United States Tax Court

United States Tax Court

T.C. Memo. 2023-30

ESTATE OF SUSAN R. BLOCK, DECEASED, JULIE B. SAFFIR

AND PETER A. BLOCK, EXECUTORS,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 10618-19.

Filed March 13, 2023.

—————

Mark H. Neikrie, for petitioners.

Molly H. Donohue and Nina P. Ching, for respondent.

MEMORANDUM OPINION

COPELAND, Judge: This case was submitted to the Court fully

stipulated pursuant to Rule 122. 1 In a Notice of Deficiency dated

March 21, 2019, respondent determined a total estate tax deficiency of

$140,085 for the Estate of Susan R. Block (Estate). After concessions, 2

the only issue remaining before the Court is whether the Estate qualifies

under section 2055(a) for a deduction from the value of the gross estate

Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, all

regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in

effect at all relevant times, and all Rule references are to the Tax Court Rules of

Practice and Procedure. Some dollar amounts are rounded.

1

2 The Estate concedes a higher value of real property owned by decedent at her

death than the value reported. The parties agree that the Estate incurred a larger

amount of administrative expenses than what was reported on the estate tax return,

and that the Estate will qualify for a further deduction for legal expenses incurred

during this litigation.

Served 03/13/23

2

[*2] for the transfer of the remainder interest of the Harriet Katz Trust

(Katz Trust).

Background

The facts have been stipulated by the parties. The Stipulation of

Facts (with attached Exhibits) and the First Supplemental Stipulation

of Facts are incorporated by this reference. When the Petition was filed,

the Estate was administered in Connecticut, and Executor Julie Saffir

and Executor Peter Block (co-executors) resided in California.

I.

Execution and Amendment of the Katz Trust Instrument

Ms. Block lived in Connecticut at all relevant times, including at

her death on October 21, 2015. On September 2, 1997, Ms. Block settled

the Susan Rubin Block Revocable Trust (Trust). On September 17,

2015, she executed a will that remained in effect at her death and that

provided for the transfer of her residuary estate to the Trust, whose

terms she amended and restated on the same day. Ms. Block, Ms. Saffir,

and Mr. Block were named as the initial co-trustees. Upon Ms. Block’s

death the following month, the Trust became irrevocable pursuant to

Article 1.2 of the Trust instrument. Thereafter, Ms. Saffir and Mr. Block

were the only co-trustees of the Trust. The Trust is governed by the laws

of the State of Connecticut.

In Article 4 of the Trust instrument, Ms. Block provided for a

subtrust, the Katz Trust, to be funded upon her death. The Katz Trust

would exist for the benefit of Ms. Block’s sister, Harriet Katz (Harriet),

and then for the benefit of Harriet’s spouse, I.W. Katz (I.W.), should he

survive Harriet. Article 4 provides that upon the death of both Harriet

and I.W., the property remaining in the Katz Trust shall be distributed

to the Jewish Community Foundation of Greater Hartford, Inc.

(Foundation). The Foundation is a charitable organization as described

in sections 170(c) and 2055(a). The co-trustees of the Katz Trust are the

same as the co-trustees of the Trust.

Article 4.1 of the Trust instrument states that Ms. Block intends

the Katz Trust to be “a charitable remainder annuity trust, within the

meaning of Rev. Proc. 2003-57 and § 664(d)(1) of the Code, and the terms

of this Section shall be construed to give maximum effect to such intent.”

Article 4.1(A) directs that an “annuity amount” be paid to Harriet during

her life (or to I.W. if he survives her), in an amount “equal to the greater

of: (a) all net income, or (b) the sum of Fifty Thousand Dollars ($50,000),

3

[*3] at least annually.”

instrument provides:

In addition, Article 4.1(I) of the Trust

Following [Ms. Block’s] death this entire Trust, including

THE HARRIET KATZ TRUST, shall be irrevocable.

However, the Trustee shall have the power, acting alone,

to amend THE HARRIET KATZ TRUST from time to time

in any manner required for the sole purpose of ensuring

that THE HARRIET KATZ TRUST qualifies and continues

to qualify as a charitable remainder annuity trust within

the meaning of § 664(d)(1) of the Code. The Trustee may

not, however, change the annuity period, the annuity

amount, or the identity of the Recipient [of the annuity

amount].

After respondent initiated an examination of the Estate’s Form

706, United States Estate (and Generation-Skipping Transfer) Tax

Return, in August 2017, the co-trustees executed an amendment to the

Trust instrument (First Amendment) with an effective date of October

21, 2015, (Ms. Block’s date of death). The First Amendment’s stated

purpose was to revise Article 4.1(A) to provide that the trustees shall

pay from the Katz Trust to Harriet for her life, and to I.W. should he

survive Harriet, “an annuity amount equal to the sum of Fifty Thousand

Dollars ($50,000), at least annually.” The First Amendment removed

“all net income” from the determination of the “annuity amount.” 3

II.

Katz Trust Income

The Katz Trust was funded with assets having a date-of-death

fair market value of $761,000. At all relevant times, all assets have been

held in the Katz Trust’s brokerage account. The chart that follows lists

the annual income generated by the Katz Trust’s assets and the balance

in its brokerage account as of December 31 of years 2016–19:

3 As explained below, we need not determine whether the First Amendment

was effective under the terms of the Trust and Connecticut law.

4

[*4]

Year

Amount of Income Earned

During Year

Balance in Brokerage

Account as of Dec. 31

2016

$29,190

$691,066

2017

23,666

677,348

2018

23,380

633,859

2019

22,242

630,123

The Katz Trust has paid $50,000 each year to Harriet from 2015 through

at least 2019.

III.

The Estate Tax Return and Notice of Deficiency

The co-executors timely filed the Estate’s Form 706 on or before

the filing deadline of July 21, 2016. On that return, the Estate deducted

from the value of the gross estate (among other things) the present value

of the charitable remainder interest of the Katz Trust, which the Estate

calculated on the basis of an annuity amount of $50,000 and the

actuarial life expectancies of Harriet and I.W. The Internal Revenue

Service (IRS) initiated an examination of the return in August 2017. At

the conclusion of the examination, the IRS issued the Notice of

Deficiency, in which it disallowed the entirety of the Estate’s claimed

charitable deduction of $352,085 in connection with the Katz Trust. To

date, the co-trustees of the Trust have not commenced any judicial

proceeding to reform any provisions of the Trust instrument.

Discussion

I.

Burden of Proof

In general, determinations in a notice of deficiency are presumed

correct, and the taxpayer bears the burden of proving error. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933). The Estate does not contend, and

the evidence does not establish, that the burden of proof shifts to

respondent under section 7491(a) as to any issue of fact. Accordingly,

the Estate bears the burden of proof with respect to contesting the

deficiency determinations.

5

[*5] II.

Split-Interest Charitable Deductions

For purposes of the federal estate tax, section 2055(a) generally

allows a deduction from the value of a decedent’s gross estate for

transfers for charitable purposes. However, Congress attached special

conditions in the case of charitable bequests in the form of split-interest

transfers. Such a transfer occurs “where an interest in property passes

to a charitable beneficiary while an interest in the same property also

passes to a noncharitable beneficiary for less than full and adequate

consideration.” Estate of Schaefer v. Commissioner, 145 T.C. 134, 138

(2015); see also I.R.C. § 2055(e)(2). Section 2055(e)(2)(A) disallows a

deduction for the charitable remainder portion of a split interest

transfer unless (i) the remainder passes in trust and (ii) the trust is a

charitable remainder annuity trust (CRAT), see I.R.C. § 664(d)(1), a

charitable remainder unitrust (CRUT), see id. para. (2), or a pooled

income fund (PIF), see I.R.C. § 642(c)(5).

Congress imposed the section 2055(e)(2)(A) requirement for splitinterest remainders in order to remove the “incentive to favor the income

beneficiary over the remainder beneficiary by means of manipulating

the trust’s investments.” Estate of Schaefer, 145 T.C. at 138 (quoting

H.R. Rep. No. 91-413, pt. 1, at 59 (1969), as reprinted in 1969-3 C.B. 200,

238; S. Rep. No. 91-552, at 88 (1969), as reprinted in 1969-3 C.B. 423,

480). It had come to Congress’ attention that taxpayers were claiming

charitable deductions for bequests of remainder interests in trusts by

making valuation assumptions that were inconsistent with the way the

trust assets were actually managed. Where trust assets were invested

to maximize the income interest (for instance, investing in stocks that

pay high dividends or bonds that pay high interest), the value eventually

passing to charity through the remainder interest might bear little

relationship to the deduction previously taken. 4 Because of this

potential for abuse of charitable remainder deductions, Congress

4 Before enactment of section 2055(e)(2)(A), the charitable remainder deduction

was computed on the assumption that the trust assets would grow by 3.5% per year.

See H.R. Rep. No. 91-413, pt. 1, at 58, as reprinted in 1969-3 C.B. at 237. The more

general point is that estimating a present value for an unfixed income interest—and

thus for the charitable remainder—requires certain upfront assumptions about rates

of current return. (In most or all states, a trust that calls for the annual payment of

“net income” is generally required to pay out only the “current” portion of the return—

such as interest, dividends, and rent—as opposed to sale proceeds or unrealized

appreciation. See, e.g., Uniform Principal and Income Act § 102(4) (Unif. L. Comm’n

2008) (providing a default definition of “income” for trust instruments, viz, “money or

property that a fiduciary receives as current return from a principal asset”).). These

assumptions are necessarily blunt and therefore create scope for arbitrage.

6

[*6] mandated that the annual payout to the noncharitable income

beneficiaries be a fixed dollar amount (in the case of CRATs) or a fixed

percentage of value of the trust assets (in the case of CRUTs). 5 See

Estate of Gillespie v. Commissioner, 75 T.C. 374, 376–78 (1980); Estate

of Tamulis v. Commissioner, T.C. Memo. 2006-183, 92 T.C.M. (CCH)

189, aff’d, 509 F.3d 343 (7th Cir. 2007); see also H.R. Rep. No. 91-413,

pt. 1, at 58–60, as reprinted in 1969-3 C.B. at 237–39; S. Rep. No. 91552, at 86–87, as reprinted in 1969-3 C.B. at 479–80.

If a trust initially fails to qualify as a CRAT or a CRUT, the

settlor’s estate still may take a charitable deduction if there is a

“qualified reformation” of the trust. I.R.C. § 2055(e)(3)(A). A qualified

reformation cannot occur unless the remainder interest is a “reformable

interest” under section 2055(e)(3)(B), meaning that in the pre-reform

trust (1) the remainder interest is exclusively charitable and (2) all

payments to the noncharitable beneficiaries are “expressed either in

specified dollar amounts or a fixed percentage of the fair market value

of the property.” 6 I.R.C. § 2055(e)(3)(C)(i) and (ii). There is an exception

to the “specified dollar or fixed percentage” requirement: An initially

nonfixed interest will be excused if, within 90 days after the due date for

the estate tax return, a judicial proceeding is commenced that results in

the trust qualifying as a CRAT or a CRUT, retroactive to the date of the

decedent’s death. § 2055(e)(3)(C)(iii). In such a case, the remainder is

deemed a reformable interest just so long as the pre-reform trust

designated it as exclusively charitable.

III.

CRATs

Section 664(d)(1) generally defines a CRAT as a trust with the

following four characteristics:

A. “[A] sum certain (which is not less than 5 percent nor more

than 50 percent of the initial fair market value of all

property placed in trust) is to be paid, not less often than

annually,” to the income beneficiaries, at least one of which

5 Alternatively, the income interest may be nonfixed, but only if the trust is a

PIF, meaning that it is managed by the charitable organization that holds the

remainder interest. See I.R.C. § 642(c)(5). A PIF’s charity-based governance

inherently protects against abuse.

6 There are a number of other requirements, besides having a charitable

remainder and a fixed income interest, for a trust to qualify as a CRAT or a CRUT.

(These are discussed below in the case of CRATs.) Therefore, the qualified reformation

rules do not require the trust to already be a CRAT or a CRUT.

7

[*7]

is not a charitable organization. In the case of individual

beneficiaries, the annuity may last for either a set period

of years (not to exceed 20) or the individual’s remaining

lifetime. I.R.C. § 664(d)(1)(A).

B. No payments other than the annuity may be made to the

noncharitable beneficiaries. I.R.C. § 664(d)(1)(B).

C. At the end of the annuity period, the entire remainder is to

be transferred to one or more charitable organizations.

I.R.C. § 664(d)(1)(C); see also Treas. Reg. § 1.664-2(a)(6)(i).

D. The present value of the remainder interest, determined at

the time of the trust’s funding, is at least 10% of the initial

fair market value of the trust assets. I.R.C. § 664(d)(1)(D);

see also Treas. Reg. § 1.664-2(c). 7

A “sum certain” is defined by Treasury Regulation § 1.664-2(a)(1)(ii) to

mean “a stated dollar amount which is the same either as to each

recipient or as to the total amount payable for each year of [the annuity]

period.”

A trust that qualifies as a CRAT is exempt from income taxation

(although it is subject to an excise tax on unrelated business taxable

income, as defined in section 512). I.R.C. § 664(c).

IV.

Attempted Reformation of the Katz Trust

Article 4.1(A) of the Trust instrument, as it stood on the date of

Ms. Block’s death, directed the trustees to pay to Harriet or I.W. an

“annuity amount equal to the greater of: (a) all net income, or (b) the

sum of Fifty Thousand Dollars ($50,000), at least annually.” This

provision is not limited to a specific stated dollar amount and therefore

violates the requirement of section 664 that the annuity of a CRAT be a

“sum certain.” Consequently, the Katz Trust did not qualify as a CRAT

at the time of Ms. Block’s death (nor, we should note, as a CRUT or a

PIF), and the charitable remainder of the Katz Trust was not a

reformable interest under the default rules—that is, before considering

the exception for judicial reformations (which can excuse an income

7 Treasury Regulation § 1.664-2(b) further provides that a trust is not a CRAT

unless the trust instrument forbids additional contributions to the candidate CRAT

after its initial funding. Article 4.1(E) of the Trust instrument contains this

prohibition.

8

[*8] interest that is not expressed as either a sum certain or a fixed

percentage of trust assets).

The Estate argues that the First Amendment to the Trust

instrument effected a qualified reformation. However, since the First

Amendment could not have done so under the default rules, the only

remaining possibility was a judicial reformation. Yet the exception for

judicial reformations clearly does not apply here. First, the First

Amendment was executed sometime after August 2017, far beyond the

90-day period following the due date for the estate tax return (July 21,

2016). Second, the amendment was instituted by the co-trustees alone,

rather than by a court. Therefore, the First Amendment fails both

components of the exception.

Petitioners ask us to deem the Estate to have substantially

complied with the exception. We decline to do so. As we have previously

observed, Congress made clear that the rules for qualified reformations

are to be construed strictly, in order to prevent abuse of the charitable

deduction. See Estate of Tamulis, 92 T.C.M. (CCH) at 192–93.

Specifically, Congress was concerned that if the reformation regime

were overly lenient, taxpayers would not reform trusts to comply with

the split-interest rules unless and until the IRS discovered defects upon

audit. As the reports of both the House Committee on Ways and Means

and the Senate Finance Committee explained:

In order to prevent [such strategic wait-and-see tactics]

from occurring, the committee believes that, in order for a

governing instrument of a charitable split-interest

contribution to be reformable, either (1) the creator had to

make a bona fide attempt to comply with the 1969 Act rules

[requiring the trust to be either a CRAT or a CRUT] or (2)

the taxpayer must initiate reformation proceedings before

the Internal Revenue Service could reasonably be expected

to begin audit. The committee believes that these rules will

permit the correction of major, obvious defects (such as

where the “income” interest is not expressed as an annuity

interest or a unitrust interest) so long as the taxpayer

initiates reformation proceedings before audit, while

allowing the correction of minor defects (such as defects in

determining the correct payout in short taxable years, in

years of additional contributions, etc.) upon audit so long

as there was a good faith attempt to comply with the 1969

9

[*9]

Act rules (i.e., the payout is basically expressed as an

annuity interest or a unitrust interest).

H.R. Rep. No. 98-432, pt. 2, at 1516–17 (1984); Staff of the S. Comm. on

Fin., 98th Cong., Deficit Reduction Act of 1984: Explanation of

Provisions Approved by the Committee on March 21, 1984, S. Prt. No.

98-169, vol. 1, at 731–32 (Comm. Print 1984).

Accordingly, this Court strictly construes the exception for

judicial reformations. See, e.g., Estate of Hall v. Commissioner, 93 T.C.

745 (1989) (finding no qualified reformation of a trust that required net

income payments to the income beneficiary, because a judicial

proceeding was not timely commenced); Estate of Tamulis, 92 T.C.M.

(CCH) 189 (finding no qualified reformation of a trust that required net

income payments to income beneficiaries, despite statement of intent on

estate tax return for payments to be limited to 5% of trust assets). Even

if we were to find that the First Amendment was effective for purposes

of Connecticut law, it did not effect a qualified reformation for purposes

of section 2055(e).

Congress provided no exception for cases, like this one, where the

income payment would likely never vary from a fixed amount (based on

the initial size of the trust assets and the wording of the income payment

provision), or where the co-trustees have in fact always paid the income

beneficiaries a fixed amount. We cannot craft an exception that

Congress did not provide for. See Henry Schein, Inc. v. Archer & White

Sales, Inc., 139 S. Ct. 524, 530 (2019).

V.

Revenue Procedures 2003-57 and 2003-59

The Estate also argues that Revenue Procedure 2003-57, 2003-2

C.B. 257, and Revenue Procedure 2003-59, 2003-2 C.B. 268 (together,

Revenue Procedures), allow a trustee to act alone, without court

involvement, to amend the terms of a trust at any time to ensure it both

qualifies as a CRAT and retroactively qualifies for an estate tax

charitable deduction. The Estate argues that the Revenue Procedures

are binding upon respondent. We have indeed held that the IRS is

generally obligated to follow published administrative positions,

including revenue procedures. See Dixon v. Commissioner, 141 T.C. 173,

188 (2013) (citing Rauenhorst v. Commissioner, 119 T.C. 157, 171–73

(2002)). However, the Revenue Procedures at issue here are unavailing

for the Estate.

10

[*10] The Revenue Procedures provide sample language for a trust to

qualify as a CRAT under section 664. For instance, the following is a

sample “Limited Power of Amendment” provision:

This trust is irrevocable. However, the Trustee shall have

the power, acting alone, to amend the trust from time to

time in any manner required for the sole purpose of

ensuring that the trust qualifies and continues to qualify

as a charitable remainder annuity trust within the

meaning of § 664(d)(1) of the Code.

Rev. Proc. 2003-57, § 4, 2003-2 C.B. at 258; Rev. Proc. 2003-59, § 4,

2003-2 C.B. at 270.

The Estate notes that this sample provision in the Revenue

Procedures does not specify a time limit for amending the trust, nor does

it require judicial intervention. However, the corollary provisions of the

Revenue Procedures must also be considered. Of note, one of the other

sample provisions in each Revenue Procedure specifies that the annuity

amount is “[a number no less than 5 and no more than 50] percent of the

initial net fair market value of all property passing to this trust as

finally determined for federal estate tax purposes.” Rev. Proc. 2003-57,

§ 4, 2003-2 C.B. at 258 (alteration in original); Rev. Proc. 2003-59, § 4,

2003-2 C.B. at 269 (alteration in original). Therefore, the nonjudicial

reformation contemplated by the “Limited Power of Amendment”

provision does not involve corrections for “major, obvious defects,” such

as a provision that allows annual payments to the income beneficiary in

the amount equal to the greater of all net income or $50,000. Major

defects, “such as where the ‘income’ interest is not expressed as an

annuity interest,” require a judicial proceeding to be commenced before

an IRS audit might begin (per section 2055(e)(3)(C)(iii)). See also H.R.

Rep. No. 98-432, pt. 2, at 1517; S. Prt. No. 98-169, vol. 1, at 732.

Moreover, each of the Revenue Procedures cautions: “A trust

instrument that contains substantive provisions in addition to those

provided in . . . this revenue procedure . . . will not necessarily be

disqualified, but neither will that trust be assured of qualification under

the provisions of this revenue procedure.” Rev. Proc. 2003-57, § 3, 2003-2

C.B. at 257 (emphasis added); Rev. Proc. 2003-59, § 3, 2003-2 C.B. at 269

(emphasis added). The pre-amendment Katz Trust did contain a

substantive provision beyond those provided in the Revenue

Procedures—namely, the direction that the income beneficiary receives

“all net income” if that should exceed $50,000. Because this direction

11

[*11] squarely violates the paramount rule for CRATs, the Katz Trust

falls outside of the Revenue Procedures’ representations regarding

eligibility for a charitable deduction.

VI.

Construction of the Pre-Amendment Katz Trust

The Estate notes that Article 4.1(A) of the original Trust

instrument called for an “annuity amount equal to the greater of: (a) all

net income, or (b) the sum of Fifty Thousand Dollars ($50,000), at least

annually.” (Emphasis added.) Moreover, the flush text of Article 4.1

states that Ms. Block intends for the Katz Trust to be “a charitable

remainder annuity trust, within the meaning of Rev. Proc. 2003-57 and

§ 664(d)(1) of the Code, and the terms of this Section shall be construed

to give maximum effect to such intent.” These two provisions, according

to the Estate, show that the Katz Trust was a CRAT from the beginning

and that the First Amendment merely confirmed this characterization.

After all, an “annuity amount” as defined in the Code and regulations is

a “sum certain” and so is incompatible with a “net income” provision.

We understand the Estate to be arguing that the “all net income”

provision of Article 4.1(A) was void ab initio, so that no qualified

reformation—let alone a judicial proceeding—was necessary for the

Katz Trust to be a CRAT. We will assume for the sake of argument that

under Connecticut law, the original Article 4.1(A) was ambiguous and

that, under the Connecticut canons of construction, the phrase “all net

income” was ineffectual. But that assumption does not necessarily

entail that the Katz Trust was a CRAT from the beginning. That matter

will depend on the proper construction of section 664(d)(1)(A), which

provides that a CRAT is (among other things) a trust “from which a sum

certain . . . is to be paid, not less often than annually, to one or more

persons.” Perhaps this provision could lead to two interpretations,

either (1) the trust’s governing instrument unambiguously provides for

a sum-certain annuity or (2) the governing instrument once properly

construed (such that any and all ambiguities are resolved in accordance

with applicable state law) provides for a sum-certain annuity.

The first interpretation accords much more soundly with

Congress’ intent with regard to section 664. That intent was, as

discussed above, to deny both income and estate tax charitable

deductions for remainder interests unless the amount going annually to

the noncharitable beneficiaries is certain and unmanipulable. See H.R.

Rep. No. 91-413, pt. 1, at 59, as reprinted in 1969-3 C.B. at 238; S. Rep.

No. 91-552, at 88, as reprinted in 1969-3 C.B. at 480. If we were to find

12

[*12] that trusts can be CRATs when the noncharitable payment is

simply more likely than not required to be a sum certain, we would

subvert Congress’ evident goal of removing as much uncertainty as

possible from the preset-value calculation of remainder interests.

Therefore, we conclude that under the proper interpretation of section

664(d), the pre-amendment Katz Trust was not a CRAT. And because

the trustees did not effect a qualified judicial reformation, the entire

charitable deduction must be denied under section 2055(e).

We have considered all the arguments made by the parties and,

to the extent they are not addressed herein, we find them to be moot,

irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.