Jon Dickinson & Helen Dickinson v. Commissioner , 2020 T.C. Memo. 128 ( 2020 )


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  •                                T.C. Memo. 2020-128
    UNITED STATES TAX COURT
    JON DICKINSON AND HELEN DICKINSON, Petitioners v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent
    Docket No. 9526-19.                           Filed September 3, 2020.
    Mitchell I. Horowitz and Qian Wang, for petitioners.
    Christopher D. Bradley and John T. Arthur, for respondent.
    MEMORANDUM OPINION
    GREAVES, Judge: This case is before the Court on petitioners’ motion for
    summary judgment and respondent’s cross-motion for partial summary judgment
    under Rule 121 (motions).1 In a timely issued notice of deficiency, respondent
    1
    Unless otherwise noted, all Rule references are to the Tax Court Rules of
    Practice and Procedure, and all section references are to the Internal Revenue
    (continued...)
    -2-
    [*2] recharacterized petitioners’ stock donations as taxable redemptions, followed
    by donations of the cash proceeds. Petitioners contend that the form of the
    transaction should be respected. We agree with petitioners, and we will grant
    petitioners’ motion and deny respondent’s motion.
    Background
    The following undisputed facts are drawn from the parties’ motion papers
    and the attached exhibits, as well as other documents the parties filed in the instant
    case. Petitioners filed joint Federal income tax returns for 2013-2015, the years at
    issue, and resided in Florida when they filed the petition.
    Petitioner husband was the chief financial officer and a shareholder of
    Geosyntec Consultants, Inc. (GCI), a privately held company, during the years at
    issue. 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,
    1
    (...continued)
    Code of 1986, as amended.
    -3-
    [*3] 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.
    GCI confirmed in letters to Fidelity that its books and records reflected
    Fidelity as the new owner of the shares. For each stock donation, petitioner
    husband signed a letter of understanding (LOU) to Fidelity, indicating that the
    transferred stock was “exclusively owned and controlled by Fidelity”, and that
    Fidelity “maintains full discretion over all conditions of any subsequent sale” of
    the stock and “is not and will not be under any obligation to redeem, sell, or
    otherwise transfer” the stock. Petitioners 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.
    Petitioners claimed a charitable contribution deduction on Form 1040, U.S.
    Individual Income Tax Return, for each year petitioner husband donated shares to
    Fidelity. Respondent issued a notice of deficiency to petitioners on March 21,
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    [*4] 2019, wherein he determined that petitioners were liable for tax on the
    redemption of the donated GCI shares. Respondent determined a corresponding
    penalty under section 6662(a) for each year at issue. Petitioners timely petitioned
    this Court for redetermination of the deficiencies and penalties. Thereafter, the
    parties filed the motions presently before the Court.
    Discussion
    I.    Summary Judgment Standard
    The purpose of summary judgment is to expedite litigation and avoid costly,
    unnecessary, and time-consuming trials. See FPL Grp., Inc. & Subs. v.
    Commissioner, 
    116 T.C. 73
    , 74 (2001). We may grant a motion for summary
    judgment, or partial summary judgment regarding an issue, when there is no
    genuine dispute of material fact and a decision may be rendered as a matter of law.
    Rule 121(b); Elec. Arts, Inc. & Subs. v. Commissioner, 
    118 T.C. 226
    , 238 (2002).
    Furthermore, we construe the facts and draw all inferences in the light most
    favorable to the nonmoving party to decide whether summary judgment is
    appropriate. Sundstrand Corp. v. Commissioner, 
    98 T.C. 518
    , 520 (1992), aff’d,
    
    17 F.3d 965
    (7th Cir. 1994). However, the nonmoving party may not rest upon the
    mere allegations or denials in his pleadings but instead must set forth specific facts
    -5-
    [*5] showing that there is a genuine dispute for trial. Rule 121(d); see also
    Sundstrand Corp. v. Commissioner, 
    98 T.C. 520
    .
    II.   Analysis
    A taxpayer may deduct the fair market value of appreciated property
    donated to a qualified charitable organization. See sec. 170; sec. 1.170A-1(c)(1),
    Income Tax Regs. 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 sec. 61(a)(3); Boris I. Bittker & Lawrence
    Lokken, Federal Taxation of Income, Estates & Gifts, para. 35.2, at *1 (Westlaw
    2020) (“[T]he 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.
    In the notice of deficiency, respondent 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. Per
    Humacid Co. v. Commissioner, 
    42 T.C. 894
    , 913 (1964), we respect the form of
    this kind of 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
    -6-
    [*6] 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; Behrend v. United States, 31 A.F.T.R.2d
    (RIA) 73-406, 
    1972 WL 2627
    , at *3 (4th Cir. 1972); 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 v.
    
    Commissioner, 490 F.2d at 246
    ; Carrington v. 
    Commissioner, 476 F.2d at 708
    ;
    Behrend, 
    1972 WL 2627
    , at *3. To defeat petitioners’ motion on this point,
    respondent must set forth specific facts showing that there is a genuine dispute for
    trial as to whether petitioner husband made an absolutely perfected gift of the GCI
    stock before the redemption. See Rule 121(d); Sundstrand Corp. v.
    Commissioner, 
    98 T.C. 520
    .
    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.
    -7-
    [*7] 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
    -8-
    [*8] point, lead us to conclude that petitioner husband’s donations satisfy the first
    Humacid requirement.
    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: 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). 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.
    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. 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
    -9-
    [*9] 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).2 By contrast, there was no assignment of income in Palmer v.
    Commissioner, 
    62 T.C. 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.
    The parties point us to Rev. Rul. 78-197, 1978-1 C.B. 83, a “bright-line”
    rule the IRS applies in cases like Palmer, which focuses on the donee’s control
    2
    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).
    - 10 -
    [*10] over the disposition of the appreciated property. See Rauenhorst v.
    Commissioner, 
    119 T.C. 165
    .3 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. 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. 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. 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.
    Conclusion
    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
    3
    Rev. Rul. 78-197, 1978-1 C.B. 83, 83, announces that the IRS “will treat
    the proceeds as income to the donor under facts similar to those in the Palmer
    decision only if the donee is legally bound, or can be compelled by the [issuing]
    corporation, to surrender the shares for redemption.”
    - 11 -
    [*11] income by way of a sale. We will therefore grant petitioners’ motion for
    summary judgment, and deny respondent’s motion for partial summary judgment.
    To reflect the foregoing,
    An appropriate order and decision
    will be entered.