Existence of Potential Dispute in Estate Sufficient to Block Estate from Treating Funds as Permanently Set Aside for Charity

The Tax Court, expanding on its earlier decision in the case of Estate of Belmont v. Commissioner, 144 TC No. 6, found that an estate which did not (unlike Belmont) end up spending a portion of the funds supposedly set aside for charity still failed to meet the requirements of §642(c) to have permanently set aside funds for charity due to a pending legal dispute.

In the case of Estate of DiMarco v. Commissioner, T.C. Memo. 2015-184 the Court found that the estate was aware of a potential contest by both the end of the tax year where it attempted to claim to have set aside the funds and by the date the return was actually filed.  The potential dispute over the estate could reasonably be expected to require an expenditure of estate funds and it more than than remotely possible that the expenditure could be substantial.

Thus, even though the will provided for the residue to go to charity and even though the estate claimed to have set aside the funds, the court found the potential suit was sufficient to cause the estate to fail to meet the requirements found at Reg. §1.642(c)-2(d) that the possibility that the funds set aside for the charity be so remote as to be negligible. 

Thus, even though the funds did not actually end up being diverted to charity, that possibility was sufficient far from remote for the Court to disallow the deduction in the year the charity claimed the deduction.