In the case of Dickinson v. Commissioner[1] the IRS was attempting to treat a taxpayer’s contribution of shares of stock directly to a charity as being rather a redemption of the stock, creating taxable capital gain, followed by a deductible charitable contribution.

In this case, the taxpayers donated shares in a privately held company in which the husband was the CFO to Fidelity Investments Charitable Gift Fund. The case notes:

The GCI board of directors (Board) authorized shareholders to donate GCI shares to Fidelity Investments Charitable Gift Fund (Fidelity), an organization tax exempt under section 501(c)(3), through written consent actions in 2013 and 2014. In both consent actions the Board stated that Fidelity “has a donor advised fund program which incorporates procedures requiring * * * [Fidelity] to immediately liquidate the donated stock” and “seeks an imminent exit strategy and, therefore promptly tenders the donated stock to the issuer for cash”. The Board approved a third round of donations at a Board meeting by unanimous vote in 2015; the Board members signed the written minutes of the meeting. After each Board authorization, petitioner husband donated appreciated GCI shares to Fidelity. Petitioner husband remained a full-time GCI employee following each donation.[2]

A taxpayer is allowed to deduct the fair market value of appreciated property donated to a charity that would have generated long term capital gain income if sold, but without having to recognize the long term capital gain income.[3] This creates a larger net deduction than would be achieved had the taxpayer sold the asset (triggering recognition of the gain) and then donated the cash proceeds to charity.

But the IRS objected that, in this case, the taxpayer knew when the donation was made that Fidelity would immediately sell the shares, so the transaction should be more properly viewed as a taxable redemption of the shares donated, followed by a donation of the cash proceeds.

The Tax Court did not agree with the IRS’s view of the transaction. The Court, citing Humacid v. Commissioner, 42 TC 894, 913 (1964) found that the form of the transaction as a contribution of the shares to Fidelity had to be respected if:

The taxpayer has given away the property absolutely and parts with the title to the property and
That gift takes place prior to when the property would give rise to income by way of a sale.[4]

The Court first looks to see if the taxpayer truly donated all of his rights in the stock to the charity. The Court finds that, despite the IRS’s arguments, there was no question that the property was truly transferred to the charity:

GCI’s letters to Fidelity confirming ownership transfer, Fidelity’s letters to petitioners explaining that Fidelity had “exclusive legal control” over the donated stock, and the LOUs to the same effect all support petitioners’ claim that petitioner husband transferred all his rights in the shares. Respondent makes much of the fact that Fidelity regularly redeemed the GCI shares shortly after each donation, according to what the Board understood to be Fidelity’s internal procedures. Respondent argues that these facts suggest petitioner husband, GCI, and Fidelity could have arranged the redemptions in advance of the gifts, but a preexisting understanding among the parties that the donee would redeem donated stock does not convert a postdonation redemption into a predonation redemption. See Behrend, 1972 WL 2627, at *3. Furthermore, neither a pattern of stock donations followed by donee redemptions, a stock donation closely followed by a donee redemption, nor selection of a donee on the basis of the donee’s internal policy of redeeming donated stock suggests that the donor failed to transfer all his rights in the donated stock. See, e.g., Grove v. Commissioner, 490 F.2d at 242- 245 (respecting form of transaction where donee needed to fundraise to support its operations, and over a decade consistently redeemed annual donations of stock for which donor remained entitled to dividends); Carrington v. Commissioner, 476 F.2d at 705-706 (respecting form of transaction where donee redeemed stock eight days after it was donated); Palmer v. Commissioner, 62 T.C. 684, 692-693 (1974), (respecting form of transaction where, pursuant to a single plan, the taxpayer donated stock to a foundation and then caused the corporation to redeem the stock from the foundation the day after the donation), aff’d, 523 F.2d 1308 (8th Cir. 1975). Petitioners’ contemporaneous documentary evidence of an absolute gift, and respondent’s failure to assert facts indicating any genuine controversy on this point, lead us to conclude that petitioner husband’s donations satisfy the first Humacid requirement.[5]

But even if there was an actual transfer of ownership, the transfer could still fail if the sale was already a fait accompli. That would serve as an impermissible assignment of income, violating the second requirement under Humacid. As the Court notes, “Humacid prong two ensures that if stock is about to be acquired by the issuing corporation via redemption, the shareholder cannot avoid tax on the transaction by donating the stock before he receives the proceeds.”[6]

For that to be the case, the Court finds the following has to be true:

Where a donee redeems shares shortly after a donation, the assignment of income doctrine applies only if the redemption was practically certain to occur at the time of the gift, and would have occurred whether the shareholder made the gift or not. See Palmer v. Commissioner, 62 T.C. at 694-695; see also Ferguson v. Commissioner, 174 F.3d 997, 1003-1004 (9th Cir. 1999) (finding that the shareholder recognizes income from a stock sale where acquisition is “practically certain to occur”, rather than the subject of “a mere anticipation or expectation”, before the shareholder donates stock), aff’g 108 T.C. 244 (1997). In Hudspeth v. United States, 471 F.2d 275, 276 (8th Cir. 1972), for example, the court recast a stock donation as a taxable stock sale and donation of the sale proceeds where the taxpayer donated stock after the issuing corporation’s directors and shareholders had adopted a plan of complete liquidation. See also Jones v. United States, 531 F.2d 1343, 1343-1344 (6th Cir. 1976); Allen v. Commissioner, 66 T.C. 340, 347 (1976).[7]

The Tax Court notes that the Ninth Circuit has gone further in its analysis of similar cases in a footnote to the above analysis:

The Court of Appeals for the Ninth Circuit has gone a step further, asserting in dicta that stock sale proceeds are taxable to a shareholder who donates stock absent a binding obligation to sell if the facts and circumstances indicate that a tender offer and merger are “practically certain to proceed” in the immediate future. See Ferguson v. Commissioner, 174 F.3d 997, 1004 (9th Cir. 1999), aff’g 108 T.C. 244 (1997).[8]

But the Tax Court found this case was not of that sort, noting:

By contrast, there was no assignment of income in Palmer v. Commissioner, 62 T.C. at 687-688, 695, even though all parties were related and anticipated the redemption before the donation, because “no vote for the redemption had yet been taken” when the shareholder donated the stock. As in Palmer, the redemption in this case was not a fait accompli at the time of the gift. As noted above, respondent argues that the parties may have prearranged for Fidelity to redeem the stock. Even if that was the case, it would not affect the analysis under the second Humacid requirement. Rather, we respect the form of the transaction because petitioner husband did not avoid receipt of redemption proceeds by donating the GCI shares.[9]

Basically, there was no income to assign—absent the contribution, the taxpayer was not going to receive cash in exchange for a portion of his shares. No buyer was sitting in the wings who was going to buy the shares in the near future regardless of the owner.

Of interest is the fact that the Court declined to follow the holding in Revenue Ruling 78-197 to decide the case, even though both parties referred the Court to it. In that ruling, the IRS, in announcing it would follow the Palmer decision noted earlier, held:

The Service will treat the proceeds of a redemption of stock under facts similar to those in Palmer as income to the donor only if the donee is legally bound, or can be compelled by the corporation, to surrender the shares for redemption.[10]

The Court notes:

This Court has not adopted Rev. Rul. 78-197, supra, as the test for resolving anticipatory assignment of income issues, see Rauenhorst v. Commissioner, 119 T.C. at 166, and does not do so today. The ultimate question, as noted in Palmer, is whether the redemption and the shareholder’s corresponding right to income had already crystallized at the time of the gift. See Palmer v. Commissioner, 62 T.C. at 694-695. Regardless of whether the donee’s obligation to redeem the stock may suggest the donor had a fixed right to redemption income at the time of the donation, see Rauenhorst v. Commissioner, 119 T.C. at 166-167, respondent does not allege that petitioner husband had any such right in this case. Accordingly, respondent’s resort to Rev. Rul. 78-197, supra, is unavailing.

Thus, the Court concludes:

As required by Humacid and its progeny, petitioner husband made an absolute gift of the GCI shares in each taxable year before the stock gave rise to income by way of a sale.[11]

Therefore, the taxpayer was not required to recognize as income a gain that would have resulted from a redemption of the donated shares immediately prior to the donation.

[1] Dickinson v. Commissioner, TC Memo 2020-128, September 3, 2020, https://www.ustaxcourt.gov/UstcInOp2/OpinionViewer.aspx?ID=12323 (retrieved September 3, 2020)

[2] Dickinson v. Commissioner, pp. 2-3

[3] See IRC §§170 and 61(3) and Reg. §1.170A-1(c)(1)

[4] Dickinson v. Commissioner, pp. 5-6

[5] Dickinson v. Commissioner, pp. 6-8

[6] Dickinson v. Commissioner, p. 8

[7] Dickinson v. Commissioner, p. 9

[8] Dickinson v. Commissioner, Footnote 2, p. 9

[9] Dickinson v. Commissioner, p. 9

[10] Rev. Rul. 78-197; 1978-1 C.B. 83

[11] Dickinson v. Commissioner, pp. 10-11