Читать книгу The Tax Law of Charitable Giving - Bruce Hopkins R., Bruce R. Hopkins, David Middlebrook - Страница 32

A transaction may appear to be a charitable gift of property but, in actuality, be an anticipatory assignment of the income from the property that would otherwise have flowed directly to the transferor. If that is the case, the charitable contribution deduction is determined as if the gift were of money first received by the donor from the property,¹⁸² subject to the 50 percent limitation,¹⁸³ rather than a gift of the property, such as long-term capital gain property subject to the 30 percent limitation.¹⁸⁴ Also, if the property has appreciated in value, the donor may be taxable on the resulting gain.¹⁸⁵

An anticipatory assignment of income occurs in the charitable giving setting when a person has certain rights in the contributed property that have so matured or ripened that the person has a right to the proceeds from the property at the time the transfer is made.¹⁸⁶ If the transaction is an assignment of income, there may not be a charitable contribution deduction for the fair market value of the property transferred; the transferor may be taxable on the proceeds diverted to the charitable organization, and the charitable deduction may be determined as if the gift were of the after-tax income.

The distinction between a gift and an assignment of income is rarely easy to make. All that is clear in this area is that the assignment-of-income doctrine must be applied on a case-by-case basis.¹⁸⁷ As one court stated: “Whether a taxpayer possesses a right to receive income or gain is, of course, a question of fact, each case turning on its own particular facts. The realities and substance of the events, rather than formalities . . . must govern . . . [the] determination of whether an anticipatory assignment of income occurred.”¹⁸⁸

A court opinion illustrated the sometimes narrow difference between the two types of transfers. A federal district court ruled that a gift to a charitable organization of the long-term capital gains in certain commodity futures contracts gave rise to a charitable contribution deduction for the transfer of that property, and that the transaction was not an anticipatory assignment of income.¹⁸⁹ The case turned on the court's finding that the donor did not retain control over the timing of the sales of the futures contracts by the recipient charitable organization.

The case concerned an individual who formed a charitable organization in the early 1970s and had been president of it since it was established. The organization had a board of trustees that, the court concluded, the founder did not control. From time to time, the founder contributed futures contracts to the organization and claimed charitable contribution deductions for these transfers. Indeed, in 1974, he obtained a private letter ruling from the IRS holding that the contributions gave rise to charitable contribution deductions for the value of the futures contracts and that he need not recognize any gain when the organization sold the contracts. In 1981, however, the federal tax law changed. Beginning with that year, all commodities futures contracts acquired and positions established had to be marked to market at year-end, and the gains (or losses) had to be characterized as being 60 percent long-term capital gains (or losses) and 40 percent short-term gains (or losses), regardless of how long the contracts had been held.¹⁹⁰ This law change posed a problem for the donor, because the charitable deduction for a gift of short-term capital gain property is confined to the donor's basis in the property¹⁹¹; there is no deduction for the full fair market value of the property (as there is for most gifts of long-term capital gain property¹⁹²). He decided to solve the problem by donating to the organization only the long-term gain portion of futures contracts. In 1982, this individual entered into an agreement under which he contributed to the charitable organization the long-term capital gains of selected futures contracts from his personal accounts at a brokerage house and retained for himself the short-term capital gains. For the most part, the selected contracts were sold on the same day that the gift was made and the portions of the proceeds representing the long-term capital gains were transferred to an account of the organization at the same brokerage house. The donor chose the futures contracts to be donated according to the funding needs of the organization and the amount of unrealized long-term capital gains inherent in them. Once the contracts were transferred to a special account, they were to be sold, pursuant to a standing instruction.

On audit for 1982, the IRS took the position that the full amount of the capital gains on the sales of these contracts was includible in this individual's taxable income. The IRS also disallowed the charitable contribution deductions for that year and prior years. The IRS's position rested on two arguments, one of which was that the transfers of portions of the gain to the organization were taxable anticipatory assignments of income.¹⁹³

The anticipatory assignment rationale had this individual not making gifts of the futures contracts but, instead, giving to the charity money in an amount equal to 60 percent of the contracts sold; he was characterized as receiving the gain and then diverting a portion of it to the organization in an attempt to shield himself from tax liability. The government contended that the organization did not bear any risk in the commodities market, but was simply the recipient of an assignment of the realized long-term capital gains. By contrast, the individual contended that the assignment-of-income theory was inapplicable because no contract for the sale of the property was in existence before the donation was made. His argument was that his right to receive at least some of the proceeds had not matured to the point where a gain from the sale should be deemed to be his income. He argued that he neither controlled the value of the donated interests nor retained any legal right to receive any matured unrealized long-term capital gains that might be realized on sales of the futures contracts.

The court was somewhat troubled by the fact that, as both a director and the president of the organization, as well as the one who timed the initial transfers, this individual appeared to be in a position to ensure that the futures contracts would be sold immediately and that the short-term gains would flow to him at the time of his choosing, while taxes on the long-term gains were avoided. The court conceded that the “retention of the short-term gains gave the transaction more the appearance of an income assignment.”¹⁹⁴ Nonetheless, the pivotal and deciding issue involved the standing instruction and this individual's influence over it. The evidence showed that the decision to shift contracts to the special account was that of the full board of trustees of the organization and not its president. Thus, the court held that this individual did not have control over the timing of the disposition of the futures contracts once they were transferred to the special account of the charitable organization. The court ruled that “the donation of the contracts' long-term capital gain, while less tangible than many other forms of gifts, should still be considered a donation of the property.”¹⁹⁵ The court also held that this individual's “donations of their [the contracts'] long-term capital gain should not properly be considered an anticipatory assignment of income.”¹⁹⁶ Under the court ruling, the donor was not taxable on the long-term capital gain contributed to the foundation, and the charitable deduction was upheld.

An earlier case also illustrated application of the assignment-of-income doctrine. Under the facts of that case, the directors of an insurance company adopted a plan of liquidation, which the corporation's stockholders promptly and overwhelmingly approved. Thereafter, the company obtained approval from the department of insurance in the state in which it operated for the issuance of reinsurance agreements, and for the sale of goodwill and fixed assets to another insurance company. The directors of the company then approved several liquidation arrangements and authorized notification to the stockholders that the first liquidating dividends would be exchanged for stock later that year.

After the liquidation arrangements were approved and before the liquidating distributions began, one of the stockholders contributed stock in the corporation to various public charities. The distributions were subsequently made as planned, and the process of liquidation was soon thereafter completed. The stockholder claimed a charitable contribution deduction for the gift of the stock. The IRS allowed the charitable deduction but, viewing the transactions as anticipatory assignments of income in the form of the liquidation proceeds, taxed the donor on the income subsequently paid to the charities (equivalent to the long-term capital gain generated by the liquidation). A court upheld the IRS's position.¹⁹⁷

The outcome of this case turned on the likelihood of completion of the liquidation proceedings. The lower court found that the shareholders of the company could have abandoned the liquidation proceedings after these gifts were made and thus that the contribution should not be treated as an anticipatory assignment of the liquidation proceeds. The appellate court, however, decided that, under the facts, the “realities and substance” rather than “hypothetical possibilities” of the matter showed that the donor expected the liquidation proceedings to be completed and that the likelihood of rescission of the proceedings was remote.¹⁹⁸ The fact that the donor was not a controlling shareholder of the liquidating company was not “pivotal” to the court's determination.¹⁹⁹

A comparison of these two cases shows how fine the line of demarcation in this area can be. In the more recent of the two cases, control was the determining factor; in the other, control was “only one factor” in the determination.²⁰⁰ In the more recent case, the donor was found not to know with “virtual certainty” that the contracts would be sold, but only to have had knowledge that gains from the sales were a “reasonable probability.”²⁰¹ There is little distinction between “reasonable probabilities” and “realities and substance.”

When control is clearly present, however, the courts are far more likely to conclude that there has been an anticipatory assignment of income. Thus, in one case, a majority stockholder in a closely held corporation donated part of his holdings to nine charitable organizations approximately nine months after the corporation adopted a plan of liquidation. The court, finding an assignment of income, wrote:

The shareholders' vote is the critical turning point because it provides the necessary evidence of [the] taxpayer's intent to convert his corporation into its essential elements of investment basis and, if it has been successful, the resulting gains. This initial evidence of the taxpayer's intent to liquidate is reinforced by the corporation's contracting to sell its principal assets and the winding-up of its business functions. In the face of this manifest intent, only evidence to the contrary could rebut the presumption that the taxpayer was, in fact, liquidating his corporation. Yet here the record is barren of any evidence that the taxpayer had any intent other than that of following through on the dissolution. The liquidation had proceeded to such a point where we may infer that it was patently never [the] taxpayer's intention that his donees should exercise any ownership in a viable corporation, but merely that they should participate in the proceeds of liquidation.²⁰²

Thus, the court concluded that the gift was an assignment of the liquidation proceeds.

In a similar case, a court held that a majority shareholder's contribution of stock in a corporation that was about to be liquidated constituted an anticipatory assignment of liquidation proceeds, and that the taxpayer was not entitled to exclude from gross income the capital gains resulting from the distribution.²⁰³ The court identified three reasons why it was unlikely that the plan of liquidation would be abandoned: (1) The plan of liquidation had been adopted in conformity with federal tax law, which requires that the liquidation must occur within one year to avoid a taxable gain on the sale of assets; (2) the donee, although holding a majority of the stock, did not have the requisite two-thirds control to unilaterally prevent the liquidation; and (3) the donee's policy was to liquidate shares of stock given to it.

The court wrote, “Realistically considered, in the light of all the circumstances, the transfer of the stock . . . to [the charitable organization recipient] was an anticipatory assignment of the liquidation proceeds.”²⁰⁴ Thus, the reality was that the liquidation of the contributed stock was certain before the stock was donated to the charitable organization.

In another case, a court held that the contribution of stock warrants to charitable organizations was not an anticipatory assignment of income, and that what otherwise would have been taxable capital gain was not recognized in the hands of the donors.²⁰⁵ It found that the charitable donees were not legally bound, nor could they be compelled, to sell their warrants. The government's contention that the donors' rights to receive the proceeds of the stock transaction had “ripened to a practical certainty” at the time of the gifts and that there was a pending “global” transaction for the purchase and sale of the stock involved at the time of the gifts²⁰⁶ was rejected. The position of the IRS in the case was seen as being in “stark contrast” to the agency's stance as articulated in a revenue ruling;²⁰⁷ the court ruled that the IRS was bound by its ruling, which the court characterized as a “concession.”²⁰⁸

This body of law has been applied in the donor-advised fund context,²⁰⁹ where the sponsoring organization has a policy of immediate liquidation of contributed securities. The IRS was of the view that these transactions should be treated in substance as a taxable redemption of the securities by the donor, followed by a charitable contribution of the redemption proceeds. When the case was litigated, the court disagreed with the government and respected the form of these transactions. The court held that the donor contributed the property “absolutely” and parted with title to it, and that the donor made the contributions before the securities gave rise to income by way of sale, thus avoiding the assignment-of-income doctrine.²¹⁰

A case is pending in the U.S. Tax Court involving a sale by a group of individuals of 87 percent of their stock in a company and a charitable contribution of the remaining shares. The sale by the individuals was for a combination of cash and notes; the sale by the charity was for cash only. The individuals agreed with the purchasing company to “use all reasonable efforts” to cause the charity to tender its shares to the purchaser. These individuals claimed charitable contributions for their gifts. The IRS is contending that the charity agreed in advance to sell its shares to the purchaser and that all steps in the transaction were prearranged, and thus that the individuals are liable for tax under the step transaction doctrine.²¹¹

The import of this body of law is not a particular concern for donee charitable organizations. They receive the contributed items and can treat them as gifts. The matter, however, essentially goes to the question of deductibility of the transfers (or the extent of deductibility) and whether the transferor must recognize income or capital gain as the result of the transaction.