IRS Says Charitable Trust Not Charitable Enough
The Schaefer case is about a charitable estate tax deduction for two NIMCRUTs. You start out with the value of the assets in the trusts and then you do some fancy math – life contingencies combined with present value – to divide that between the income interest and the remainder interest. The latter is deductible either for estate tax purposes as in this case or as an income tax deduction. If the remainder interest computes to less than 10% of the overall value, no charitable deduction is allowed.
The higher the payout ratio, the lower the value of the remainder. One of the trusts had a payout rate of 10% and the other was 11%. Both the IRS and the executor agreed that with that payout the charity would be getting less than 10% of the value. The executor argued that in doing the valuation the net income limit should be taken in account. Apparently there was some sense that the trust would not hit that target rate. The Tax Court wanted them to also consider using 5%, which is the minimum allowed payout rate.
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Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.