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Court Denies Estate's Deduction for Charitable Contribution of Farm Sale Proceeds

(Parker Tax Publishing December 2021)

The Ninth Circuit affirmed a Tax Court decision denying an estate's charitable deduction for its transfer of proceeds from the sale of a family farm, which was held in a partnership, to an irrevocable trust, which then transferred the funds to a charitable trust. The Ninth Circuit held that the trustee of the irrevocable trust was not required to eventually transfer the farm's proceeds to the charitable trust upon the decedent's death and thus the IRS was correct in denying the deduction. Estate of Moore v. Comm'r, 2021 PTC 354 (9th Cir. 2021).


Howard Moore owned a 1,000 acre farm in Arizona called Moore Farms. Moore had four children. In 2004, Moore became seriously ill and began making an estate plan. His goals included maintaining control over his assets during his life, treating his children equally upon his death, managing and preserving the value of his assets, and reducing or eliminating federal estate taxes.

Moore's estate plan included the creation of a Living Trust, a Charitable Trust, a Children's Trust, an Irrevocable Trust, a Management Trust, and a family limited partnership (FLP). Moore transferred all his real and intangible personal property to the Living Trust, including Moore Farms. The Living Trust provided that upon Moore's death, after payment of Moore's expenses, claims, taxes, and specific distributions, the remaining trust property should be divided between the Charitable Trust and the Children's Trust. The Charitable Trust was established to make charitable donations through a foundation (the Foundation) established by Moore. The amount that the Living Trust would distribute to the Charitable Trust was defined not as a fixed sum or a fixed value of property, but as a fraction of the full value of the estate.

The Irrevocable Trust provided that, upon Moore's death, the trustee had to "distribute an amount equal to the value of any asset of this trust which is includible in my gross estate for federal estate tax purposes" to the Living Trust, and such amount would then be distributed in accordance with the terms of the Living Trust. The estate and the IRS agreed that the only way this clause could become operative was if an IRS audit resulted in the inclusion of additional property in the gross estate.

The FLP was formed with Moore's four children as limited partners and Moore in control of the general partnership interest as a beneficiary of the Management Trust. Moore transferred four-fifths of his interest in Moore's Farm to the FLP. Transfer restrictions prohibited any partner of the FLP from transferring or selling any interest unless the family unanimously agreed. The limited partners also had no right to participate in business management or operations.

In early 2005, shortly before his death in March, Moore sold Moore's Farm to an unrelated party. After the sale, Moore continued to live on the property and operate the farm. With part of the farm sale proceeds, Moore directed the FLP to issue a check for $500,000 to each of his four children in exchange for a note promising to pay the money back to the FLP on or before February 2010. No payment schedule was specified, and none of Moore's children made payments of principal or interest.

In the years following Moore's death, the Irrevocable Trust's trustee transferred large sums of money to the Charitable Trust. Each donation had the same origins. First, the Irrevocable Trust received a transfer of a certain sum from the FLP. That sum was used to fund the Charitable Trust, which then made a payment to the Foundation. From 2007-09 the Charitable Trust made three payments to the Foundation: $790,000 in 2007, $433,818 in 2008, and $433,818 in 2009.

Moore's estate tax return excluded the value of the farm and treated the $500,000 distributions to Moore's children as loans. The estate also claimed a charitable deduction for amounts paid to the Charitable Trust. In a notice of deficiency, the IRS asserted that the value of Moore Farms had to be included in the estate despite the transfer of four-fifths of the farm to the FLP and the subsequent sale of the farm by Moore. The IRS further asserted that the purported loans to Moore's children were gifts. The IRS also disallowed the charitable deduction for the transfers to the Charitable Trust. In Moore v. Comm'r, T.C. Memo. 2020-40, the Tax Court upheld the IRS's determinations. With regard to the claimed charitable deduction, the Tax Court held that the deduction was properly denied because under Reg. Sec. 20.2055-1(b), no deduction is allowed for a charitable contribution subject to a contingency. Whether the Irrevocable Trust would make additional transfers to the Charitable Trust, the court noted, was not ascertainable at Moore's death but only after an IRS audit, followed by a determination that additional property should be included in the estate.

Moore's estate appealed the denial of the charitable deduction to the Ninth Circuit. Under Code Sec. 2055 and Reg. Sec. 20.2055-1(a), a charitable deduction can be taken for the value of property included in the decedent's gross estate and transferred by the decedent during his lifetime or by will or trust upon his death to a charitable entity. The Ninth Circuit said that the issue before it was therefore whether the donations to the Charitable Trust were required by the Moore trust documents. The estate argued that they were because, under the terms of the Irrevocable Trust, the trustee was required to make distributions on Moore's death to minimize the federal estate tax liability. The estate contended in the alternative that the phrase "asset of this trust" in the Irrevocable Trust document was ambiguous and should therefore be construed to encompass the assets of the FLP in order to effectuate the purposes of Moore's estate plan.


The Ninth Circuit affirmed the Tax Court's denial of the charitable deduction after finding that the donations to the Charitable Trust were not required under the Irrevocable Trust documents. The court concluded that the Irrevocable Trust provision requiring the trustee to make distributions to minimize taxes was triggered only by a determination that "any asset of this trust" was also an asset of the gross estate. But the court noted that the proceeds of the farm sale were not assets of the Irrevocable Trust, or for that matter any Moore trust, notwithstanding that the Irrevocable Trust owned 98 percent of the FLP at the time of Moore's death. Rather, the proceeds were the asset of the FLP, and the court found that the FLP partnership agreement expressly provided that "no Partner shall have any interest in any of the assets of the Partnership."

The court rejected the estate's alternative argument that the trust document language was ambiguous. Rather, the court said that the relevant language of both the Irrevocable Trust and FLP documents unambiguously provided that, as a limited partner, the Irremovable Trust had no interest in any of the assets of the Partnership. The court concluded that the trustee of the Irrevocable Trust was therefore not required to make the transfers to the Living Trust and eventually to the Charitable Trust upon Moore's death, and the IRS therefore correctly denied the estate's claimed charitable deductions.

For a discussion of the estate tax charitable deduction, see Parker Tax ¶227,710.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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