I am
uncertain what the IRS saw in the case. The facts were very much in the
taxpayer’s favor.
The IRS was
throwing a penalty flag and asking the Court to call an assignment of income
foul.
Let’s talk
about it.
The tax concept
for assignment-of-income is that a transaction has progressed so far that one
has – for all real and practical purposes – realized income. One is just
waiting for the check to arrive in the mail.
But what if
one gives away the transaction – all, part or whatever – to someone else? Why?
Well, one reason is to move the tax to someone else.
A classic
case in this area is Helvering v Horst. Horst goes back to old days
of coupon bonds, which actually had perforated coupons. One would tear-off a
coupon and redeem it to receive an interest check. In this case the father
owned the bonds. He tore off the coupons and gave them to his son, who in turn
redeemed them and reported the income. Helvering v Horst gave tax practitioners
the now-famous analogy of a tree and its fruit. The tree was the bond, and the
fruit was the coupon. The Court observed:
… The fruit is not to be attributed to a different tree from that on which it grew.”
The Court
decided that the father had income. If he wanted to move the income (the fruit)
then he would have to move the bond (the tree).
Jon
Dickinson (JD) was the chief financial officer and a shareholder of a Florida
engineering firm. Several shareholders – including JD – had requested
permission to transfer some of their shares to the Fidelity Charitable Gift
Fund (Fidelity). Why did they seek permission? There can be several reasons,
but one appears key: it is Fidelity’s policy to immediately liquidate the
donated stock. Being a private company, Fidelity could not just sell the shares
in the stock market. No, the company would have to buy-back the stock. I
presume that JD and the others shareholders wanted some assurance that the company
would do so.
JD buttoned-down
the donation:
· The Board approved the transfers to
Fidelity.
· The company confirmed to Fidelity
that its books and records reflected Fidelity as the new owner of the shares.
· JD also sent a letter to Fidelity with
each donation indicating that the transferred stock was “exclusively owned and
controlled by Fidelity” and that Fidelity “is not and will not be under any
obligation to redeem, sell or otherwise transfer” the stock.
· Fidelity sent a letter to JD after
each donation explaining that it had received and thereafter exercised “exclusive
legal control over the contributed asset.”
So what did
the IRS see here?
The IRS saw
Fidelity’s standing policy to liquidate donated stock. As far as the IRS was
concerned, the stock had been approved for redemption while JD still owned it.
This would trigger Horst – that is, the transaction had progressed so
far that JD was an inextricable part. Under the IRS scenario, JD would have a
stock redemption – the company would have bought-back the stock from him and
not Fidelity – and he would have taxable gain. Granted, JD would also have a
donation (because he would have donated the cash from the stock sale to
Fidelity), but the tax rules on charitable deductions would increase his income
(for the gain) more than the decrease in his income (for the contribution). JD
would owe tax.
The Court
looked at two key issues:
(1) Did JD part with the property
absolutely and completely?
This one was a quick “yes.” The paperwork was buttoned-up as
tight as could be.
(2) Did JD donate the property before there
was a fixed and determinable right to sale?
You can see where the IRS was swinging. All parties knew that
Fidelity would redeem the stock; it was Fidelity’s policy. By approving the
transfer of shares, the company had – in effect – “locked-in” the redemption
while JD still owned the stock. This would trigger assignment-of-income, argued
the IRS.
Except that there is a list of cases that look at formalities
in situations like this. Fidelity had the right to request redemption – but the
redemption had not been approved at the time of donation. While a seemingly
gossamer distinction, it is a distinction with tremendous tax weight. Make a sizeable
donation but fail to get the magic tax letter from the charity; you will
quickly find out how serious the IRS is about formalities. Same thing here. JD and
the company had checked all the boxes.
The Court
did not see a tree and fruit scenario. There was no assignment of income. JD
got his stock donation.
Our case
this time was Dickinson v Commissioner, TC Memo 2020-128.
