(Bloomberg Business) — Wealthy people have lots of ways to avoid the estate tax. But a federal judge says one family got a little too creative in dodging its tax bill.
When Julius Schaller died at the age of 91 in 2003, his executors set up the ”Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc.” and sent it $2.6 million of Schaller’s money. (Schaller once owned a grocery business in Philadelphia called J. Schaller & Co.)
The foundation’s stated goal was clear in its name, and the donation provided enough of a deduction to reduce his estate’s tax bill to zero. Despite the awkward, 14-word name and the highly specific purpose, the IRS initially approved the foundation’s application for tax-exempt status.
A year after Schaller’s death, the foundation awarded its first two scholarships—to two descendants of Schaller’s niece and nephew. They got another set of scholarships the next year, as did another Schaller relative. The IRS cried foul after noticing scholarships “were made only to descendants of the nieces and nephews of Julius Schaller.”