On September 3, 2020, the Tax Court issued a Memorandum Opinion in the case of Dickinson v. Commissioner (T.C. Memo. 2020-128). The primary issue before the court in Dickinson v. Commissioner was whether the IRS’s recharacterization of the petitioners’ stock donations as taxable redemptions followed by donations of the cash proceeds was appropriate, or whether the form of the transaction should be respected.
Background to Dickinson v. Commissioner
The petitioner-husband was the CFO and shareholder of GCI during the years at issue. The GCI board of directors authorized the shareholders to donate GCI shares to the Fidelity Investment Charitable Gift Fund, a tax-exempt organization under IRC § 501(c)(3). Upon transfer of the stock, Fidelity liquidated it.
The petitioner-husband signed a letter of understanding to Fidelity, indicating that the transferred stock was exclusively owned and controlled by Fidelity. The petitioner-husband received confirmation letters from Fidelity, which explained that Fidelity had exclusive legal control over the contributed asset. Shortly after each donation, Fidelity redeemed the GCI shares for cash. The IRS audited the petitioners’ return on which they claimed a charitable contribution deduction for each year that the petitioner-husband donated shares to Fidelity.
General Rule of Charitable Deductions
A taxpayer may deduct the fair market value of appreciated property donated to a qualified charitable organization. See IRC § 170; Treas. Reg. § 1.170A-1(c)(1). Donating appreciated property to a charity allows the taxpayer to avoid paying tax that would arise if the taxpayer instead sold the property and donated the cash proceeds. See IRC § 61(a)(3). The “shrewd strategy” with appreciated assets is to contribute the property in kind, allowing the charity to sell if it prefers cash. Petitioners sought the tax advantages of donating appreciated property rather than cash proceeds.
IRS Argues Redemption of the Shares Followed by Donation of Cash
The IRS determined that each donation of the GCI shares, followed by Fidelity’s exchange of the shares for cash, should be treated in substance as a redemption of the shares for cash by petitioner husband, followed by petitioners’ donation of the cash redemption proceeds to Fidelity. However, pursuant to Humacid Co. v. Commissioner, 42 T.C. 894, 913 (1964), the Tax Court respects the form of such a transaction if the donor (1) gives the property away absolutely and parts with title thereto (2) before the property gives rise to income by way of a sale. See also Grove v. Commissioner, 490 F.2d 241, 246 (2d Cir. 1973), aff’g T.C. Memo. 1972-98; Carrington v. Commissioner, 476 F.2d 704, 708 (5th Cir. 1973), aff’g T.C. Memo. 1971-222; Rauenhorst v. Commissioner, 119 T.C. 157, 162-163 (2002).
The first Humacid prong requires us to determine whether the donor transferred all his rights in the donated property. See, e.g., Grove, 490 F.2d at 246; Carrington, 476 F.2d at 708. To defeat the petitioners’ motion on this point, the IRS must set forth specific facts showing that there is a genuine dispute for trial as to whether the petitioner-husband made an absolutely perfected gift of the GCI stock before the redemption. See Rule 121(d); Sundstrand Corp., 98 T.C. at 520. The Petitioners’ contemporaneous documentary evidence of an absolute gift, and the IRS’s failure to assert facts indicating any genuine controversy satisfied the first Humacid prong.
The second Humacid requirement, that the taxpayer make the donation before the stock gives rise to income by way of sale, implements the assignment of income doctrine, which is to say that a taxpayer who has earned income cannot escape taxation by assigning his right to receive payment. See Helvering v. Horst, 311 U.S. 112, 116 (1940). This second prong of the Humacid case 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.
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). In the present case, the petitioner-husband did not actively or otherwise avoid receipt of redemption proceeds by donating the GCI shares to Fidelity. Therefore, the shareholder’s corresponding right to income had not already “crystallized at the time of the gift,” and, therefore, the Tax Court respected the form of the transaction under the second prong of the Humacid case.
(T.C. Memo. 2020-128) Dickinson v. Commissioner
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