Often, executors of estates help manage the charitable donations that the deceased intended to distribute from the estate. Such charitable donations usually result in an income tax deduction for the estate at tax time.

However, as evidenced under a recent U.S. Tax Court decision, in some circumstances the IRS can disallow such a deduction.

The Remote Possibility Threshold

Sometimes legal challenges to the distribution of money in an estate to a designated charity may divert money that the deceased intended for charity. When cases like this occur, there is a rule that disallows a charitable deduction — unless there is a only a remote possibility that the amount intended for a charity won’t be turned over to the charity.

Another way of looking at it is if there is a high possibility the money won’t go to charity, then the charitable deduction is disallowed. But if it’s just a small or remote possibility, then the deduction is permitted.

The Case of the Condo

In the case of the recent U.S. Tax Court decision, the estate in question had become ensnared in a legal battle with the brother of the deceased. The deceased wished the ownership rights of a condo belonging to the estate go to a charity. However, the brother of the deceased still lived in the condo and was prepared to legally fight to stay there.

The U.S. Tax Court concluded that because the executor knew that a legal dispute with the brother of the deceased was more than just a remote possibility when the deduction was claimed on the estate’s income tax return, then the IRS was permitted to disallow the deduction. (Estate of Eileen S. Belmont, 144 TC 84.)

The Case of The Churches

There was a similar case where an estate attempted to claim charitable income tax deductions for money the deceased wanted to go to two churches. Because there were several potential heirs that contested the will and were seeking a portion of the funds set aside for the churches, the matter became complicated. The Tax Court concluded that because the estate couldn’t prove that it was only a remote possibility that the money would not go to the churches, then the charitable deduction must be denied. (Estate of John D. DiMarco, TC Memo 2015-184.)

Uncertain About Estate Charitable Income Tax Deductions?

The rules are complex around state and federal estate taxes. It’s wise to seek professional guidance. PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.