IRS Taxes Gain On Sale of Shares Gifted to Charity to Donor
The recent case of Estate of Hoensheid v. Commissioner of Internal Revenue, decided in March 2023, shows that the IRS is continuing to aggressively attack gifts of shares of stock to a charity, followed by a sale of those shares by the charity.
The object of the taxpayer is to get a charitable deduction for the value of the shares and not have to pay tax on the gain resulting from the sale of the shares by the charity.
BACKGROUND
The case involved a gift of stock of Commercial Steel Treaty Corp., (CSTC) by Hoensheid to the Fidelity Charity Gift Fund (FC). The shares were subsequently sold, and FC received its shares of the sales proceeds. FC, a tax exempt charity, did not pay tax on its shares of the gain. The Tax Court held that the gain from the sale of the shares by FC was taxable to Hoensheid, and to make matters worse, Hoensheid was not entitled to a charitable deduction for the gift.
On April 1, 2015, HCI Equity Partners (HCI) submitted a letter of intent to Hoensheid to acquire CSTC for ninety-Two Million ($92,000,000) Dollars. On April 23, 2015, Hoensheid executed a non-binding Letter of Intent with HCI establishing the parties mutual intent for HCI to acquire CSTC for $107,000,000. On June 12th, HCI approved the acquisition, subject to its due diligence. On July 6th HCI created CSTC Holdings, Inc. to acquire the shares.
On November 18, 2015, FC sent Hoensheid a Contribution Confirmation Letter acknowledging receipt of 1,380,400 shares of CSTC stock. The letter indicated that FC received the shares on June 11, 2015. Hoensheid claimed a charitable deduction of $3,282,511. Hoensheid did not report any capital gains associated with the sale of those shares by FC.
Was there a gift made, and if so, when?
The Tax Court applied a two part test in. The Court held the donor must: (1) give the appreciated property away absolutely and devest of title, (2) before the property gives rise to income, by way of the sale.
A Court had noted that a charitable contribution is generally made at the time delivery is effective. Hoensheid argued the gifts were made on June 11, 2015, the date Hoensheid executed a Consent to Assign Agreement. However, that document did not specify the number of shares.
On November 18th FC sent Hoensheid a letter that indicated it received their shares on June 11th. However, the IRS argued, and the Court ruled, that the gift was not made until at least July 13th, when FC actually received physical possession of the Stock Certificates. The Court held that even though Hoensheid executed the Assignment on June 11th, it did not specify the number of shares. Hoensheid did not settle on a number of shares until July 11th. The Court held that at that time, Hoensheid had an intent to make a gift, but he did not deliver the shares until July 13th. The Court held the gift was made on July 13th.
Was there an Assignment of Income?
The Court next determined whether there was an assignment of income. The Court said it looks at the “realities and substance of the underlining transaction, rather than to formalities or hypothetical possibilities. The Court asked whether the transaction is “practically certain to occur” at the time of the gift. In contrast, the mere anticipation or expectation of income at the time of the gift does not establish that a donor’s right to the income is fixed. The ultimate question is whether the transferor, in considering the realty and substance of the circumstances, had a fixed right to income regarding the property at the time of transfer.
The Court held that the IRS did not establish that FC had any legal obligation to sell the shares, and this weighed against the Anticipatory Assignment of Income, but is not conclusive. The Court felt that several acts took place suggesting the transaction was “virtually certain” to occur, such as CSTC taking all cash out of the Corporation before the gift on July 13th, and the fact that none of the unresolved contingencies remaining on July 13th were substantial enough to have posed even a small risk of the overall transaction failing to close. Accordingly, the Court held that a sale was a virtual certainty by the time the gift was made on July 13th.
Was the Taxpayer Entitled to a Charitable Deduction?
The Court held that Hoensheid made a valid gift, but that did not necessarily mean he was entitled to a charitable deduction under Section 170. Because the CSTC shares exceeded $500,000 Dollars, Hoensheid was required to substantiate the deduction with both a contemporaneous written acknowledgement (CWA) and a qualified appraisal. The CWA issued by FC was contemporaneous, acknowledged receipt of 1,380,400 shares of CSTC stock and contained all the language required by the statue. However, the Court held that for contributions in excess of Five Hundred Thousand ($500,000) Dollars, a taxpayer must also attach a qualified appraisal to the return. In this case the Court noted that the appraiser did not have the required Appraisal Certifications. Accordingly, the Court held that Hoensheid is not entitled to a charitable deduction.
This is the worst possible result for Hoensheid. He had to pay tax on the sale, and he did not get a charitable contribution.