Abstract
Case Name: Dickinson v. Commissioner, T.C. Memo 2020-128 (Sept. 3, 2020).
Jurisdiction: U.S.T.C.
Petitioner: Jon Dickinson and Helen Dickinson.
Respondent: Commissioner of the Internal Revenue Service.
Concepts: Tax; Charitable Contribution; Charitable Deduction.
Nature of Case: Does the immediate redemption of closely held stock by a sponsoring organization of a donor-advised fund cause the inherent capital gain to be included in the donor’s gross income?
Introduction
Jon Dickinson was the chief financial officer and a shareholder of the privately held company, Geosyntec Consultants, Inc. (GCI), when he donated shares of GCI to a donor advised fund administered by Fidelity. The GCI board of directors authorized the donations from 2013-2015 and Mr. Dickinson claimed a charitable deduction for the gift. Upon receipt of the shares, Fidelity immediately offered the shares for sale back to GCI as part of their internal procedures. The IRS claimed that while the charitable deduction claimed by the Dickinsons on their return was allowable, the Dickinsons should have included the capital gain inherent in the shares of GCI on their 2013-2015 tax returns, which they did not. The Tax Court ruled in favor of the Dickinsons and allowed them to exclude the gain from their gross income for the years at issue. The tax code affords taxpayers a rare opportunity to benefit twice when donating appreciated property. First, taxpayers may claim a charitable deduction when donating property to charity subject to limitations based upon the type of property, the type of charity, and the taxpayers adjusted gross income (AGI). The code also provides the taxpayer the opportunity to avoid recognizing the capital gain inherent in the donated asset. The issue at hand is whether the immediate redemption of the closely held stock functions as a redemption of the GCI stock in conjunction with the charitable gift.
The tax code affords taxpayers a rare opportunity to benefit twice when donating appreciated property. First, taxpayers may claim a charitable deduction when donating property to charity subject to limitations based upon the type of property, the type of charity, and the taxpayers adjusted gross income (AGI). The code also provides the taxpayer the opportunity to avoid recognizing the capital gain inherent in the donated asset. The issue at hand is whether the immediate redemption of the closely held stock functions as a redemption of the GCI stock in conjunction with the charitable gift.
Background
Taxpayers are allowed a charitable deduction for contributions of appreciated property to qualified charities subject to certain limitations.1 By donating appreciated property directly to charity rather than selling the same property and donating cash, it is possible to avoid recognizing the capital gain inherent in the asset. In Humacid v Commissioner, 42 T.C. 894, 913 (1964), the tax court held that “a gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of a sale.”
Case Description
In the taxable years ranging from 2013-2015, the Dickinsons contributed shares of GCI to a donor-advised fund administered by Fidelity, which then sold the same shares back to GCI as part of their internal procedures. GCI issued letters to Fidelity confirming the ownership transfer and Fidelity provided letters to the Dickinsons explaining that Fidelity had “exclusive legal control” over the donated stock. The Service argued that the Dickinsons, GCI, and Fidelity colluded to disguise what they argued was a redemption as a charitable donation. Relying on the substance over form doctrine, the Service sought to have the Dickinsons recognize the capital gain inherent in the GCI shares. The Tax Court relied primarily on Humacid in its reasoning that the gift of the GCI shares to Fidelity was a perfected gift. The documentation providing that the Dickinsons released all incidences of ownership prior to the sale of the GCI shares. Both parties looked to a bright line test the Service has used to determine the assignment of income[1], which centers on the donee’s control over donated assets. The Tax Court reasoned that the key issue at hand was whether the Dickinsons were virtually certain to recognize income at the time of the gift or if they merely anticipated the sale of the GCI stock to occur.2 It concluded that the sale of GCI stock was not imminent at the time of the gift and that the Dickinsons had no legal incidences of ownership at the time the GCI shares were sold.
The Tax Court relied primarily on Humacid in its reasoning that the gift of the GCI shares to Fidelity was a perfected gift. The documentation providing that the Dickinsons released all incidences of ownership prior to the sale of the GCI shares. Both parties looked to a bright line test the Service has used to determine the assignment of income[1], which centers on the donee’s control over donated assets. The Tax Court reasoned that the key issue at hand was whether the Dickinsons were virtually certain to recognize income at the time of the gift or if they merely anticipated the sale of the GCI stock to occur.3 It concluded that the sale of GCI stock was not imminent at the time of the gift and that the Dickinsons had no legal incidences of ownership at the time the GCI shares were sold.
Conclusion
Had GCI been a publicly traded company rather than privately held, this issue would not have been contested as donations of publicly traded company securities is commonplace. The fact that GCI was privately held and that Fidelity’s internal processes resulted in the shares of GCI being offered to GCI for sale did not impact the Dicksons’ ability to avoid the imbedded tax liability. Upon a first reading, the facts of the case seem to indicate that the Tax Court would rely on the substance over form doctrine and side with the Service since the sequence of transactions does appear to be a disguised redemption. But it relied primarily on the donee’s incidence of ownership at the time of the sale and whether the sale was all but certain at the time of the gift. This ruling further increases the flexibility afforded taxpayers to benefit from donating appreciated property and opens the door to more taxpayers benefitting from gifting privately held stock.