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Posted September 5th, 2018

Questions & Answers

  1. WHY DOESN’T THE DONOR REALIZE GAIN WHEN GIVING AN APPRECIATED ASSET SUCH AS APPRECIATED STOCK?

  • Gain is realized only on the sale or exchange of an appreciated asset. Note that a gift annuity funded with appreciated stock involves a sale or exchange (it’s a kind of bargain sale). Note too that a gift of mortgaged real estate is treated as a sale for an amount equal to the mortgage debt.
  1. WHY DOESN’T THE DONOR REALIZE GAIN WHEN PAYING AN ENFORCEABLE PLEDGE WITH APPRECIATED STOCK?

  • The donor would realize gain if the pledge were considered a debt for federal income tax purposes; but IRS does not consider an enforceable pledge a debt for federal income tax purposes.
  1. IS A DAF SUBJECT TO THE SAME TAX RULES AS A PRIVATE FOUNDATION?

  • No, provided the DAF is a “public charity.” A community foundation DAF, for example, is such a critter. So are the gift funds set up by the financial institutions. Public charities are not subject to a slew of “don’t-do-thats” (such as the prohibition against self-dealing) that apply to private foundations.
  1. IS IT ALL RIGHT FOR AN INDIVIDUAL AGED 70.5 YEARS OR OLDER TO TRANSFER $ FROM A 401(k) PLAN TO AN IRA AND THEN MAKE AN “IRA ROLLOVER” GIFT FROM THE IRA?

  • Not clear. The transfer from the 401(k) to the IRA is simply an end run around the tax law. It has no independent, nontax, financial purpose. The IRS might attack this maneuver using the step-transaction doctrine.
  1. WHAT IS THE STEP-TRANSACTION DOCTRINE?

  • It’s an oft-used way for the IRS to disregard the form of a series of transactions and treat the series according to their cumulative substance. It comes into play when one of more of the individual transactions lack economic substance apart from saving taxes. Only a tax expert is qualified to size up a potential step-transaction problem. Many tax scams that arguably look good on paper run afoul of the step-transaction doctrine.

If you have questions and want answers, contact your SHARPE newkirk rep.

By Jon Tidd, Esq

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