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Anticipatory assignment of income, charitable contribution deduction, and qualified appraisals.
Estate of Hoenshied v. Comm’r, T.C. Memo. 2023-34 | March 15, 2023 | Nega, J. | Dkt. No. 18606-19
Summary: In this 49-page opinion the Tax Court addresses a deficiency arising from the charitable contribution of appreciated shares of stock in a closely held corporation to a charitable organization that administers donor-advised funds for tax-exempt purposes under section 501(c)(3). The contribution in issue was made near contemporaneously with the selling of those shares to a third party. The timeline (truncated heavily for this blog) is as follows:
On June 11, 2015, the shareholders of the corporation in issue unanimously ratified the sale of all outstanding stock of the corporation. Immediately following the shareholder meeting, the corporation’s board of directors unanimously approved Petitioner’s request to be able to transfer a portion of his shares to Fidelity Charitable Gift Fund, a tax-exempt charitable organization under section 501(c)(3). Thereafter, the corporation and the purchaser of shares continued drafting and revising the Contribution and Stock Purchase Agreement.
On July 13, 2015, Fidelity Charitable first received a stock certificate from Petitioner.
On July 14, 2015, the Contribution and Stock Purchase Agreement was revised to specify that Petitioner contributed shares to Fidelity Charitable on July 10, 2015, and on July 15, 2015, the Contribution and Stock Purchase Agreement was signed and the transaction was funded.
Fidelity Charitable, having provided an Irrevocable Stock Power as part of the transaction, received $2,941,966 in cash proceeds from the sale, which was deposited in Petitioner’s donor-advised fund giving account.
On November 18, 2015, Fidelity Charitable sent Petitioner a contribution confirmation letter acknowledging a charitable contribution of the corporate shares and indicating that Fidelity Charitable received the shares on June 11, 2015.
In its 2015 tax return, Petitioner did not report any capital gains on the shares contributed to Fidelity Charitable but claimed a noncash charitable contribution deduction of $3,282,511. In support of the claimed deduction, a Form 8283 was attached to the return.
Petitioner’s 2015 tax return was selected for examination. The IRS issued to Petitioners a notice of deficiency, determining a deficiency of $647,489, resulting from the disallowance of the claimed charitable contribution deduction, and a penalty of $129,498 under section 6662(a).
Key Issues:
Whether and when Petitioners made a valid contribution of the shares of stock? Whether Petitioners had unreported capital gain income due to their right to proceeds from the sale of those shares becoming fixed before the gift? Whether Petitioners are entitled to a charitable contribution deduction? Whether Petitioners are liable for an accuracy-related penalty under section 6662(a) with respect to an underpayment of tax?
Primary Holdings:
(1) Petitioners failed to establish that any of the elements of a valid gift was present on June 11, 2015. No evidence was presented to credibly identify a specific action taken on June 11 that placed the shares within Fidelity Charitable’s dominion and control. Instead, the valid gift of shares was made by effecting delivery of a PDF of the certificate to Fidelity Charitable on July 13.
(2) Yes. None of the unresolved contingencies remaining on July 13, 2015 were substantial enough to have posed even a small risk of the overall transaction’s failing to close. Thus, Petitioners, through the doctrine of anticipatory assignment of income, had capital gains on the sale of the 1,380 appreciated shares of stock, even though Fidelity Charitable received the proceeds from that sale.
(3) No, Petitioners failed to show that the charitable contribution met the qualified appraisal requirements of section 170. The appraiser was not shown to be qualified, per regulations, at trial or in the appraisal itself, and the appraisal did not substantially comply with the regulatory requirements. “The failure to include a description of such experience in the appraisal was a substantive defect. . . . Petitioners’ failure to satisfy multiple substantive requirements of the regulations, paired with the appraisal’s other more minor defects, precludes them from establishing substantial compliance.” In addition, Petitioners failed to establish reasonable cause for failing to comply with the appraisal requirements “because petitioner knew or should have known that the date of contribution (and thus the date of valuation) was incorrect.” Thus, the IRS’s determination to disallow the charitable contribution deduction is sustained.
(4) No. While Petitioners did not have reasonable cause for their failure to comply with the qualified appraisal requirement, their liability for an accuracy-related penalty was a separate analysis, and the IRS did not carry the burden of proof. Petitioners did not follow their professional’s advice to have the paperwork for the contribution ready to go “well before the signing of the definitive purchase agreement.” But, Petitioners adhered to the literal thrust of the advice given: that “execution of the definitive purchase agreement” was the firm deadline to contribute the shares and avoid capital gains (even if that proved to be incorrect advice under the circumstances).
Key Points of Law:
Gross Income. Gross income means “all income from whatever source derived,” including “[g]ains derived from dealings in property.” 26 U.S.C. § 61(a)(3). In general, a taxpayer must realize and recognize gains on a sale or other disposition of appreciated property. See id. at § 1001(a)–(c). However, a taxpayer typically does not recognize gain when disposing of appreciated property via gift or charitable contribution. See Taft v. Bowers, 278 U.S. 470, 482 (1929); see also 26 U.S.C. § 1015(a) (providing for carryover basis of gifts). A taxpayer may also generally deduct the fair market value of property contributed to a qualified charitable organization. See 26 U.S.C. § 170(a)(1); Treas. Reg. 16 § 1.170A-1(c)(1). Contributions of appreciated property are thus tax advantaged compared to cash contributions; when a contribution of property is structured properly, a taxpayer can both avoid paying tax on the unrealized appreciation in the property and deduct the property’s fair market value. See, e.g., Dickinson v. Commissioner, T.C. Memo. 2020-128, at *5.
Donor-Advised Fund. The use of a donor-advised fund further optimizes a contribution by allowing a donor “to get an immediate tax deduction but defer the actual donation of the funds to individual charities until later.” Fairbairn v. Fid. Invs. Charitable Gift Fund, No. 18-cv-04881, 2021 WL 754534, at *2 (N.D. Cal. Feb. 26, 2021).
Two-Part Test to Determine Charitable Contribution of Appreciated Property Followed by Sale by Donee. The donor must (1) give the appreciated property away absolutely and divest of title (2) “before the property gives rise to income by way of a sale.” Humacid Co. v. Commissioner, 42 T.C. 894, 913 (1964). Valid Gift of Shares of Stock. “Ordinarily, a contribution is made at the time delivery is effected.” Treas. Reg. § 1.170A-1(b). “If a taxpayer unconditionally delivers or mails a properly endorsed stock certificate to a charitable donee or the donee’s agent, the gift is completed on the date of delivery.” Id. However, the regulations do not define what constitutes delivery, and the Tax Court evaluates applicable state law for the threshold determination of whether donors have divested themselves of their property rights via gift. See, e.g., United States v. Nat’l Bank of Com., 472 U.S. 713, 722 (1985). In determining the validity of a gift, Michigan law, for example (and as applied in Estate of Hoensheid), requires a showing of (1) donor intent to make a gift; (2) actual or constructive delivery of the subject matter of the gift; and (3) donee acceptance. See Davidson v. Bugbee, 575 N.W.2d 574, 576 (Mich. Ct. App. 1997).
Present Intent. The determination of a party’s subjective intent is necessarily a highly fact-bound issue. When deciding such an issue, the Tax Court must determine “whether a witness’s testimony is credible based on objective facts, the reasonableness of the testimony, the consistency of statements made by the witness, and the demeanor of the witness.” Ebert v. Commissioner, T.C. Memo. 2015-5, at *5–6. If contradicted by the objective facts in the record, the Tax Court will not “accept the self-serving testimony of [the taxpayer] . . . as gospel.” Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
Delivery. Under Michigan law, the delivery requirement generally contemplates an “open and visible change of possession” of the donated property. Shepard v. Shepard, 129 N.W. 201, 208 (Mich. 1910). Manually providing tangible property to the donee is the classic form of delivery. Manually providing to the donee a stock certificate that represents intangible shares of stock is traditionally sufficient delivery. The determination of what constitutes delivery is context-specific and depends upon the “nature of the subject-matter of the gift” and the “situation and circumstances of the parties.” Shepard, 129 N.W. at 208. Constructive delivery may be effected where property is delivered into the possession of another on behalf of the donee. See, e.g., In re Van Wormer’s Estate, 238 N.W. 210, 212 (Mich. 1931). Whether constructive or actual, delivery “must be unconditional and must place the property within the dominion and control of the donee” and “beyond the power of recall by the donor.” In re Casey Estate, 856 N.W.2d 556, 563 (Mich. Ct. App. 2014). If constructive or actual delivery of the gift property occurs, its later retention by the donor is not sufficient to defeat the gift. See Estate of Morris v. Morris, No. 336304, 2018 WL 2024582, at *5 (Mich. Ct. App. May 1, 2018).
Delivery of Shares. Retention of stock certificates by donor’s attorney may preclude a valid gift. Also, a determination of no valid gift may occur where the taxpayer instructs a custodian of corporate books to prepare stock certificates but remained undecided about ultimate gift. In some jurisdictions, transfer of shares on the books of the corporation can, in certain circumstances, constitute delivery of an inter vivos gift of shares. See, e.g., Wilmington Tr. Co. v. Gen. Motors Corp., 51 A.2d 584, 594 (Del. Ch. 1947); Chi. Title & Tr. Co. v. Ward, 163 N.E. 319, 322 (Ill. 1928); Brewster v. Brewster, 114 A.2d 53, 57 (Md. 1955). The U.S. Court of Appeals for the Sixth Circuit has stated that transfer on the books of a corporation constitutes delivery of shares of stock, apparently as a matter of federal common law. See Lawton v. Commissioner, 164 F.2d 380, 384 (6th Cir. 1947), rev’g 6 T.C. 1093 (1946); Bardach v. Commissioner, 90 F.2d 323, 326 (6th Cir. 1937), rev’g 32 B.T.A. 517 (1935); Marshall v. Commissioner, 57 F.2d 633, 634 (6th Cir. 1932), aff’g in part, rev’g in part 19 B.T.A. 1260 (1930). The transfers on the books of the corporation were bolstered by other objective actions that evidenced a change in possession and thus a gift. See Jolly’s Motor Livery Co. v. Commissioner, T.C. Memo. 1957-231, 16 T.C.M. (CCH) 1048, 1073.
Acceptance. Donee acceptance of a gift is generally “presumed if the gift is beneficial to the donee.” Davidson, 575 N.W.2d at 576.
Anticipatory Assignment of Income. The anticipatory assignment of income doctrine is a longstanding “first principle of income taxation.” Commissioner v. Banks, 543 U.S. 426, 434 (2005). The doctrine recognizes that income is taxed “to those who earn or otherwise create the right to receive it,” Helvering v. Horst, 311 U.S. 112, 119 (1940), and that tax cannot be avoided “by anticipatory arrangements and contracts however skillfully devised,” Lucas v. Earl, 281 U.S. 111, 115 (1930). A person with a fixed right to receive income from property thus cannot avoid taxation by arranging for another to gratuitously take title before the income is received. See Helvering, 311 U.S. at 115–17; Ferguson, 108 T.C. at 259. This principle is applicable, for instance, where a taxpayer gratuitously assigns wage income that the taxpayer has earned but not yet received, or gratuitously transfers a debt instrument carrying accrued but unpaid interest. A donor will be deemed to have effectively realized income and then assigned that income to another when the donor has an already fixed or vested right to the unpaid income. See Cold Metal Process Co. v. Commissioner, 247 F.2d 864, 872–73 (6th Cir. 1957), rev’g 25 T.C. 1333 (1956). The same principle is often applicable where a taxpayer gratuitously transfers shares of stock that are subject to a pending, prenegotiated transaction and thus carry a fixed right to proceeds of the transaction. See Rollins v. United States, 302 F. Supp. 812, 817–18 (W.D. Tex. 1969).
Determining Anticipatory Assignment of Income. In determining whether an anticipatory assignment of income has occurred with respect to a gift of shares of stock, the Tax Court looks to the realities and substance of the underlying transaction, rather than to formalities or hypothetical possibilities. See Jones v. United States, 531 F.2d 1343, 1345 (6th Cir. 1976) (en banc); Allen v. Commissioner, 66 T.C. 340, 346 (1976). In general, a donor’s right to income from shares of stock is fixed if a transaction involving those shares has become “practically certain to occur” by the time of the gift, “despite the remote and hypothetical possibility of abandonment.” Jones, 531 F.2d at 1346. The mere anticipation or expectation of income at the time of the gift does not establish that a donor’s right to income is fixed. The Tax Court looks to several other factors that bear upon whether the sale of shares was virtually certain to occur at the time of a purported gift as part of the same transaction. Relevant factors may include (1) any legal obligation to sell by the donee, (2) the actions already taken by the parties to effect the transaction, (3) the remaining unresolved transactional contingencies, and (4) the status of the corporate formalities required to finalize the transaction.
Corporate Formalities. Also relevant is the status of the corporate formalities necessary for effecting the transaction. See Estate of Applestein, 80 T.C. at 345–46 (finding that taxpayer’s right to sale proceeds from shares had “virtually ripened” upon shareholders’ approval of proposed merger agreement). Under Michigan law, a proposed plan to exchange shares must generally be approved by a majority of the corporation’s shareholders. Formal shareholder approval of a transaction has often proven to be sufficient to demonstrate that a right to income from shares was fixed before a subsequent transfer. However, such approval is not necessary for a right to income to be fixed, when other actions taken establish that a transaction was virtually certain to occur. See Ferguson, 104 T.C. at 262–63. Charitable Contribution Deduction. Section 170(a)(1) allows as a deduction any charitable contribution (as defined) payment of which is made within the taxable year. “A charitable contribution is a gift of property to a charitable organization made with charitable intent and without the receipt or expectation of receipt of adequate consideration.” Palmolive Bldg. Invs., LLC v. Commissioner, 149 T.C. 380, 389 (2017). Section 170(f)(8)(A) provides that “[n]o deduction shall be allowed . . . for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization that meets the requirements of subparagraph (B).” For contributions of property in excess of $500,000, the taxpayer must also attach to the return a “qualified appraisal” prepared in accordance with generally accepted appraisal standards. 26 U.S.C. § 170(f)(11)(D) and (E). Contemporaneous Written Acknowledgement (“CWA”). A CWA must include, among other things, the amount of cash and a description of any property contributed. 26 U.S.C. § 170(f)(8)(B). A CWA is contemporaneous if obtained by the taxpayer before the earlier of either (1) the date the relevant tax return was filed or (2) the due date of the relevant tax return. Id. at § 170(f)(8)(C). For donor-advised funds, the CWA must include a statement that the donee “has exclusive legal control over the assets contributed.” 26 U.S.C. § 170(f)(18)(B). These requirements are construed strictly and do not apply the doctrine of substantial compliance to excuse defects in a CWA.
Qualified Appraisal for Certain Charitable Contributions. Section 170(f)(11)(A)(i) provides that “no deduction shall be allowed . . . for any contribution of property for which a deduction of more than $500 is claimed unless such person meets the requirements of subparagraphs (B), (C), and (D), as the case may be.” Subparagraph (D) requires that, for contributions for which a deduction in excess of $500,000 is claimed, the taxpayer attach a qualified appraisal to the return. Section 170(f)(11)(E)(i) provides that a qualified appraisal means, with respect to any property, an appraisal of such property which—(I) is treated for purposes of this paragraph as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and (II) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed under subclause (I). The regulations provide that a qualified appraisal is an appraisal document that, inter alia, (1) “[r]elates to an appraisal that is made” no earlier than 60 days before the date of contribution and (2) is “prepared, signed, and dated by a qualified appraiser.” Treas. Reg. § 1.170A-13(c)(3)(i).
Qualified Appraisal Must Include: Treasury Regulation § 1.170A-13(c)(3)(ii) requires that a qualified appraisal itself include, inter alia:
(1) “[a] description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was (or will be) contributed;”
(2) “[t]he date (or expected date) of contribution to the donee;”
(3) “[t]he name, address, and . . . identifying number of the qualified appraiser;”
(4) “[t]he qualifications of the qualified appraiser;”
(5) “a statement that the appraisal was prepared for income tax purposes;”
(6) “[t]he date (or dates) on which the property was appraised;”
(7) “[t]he appraised fair market value . . . of the property on the date (or expected date) of contribution;” and
(8) the method of and specific basis for the valuation.
Qualified Appraiser. Section 170(f)(11)(E)(ii) provides that a “qualified appraiser” is an individual who (I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations, (II) regularly performs appraisals for which the individual receives compensation, and (III) meets such other requirements as may be prescribed . . . in regulations or other guidance. An appraiser must also demonstrate “verifiable education and experience in valuing the type of property subject to the appraisal.” The regulations add that the appraiser must include in the appraisal summary a declaration that he or she (1) “either holds himself or herself out to the public as an appraiser or performs appraisals on a regular basis;” (2) is “qualified to make appraisals of the type of property being valued;” (3) is not an excluded person specified in paragraph (c)(5)(iv) of the regulation; and (4) understands the consequences of a “false or fraudulent overstatement” of the property’s value. Treas. Reg. § 1.170A-13(c)(5)(i). The regulations prohibit a fee arrangement for a qualified appraisal “based, in effect, on a percentage . . . of the appraised value of the property.” Id. at subpara. (6)(i).
Substantial Compliance with Qualified Appraisal Requirements . The qualified appraisal requirements are directory, rather than mandatory, as the requirements “do not relate to the substance or essence of whether or not a charitable contribution was actually made.” See Bond v. Commissioner, 100 T.C. 32, 41 (1993). Thus, the doctrine of substantial compliance may excuse a failure to strictly comply with the qualified appraisal requirements. If the appraisal discloses sufficient information for the IRS to evaluate the reliability and accuracy of a valuation, the Tax Court may deem the requirements satisfied. Bond, 100 T.C. at 41–42. Substantial compliance allows for minor or technical defects but does not excuse taxpayers from the requirement to disclose information that goes to the “essential requirements of the governing statute.” Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34, at *12. The Tax Court generally declines to apply substantial compliance where a taxpayer’s appraisal either (1) fails to meet substantive requirements in the regulations or (2) omits entire categories of required information.
Reasonable Cause to Avoid Denial of Charitable Contribution Deduction. Taxpayers who fail to comply with the qualified appraisal requirements may still be entitled to charitable contribution deductions if they show that their noncompliance is “due to reasonable cause and not to willful neglect.” 26 U.S.C. § 170(f)(11)(A)(ii)(II). This defense is construed similarly to the defense applicable to numerous other Code provisions that prescribe penalties and additions to tax. See id. at § 6664(c)(1). To show reasonable cause due to reliance on a professional adviser, the Tax Court generally requires that a taxpayer show (1) that their adviser was a competent professional with sufficient expertise to justify reliance; (2) that the taxpayer provided the adviser necessary and accurate information; and (3) that the taxpayer actually relied in good faith on the adviser’s judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). “Unconditional reliance on a tax return preparer or C.P.A. does not by itself constitute reasonable reliance in good faith; taxpayers must also exercise ‘[d]iligence and prudence’.” See Stough v. Commissioner, 144 T.C. 306, 323 (2015) (quoting Estate of Stiel v. Commissioner, T.C. Memo. 2009-278, 2009 WL 4877742, at *2)).
Section 6662(a) Penalty. Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on any underpayment of tax required to be show on a return that is attributable to negligence, disregard of rules or regulations, or a substantial understatement of income tax. Negligence includes “any failure to make a reasonable attempt to comply” with the Code, 26 U.S.C. § 6662(c), or a failure “to keep adequate books and records or to substantiate items properly,” Treas. Reg. § 1.6662-3(b)(1). An understatement of income tax is “substantial” if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000. 26 U.S.C. § 6662(d)(1)(A). Generally, the IRS bears the initial burden of production of establishing via sufficient evidence that a taxpayer is liable for penalties and additions to tax; once this burden is met, the taxpayer must carry the burden of proof with regard to defenses such as reasonable cause. Id. at § 7491(c); see Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). The IRS bears the burden of proof with respect to a new penalty or increase in the amount of a penalty asserted in his answer. See Rader v. Commissioner, 143 T.C. 376, 389 (2014); Rule 142(a), aff’d in part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015); see also RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 38–39 (2017), aff’d sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019). As part of the burden of production, the IRS must satisfy section 6751(b) by producing evidence of written approval of the penalty by an immediate supervisor, made before formal communication of the penalty to the taxpayer.
Reasonable Cause Defense to Section 6662(a) Penalty. A section 6662 penalty will not be imposed for any portion of an underpayment if the taxpayers show that (1) they had reasonable cause and (2) acted in good faith with respect to that underpayment. 26 U.S.C. § 6664(c)(1). A taxpayer’s mere reliance “on an information return or on the advice of a professional tax adviser or an appraiser does not necessarily demonstrate reasonable cause and good faith.” Treas. Reg. § 1.6664-4(b)(1). That reliance must be reasonable, and the taxpayer must act in good faith. In evaluating whether reliance is reasonable, a taxpayer’s “education, sophistication and business experience will be relevant.” Id. para. (c)(1).
Insights: Going forward, this opinion of Estate of Hoenshied v. Commissioner will likely be a go-to source for any practitioner involved in a taxpayer’s proposed transfer of corporate shares (or other property) to a donor-advised fund or other charitable organization as part of a buy-sell transaction that is anywhere close in time to the proposed donation.
Have a question? Contact Jason Freeman , Managing Member Legal Team.
Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.
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Section 1202 Planning: When Might the Assignment of Income Doctrine Apply to a Gift of QSBS?
Jan 26, 2022
Categories:
Blogs Qualified Small Business Stock (QSBS) Tax Law Defined™ Blog
Scott W. Dolson
Section 1202 allows taxpayers to exclude gain on the sale of QSBS if all eligibility requirements are met. Section 1202 also places a cap on the amount of gain that a stockholder is entitled to exclude with respect to a single issuer’s stock. [i] A taxpayer has at least a $10 million per-issuer gain exclusion, but some taxpayer’s expected gain exceeds that cap. In our article Maximizing the Section 1202 Gain Exclusion Amount , we discussed planning techniques for increasing, and in some cases multiplying, the $10 million gain exclusion cap through gifting QSBS to other taxpayers. [ii] Increased awareness of this planning technique has contributed to a flurry of stockholders seeking last-minute tax planning help. This article looks at whether you can “multiply” Section 1202’s gain exclusion by gifting qualified small business stock (QSBS) when a sale transaction is imminent.
This is one in a series of articles and blogs addressing planning issues relating to QSBS and the workings of Sections 1202 and 1045. During the past several years, there has been an increase in the use of C corporations as the start-up entity of choice. Much of this interest can be attributed to the reduction in the corporate rate from 35% to 21%, but savvy founders and investors have also focused on qualifying for Section 1202’s generous gain exclusion. Recently proposed tax legislation sought to curb Section 1202’s benefits, but that legislation, along with the balance of President Biden’s Build Back Better bill, is currently stalled in Congress.
The Benefits of Gifting QSBS
Section 1202(h)(1) provides that if a stockholder gifts QSBS, the recipient of the gift is treated as “(A) having acquired such stock in the same manner as the transferor, and (B) having held such stock during any continuous period immediately preceding the transfer during which it was held (or treated as held under this subsection by the transferor.” This statute literally allows a holder of $100 million of QSBS to gift $10 million worth to each of nine friends, with the result that the holder and his nine friends each having the right to claim a separate $10 million gain exclusion. Under Section 1202, a taxpayer with $20 million in expected gain upon the sale of founder QSBS can increase the overall tax savings from approximately $2.4 million (based on no Federal income tax on $10 million of QSBS gain) to $4.8 million (based on no Federal income tax on $20 million of QSBS gain) by gifting $10 million worth of QSBS to friends and family. [iii]
A reasonable question to ask is whether it is ever too late to make a gift of QSBS for wealth transfer or Section 1202 gain exclusion cap planning? What about when a sale process is looming but hasn’t yet commenced? Is it too late to make a gift when a nonbinding letter of intent to sell the company has been signed? What about the situation where a binding agreement has been signed but there are various closing conditions remaining to be satisfied, perhaps including shareholder approval? Finally, is it too late to make a gift when a definitive agreement has been signed and all material conditions to closing have been satisfied?
Although neither Section 1202 nor any other tax authorities interpreting Section 1202 address whether there are any exceptions to Section 1202’s favorable treatment of gifts based on the timing of the gift, the IRS is not without potential weapons in its arsenal.
Application of the Assignment of Income Doctrine
If QSBS is gifted in close proximity to a sale, the IRS might claim that the donor stockholder was making an anticipatory assignment of income. [iv]
As first enunciated by the Supreme Court in 1930, the anticipatory assignment of income doctrine holds that income is taxable to the person who earns it, and that such taxes cannot be avoided through “arrangement[s] by which the fruits are attributed to a different tree from that on which they grew.” [v] Many assignment of income cases involve stock gifted to charities immediately before a prearranged stock sale, coupled with the donor claiming a charitable deduction for full fair market value of the gifted stock.
In Revenue Ruling 78-197, the IRS concluded in the context of a charitable contribution coupled with a prearranged redemption that the assignment of income doctrine would apply only if the donee is legally bound, or can be compelled by the corporation, to surrender shares for redemption. [vi] In the aftermath of this ruling, the Tax Court has refused to adopt a bright line test but has generally followed the ruling’s reasoning. For example, in Estate of Applestein v. Commissioner , the taxpayer gifted to custodial accounts for his children stock in a corporation that had entered into a merger agreement with another corporation. Prior to the gift, the merger agreement was approved by the stockholders of both corporations. Although the gift occurred before the closing of the merger transaction, the Tax Court held that the “right to the merger proceeds had virtually ripened prior to the transfer and that the transfer of the stock constituted a transfer of the merger proceeds rather than an interest in a viable corporation.” [vii] In contrast, in Rauenhorst v. Commissioner , the Tax Court concluded that a nonbinding letter of intent would not support the IRS’ assignment of income argument because the stockholder at the time of making the gift was not legally bound nor compelled to sell his equity. [viii]
In Ferguson v. Commissioner , the Tax Court focused on whether the percentage of shares tendered pursuant to a tender offer was the functional equivalent of stockholder approval of a merger transaction, which the court viewed as converting an interest in a viable corporation to the right to receive cash before the gifting of stock to charities. [ix] The Tax Court concluded that there was an anticipatory assignment of income in spite of the fact that there remained certain contingencies before the sale would be finalized. The Tax Court rejected the taxpayer’s argument that the application of the assignment of income doctrine should be conditioned on the occurrence of a formal stockholder vote, noting that the reality and substance of the particular events under consideration should determine tax consequences.
Guidelines for Last-Minute Gifts
Based on the guidelines established by Revenue Ruling 78-197 and the cases discussed above, the IRS should be unsuccessful if it asserts an assignment of income argument in a situation where the gift of QSBS is made prior to the signing of a definitive sale agreement, even if the company has entered into a nonbinding letter of intent. The IRS’ position should further weakened with the passage of time between the making of a gift and the entering into of a definitive sale agreement. In contrast, the IRS should have a stronger argument if the gift is made after the company enters into a binding sale agreement. And the IRS’ position should be stronger still if the gift of QSBS is made after satisfaction of most or all material closing conditions, and in particular after stockholder approval. Stockholders should be mindful of Tax Court’s comment that the reality and substance of events determines tax consequences, and that it will often be a nuanced set of facts that ultimately determines whether the IRS would be successful arguing for application of the assignment of income doctrine.
Transfers of QSBS Incident to Divorce
The general guidelines discussed above may not apply to transfers of QSBS between former spouses “incident to divorce” that are governed by Section 1041. Section 1041(b)(1) confirms that a transfer incident to divorce will be treated as a gift for Section 1202 purposes. Private Letter Ruling 9046004 addressed the situation where stock was transferred incident to a divorce and the corporation immediately redeemed the stock. In that ruling, the IRS commented that “under section 1041, Congress gave taxpayers a mechanism for determining which of the two spouses will pay the tax upon the ultimate disposition of the asset. The spouses are thus free to negotiate between themselves whether the ‘owner’ spouse will first sell the asset, recognize the gain or loss, and then transfer to the transferee spouse the proceeds from the sale, or whether the owner spouse will first transfer the asset to the transferee spouse who will then recognize gain or loss upon its subsequent sale.” Thus, while there are some tax cases where the assignment of income doctrine has been successfully asserted by the IRS in connection with transfers between spouses incident to divorce, Section 1041 and tax authorities interpreting its application do provide divorcing taxpayers an additional argument against application of the doctrine, perhaps even where the end result might be a multiplication of Section 1202’s gain exclusion.
More Resources
In spite of the potential for extraordinary tax savings, many experienced tax advisors are not familiar with QSBS planning. Venture capitalists, founders and investors who want to learn more about QSBS planning opportunities are directed to several articles on the Frost Brown Todd website:
- Planning for the Potential Reduction in Section 1202’s Gain Exclusion
- Section 1202 Qualification Checklist and Planning Pointers
- A Roadmap for Obtaining (and not Losing) the Benefits of Section 1202 Stock
- Maximizing the Section 1202 Gain Exclusion Amount
- Advanced Section 1045 Planning
- Recapitalizations Involving Qualified Small Business Stock
- Section 1202 and S Corporations
- The 21% Corporate Rate Breathes New Life into IRC § 1202
- View all QSBS Resources
Contact Scott Dolson or Melanie McCoy (QSBS estate and trust planning) if you want to discuss any QSBS issues by telephone or video conference.
[i] References to “Section” are to sections of the Internal Revenue Code.
[ii] The planning technique of gifting QSBS recently came under heavy criticism in an article written by two investigative reporters. See Jesse Drucker and Maureen Farrell, The Peanut Butter Secret: A Lavish Tax Dodge for the Ultrawealthy. New York Times , December 28, 2021.
[iii] But in our opinion, in order to avoid a definite grey area in Section 1202 law, the donee should not be the stockholder’s spouse. The universe of donees includes nongrantor trusts, including Delaware and Nevada asset protection trusts.
[iv] This article assumes that the holder of the stock doesn’t have sufficient tax basis in the QSBS to take advantage of the 10X gain exclusion cap – for example, the stock might be founder shares with a basis of .0001 per share.
[v] Lucas v. Earl , 281 U.S. 111 (1930). The US Supreme Court later summarized the assignment of income doctrine as follows: “A person cannot escape taxation by anticipatory assignments, however skillfully devised, where the right to receive income has vested.” Harrison v. Schaffner , 312 U.S. 579, 582 (1941).
[vi] Revenue Ruling 78-197, 1978-1 CB 83.
[vii] Estate of Applestein v. Commissioner , 80 T.C. 331, 346 (1983).
[viii] Gerald A. Rauenhorst v. Commissioner , 119 T.C. 157 (2002).
[ix] Ferguson v. Commissioner , 108 T.C. 244 (1997).
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Tax Alert | Tax Court Guidance on Charitable Contributions and Assignment of Income
February 26, 2024
Tax Court Guidance on Charitable Contributions and Assignment of Income
Today is the first of two alerts dealing with the Estate of Hoensheid v. Commissioner of Internal Revenue, T.C. Memo 2023-34 (2023). In this, the first, the standard for determining whether a taxpayer has made an anticipatory assignment of income is discussed. The judicially created anticipatory assignment of income doctrine recognizes that income is taxed to those who earn or otherwise create the right to receive it and that it cannot be assigned or gifted away.
Hoensheid involves a common fact pattern. The taxpayer was one of three owners of a closely held business, wishing to both sell and to contribute part or all of the proceeds to a tax exempt charity or donor advised fund, the assignee. If properly structured, the owner receives a charitable deduction equal to the fair market value of the contributed property and the built in gain on the investment is taxed to the charity. In order to do so, the owner must contribute the ownership interest (in this case 1380 shares of stock) to the charity, but when? Like most owners, the taxpayer in Hoensheid wanted to wait as long as possible before making the actual contribution. During the course of the negotiations concerning the sale, the taxpayer was advised that the contribution had to be completed before any purchase agreement was executed. This is referred to the binding agreement test and has its origin in Rev. Rul. 78-197. If you contribute before the purchase agreement is signed, no anticipatory assignment. If you contribute after the purchase agreement is signed, anticipatory assignment. It provides a bright line for taxpayers. But is it that simple? The Tax Court first analyzed the requirements under state law to determine when the gift was completed. It concluded the gift took place on July 13, 2015 two days before the signing of the SPA on July 15, 2015 seemingly within the bright line test of Rev. Rul. 78-197. The Tax Court agreed that the gift occurred before the sale and that the charity was not obligated to sell at the time of the gift, but that although the donee’s legal obligation to sell is significant to the assignment of income analysis, it was only one factor.
In short, there is no bright line but there are multiple factors in an assignment of income analysis of a fact pattern. Instead, the ultimate question is whether the transferor, considering the reality and substance of all the circumstances, had a fixed right to income in the property at the time of transfer. If the sale was virtually certain to occur, the anticipatory assignment of income doctrine is satisfied and the taxpayer, not the charity, is taxed on the sales proceeds from the charities sale.
In this case, the relevant factors in determining whether the sale of shares were virtually certain to occur include (1) any legal obligation to sell by the donee, (2) the actions already taken by the parties to effect the transaction, (3) the remaining unresolved transactional contingencies, and (4) the status of the corporate formalities required to finalize the transactions.
With regard to the first factor, the Tax Court held that there was no proof of any obligation of the charity to sell the shares either formal or informal. This was a favorable factor for the taxpayer.
With regard to the second factor, the Tax Court found that their were bonus and shareholder distributions made before the SPA was executed. This factor indicates that the income was earned at an earlier point in time.
With regard to the third factor, the Tax Court found that there were major transactional contingencies (environmental obligations) but that they had been resolved before the SPA was executed. This factor indicates that the income was earned at an earlier point in time.
With regard to the fourth factor, the Tax Court found that after the SPA was executed there were only ministerial actions remaining. This factor indicates that the income was earned at an earlier point in time.
The tax court, based on the various factors mentioned above that the income or gain from the sale was earned at an earlier point in time, resulting in the taxpayer being treated as the seller of the shares of stock purportedly gifted to the charity.
In summary, as the Tax Court found, to avoid an anticipatory assignment of income on the contribution of appreciated shares of stock followed by a sale of the donee, a donor must bear at least some risk at the time of contribution that the sale will not close. The bright line of Rev. Rul. 78-187 was a factor but compliance with that alone did not provide a safe harbor. Other factors needed to be considered to determine if the gain was earned before the sale and taxable to the donor.
If you are the owner of a closely held business and are contemplating a charitable gift of a portion of your ownership interest do not hesitate to contact either David Ritter, Stuart Gladstone, Bob Kosicki or Cheryl Ritter for guidance in dealing with the multiple factors set forth in the anticipatory assignment of income doctrine.
For more information or assistance, please contact:
David J. Ritter, Esq. , Member and Chair, Tax Practice , at [email protected] or 973-403-3117
Stuart M. Gladstone, Esq. , Member, Tax Practice , at [email protected] or 973-403-3109
Robert A. Kosicki, Esq. , Counsel, Tax Practice , at [email protected] or 973-403-3122
Cheryl L. Ritter, Esq. , Counsel, Tax Practice , at [email protected] or 973-364-8307
About Brach Eichler LLC
Brach Eichler LLC, is a full-service law firm based in Roseland, NJ. With over 80 attorneys, the firm is focused in the following practice areas: Healthcare Law; Real Estate; Litigation; Trusts and Estates; Corporate Transactions & Financial Services; Personal Injury; Criminal Defense and Government Investigations; Labor and Employment; Environmental and Land Use; Family Law Services; Patent, Intellectual Property & Information Technology; Real Estate Tax Appeals; Tax; and Cannabis Law. Brach Eichler attorneys have been recognized by clients and peers alike in The Best Lawyers in America©, Chambers USA, and New Jersey Super Lawyers. For more information, visit www.bracheichler.com .
This alert is intended for informational and discussion purposes only. The information contained in this alert is not intended to provide, and does not constitute legal advice or establish the attorney/client relationship by way of any information contained herein. Brach Eichler LLC does not guarantee the accuracy, completeness, usefulness or adequacy of any information contained herein. Readers are advised to consult with a qualified attorney concerning the specifics of a particular situation.
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Related Attorney: Cheryl L. Ritter , David J. Ritter , Stuart M. Gladstone , Robert A. Kosicki
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| 2022-1087 IRS properly denied charitable deduction for partnership interest given to private foundation absent appropriate contemporaneous written acknowledgement Granting partial summary judgment for the government, the U.S. District Court for the Northern District of Texas has held that the IRS properly denied a charitable deduction stemming from a couple's donation of a 4% limited partnership interest to a private foundation to establish a DAF, so the couple was not entitled to a refund for the resulting tax paid ( Kevin M. Keefer, et ux. v. United States ). Kevin Keefer was a limited partner in Burbank HHG Hotel, LP (Burbank), which owned and operated a single hotel. On April 23, 2015, Burbank and the Apple Hospitality REIT (Apple) exchanged a nonbinding letter of intent (LOI) for Apple to purchase Burbank. Burbank had not signed the LOI and continued courting potential buyers. On June 18, 2015, Keefer assigned to Pi Foundation a 4% limited partner interest in Burbank to establish a DAF. Although Burbank had tentatively agreed to sell the hotel to Apple for $54m, the sales contract had not been signed, and Apple had not yet reviewed the property or associated records. The parties signed a sales contract on July 2, 2015, and the sale closed on August 11, 2015. The Keefers commissioned an appraisal of the donated interest as of June 18, 2015, which:
The appraisal concluded the fair market value of the donated interest was $1.257m. Pi sent Keefer a 12-page packet of documents related to establishing the DAF (DAF Packet), which he signed on June 8, 2015. In early September 2015, Pi sent Keefer a brief letter acknowledging the donation (Acknowledgment Letter). In their timely filed joint federal income tax return for 2015, the Keefers claimed a $1.257m charitable contribution deduction for the donation to the DAF. Their Form 1040 provided their appraiser's tax identification number, the appraisal, the DAF Packet, and the Acknowledgement Letter. The IRS issued a deficiency notice in July or August 2019, denying the charitable deduction and increasing the Keefers' 2015 tax liability by $423,304 plus penalties and accruing interest. The IRS asserted that (1) the Keefers did not have a CWA from the donee showing the DAF "has exclusive legal control over the assets contributed" and (2) their appraisal did not include the appraiser's identifying number. The Keefers paid the additional tax and filed a refund claim in November 2019, which the IRS denied in March 2020 as untimely. In November 2019, the Keefers filed the instant refund action in district court. District court refund claim Both parties moved for summary judgment. The Keefers made four claims:
The government asserted that (1) the defense of variance barred the Keefers' two alternative claims and (2) the Keefers' were not entitled to any refund. Ultimately, the court concluded that:
A discussion of the last three points follows. Assignment of income Noting that a taxpayer may not escape tax on earned income by assigning that income to another party, the court stated, "[T]he critical question is whether the [donated] asset itself, or merely the income from it, has been transferred." The Keefers argued that their donation of the 4% interest met both prongs of the test established in Humacid Co. v. Commissioner , 42 T.C. 894 (1964), which provided that courts will respect the form of a donation of appreciated stock if the donor donates the property and title to it completely before the property produces income from a sale. Specifically, the Keefers contended that the hotel's sale to Apple remained uncertain when they assigned to Pi the 4% partnership interest, including all rights and interest pertaining to the interest. The government contended that the hotel's sale was "practically certain" at the time of the donation and "the Keefers carved out and retained a portion of the partnership asset by oral agreement." When the Keefers signed the agreement to assign the partnership interest to Pi on June 18, 2015, the court concluded, the hotel was not yet under contract. The contract to sell the hotel was signed on July 2, 2015, and Apple had 30 days to review the property and potentially back out of the contract. Absent a binding obligation to close the sale, "the deal was not 'practically certain' to go through," the court found. The pending sale of the hotel, "even if very likely to occur considering the presence of backup offers and as reflected in the appraiser's estimate that the risk of no sale was only 5% — does not render this donation an anticipatory assignment of income," the court stated. Turning back to the first Humacid prong, however, the court concluded that the Keefers had carved out a partial interest in the 4% partnership interest when they donated it, and thus did not give the entire interest to Pi. The Keefers asserted that their assignment of the 4% interest subject to an oral agreement that Pi would receive the net proceeds from the sale of the hotel, as opposed to other partnership assets not covered in the sale, "is not a 'carving out' from the 4% partnership interest to Pi any more than the partnership paying a liability for a pre-existing light bill is a 'carving out' from some partnership interest." The government argued that the oral agreement showed the taxpayers "did not donate a true partnership interest [but gave] away 4% of the net cash from the sale of one of the Partnership's assets [that] the Keefers would otherwise have received from the sale of the hotel. This is a classic assignment of income." The court rejected the Keefers' light-bill analogy, noting that the funds held back in the Keefers' transfer to Pi were funds that the general partner (1) chose to maintain to comply with loan agreements and (2) had the discretion to withhold from partner distributions. The taxpayers had not made a complete donation of the 4% interest, the court concluded, finding no genuine issue of material fact that they had carved out part of the 4% partnership interest before donating it to Pi. Thus, the anticipatory assignment of income doctrine applied. Insufficient CWA The court found that the CWA the Keefers received from Pi did not meet the requirements of IRC Section 170(f)(8) and (18). The Keefers argued that the Acknowledgement Letter and DAF Packet together constitute a statutorily compliant CWA. The government contended that multiple documents cannot be combined to constitute a CWA unless the documents include a merger clause, and neither document in this case stated that Pi had "exclusive legal control" over the donated assets. The court concluded that the CWA was not statutorily compliant; therefore, the IRS properly denied the charitable deduction. The court based this conclusion on its finding that (1) the DAF Packet did not constitute a CWA; and (2) the Acknowledgement Letter cannot supplement the DAF Packet. Specifically, the court found that the June 8, 2015 "DAF Packet did not complete the donation or legally obligate Kevin to donate the interest to Pi." The September 9, 2015 Acknowledgement Letter constituted the CWA in this case but did not meet the necessary statutory requirements because it did not "reference the Keefer DAF or otherwise affirm Pi's exclusive legal control, as required by [IRC Section] 170(f)(8)," which requires "strict compliance." Implications Taxpayers contemplating making a transfer to a DAF should consider the court's discussion on CWAs. As a general matter, the donee is not required to record or report the information provided on a CWA to the IRS, so the burden falls on the donor to ensure that proper documentation is received for the charitable organization. The court noted that the CWA requirements, under IRC Section 170(f)(8), required strict compliance; thus, IRC Section 170(f)(18) must also require strict compliance because it supplements and cross references IRC Section 170(f)(8): "The taxpayer obtains a [CWA] (determined under rules similar to the rules of [IRC Section 170(f)(8)(C)] from the sponsoring organization (as so defined) of such [DAF] that such organization has exclusive legal control over the assets contributed" (citing Averyt v. Commissioner , T.C. Memo. 2012-198 (internal citations omitted)). The court noted that the specific language included in IRC Section 170(f)(18) ("exclusive legal control") was not required. Given the lack of guidance in this area, however, failure to make clear that the donee organization had exclusive legal control may result in denial of the donor's charitable deduction. Absent subsequent guidance, a more conservative approach may be for donors to DAFs to request CWAs that contain such language (e.g., "exclusive legal control of contributed assets was held by the [DAF]"). Another small, but important nuance, is that the court in Keefer rejected the government's position that the court should apply the Ninth Circuit's expanded view of the assignment of income doctrine, whereby a deal that is "practically certain to proceed" would cause the assignment of income doctrine to apply ( Ferguson v. Commissioner , 174 F.3d 997, 1003 (9th Cir. 1999)). Given the differences in approach, taxpayers should consult their tax advisor to ensure the proper precedent is being considered pursuant to any charitable contribution. ———————————————
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IMAGES
VIDEO
COMMENTS
Determining Anticipatory Assignment of Income. In determining whether an anticipatory assignment of income has occurred with respect to a gift of shares of stock, the Tax Court looks to the realities and substance of the underlying transaction, rather than to formalities or hypothetical possibilities.
In determining whether the donating taxpayer has assigned income in these circumstances, one relevant question is whether the prospective sale of the donated stock is a mere expectation or a virtual certainty. "More than expectation or anticipation of income is required before the assignment of income doctrine applies," the Court stated.
If QSBS is gifted in close proximity to a sale, the IRS might claim that the donor stockholder was making an anticipatory assignment of income. ... the IRS concluded in the context of a charitable contribution coupled with a prearranged redemption that the assignment of income doctrine would apply only if the donee is legally bound, or can be ...
Tax Court Guidance on Charitable Contributions and Assignment of Income. Today is the first of two alerts dealing with the Estate of Hoensheid v. Commissioner of Internal Revenue, T.C. Memo 2023-34 (2023). In this, the first, the standard for determining whether a taxpayer has made an anticipatory assignment of income is discussed. The ...
Exploring crucial aspects of charitable tax planning: contemporaneous written acknowledgments, qualified appraisals, and anticipatory assignment of income.
More broadly, the anticipatory assignment of income doctrine prevents taxpayers from gratuitously assigning property ripe with income to a third party (usually a charity or relative) with a purpose of having the assignee taxed on the income inherent in the property.
IRS properly denied charitable deduction for partnership interest given to private foundation absent appropriate contemporaneous written acknowledgement. ... If the court finds the contribution was actually an anticipatory assignment of income, the Keefers are nonetheless entitled to a refund of tax, interest and penalties;
IRS may deem your gift an "anticipatory assignment of income" to the charity. As such, you may be required to pay capital gains taxes on the sale by the charity. 2. Business gifts require due diligence by the charity and careful planning by the donor. Many charities will not accept gifts of privately held business
"anticipatory assignment of income" is dependent on the facts and circumstances. Considerations 2. What transfer restrictions apply to Karen and to the charity? Powell's governing documents (i.e., shareholders' agreement, etc.) must be reviewed by the recipient charity to understand whether Karen and her transferees, including the recipient
The IRS selected all the taxpayers' returns for examination and issued notices of deficiency disallowing the charitable deductions based on the anticipatory assignment of income doctrine and for failure to satisfy the substantiation requirement of Section 170. The taxpayers filed petitions in Tax Court, and both parties filed motions for ...
The Tax Court recently addressed what can happen when gifts of appreciated stock to charity occur in close proximity to a sale of a company. Read our article to discover more. ... apply the anticipatory assignment of income doctrine to charge the capital gains tax attributable to the gifted shares to Scott and (2) disallow the charitable ...
Outline of Presentation. What is it? A judicial doctrine that income should be taxed at the source that generated it and cannot be anticipatorily signed to a third party. "There is no doubt that the statute could tax salaries to those who earned them, and provide that the tax could not be escaped by anticipatory arrangements and contracts ...
Assignment-of-Income Doctrine Precludes Taxpayer's Charitable Deduction. A district court held that a couple could not deduct the contribution of a 4 percent partnership interest to a nonprofit because the donation was an anticipatory assignment of income. The court also concluded that a donor advised fund packet submitted with the taxpayers ...
A recent Tax Court case highlights the importance of completing charitable gifts of stock prior to selling a business. ... the petitioner avoided recognition of realized income under the anticipatory assignment of income doctrine. The Court's decision also highlighted the petitioner's failure to secure a qualified appraisal given that the ...
Determining Anticipatory Assignment of Income. In determining whether an anticipatory assignment of income has occurred with respect to a gift of shares of stock, the Tax Court looks to the realities and substance of the underlying transaction, rather than to formalities or hypothetical possibilities.
The anticipatory assignment of income doctrine. Simply put, if a donor gives a long-term appreciated asset to a public charity, the donor gets a charitable deduction for the asset's fair ...
Fidelity Charitable provided a similar warning to the taxpayers that the gift must take place before any purchase agreement is executed to avoid the Internal Revenue Service raising the anticipatory assignment of income doctrine. Anticipatory Assignment of Income Doctrine. The anticipatory assignment of income doctrine has been around since at ...
The IRS argued that the contribution made just before the sale was to close amounted to an anticipatory assignment of income from that sale, thus requiring the taxpayer to recognize the income from the sale rather than merely getting a charitable contribution deduction for the value of this noncash asset (the interest in the partnership).
Substantiation. Although the scope of this writing is to address the concept of anticipatory assignment of income and the Hoensheid opinion, particularly as it relates to prior authorities and guidance, it is important to note the substantiation issues which ultimately cost the taxpayers any charitable deduction.
of private stock to a charity. If the donation is made too late, the Internal Revenue Service may argue that the "anticipatory assignment of income" doctrine applies, in which case the founder will have to pay tax on the gain realized by the charity when it sells the stock received from the founder. In that circumstance, the first benefit
The anticipatory assignment doctrine can arise in connection with an assignment to a qualified char-ity, and the agency exception operates there as well. For example, Patricia, a prominent actress, wished to make a gift to the Beth El Temple, a qualified charity. She was offered a position to perform on a television production for a fee of ...
ANTICIPATORY ASSIGNMENT OF INCOME DOCTRINE. ... receipt of income is "practically certain to occur" even if the taxpayer transfers the right before receiving the income. 4. With respect to gifts to charity made before an asset is sold, taxpayers should consider whether a fixed right to income has occurred, which may not be easily ...
The IRS alleged that the assignment of income doctrine (discussed below) applied to deny the Taxpayer the first benefit, and sought to fully deny the charitable contribution deduction thereby denying the Taxpayer the second benefit.
Federal income tax withholding for 2024 ..... 28 State income tax withholding tables, ... related to charity is set by law and remains at $0.14 per mile. (Notice 2024-08; ... assignment of SUI tax rates will move from Rate Schedule C to Rate Schedule D, with rates ranging from 0.6% to 6.4%. ...