Estate of Scott M. Hoensheid et al. v. Comm., TCM 2023-34

Scott Hoensheid in anticipation of the sale of Commercial Steel Treating Corp. (CSTC), a closely held corporation, contributed 1380 shares of CSTC to Fidelity Charitable Gift Fund (a donor advised fund).

Contributing appreciated stock. When a taxpayer disposes of appreciated property via charitable contribution, they typically do not recognize any gain. This is because the taxpayer can avoid paying tax on the unrealized appreciation in the property and deduct the fair market value of the property contributed to a qualified charitable organization. Contributions of appreciated property are therefore tax-advantaged compared to cash contributions. Donor-advised funds can further optimize a contribution by allowing a donor to get an immediate tax deduction but defer the actual donation of the funds to individual charities until later.

Anticipatory assignment of income doctrine. The anticipatory assignment of income doctrine is a fundamental principle of income taxation that holds that income must be taxed to the person who earns or creates the right to receive it. This doctrine prevents taxpayers from avoiding tax by arranging anticipatory assignments of income, which transfer the right to receive income from one person to another before the income is received.

For example, if a taxpayer assigns the right to receive wage income or a debt instrument carrying accrued but unpaid interest to another person before receiving the income, the taxpayer cannot avoid tax on that income. Similarly, if a taxpayer gratuitously transfers shares of stock that carry a fixed right to proceeds of a pending, pre-negotiated transaction, the taxpayer’s right to income from those shares is deemed fixed and cannot be avoided through an anticipatory assignment of income.

In determining whether an anticipatory assignment of income has occurred with respect to a gift of shares of stock, the focus is on the realities and substance of the underlying transaction, rather than on formalities or hypothetical possibilities. If a transaction involving shares of stock has become “practically certain to occur” by the time of the gift, despite the remote and hypothetical possibility of abandonment, a donor’s right to income from those shares is deemed fixed, and an anticipatory assignment of income has occurred.

Gain must be recognized as if donated stock was sold. Waiting to transfer CSTC shares until two days before closing eliminated any risk and made the sale a virtual certainty. Mr. Hoensheid’s right to income from the sale of CSTC shares was thus fixed as of the gift on July 13, 2015. The Court ruled that gain must be recognized on the sale of the 1,380 appreciated shares of CSTC stock.

Tax practitioner planning. To avoid an anticipatory assignment of income on the contribution of appreciated shares of stock followed by a sale by the donee, a donor must bear at least some risk at the time of contribution that the sale will not close. Thus, a gift of appreciated stock should not be made so close to the sale as to trigger the assignment of income threat.

Charitable deduction denied for lack of a qualified appraisal. The Court concluded that Mr. Hoenshied made a valid gift, and although the Court determined that gift to be an assignment of income, Mr. Hoenshied may nevertheless be entitled to a charitable contribution deduction under §170.

Section 170(f)(11)(A)(i) provides that “no deduction shall be allowed . . . for any contribution of property for which a deduction of more than $500 is claimed unless such person meets the requirements of subparagraphs (B), (C), and (D), as the case may be.”  Subparagraph (D) is the relevant one here, requiring that, for contributions for which a deduction in excess of $500,000 is claimed, the taxpayer attach a qualified appraisal to the return.

The court found that the submitted appraisal was “substantially deficient”: (1) the appraiser did not have appraisal certifications and did not hold himself out as an appraiser; (2) the appraisal did not sufficiently describe the appraiser’s qualifications and valuation experience; (3) the appraisal was based upon an incorrect date of the contribution. For lack of a qualified appraisal, the Court agreed with the IRS’s disallowance of the taxpayer’s $3,282,511 charitable contribution.

Tax practitioner planning. Because the contribution exceeded $500,000, the return preparer had the appraisal in hand so it could be attached to Mr. Hoenshied’s tax return. Particularly in this case, reviewing the appraisal may have saved the charitable contribution deduction.