## Facts

- Frank Parkes, an Oklahoma rancher with substantial assets, executed a revocable living trust with testamentary provisions.
- The trust made specific gifts to certain relatives and an employee and authorized discretionary lifetime support for Parkes’ sister, Nellie Davis.
- The trust directed the remaining trust property to charitable, educational, and public purposes, with suggested emphasis on horse breeding and training.
- After Parkes died (1976), co-trustees initiated state-court administration; Davis and other heirs contested the trust’s validity and sought intestate distribution.
- The parties entered a stipulation and settlement (1976) approved in state court: specified property (about $355,145.54) would be transferred to a newly formed qualified charitable foundation (Frank Parkes Foundation, Inc.), and the remainder would pass to heirs under intestacy.
- The estate filed a federal estate tax return claiming a charitable deduction for the property transferred to the foundation.
- The IRS disallowed the deduction, asserting the transfer was a non-qualifying “split-interest” under I.R.C. § 2055(e)(2); the estate paid and sued for a refund.

## Issues

1. Whether property transferred to a qualified charity under a court-approved settlement of a bona fide contest over a decedent’s trust plan qualifies for an estate tax charitable deduction under I.R.C. § 2055(a).
2. Whether the transfer must be treated as a disallowed split-interest transfer under I.R.C. § 2055(e)(2) because the original plan involved non-charitable interests.

## Decision

- The Tenth Circuit reversed the district court and remanded.
- The court held that the property transferred outright to the charitable foundation pursuant to the settlement qualified for a charitable deduction under I.R.C. § 2055(a)(2).
- The court rejected the IRS’s characterization of the settlement transfer as a disqualifying split-interest under § 2055(e)(2) on these facts.
- The case was remanded for determination of valuation and the proper amount of the allowable deduction.

## Legal Principles

- A court-approved settlement of a bona fide will/trust contest can establish that a charitable transfer is treated as passing from the decedent for purposes of the estate tax charitable deduction under I.R.C. § 2055(a).
- I.R.C. § 2055(e)(2) generally limits deductions for split-interest transfers unless they take specified qualifying forms, but the limitation does not apply where the charity receives a present, outright, indefeasible interest in identified property under the settlement.
- Federal tax consequences depend on state-law property rights as fixed by the judicially approved settlement, including the definitive allocation of property to charity.

## Conclusion

The court held that an estate may claim an I.R.C. § 2055 charitable deduction for property conveyed outright to a qualified foundation under a judicially approved settlement resolving a bona fide contest, and that the deduction was not barred as a split-interest transfer; valuation issues were left for remand.


Flanagan v. United States, 810 F.2d 930 (10th Cir. 1987)