Notwithstanding the possible disruption to the world of donor advised funds from a potential trial in Fairbairn v. Fidelity Charitable Fund,1 a recently decided tax court case affirmed the longstanding rules governing gifts of appreciated stock to donor advised funds.
In Jon Dickinson, Et Ux (2020) TC Memo 2020-18, the Dickinsons donated shares of their business to a charitable gift fund. The IRS argued, despite decades of unsuccessful litigation, that the economic substance of the gift of the closely held stock followed by a redemption is in effect a taxable stock sale and gift of the proceeds. The tax court ruled for the Dickinson respecting the form of the transaction with written records confirming the donee’s undisputed ownership prior to its subsequent sale.
This result is consistent with a long line of precedent from case law, revenue rulings and other Treasury pronouncements.
In the Palmer case,2 the court held where a shareholder transfers stock to a charity and the stock is then redeemed, the form of the transaction will be respected (i.e., the transaction will be treated as a gift of stock followed by a redemption of the stock, rather than as a distribution of cash to the shareholder followed by a gift of the cash) so long as the charity is legally bound and can be compelled by the corporation to surrender the donated shares for redemption.2 The tax court in Rauenhorst says that IRS is bound to follow Rev Rul 78-197 and may not litigate against the position it took in that ruling.3
Other cases acknowledge the reality of discussions between donor and donee which do not trigger a deemed sale. A line of cases have held that notwithstanding the gift being made with an “understanding” between the contributor and charity, the stock being redeemed did not result in the gift being treated as a cash gift.4 Additionally, the transaction will be treated as a gift of stock, notwithstanding the taxpayer’s inquiry about the charity’s policy regarding the sale of contributed stock before he made the contribution.5
Gifts of appreciated securities remain the only deduction available to an individual taxpayer in an amount greater than its original basis. As long as the donor and donee avoid a prearranged sale or a transfer before the contribution, then a deduction will be allowed for the full fair market value. Let’s hope 2021 continues to be another year for the availability of these benefits.
By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
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1. See my blog post The Looming Pyrrhic Victory for Contributors and Sponsors of Donor Advised Funds? ↵
2. Palmer, Daniel D., (1974) 62 TC 684 , acq (1974) 1978-2 CB 2, 1974 WL 36301 ↵
3. Rauenhorst, Gerald A., (2002) 119 TC 157 ↵
4. Grove, Philip (1972) TC Memo 1972-98; Makoff, Richard P. (1967) TC Memo 1967-13 ↵
5. DeWitt, Clinton v. US (1974 Ct Cl), 204 Ct Cl 274 ↵