6, 2000, and August 12,
2001. Twenty-six of the 29 items listed in the 2001 Shulman
Form 8283 are identical to the equipment petitioners
purchased on those two dates. Similarly, 18 of the 19 items
listed in the 2002 John E. LeVan Form 8283 are identical to
equipment petitioners purchased on November 17, 2002. Since
petitioners did not provide Mr. Spangler with all the
information available to them, they failed to provide him with
necessary and accurate information, and their reliance on his
advice does not constitute reasonable cause.

In ECC 201014056 Chief Counsel reviewed the appraisal
requirements for a conservation easement deduction and
discussed two cases decided in the last year dealing with
substantial compliance.

A judicial doctrine, substantial compliance has been used to
allow a deduction for a taxpayer who has substantially, but not
strictly, complied with the regulations governing tax elections
and deductions. See Bond v. Commissioner, 100 T.C. 32, 41
(1993).

In Prussner v. United States, 896 F.2d 218, 224 (7th Cir.
1990), the Court of Appeals referred to the Tax Court doctrine
of substantial compliance as confusing and difficult to apply
and concluded:

The common law doctrine of substantial compliance should
not be allowed to spread beyond cases in which the taxpayer
had a good excuse (though not a legal justification) for failing
to comply with either an unimportant requirement or one
unclearly or confusingly stated in the regulations or the
statute.

In Bond, supra, the Tax Court considered whether certain
aspects of the regulations were mandatory or directory and
whether the taxpayer in that case had substantially complied
with the regulations. The court found that the taxpayer had
substantially complied with the qualified appraisal
requirements because substantially all of the information
required had been provided, except for the qualifications of
the appraiser on the Form 8283 attached to the return. It is
worth noting, though, that Bond was decided prior to the
enactment of the Jobs Act (2004) and the Pension Act (2006),
both of which impose new statutory requirements for qualified
appraisals.


                          61
                        In Hewitt v. Commissioner, 109 T.C. 258 (1997), aff'd without
                        published opinion, 166 F.3d 332 (4th Cir. 1998), the taxpayers
                        claimed a deduction for the donation of stock that was not
                        publicly traded. They did not obtain qualified appraisals
                        before filing their return. The taxpayers argued that they had
                        substantially complied with the regulations, but the Tax Court
                        rejected that argument because the taxpayers had not obtained
                        a qualified appraisal and did not attach an appraisal summary
                        to their returns.

                        In Bruzewicz v. United States, 604 F. Supp. 2d 1197 (N.D. Ill.
                        2009), the District Court found that taxpayers, who had
                        donated a façade easement on their home, had totally failed to
                        comply with the section 170(f)(8) contemporaneous written
                        acknowledgment requirement. The court noted that that failure
                        alone is fatal to their claimed deduction. The District Court
                        also found that the taxpayers failed to strictly comply with the
                        appraisal requirements of section 1.170A-13 of the
                        Regulations. The court wrote that section 170(f)(8) is not
                        unclear or confusing. Further, the very inclusion of the
                        requirement in the Code itself signals that Congress felt that a
                        contemporaneous written acknowledgment was of the utmost
                        importance. The court stated that other provisions in the
                        regulations, such as appraiser qualifications and a description
                        of donated property, are not unimportant or confusing to
                        follow.

                        In Simmons v. Commissioner, T.C. Memo. 2009-208, the
                        taxpayer donated a façade easement to charity. The Tax Court
                        allowed the deduction even though the taxpayer did not
                        strictly comply with the substantiation requirements of section
                        170. The court wrote that based upon the holdings in Bond
                        and Hewitt, there is a standard that the court can use to
                        consider whether the taxpayer had provided enough
                        information to allow the Service to evaluate the reported
                        contributions. The court in Simmons found that the taxpayer
                        complied with the substantiation requirements of section 170
                        because she "included all of the required information in the
                        appraisals attached to her returns or on the face of the returns."

       3.      Assignment of Income Issues (“Palmer Problems”).

       In PLR 200230004 husband and wife proposed to transfer 495 of 500 shares of a
C corporation to a charitable remainder unitrust and asked whether the redemption by the
corporation would be self-dealing. The ruling determined it would not be self-dealing
because there is an exception to the self-dealing rules:

               Section 53.4941(d)-3(d)(1) of the foundation regulations provides that,
               in general, under section 4941(d)(2)(F), any transaction between a
               private foundation and a corporation which is a disqualified person will
               not be an act of self-dealing if such transaction is engaged in pursuant
               to a liquidation, merger, redemption, recapitalization, or other corporate
               adjustment, organization, or reorganization, so long as all the securities
                                                  62
              of the same class as that held (prior to such transaction) by the
              foundation are subject to the same terms and such terms provide for
              receipt by the foundation of no less than fair market value. For
              purposes of this paragraph, all of the securities are not subject to the
              same terms unless, pursuant to such transaction, the corporation makes
              a bona fide offer on a uniform basis to the foundation and every other
              person who holds such securities.

       The taxpayers also asked whether the C corporation dividends would be unrelated
taxable income and the answer was no, even though the corporation would be a
controlled corporation, because dividends are excepted:

              Section 512(b)(13)(A) of the Code provides that notwithstanding
              section 512(b)(1), (2), and (3), an organization (controlling
              organization) receiving a specified payment from another entity which
              it controls (controlled entity), shall include such payment as an item of
              gross income derived from an unrelated trade or business to the extent
              such payment reduces the net unrelated income of the controlled entity
              (or increases any net unrelated loss of the controlled entity). There shall
              be allowed all deductions of the controlling organization directly
              connected with amounts treated as derived from an unrelated trade or
              business under the preceding sentence.

              Section 512(b)(13)(C) of the Code provides that the term ―specified
              payment‖ means any interest, annuity, royalty, or rent.

              Section 512(b)(13)(D)(i) of the Code provides, in part, that the term
              ―control‖ means in the case of a corporation, ownership (by vote or
              value) of more than 50 percent of the stock of such corporation, and in
              any other case (other than a corporation or a partnership) ownership of
              more than 50 percent of the beneficial interests in the entity.

              The modifications contained in section 512(b) of the Code, in effect,
              constitute an exception to the general rule by excluding from the
              computation of unrelated business taxable income items such as
              dividends, interest, annuities, royalties, and rents. If these
              modifications, which are provided in section 512(b)(1), (2), and (3), are
              considered an exception to the general rule of taxing the unrelated
              business income of exempt organizations, then section 512(b)(13) may
              be considered an exception to the exception. Under section 512(b)(13),
              the exclusion of interest, annuities, royalties, and rents provided by
              section 512(b)(1), (2), and (3) does not apply where such amounts are
              derived from ―controlled organizations.‖

              The exception to the modifications contained in section 512(b) of the
              Code is not applicable in this case. Although Trust, which holds the
              majority of X stock, is a ―controlling organization‖ within the meaning
              of section 512(b)(13), the income earned by X while part of its stock is
              owned by Trust will not constitute UBTI to Trust. The distributions to
              Trust from X while Trust owns part of its stock are dividends. The
              receipt of dividends is not taxable to Trust, because section 512(b)(1)
              excludes dividends from the UBTI, and the rules of section 512(b)(13)
              do not apply to the payment of dividends.

                                                 63
              Therefore, the income earned by X while part of its stock is owned by
              Trust will not constitute unrelated business taxable income to Trust. In
              addition, distributions to Trust from X while Trust owns part of its
              stock will constitute dividends that are excluded from unrelated
              business income under section 512(b)(1) of the Code, so long as they
              are not interest, annuities, royalties, and rents derived from the
              controlled corporation.

       Finally, the taxpayers asked whether the redemption would be treated as an
assignment of income. The ruling states:

              This request involves Palmer v. Commissioner, 62 T.C. 684 (1974),
              affd. on other grounds, 523 F.2d 1308 (8th Cir. 1975), acq., 1978-1
              C.B. 2. In the Palmer case, the Tax Court held that a taxpayer‘s gift of
              stock in a closely held corporation to a private foundation, followed by
              a redemption, was not to be recharacterized as a sale or redemption
              between the taxpayer and the corporation followed by a gift of the
              redemption proceeds to the foundation, even though the taxpayer held
              voting control over both the corporation and the foundation. The Tax
              Court based its opinion, in part, on the fact that the foundation was not
              legally obligated to redeem the stock at the time it received title to the
              shares.

              In Rev. Rul. 78-197, 1978-1 C.B. 83, the Internal Revenue Service
              announced that it will treat the proceeds of a redemption of stock under
              facts similar to those in the Palmer case as income to the donor only if
              the donee is legally bound or can be compelled by the corporation to
              surrender the shares for redemption.

              In the present case, at the time X shares are transferred to Trust, X will
              be under no legal obligation to redeem the contributed stock. There is
              no agreement among the parties under which X would be obligated to
              redeem, or Trust would be obligated to surrender for redemption, the
              stock. Trust is not legally obligated to accept any offer of redemption
              made by X. Accordingly, any redemption by X of the stock contributed
              by Grantors to Trust will be respected.

              Based on the representations submitted and information described
              above, we conclude that a purchase by X of the stock transferred by
              Grantors to Trust will be treated as a redemption of the stock from
              Trust, and will not be treated as a redemption of stock from Grantors or
              a distribution by X to Grantors. Therefore, the sale or redemption by
              Trust of its X stock will not result in the capital gain in such sale or the
              redemption price being attributed for tax purposes to Grantors.

       Among the representations made – whether required or given voluntarily – was:

              In addition, A, as president and sole shareholder of X and grantor and
              co-trustee of Trust, represents the following:

              (1)       I, A, grantor and co-trustee of Trust, hereby represent that
              neither I nor any family member of me will acquire, offer to acquire, or
              become obligated to acquire shares of X stock from Trust earlier than at

                                                  64
              least one year after the date of any transfer of shares of X stock to
              Trust.

              (2)      I, A, President and sole shareholder of X, hereby represent that
              X will not redeem, offer to redeem, or become obligated to redeem
              shares of X stock from Trust earlier than at least one year after the date
              of any transfer of shares of X stock to Trust, directly or indirectly, by
              the grantor of Trust or a family member of the grantor.

              (3)      I, A, President and sole shareholder of X, and grantor and co-
              trustee of Trust, hereby represent that neither X nor I am aware of any
              plan or intention of Trust to transfer any corporate stock, or to have any
              person acquire any corporate stock from Trust.

       The application of Revenue Ruling 78-197 arose in Gerald A. Rauenhorst, et ux.
v. Commissioner, 119 T.C. No. 9 (2002). Arbeit (a partnership) owned warrants enabling
it to purchase NMG stock. On September 28, 1993, WCP (a corporation) offered to
purchase all NMG stock. On November 9, 1993 the partnership assigned come warrants
to four charities. On November 19 sold its remaining warrant to WCP, and the charities
sold their warrants to WCP. On November 22, 1993, WCP and NMG agreed on a sale of
all the NMG stock.

       The government argued that the bright-line rule of Rev. Rul. 78-197 was not
controlling. The Opinion states:

              Respondent argues that petitioners are not entitled to judgment as a
              matter of law and that genuine issues of material fact remain for trial.
              Respondent argues that the question whether the donees were bound or
              could be legally compelled to surrender their NMG warrants is not ―the
              critical issue‖ to be resolved and, accordingly, neither Carrington v.
              Commissioner, supra, nor Rev. Rul. 78-197, supra, controls this case. It
              is respondent‘s position that ―the critical issue‖ in this case is ―a factual
              one‖: whether petitioners‘ rights to receive the proceeds of the stock
              transaction involving WCP ―ripened to a practical certainty‖ at the time
              of the assignments. Respondent relies on Ferguson v. Commissioner,
              174 F.3d 997 (9th Cir. 1999), Jones v. United States, supra, Kinsey v.
              Commissioner, 477 F.2d 1058 (2d Cir. 1973), affg. 58 T.C. 259 (1972),
              Hudspeth v. United States, 471 F.2d 275 (8th Cir. 1972), and Estate of
              Applestein v. Commissioner, supra.

              Respondent purports to distinguish both Carrington and Rev. Rul.
              78-197, supra, on the facts of the case and the ruling. To that end, he
              contends that Carrington and Rev. Rul. 78-197, supra, are not
              inconsistent with the cases he relies upon above. Respondent claims
              that in this case, and the cases upon which he relies, there was a
              pending ―global‖ transaction for the purchase and sale of all the stock
              of a corporation at the time of the gift or transfer at issue. He then
              surmises that because Carrington and Rev. Rul. 78-197, supra, did not
              involve a pending ―global‖ transaction, the legal principles of those

                                                  65
              authorities do not apply. Instead, he argues that we must apply the
              principles of the cases he relies upon, and, accordingly, we must
              conduct a detailed factual inquiry for purposes of determining whether
              the sale of the stock warrants had ripened to a practical certainty at the
              time of the assignments.

              We cannot agree that respondent has effectively distinguished
              Carrington and Rev. Rul. 78-197, supra, on their facts. First, neither
              this Court nor the Courts of Appeals have adopted respondent‘s theory
              of a pending ―global‖ transaction as a means of distinguishing cases
              such as Carrington and Palmer v. Commissioner, 62 T.C. 684 (1974).
              Indeed, the case law in this area applies essentially the same
              anticipatory assignment of income principles to cases of a ―global‖
              nature as those applicable to cases of a ―nonglobal‖ nature. See, e.g.,
              Greene v. United States, supra at 581. We can only interpret
              respondent‘s use of the phrase ―pending global transaction‖ as simply a
              restatement of the principles contained in the cases upon which he
              relies. Thus, we cannot agree that respondent‘s reliance on a pending
              global transaction distinguishes either Carrington, Rev. Rul. 78-197,
              supra, or other cases upon which petitioners rely. With that being said
              and leaving Carrington and those other cases aside at this point, the
              bright-line test of Rev. Rul. 78-197, supra, which focuses solely on the
              donee‘s control over the contributed property, stands in stark contrast to
              the legal test and the cases upon which respondent relies and which
              consider the donee‘s control to be only a factor.

       The Court took a dim view of the government‘s urging that Rev. Rul. 78-197 be
ignored:

              While this Court may not be bound by the Commissioner‘s revenue
              rulings, and in the appropriate case we could disregard a ruling or
              rulings as inconsistent with our interpretation of the law, see Stark v.
              Commissioner, 86 T.C. 243, 251 (1986), in this case it is respondent
              who argues against the principles stated in his ruling and in favor of our
              previous pronouncements on this issue. The Commissioner‘s revenue
              ruling has been in existence for nearly 25 years, and it has not been
              revoked or modified. No doubt taxpayers have referred to that ruling in
              planning their charitable contributions, and, indeed, petitioners submit
              that they relied upon that ruling in planning the charitable contributions
              at issue. Under the circumstances of this case, we treat the
              Commissioner‘s position in Rev. Rul. 78-197, 1978-1 C.B. 83, as a
              concession. Accordingly, our decision is limited to the question
              whether the charitable donees were legally obligated or could be
              compelled to sell the stock warrants at the time of the assignments.

       On the facts, the court found in favor of the taxpayer:

              Petitioners argue that as of November 12, 1993, the date the warrants
              were transferred on the books of NMG, the donees had not entered into
              any agreement to sell the warrants and could not be compelled by any
              legal means to transfer the warrants. Accordingly, they contend that, as
              a matter of law, there was not an assignment of income. Petitioners
              submitted affidavits from representatives of the donees in support of
              their motion for partial summary judgment. Each of those affidavits
                                                 66
outlines the events which preceded the assignments, each states that the
stock warrants were received on November 12, 1993, and each also
states that, as of that date, the donees had not entered into agreements
to sell the stock warrants.

Respondent questioned the reliability of those affidavits, and he
contended that the affidavits were deficient in that they failed to state
the personal involvement of the representatives with respect to
petitioners‘ contributions. He also asserted that the testimony of those
affiants is ―unknown‖, and he questioned whether they were involved
in any negotiations or discussions with NMG, WCP, or Arbeit
regarding WCP‘s proposed acquisition of NMG stock and warrants.
Respondent also questioned the affiants‘ competency ―to opine upon,
or reach any conclusion as to, what constitutes a binding agreement or
whether their respective organizations had indeed entered binding
agreements in connection with the transactions at issue.‖ We do not
share respondent‘s reservations with respect to the affidavits, and we
find those affidavits credible.

First, in response to respondent‘s allegations, petitioners submitted
additional affidavits from each of the affiants. Each of those affidavits
states: (1) The affiants were personally involved with respect to
petitioners‘ contributions; (2) before the donees‘ execution of the
warrant purchase and sale agreement, there were no agreements
amongst the donees, Arbeit, Mr. Rauenhorst, or any other person or
entity regarding the sale of the warrants; and (3) through November 12,
1993, there were no negotiations or communications between the
donees and NMG or parties representing NMG, except for the letters
from NMG‘s legal counsel requesting that the donees sign an
Additional Party Signature Page.

Second, respondent relies on nonspecific allegations of an informal
agreement or understanding between the donees and NMG, WCP, Mr.
Rauenhorst, and/or Arbeit. Summary assertions and conclusory
allegations are simply not enough evidence to raise a genuine issue of
material fact. [citations omitted]

Respondent alleges no facts or evidence to substantiate his position,
and he has submitted no affidavits in response to the affidavits that
petitioners submitted. Instead, he points out that the record lacks
information regarding any discussions, deliberations, or negotiations
which may have taken place between the donees and the other parties.
Respondent has had ample opportunity to investigate the facts
surrounding these transactions, and it is clear that respondent could
have requested additional information from the individuals involved.
See Rule 121(e). He has requested neither additional discovery nor a
continuance for purposes of additional discovery. He has not
demonstrated to our satisfaction that the only available method for
opposing the statements in the affidavits is through cross- examination
at trial. Further, it is insufficient for the opposing party to argue in the
abstract that the legal theory involved in the case encompasses factual
questions. Hibernia Natl. Bank v. Carner, 997 F.2d 94, 98 (5th Cir.
1993); Daniels v. Commissioner, supra. Since petitioners have offered
affidavits directly supporting their position on a material issue of fact,
and since respondent has failed to counter those affidavits with
anything other than unsupported allegations, respondent cannot avoid

                                    67
                summary judgment on this issue. See Greene v. United States, 806 F.
                Supp. 1165, 1171 (S.D.N.Y. 1992), affd. 13 F.3d 577 (2d Cir. 1994).
                Thus, we find that there is no genuine issue of material fact regarding
                whether the donees entered into a legally binding agreement to sell
                their stock warrants before, or at the time of, the assignments by
                petitioners.

        Footnote 14 states:

                The record indicates that no agreement was entered into by the donees
                before Nov. 19, 1993, the date they signed the warrant purchase and
                sale agreement. On Nov. 16, 1993, NMG‘s legal counsel sent letters to
                each of the donees enclosing a warrant purchase and sale agreement.
                Those letters state that pursuant to the warrant purchase and sale
                agreement, the donees would agree to sell their reissued warrants to
                WCP and ―to abstain from either exercising its Warrant or selling or
                otherwise transferring it to any other party through Dec. 31, 1993.‖
                Certainly, the formality of having the donees enter into the warrant
                purchase and sale agreements suggests that they had not entered into
                any binding agreements before Nov. 19, 1993.

        Subsequent to the decision, the government has reiterated its intention, generally,
to follow its own rulings in litigation.

        In PLR 200321010 a retired officer of a corporation intended to give shares of the
corporation to a CRUT. The corporation had the right to purchase the stock if it so
desired, and the agreement also bound the trust:

                X proposes to establish a CRUT (as defined in § 664 of the Internal
                Revenue Code). Upon establishment of the CRUT, X will notify
                Company of X‘s intent to transfer a portion of X‘s Company stock
                purchased under the Plan to the CRUT, thereby triggering Company‘s
                option to purchase the stock for the formula price set forth in the stock
                restriction agreements applicable to such stock. Taxpayer represents
                that Company will likely decline to purchase the stock for the formula
                price set forth in the stock restriction agreements and thus X will be
                free to transfer the stock to the CRUT. The stock transferred to the
                CRUT will continue to be subject to the terms of the stock restriction
                agreements under the Plan in accordance with the terms of the stock
                restriction agreements. Therefore, if the trustee of the CRUT wishes to
                sell or otherwise dispose of the stock, Company will have a right to
                purchase the stock for the formula price set forth in the stock restriction
                agreements. The trustee will notify Company that the CRUT wishes to
                sell Company stock prior to any proposed sale or disposition. X
                represents that Company has always exercised its option under the
                stock restriction agreements in the past for the formula price set forth
                therein.

        The ruling described the ―bright-line‖ test of Palmer, citing Rauenhorst:


                                                   68
              The Service has acquiesced in the Palmer decision. See 1978-1 C.B. 2.
              In Rev. Rul. 78-197, 1978-1 C.B. 83, the Service concluded that it will
              treat the proceeds of a redemption of stock under facts similar to those
              in Palmer as income to the donor only if the donee is legally bound or
              can be compelled by the corporation to surrender the shares for
              redemption. The Tax Court has characterized the ―legally bound‖
              standard in Rev. Rul. 78-197 as a ―bright line‖ test for determining if a
              contribution of stock to a charity followed by a redemption of that
              stock from that charity should be respected in form or recharacterized
              as a redemption of the stock from the donor followed by a contribution
              of the proceeds by the donor to the charity. See generally, Rauenhorst
              v. Commissioner, 119 T.C. No. 9 (October 7, 2002).

       Thus, the ruling concludes:

              Consequently, the test for purposes of this ruling request, is whether the
              CRUT will be legally bound or can be compelled by Company to
              surrender the stock for redemption at the time of the donation. Here, X
              proposes to transfer the Company stock to the CRUT. Under the
              restrictions contained in each year‘s stock restriction agreement, the
              CRUT must first offer the stock to Company at a set formula price
              should the CRUT propose to dispose of the shares. This provision
              amounts to a right of first refusal. However, it does not mean that the
              CRUT is legally bound or can be compelled by Company to surrender
              the stock to Company at the time of the donation. The information
              submitted contains no indication that the CRUT will be legally bound,
              or could be compelled by Company, to redeem or sell the gifted stock.
              That all or a portion of the gifted stock was subject to restrictions upon
              transfer to a third party by X, and thus by the CRUT following the
              transfer, does not give Company the ability to compel its redemption or
              sale from the CRUT. The CRUT is free to retain title to and ownership
              of the stock indefinitely.

              Because the CRUT is not legally bound and cannot be compelled by
              Company to redeem or sell the stock, we conclude that the transfer of
              the Company stock by X to the CRUT, followed by any subsequent
              redemption of the stock by Company, will not be recharacterized for
              federal income tax purposes as a redemption of the stock by Company
              from X followed by a contribution of the redemption proceeds to the
              CRUT. See Palmer v. Commissioner, supra, and Rev. Rul. 78-197,
              supra. The same principles apply if the stock is sold by the CRUT
              rather than redeemed by Company. Thus, provided there is no
              prearranged sale contract whereby the CRUT is legally bound to sell
              the stock upon the contribution, we conclude that any subsequent sale
              will not be recharacterized for federal income tax purposes as a sale of
              the stock by X, followed by a contribution of the sale proceeds to the
              CRUT. Accordingly, any redemption proceeds or sales proceeds
              received by the CRUT for the stock will not be treated as taxable
              income received by X.

       In Ian G. Koblick v. Commissioner, T. C. Memo 2006-63, 45% of a corporation
was given by taxpayer to a charity, at the same time as other owners gave the remaining
55% of the corporation to the charity.                The corporation owned undersea diving

                                                 69
equipment. The corporation‘s bylaws restricted sales without the corporation‘s consent
and also gave it a right of first refusal. The corporation was not formed, apparently, for
purposes of donating equipment to charity. The taxpayer argued, and the court largely
accepted, that the transfer to charity was part of a prearranged plan in which the taxpayer
and other donors ―walked in lockstep.‖ Thus the court applied only a 10% minority
interest discount to the stock gift.

        In PLR 200821024 the donor owned shares of voting common stock individually
and through a grantor trust as did other members of the donor‘s family. The donor
intended to contribute the shares to a donor advised fund that had as an investment policy
to diversify and thus will intend to sell the shares. The donor‘s attorney and various
family members would serve as advisors to the fund. The donor was trustee of a trust for
the benefit of the donor‘s spouse and descendants that was a potential buyer for the stock
if the donor advised fund offered it for sale. The ruling recites:

                You represent that your contributions of g shares of X voting common
                stock to Y under the terms of the Fund are not subject to any condition
                or legally binding obligation requiring Y [the fund] to sell the shares, or
                offer them for sale. The contributed shares will not be subject to any
                option or right by any person to acquire them from Y. Y has the sole
                discretion regarding whether or when to sell the contributed shares and
                to whom those shares may be sold. Further, you will not retain any
                rights or interest in the contributed shares.

        At issue was whether the gift would be construed as an assignment of income.
The IRS determined that it would not be, stating:

                Under the anticipatory assignment of income doctrine, a mere transfer
                which is in form a gift of appreciated property may be disregarded for
                tax purposes if its substance is an assignment of a right to income.
                Rauenhorst v. Commissioner, 119 T.C. 157, 164 (2002). By contrast,
                the mere anticipation or expectation of the receipt of income is
                insufficient to conclude that a fixed right to income exists. S.C.
                Johnson & Son, Inc. v. Commissioner, 63 T.C. 778, 787-788 (1975).

                In Palmer v. Commissioner, 62 T.C. 684 (1974), aff'd on other grounds,
                523 F.2d 1308 (8th Cir. 1975), acq., 1978-1 C.B. 2, the Tax Court held
                that a taxpayer's gift of stock in a closely held corporation to a private
                foundation, followed by a redemption, was not to be recharacterized as
                a sale or redemption between the taxpayer and the corporation followed
                by a gift of the redemption proceeds to the foundation, even though the
                taxpayer held voting control over both the corporation and the
                foundation. The Tax Court based its opinion, in part, on the fact that the


                                                   70
foundation was not legally obligated to redeem the stock at the time it
received title to the shares.

In Rev. Rul. 78-197, 1978-1 C.B. 83, the Internal Revenue Service
announced that it will treat the proceeds of a redemption of stock under
facts similar to those in Palmer as income to the donor only if the donee
is legally bound or can be compelled by the corporation to surrender
the shares for redemption.

You retain no rights or interest in the g shares that you have contributed
and will contribute to the Fund. At the time you contribute the shares to
Y under the terms of the Fund, Y will not be under any legal obligation
to sell the shares. Y has the sole discretion to decide whether or when
to sell the contributed shares, and cannot be compelled by you or any
other individuals to sell them.




                                   71
        4.     Investing Charitable Remainder Trusts in Charitable Endowments.

        In PLRs 200352017 - 19 Harvard University obtained favorable rulings on the
purchase of ―endowment shares‖ in the Harvard endowment by charitable remainder
trusts and charitable lead trusts. The return on the endowment shares is tied to the return
on the Harvard endowment. The shares are structured such that all return is treated as
ordinary income - - tier one income to a charitable remainder trust - - but none as
unrelated business income (even if the endowment would produce such income). The
IRS has now determined that it will issue similar rulings to other institutions but will not
issue any such ruling dealing with charitable lead trusts (and has withdrawn approval for
the use of such shares in charitable lead trusts in PLR 200702036, -040, -041). See, e.g.,
PLRs 200703037 - 38, 200704035 - 36, 200710013 - 16.

        5.     Contribution by Corporation.

        In PLR 200715015, a corporation formed a limited partnership and contributed to
it exclusive ownership of certain trademarks and other intellectual property; the other
partner was the owner of the corporation who contributed cash. The partnership granted
the corporation a license to use that property in exchange for a royalty based on the
corporation‘s net sales. The corporation then contributed the limited partnership units to
a private foundation (created and managed by the owner).                       Because the limited
partnership receives 95% or more of its gross income from passive sources (here,
royalties), the units are not an excess business holding. Further, the foundation has no
unrelated business income because royalties are exempt.

        PLR 200644013 dealt with an S corporation contributing residential and
commercial real estate to a 20 year charitable remainder unitrust. The facts presented
were:

               Company owns, leases, and manages residential and commercial real
               estate. Company reported its taxable income as a C corporation for all
               taxable years ending on or before Date 1. Company elected to be taxed
               as an S corporation within the meaning of § 1361 of the Code effective
               for tax years beginning on Date 2. Company holds three separate
               parcels of real property (the "Real Estate") and represents that the Real
               Estate does not constitute "substantially all" of its assets. Company
               purchased the Real Estate prior to Date 2 and will recognize gain under


                                                 72
              § 1374 if it sells the Real Estate within ten years of Date 2 (the
              "Recognition Period").

              Company intends to form a charitable remainder unitrust under § 664
              (the "Trust"). Following the formation of the Trust, Company will
              contribute the Real Estate to the Trust. Subsequently, but before the end
              of the Recognition Period, the Trust will sell the Real Estate ("Sale
              Date") and use the sale proceeds to invest in stocks, bonds, and other
              securities that pay interest and dividends. For a period of 20 years, the
              Trust will be required to annually distribute a unitrust amount to the
              Company. At the end of 20 years, the Trust will terminate and all assets
              remaining in the Trust will be distributed to one or more charities
              described in §§ 170(c), 2055(a), and 2522(a).

              The Trust will be structured initially as a net income with makeup
              charitable remainder unitrust ("NIMCRUT") and, on the Sale Date, will
              convert to a fixed percentage charitable remainder unitrust ("CRUT"),
              as permitted under § 1.664-3(a)(1)(i)(c). As a NIMCRUT, the Trust
              will annually distribute to Company a unitrust amount equal to the
              lesser of (1) the Trust's income (as defined under § 643(b) and the
              applicable regulations) for the year (the "Trust Income") or (2) the fair
              market value of the Trust's assets multiplied by a fixed payout
              percentage ("Fixed Percentage Amount"). The unitrust amount for any
              year will also include any amount of Trust income for such year that is
              in excess of the amount required to be distributed under (2), to the
              extent that the aggregate of the amounts paid in prior years was less
              than the aggregate of the amounts computed under (2) in prior years.
              After the Trust converts to a CRUT, the Trust will annually distribute
              to Company a unitrust amount equal to the Fixed Percentage Amount.

       The Service granted the following rulings:

              1. Company will not have recognized built-in gain under § 1374 on its
              contribution of the Real Estate to the Trust.

              2. Company will not have recognized built-in gain under § 1374 on the
              Trust's disposition of the Real Estate.

              3. Company will not have recognized built-in gain under § 1374 on
              unitrust amounts received by it during the Recognition Period, to the
              extent the unitrust amounts do not exceed Trust Income.

              4. Company will not have recognized built-in gain under § 1374 on
              unitrust amounts received by it after the Recognition Period.

       6.     Trust Division Did Not Create Estate Tax Deduction.

       In TAM 200840008, the Service determined that the value of the property
distributed to Trust No. 1 pursuant to the non-judicial division of Testamentary Trust
under a state statute did not qualify for the estate tax charitable deduction under §
2055(a).


                                                 73
The facts were as follows:

       Decedent died testate on Date 1. Decedent's last will was executed on
       Date 2 and is governed by the laws of State. After providing for certain
       pre-residuary bequests, the will provides that the residue of Decedent's
       estate is to be held in trust (Testamentary Trust), with 25% of the net
       income to [A] during her life, and 25% to [B], during her life. The rest
       of the net income received shall be distributed annually to in amounts
       and at times determined in the best judgment and discretion of the
       Trustees to qualified charities. On termination of the trust after the
       death of A and B, the remaining assets are to be distributed to a charity
       or charities selected by the Trustees in any proportion they deem
       proper.

       On Date 3, the executors/trustees filed with Court a document entitled
       ―Notice of Proposed Division of Trust Under [State Statute].‖ The
       Notice recites that Testamentary Trust does not satisfy the requirements
       of 2055(e)(2) and therefore, the interests passing to charity under the
       terms of the trust would not qualify for the estate tax charitable
       deduction. Further, the Notice recites that the executors and trustees
       reasonably believe that splitting the single residue trust ... into two
       separate trusts will decrease significantly the potential estate tax due
       with the 706 Estate Tax Return to be submitted to the Internal Revenue
       Service.

       Under the Notice, Testamentary Trust will be divided into two trusts,
       Trust No.1 and Trust No. 2. Trust No. 1 will be funded with one-half of
       the net residue of the estate. This trust will be administered in
       accordance with the instructions for Testamentary Trust contained in
       the Decedent's will and the net income of the trust (as defined in the
       Decedent's will) will be distributed to qualified charities.

       Trust No. 2 will be funded with the other one-half of the net residue of
       the estate. This trust will be administered in accordance with the
       instructions for Testamentary Trust contained in the Decedent's will
       and the net income of the trust (as defined in the Decedent's will) will
       be distributed as follows: 50% of the net income will be distributed to
       A for her life and after her death this 50% will be distributed to
       qualified charities; 50% of the net income will be distributed to B for
       her life and after her death, this 50% will be distributed to qualified
       charities.

       On Date 4, the Form 706, United States Estate (and Generation-
       Skipping Transfer) Tax Return, was timely filed for Decedent's estate.
       On Schedule O of Form 706, the executor claimed a charitable
       deduction for the date of death value of the assets distributed to Trust
       No. 1.

The Service applied Section 2055 to these facts as follows:

       Section 2055(a) provides for an estate tax charitable deduction for
       bequests to or for the use of qualifying charitable organizations. Section
       2055(e)(2) provides that when an interest in property passes or has
       passed from a decedent to a charitable organization and an interest in
       the same property also passes to a noncharitable beneficiary, a
                                          74
                deduction is not allowed unless, in the case of a charitable remainder
                interest, the interest is in the form of a charitable remainder unitrust or
                annuity trust described in § 664, or a pooled income fund described in §
                642(c)(5). In the case of a charitable lead interest, the interest must be
                in the form of a guaranteed annuity or fixed percentage distributed
                yearly of the fair market value of the property (determined annually).

                Section 2055(e)(3) provides statutory relief in situations where the
                bequest of a lead or remainder interest to charity is not in the form
                required under § 2055(e)(2). Under this section, a deduction will be
                allowed for property passing from the decedent to a charitable trust that
                does not meet the requirement of § 2055(e)(2), provided the trust is
                reformed, within the time prescribed by the statute, into one of the
                qualifying forms specified in § 2055(e)(2)(A).

                In this case, at Decedent's death, Testamentary Trust did not satisfy the
                requirements under § 2055(e)(2) and therefore did not qualify for a
                charitable deduction under § 2055(a). The reformation of under State
                Statute performed by the executors/trustees did not meet the
                requirements of § 2055(e)(3), and the time period for commencing a §
                2055(e)(3) reformation (prescribed under § 2055(e)(3)(C)(iii)) has
                expired. Accordingly, since the executors/trustees failed to timely
                reform Testamentary Trust under § 2055(e)(3), a charitable deduction
                under § 2055(a) is not allowable for the value of the property
                distributed to Trust No. 1.

         The Service disputed the assertion of the executors/trustees that the parties can
terminate a trust and avoid the requirements of § 2055(e)(3) by demonstrating any nontax
reason for the termination:

                For example, we do not believe that the parties could terminate a trust
                and avoid the application of § 2055(e)(3) simply because they prefer to
                receive immediate lump sum payments, rather than the temporal
                interests provided under the trust. We do not believe a deduction would
                be allowed in that situation.

10364799.1




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