Appreciated stock donation not treated as a taxable redemption
The Tax Court granted summary judgment to a married couple, ruling that the IRS improperly recharacterized their charitable donations of stock as taxable redemptions. The court held the couple made an absolute gift in each tax year at issue, and although the charity soon after redeemed the stock, the court respected the form of the transaction.
Facts: Jon and Helen Dickinson claimed a charitable contribution deduction on their joint federal income tax returns for 2013 through 2015, due to a contribution each year by Jon Dickinson of appreciated stock in his employer, Geosyntec Consultants Inc. (GCI), a privately held company, to Fidelity Investments Charitable Gift Fund, a Sec. 501(c)(3) tax-exempt organization. Dickinson was GCI’s CFO.
GCI’s board of directors authorized shareholders to donate GCI shares to Fidelity in written consent actions in 2013 and 2014, stating that Fidelity’s donor-advised fund program required Fidelity “to immediately liquidate the donated stock” and that the charity “promptly tenders the donated stock to the issuer for cash.” The board also authorized donations in 2015.
GCI confirmed in letters to Fidelity the recording of Fidelity’s new ownership of the shares. Dickinson signed a letter of understanding to Fidelity regarding each stock donation, stating that the stock was “exclusively owned and controlled by Fidelity.” Fidelity sent confirmation letters stating that it had “exclusive legal control over the contributed asset.” Fidelity redeemed the GCI shares for cash shortly after each donation.
The IRS issued a notice of deficiency, asserting that the Dickinsons were liable for tax on the redemption of the donated GCI shares and a penalty under Sec. 6662(a) for each year. The Service contended the donations should be treated in substance as taxable redemptions of the shares for cash by Dickinson, followed by donations of the cash to Fidelity.
The Dickinsons petitioned the Tax Court for a redetermination of the deficiencies and penalties and moved for summary judgment.
Issue: Generally, pursuant to Sec. 170 and Regs. Sec. 1.170A-1(c)(1), a taxpayer may deduct the fair market value of appreciated property donated to a qualified charity without recognizing the gain in the property.
In Humacid Co., 42 T.C. 894, 913 (1964), the Tax Court stated: “The law with respect to gifts of appreciated property is well established. A gift of appreciated property does not result in income to the donor so long as [1] he gives the property away absolutely and parts with title thereto [2] before the property gives rise to income by way of a sale.”
The issue before the court was whether the form of Dickinson’s donations of GCI stock should be respected as meeting the requirements in Humacid Co., or recharacterized as taxable redemptions resulting in income to the Dickinsons.
Holding: The Tax Court held that the form of the stock donations should be respected, as both prongs of Humacid Co. were satisfied, and granted the taxpayers summary judgment.
Regarding the first prong, the court held that Dickinson transferred all his rights in the shares to Fidelity, based on GCI’s letters to Fidelity confirming the transfer of ownership in the shares, Fidelity’s letters to the Dickinsons stating it had “exclusive legal control” over the donated stock, and the letters of understanding. Thus, Dickinson made an absolute gift.
The Tax Court analyzed the second prong under the assignment-of-income doctrine. This provides that a taxpayer cannot avoid taxation by assigning a right to income to another. The court stated: “Where a donee redeems shares shortly after a donation, the assignment of income doctrine applies only if the redemption was practically certain to occur at the time of the gift, and would have occurred whether the shareholder made the gift or not.”
The Tax Court noted that in Palmer, 62 T.C. 684 (1974), it held there was no assignment of income where there was not yet a vote for a redemption at the time of a stock donation, even though the vote was anticipated. Similarly, the court reasoned that “the redemption in this case was not a fait accompli at the time of the gift” and held Dickinson did not avoid income due to the redemption by donating the GCI shares. Thus, the court respected the form of the transaction.
The Tax Court did not apply Rev. Rul. 78-197, in which the IRS ruled that it “will treat the proceeds as income to the donor under facts similar to those in the Palmer decision only if the donee is legally bound, or can be compelled by the [issuing] corporation, to surrender the shares for redemption.” The court noted that it has not adopted the revenue ruling, and furthermore, the IRS did not allege that Dickinson had a fixed right to redemption income at the time of the donation.
— By Mark Aquilio, CPA, J.D., LL.M., professor of accounting and taxation, St. John’s University, Queens, N.Y.
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