Estate of Petter v. CIR

Summarized by:

  • Court: 9th Circuit Court of Appeals Archives
  • Area(s) of Law: Tax Law
  • Date Filed: 08-04-2011
  • Case #: 10-71854
  • Judge(s)/Court Below: Circuit Judge Bybee for the Court; Circuit Judges F. Fernandez and O’Scannlain
  • Full Text Opinion

An audit of a person’s taxes is not a condition precedent to make a transfer effective for the purpose of a charitable gift.

Anne Petter inherited United Parcel Service (“UPS”) stock and created two trusts and a limited liability company (“LLC”) to transfer the stock money to. Petter did not want to pay a gift tax on these transfers so at the same time she transferred some LLC units into two different tax-exempt public charities. She used a formula to determine how many units the charities would receive. Petter’s tax form showed she did not owe any gift tax, however during an audit, the Internal Revenue Service (“IRS”) determined the LLC units were undervalued; specifically they were enough to make the gift non-tax exempt, and stated that Petter owed $2.1 million dollars in taxes. The IRS and Petter agreed that the LLC units were undervalued and that Petter would need to give more LLC units to the charities. Petter petitioned the United States Tax Court, and the tax court determined that Petter was entitled to a charitable deduction based on the value of the LLC units. The IRS appealed the decision to the Ninth Circuit. The Treasury Regulations allows tax-exempt charitable gifts unless the transfer of the gift is dependent upon a condition precedent to make the transfer effective. The IRS argued that the charitable gift to the public charities would not have happened had they not audited Petter and forced her to give them more LLC units. The Ninth Circuit disagreed, stating that the additional transfer of units to the charities were not subject to a condition precedent under the Treasury Regulations because the charities would have received the LLC units no matter what the value at the time, and with or without an IRS audit. The transfer of units was not dependent on the IRS audit, it would have happened no matter what, thus the transfer was not subject to the Treasury Regulations, and thus the transfer was eligible for the charitable donation. AFFIRMED.

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