Gifting Appreciated Stock Before Redemption Dickinson

Introduction

Generally, a taxpayer may deduct the fair market value of appreciated property donated to a qualified charitable organization.[1] This provision expands the benefits available to taxpayers with respect to charitable deductions. The result, in effect, is that a taxpayer may gift an appreciated asset in lieu of selling the asset, paying tax, and then donating the cash. However, planning mechanisms involving these provisions are not without government challenge, such as in the case of Jon and Helen Dickinson.[2]

Factual Background

Jon Dickinson (Dickinson) served as CFO and was a shareholder of Geosyntec Consultants, Inc. (GCI), a privately held company, during the years at issue (2013-2015). The Board of Directors of GCI authorized charitable donations of stock to Fidelity Investments Charitable Gift Fund, an organization being tax-exempt under IRC §501(c)(3) (Fidelity). Fidelity was a donor advised fund which implemented procedures requiring Fidelity to liquidate donated stock. Thus, upon receiving a gift of stock, Fidelity would immediately tender the stock to the issuer for cash. Each year, subsequent to the board resolution authorizing such charitable gifts of stock, Dickinson made his gifts of stock at issue. For each stock donation, Dickinson and Fidelity would enter into a letter of understanding indicating that Fidelity would be the exclusive owner and controller of the stock and that Fidelity would maintain full discretion over any conditions of any subsequent sale. Further, Fidelity would not be under any obligation to redeem, sell, or otherwise transfer the stock. After the gifts were made however, the stock was redeemed by GCI from Fidelity in cash.

Dickinson claimed charitable deductions on his Form 1040 for each year shares were donated. The IRS issued a notice of deficiency (NOD) on March 21, 2019 determining income tax liability  on the redemption of the donated GCI shares (i.e. the IRS believed an assignment of income theory was applicable due to the immediate sale and seeming certainty of the redemption). Effectively, the position of the IRS was that the effect of the transaction, with all steps taken together, was that Dickinson effectively sold the stock and made the gift in cash to Fidelity. The posture of the case presented is of summary judgment, which was decided on the merits, therefore disposing the case.

Discussion

As previously mentioned, a taxpayer may deduct charitable gifts of appreciated property without having to recognize built in gain. It should be noted however that this provision is limited to property held for a period of greater than one year and is subject to a limitation of any year’s deduction equal to 30% of the donor’s adjusted gross income, with excess being allowed for a 5 year carryforward period.[3] In the NOD, the IRS determined that each donation of GCI shares, followed by Fidelity’s exchange of the shares for cash, should be treated in substance as a redemption of Dickinson’s shares for cash by GCI, followed by Dickinson’s gift of the cash received to Fidelity.

The Tax Court will respect the form of this type of transaction if the donor (Dickinson) (1) gives the property away absolutely and parts with title, (2) before the property gives rise to income by way of a sale.[4]

Whether Dickinson Gave Away and Parted with Title

In analyzing the first prong under Humacid the Court sought to determine whether Dickinson did indeed part with title and make a complete and absolute gift of the stock. Not being what the Court said, and more my interpretation, is that a gift should be absolute with “no strings attached.” Here, it is not hard for one to see what happened and the expectation of what was going to happen, but that is not entirely what mattered. Instead, Dickinson gave away the stock, expressly in writing, memorializing contemporaneously the understanding of the parties, that his gift was absolute. Specifically, GCI sent letters to Fidelity confirming the ownership transfer, Fidelity sent letters to Dickinson explaining that Fidelity had “exclusive legal control” over the stock, and the letters of understanding between Dickinson and GCI confirming Dickinson’s departure with title and Fidelity’s independence in decision-making with respect to the stock to the same effect all supported Dickinson’s position that all rights to the stock were transferred.[5]

The IRS’ position was that the scheme could have been arranged as redemptions ahead of the gifts. However, the Court’s position was that a preexisting understanding among the parties that would redeem the donated stock does not convert a post-donation redemption into a pre-donation redemption, as the IRS would prefer. Further, the Court noted that neither a pattern of stock donations followed by redemptions, a stock donation closely followed by a redemption, nor a selection of a donee on the basis of a donee’s internal policy of selling donated stock suggests that the donor failed to transfer all of his rights in the donated stock. The Court noted its strong persuasion by Dickinson’s contemporaneous documentary evidence of an absolute gift and the IRS’ failure to assert facts indicating any genuine controversy on the point.

Whether the Gift Occurred Prior to Income Rights Arising

The second prong of Humacid analyzed by the Court was that the gift must have been made by Dickinson prior to his right to income from the sale, thus implicating the assignment of income doctrine. Citing Helvering v. Horst, 311 U.S. 112, 116 (1940), the Court noted that a taxpayer who has earned income cannot escape taxation by assigning his right to receive payment. The second prong under Humacid follows this holding, ensuring that a shareholder cannot avoid taxation on a redemption by donating stock immediately prior to redemption. Thus, where a donee sells shares shortly after a donation, the assignment of income doctrine applies

Conclusion

In the end, the Court agreed with Dickinson holding that (1) he absolutely made the gift of the stock, and (2) there was no absolute redemption on the horizon, regardless of the gift. Therefore, the Court ruled in favor of Dickinson.

This case is not without some important takeaways. Specifically, I would note the following:

  1. Contemporaneous documentation is critical in transactions and seldom is there better support for a taxpayer’s argument than such contemporaneous documentation.
  2. Effectively, gifts of appreciated stock are perfectly fine, following by a subsequent sale of such stock, even if it is highly probable that the sale will occur following the gift, even the following day, so long as the sale is not a certainty and that the shareholder/donor is not in a position of having a sale right or an expectation of a sale, notwithstanding the gift.

[1] See IRC §170 and Treas Reg. §1.170A-1(c)(1).

[2] Dickinson v. Comm’r, T.C. Memo 2020-128.

[3] IRC §170(b)(1)(B)(ii).

[4] See Humacid Co. v. Comm’r, 42 T.C. 894, 913 (1964).

[5] As planners, we strongly urge our clients to document the intent, substance, and nature of their transactions regularly and contemporaneously. The courts seem to be strongly persuaded by such contemporaneous documentation and memorialization.

Joshua W. Sage, J.D., LL.M.

Josh is a partner at ESA Law. Josh practices in the areas of tax, business, and estate planning. View Full Profile.