Talk about a double whammy.

A taxpayer who claimed a $3 million deduction for a gift of private company stock to a charity immediately before a sale of the company has been told by the Tax Court that the sale was so “practically certain to occur” that he had to pay tax on his entire capital gain.  The Court said the “anticipatory assignment of income” doctrine deemed the sale to have occurred before the gift was given.  And in addition, because the gift was a gift of property in the form of stock and not cash, a qualified appraisal was required. But the appraisal submitted did not meet the regulatory requirements and he was not entitled to any deduction for the gift.

Scott Hoensheid and his two brothers each owned a one-third interest in Commercial Steel Treating Corp, which was in the business of heat-treating metal fasteners for use in automobiles and other commercial vehicles.  In 2014, they decided to sell the business and retained a business broker, which found a potential buyer in April, 2015. 

Around the same time, Hoensheid began talking with Fidelity Charitable Gift Fund about creating a donor advised fund, saying he wanted to donate about $3.5 million in stock to the DAF.  Hoensheid told his lawyer that he wanted to “wait as long as possible to pull the trigger” because he was concerned with what might happen if the sale did not go through.

On April 23, the buyer and seller signed a non-binding letter of intent.  On June 1, Hoensheid emailed Fidelity Charitable a letter of understanding which described the planned donation of shares of stock, but did not specify the number of shares. At the same time, he told his lawyer he did “not want to transfer the stock until we are 99% sure we are closing.”

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The company held its annual shareholders meeting on June 11 and approved the sale of stock and approved Hoensheid’s request to be able to transfer a portion of his stock to Fidelity Charitable, although the consent form did not specify the number of shares.  Immediately following the shareholder meeting, the board of the company, composed of the three brothers and two others, agreed to dissolve an incentive compensation plan for executives and to distribute all remaining balances to the executives.  Hoensheid had a stock certificate prepared to transfer his shares to Fidelity Charitable, without including the number of shares, which he held in his office until mid-July when he dropped it off with his lawyer for transfer to Fidelity Charitable.

The buyer approved the purchase on June 12, subject to completion of due diligence, which was completed on June 30.  On July 6, the parties began final revisions of the purchase agreement, but acknowledged that they did not know how many shares would be transferred to Fidelity Charitable.  On July 13, Fidelity Charitable refused to sign a warranty that it owned the contributed shares because it did not have a stock certificate. The certificate was finally delivered the same day.  The deal ultimately closed on July 15.

Hoensheid obtained an appraisal from an executive at the business broker, who valued the stock at $3.2 million. He attached the appraisal to a Form 8283 on his joint tax return with his wife to claim the deduction.  The IRS denied the deduction on the basis that the appraisal was insufficient and Hoensheid appealed.  In response to the appeal, the IRS amended its answer to claim also that the sale itself was an anticipatory assignment of income and that Hoensheid would have to pay tax on the capital gain.

The Court first looked to see the date of the actual gift.  Hoensheid claimed it was June 11, when he and his brothers had first signed a consent to the transfer.  But the Court said the June 11 document did not establish the gift because the number of shares was not specified and Hoensheid’s subsequent emails showed he had not yet decided how many shares to give.  Ultimately it concluded that the gift was not made before delivery of the certificate on July 13.

The basic law of assignment of income applies, the Court said, if the donor’s right to income from the shares of stock “is fixed” and is “practically certain to occur” by the time of the gift, “despite the remote and hypothetical possibility of abandonment.”  Reviewing a series of cases in which courts have grappled with this issue, the Court noted the company dissolved its bonus plan on July 7 and distributed $6.1 million in payments to eligible grantees on July 10. The company also swept cash from the company to pay $4.7 million in dividends to the shareholders on July 14.  The Court said it was “highly improbable” that the company would have done so if there had been “even a small risk of not consummating” the transaction.

The Court also said that a number of substantive issues that Hoensheid said were being negotiated up to the date of closing had been basically resolved in earlier drafts of the final documentation.  

“On the record before us, viewed in the light of the realities and substance of the transaction, we are convinced that petitioners’ delay in transferring the CSTC shares until two days before closing eliminated any such risk and made the sale a virtual certainty.  Petitioners’ right to income from the sale of CSTC shares was thus fixed as of the gift on July 13.  We hold that petitioners recognized gain on the sale of the 1,380 appreciated shares.”

On the appraisal, the Court noted that the executive did not meet the requirements of a “qualified appraiser.”  He did not show verifiable education and experience in valuing the type of property subject to the appraisal, did not hold himself out to the public as a person who performs appraisals on a regular basis, and failed several other requirements.  The appraisal also admittedly contained several other errors, including its statement of the date of the transfer.

The Court also rejected the petitioners’ claim of “substantial compliance.”  (Estate of Hoensheid v. Commissioner, T.C. Memo 2023-34, 3/15/23.)

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The Court recognized that it did not set a “bright line test” for determining when a sale takes place and the assignment of income doctrine comes into play.  Quoting another Tax Court case, it said that “drawing lines is part of the daily grist of judicial life.”  This case had “simply proceeded too far down the road to enable petitioners to escape taxation on the gain attributable to the donated shares.”