Estate of Scott M. Hoensheid, Anne M. Hoensheid, Personal Representative and Anne M. Hoensheid

United States Tax Court
T.C. Memo. 2023-34ESTATE OF SCOTT M. HOENSHEID, DECEASED, ANNE M.
HOENSHEID, PERSONAL REPRESENTATIVE,
AND ANNE M. HOENSHEID,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 18606-19. Filed March 15, 2023.
—————
Steven S. Brown, William Gibbs Sullivan, and Adam M. Ansari, for
petitioners.
Megan E. Heinz, Alexandra E. Nicholaides, and Lauren M. Simasko, for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
NEGA, Judge: This case is before the Court on a Petition filed in
response to a statutory notice of deficiency issued to petitioners for the
tax year 2015. It involves the contribution of appreciated shares of stock
in a closely held corporation to a charitable organization that
administers donor-advised funds for tax-exempt purposes under section
501(c)(3). 1 The contribution was made near contemporaneously with the
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
Served 03/15/23
2
[*2] selling of those shares to a third party. After concessions, 2 the
issues for decision are (1) whether and when petitioners made a valid
contribution of the shares of stock; (2) whether petitioners had
unreported capital gain income due to their right to proceeds from the
sale of those shares becoming fixed before the gift; (3) whether
petitioners are entitled to a charitable contribution deduction; and
(4) whether petitioners are liable for an accuracy-related penalty under
section 6662(a) with respect to an underpayment of tax.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
Stipulations of Facts and the attached Exhibits are incorporated herein
by this reference. Petitioners resided in Michigan when their Petition
was timely filed.
I. Commercial Steel Treating Corp. (CSTC)
CSTC was founded in 1927 by Ralph Hoensheid (Mr. Hoensheid)
and members of the Hoensheid family. CSTC has historically engaged
in the business of heat-treating metal fasteners for use in automobiles
and other commercial vehicles. Mr. Hoensheid’s son, Merle, later
established a separate manufacturing facility in order to provide
engineered coatings for fasteners, which was incorporated as a
subsidiary of CSTC, named Curtis Metal Finishing Co. The ownership
of CSTC remained in the family, and as of January 1, 2015, CSTC was
owned by Mr. Hoensheid’s grandchildren Scott Hoensheid (petitioner)
and his two brothers Craig P. Hoensheid and Kurt L. Hoensheid (two
brothers) with each holding an equal one-third share of the outstanding
stock. As of June 11, 2015, petitioner, his two brothers, Jack R. Howard,
and William A. Penner made up the board of directors of CSTC.
II. Fidelity Charitable
Fidelity Charitable Gift Fund (Fidelity Charitable) is a tax-
exempt charitable organization under section 501(c)(3). Fidelity
Charitable is primarily engaged in administering donor-advised funds
as a sponsoring organization. Under Fidelity Charitable’s donor-
advised fund program, donors can establish a giving account with
Fidelity Charitable by completing and submitting a donor application
2 Respondent has conceded that petitioners are not liable for a penalty under
section 6662(a) with respect to the underpayment determined in the notice of
deficiency resulting from a disallowed charitable contribution deduction.
3
[*3] and making an irrevocable cash or noncash asset contribution.
After a giving account is established and a contribution made, donors
have retained advisory privileges over three things: (1) how to invest the
funds, (2) which public charities will receive grants, and (3) the timeline
for making grants, subject to some minimum activity requirements.
Fidelity Charitable typically requires proof of transfer in the form of a
stock certificate and formal acceptance by Fidelity Charitable to
complete a contribution of shares of a privately held corporation that
issues stock certificates. The general policy of Fidelity Charitable is to
liquidate noncash contributed assets as quickly as possible after
contribution.
III. The Transaction & Contribution
In the fall of 2014 Kurt informed petitioner and Craig of his
intention to retire from CSTC. Petitioner and Craig did not want CSTC
to incur debt to finance a redemption of Kurt’s 33% interest in CSTC, so
they instead decided to pursue a potential sale of CSTC. 3 As of
December 12, 2014, CSTC had established an amended Change in
Control Bonus Plan, which granted certain employees a potential right
to bonus compensation in the event of a change in control of CSTC, such
as a transfer of more than 80% of CSTC’s stock to third parties.
In the end, CSTC chose to engage FINNEA Group as its financial
adviser in connection with a sale of CSTC. FINNEA Group is a sell-side
investment banking firm. Brian Dragon, senior managing director of
FINNEA was the main collaborator for CSTC and petitioner. Both
petitioner and Mr. Dragon considered $80 million to be a fair target price
for CSTC. Thus, the engagement letter executed by petitioner on behalf
of CSTC stated that CSTC would pay FINNEA a fee of 1% of the
ultimate transaction’s value up to $80 million and 5% of the ultimate
transaction’s value over $80 million. The engagement letter, however,
did not include any mention of appraisal or valuation services in
connection with the transaction.
In early 2015 FINNEA began soliciting bids for CSTC and
received several letters of intent to purchase the company from
interested private equity firms. HCI Equity Partners (HCI), a
Washington, D.C. based private equity firm which focuses in part on
acquiring companies in the automotive industry, was one of the
3 Two other brothers, Mark Hoensheid and Ralph Hoensheid, had retired from
CSTC in previous years.
4
[*4] interested parties. On April 1, 2015, HCI submitted a letter of
intent to acquire CSTC for total consideration of $92 million.
Meanwhile, in mid-April 2015, petitioner began discussing the
prospect of establishing a Fidelity Charitable donor-advised fund to
make a presale charitable contribution of some of his CSTC stock with
his wealth advisers, Richard Balamucki and Casey Bear, and Andrea
Kanski, his longtime tax and estate planning attorney at Clark Hill
PLC.
On April 16, 2015, Ms. Kanski emailed John Hensien, a corporate
attorney at Clark Hill and CSTC’s merger and acquisition partner. In
the email, Ms. Kanski mentioned that petitioner was considering
donating some of his CSTC stock to charity “to avoid some capital gains”
and noted that “the transfer would have to take place before there is a
definitive agreement in place.” Ms. Kanski also requested that Mr.
Hensien inquire as to FINNEA’s capability to prepare a qualified
appraisal to establish the value of the charitable gift; “since they have
the numbers, it would seem to be the most efficient method.”
On April 20, 2015, after discussions with representatives of
Fidelity Charitable, Mr. Balamucki emailed petitioner and Ms. Kanski
to inform them that Fidelity Charitable had brought up a “concept called
the ‘anticipatory assignment of income’ which makes the timing of the
gift very important.” Mr. Balamucki added that “it must be a completed
gift before any purchase agreement is executed or else the IRS can come
back and try and impose the capital gains tax on the gift.” Fidelity
Charitable provided petitioners’ wealth advisers with a Letter of
Understanding to be executed in advance of the gift. On April 21, 2015,
Ms. Kanski responded to Mr. Balamucki and petitioner, stating that
“the deadline to assign the stock to a donor advised fund is prior to
execution of the definitive purchase agreement” and suggesting that
they “gather the forms and documents from Fidelity so we’re ready to go
and the paperwork is done well before the signing of the definitive
purchase agreement.” Petitioner responded in an email to Ms. Kanski
with the following:
Anne and I have agreed that we want to put 3.5MM in the
fund, but I would rather wait as long as possible to pull the
trigger. If we do it and the sale does not go through, I guess
my brothers could own more stock than I and I am not sure
if it can be reversed. I have not definitively given Richard
a number. Please know this and help us plan accordingly.
5
[*5] On April 23, HCI, CSTC, petitioner, and his two brothers
executed a nonbinding letter of intent, 4 establishing the parties’ mutual
interest in HCI’s acquisition of CSTC for total consideration of $107
million. The letter of intent did not include any breakup fee provision
to compensate HCI if the transaction was not finalized. After the
execution of the letter of intent, HCI began the process of conducting
due diligence into CSTC’s business and financial operations.
In mid-May counsel for HCI and CSTC began negotiating a
contribution and stock purchase agreement based on the terms of the
letter of intent. Ms. Kanski was not involved in the drafting process but
was provided with copies of each draft and was kept up to date on the
progress of the negotiations. On May 21, 2015, Ms. Kanski noted in an
email to Messrs. Balamucki and Bear and petitioner: “We now have a
draft purchase and sale agreement; do you have the information from
Fidelity for my review?” Petitioner responded that he had not yet signed
the Letter of Understanding document provided by Fidelity Charitable;
Ms. Kanski replied that she “want[ed] to make sure that nothing slips
and all of your advisors are on the same page so that there are no issues
with the charitable deduction.” On May 22, pursuant to 16 C.F.R.
§ 803.5(b), petitioner executed a notarized Affidavit of Acquired Person
on behalf of CSTC, representing that CSTC had “a good faith intention
of completing the transaction.”
On June 1, Mr. Bear emailed to Kurt Chisholm, a representative
of Fidelity Charitable, a Letter of Understanding signed by petitioner
which described the planned donation as being of shares of CSTC stock
but did not specify the number of shares. The terms and conditions of
that Letter of Understanding stated inter alia that (1) “As holder of the
Asset, Fidelity Charitable is not and will not be under any obligation to
redeem, sell, or otherwise transfer the asset” and (2) “No contribution is
complete until formally accepted by Fidelity Charitable.” Furthermore
on June 1, 2015, petitioner emailed Ms. Kanski requesting that she
prepare a shareholder consent agreement allowing him to transfer a
portion of his stock to Fidelity Charitable. 5 In the email, petitioner
reiterated to Ms. Kanski that “I do not want to transfer the stock until
we are 99% sure we are closing.”
4The letter of intent was binding on the parties with respect to confidentiality
and a 60-day exclusivity period for negotiations.
5 Petitioner and his two brothers were parties to a Buy-Sell Agreement that
restricted their ability to dispose of their shares of CSTC stock.
6
[*6] On June 11, 2015, CSTC held its annual shareholders meeting,
at which petitioner and his two brothers were present and unanimously
approved petitioner’s request for “ratification of the sale of all
outstanding stock of Commercial Steel Treating Corporation to HCI.”
As part of that approval, petitioner and his two brothers
“acknowledge[d] that they have been involved throughout the process,
understand and accept all terms associated with the transaction;” the
minutes also noted that “a formal Consent Resolution authorizing the
recapitalization will be developed as part of the closing documents” and
“will be distributed for all Board members [sic] signature.” Craig and
Kurt also unanimously approved petitioner’s request to be able to
transfer a portion of his stock to Fidelity Charitable and executed a
Consent to Assignment agreement to that effect. The Consent to
Assignment agreement had a blank space for the parties to specify the
number of shares and stated that the consent governed “only the
number of shares identified above.” However, that field was left blank
and not filled in on June 11, when the parties signed the agreement, nor
on June 15, 2015, when petitioner emailed a copy of the signed
agreement to Ms. Kanski. 6
Immediately following the shareholder meeting, CSTC held a
board meeting. The directors unanimously approved petitioner’s
request to be able to transfer a portion of his shares to Fidelity
Charitable. The directors also unanimously approved a resolution to
dissolve CSTC’s Incentive Compensation Plan for executives and to
distribute all remaining balances “prior to the recapitalization of the
corporation.” At some point after the June 11, 2015, board meeting,
petitioner had a stock certificate partially prepared for the eventual
transfer to Fidelity Charitable. Petitioner kept the incomplete stock
certificate on his office desk until July 9 or 10, 2015, when he dropped it
off at Ms. Kanski’s office.
On June 12, 2015, HCI’s Investment Committee and managing
partners unanimously approved the acquisition of CSTC, subject to
completion of their financial and business due diligence. On June 30,
consultants hired by HCI completed and delivered a due diligence report
6 During the examination of petitioners’ 2015 return, Ms. Kanski produced to
the examining revenue agent a copy of the Consent to Assignment agreement, with a
number of “1380” shares hand-written onto the blank line. At trial petitioner
confirmed his handwriting inserting the number of shares and testified that he had
prepared and signed the agreement on June 11, 2015, before his two brothers signed
it.
7
[*7] addressing potential environmental liability issues arising out of
CSTC’s existing facilities.
Negotiations between CSTC and HCI began to gather steam. On
July 1, HCI’s counsel prepared a revised draft of the Contribution and
Stock Purchase Agreement. This draft, dated July 1, 2015, included a
new, partially blank recital (share contribution provision) stating in
relevant part: “On June 2015, Scott M. Hoenshied [sic] transferred . . .
shares of Common Stock to . . . .” Furthermore, on July 1, HCI prepared
and circulated the initial draft of the Minority Stock Purchase
Agreement for a purchase of shares from Fidelity Charitable. The draft
Minority Stock Purchase Agreement included a clause appointing
petitioner as seller’s representative with authority to, inter alia,
(1) accept delivery of, on behalf of the Seller [Fidelity Charitable], all
such documents as may be deemed . . . to be appropriate to consummate
this Agreement;” and (2) “to endorse and to deliver on behalf of the Seller
[Fidelity Charitable], certificates representing the Shares.” Counsel for
CSTC forwarded the draft to petitioner with this message: “Attached is
the initial draft of the purchase agreement for the shares you
have/intend to gift.”
On July 6, 2015, HCI caused the organization of a Delaware
corporation, CSTC Holdings, Inc., for the purpose of acquiring shares of
CSTC. That same day petitioner emailed Messrs. Bear, Balamucki, and
Hensien and Ms. Kanski, circulating the draft Minority Stock Purchase
Agreement and stating inter alia: “We are not totally sure of the shares
being transferred to the charitable fund yet” and “[h]opefully, and based
on the closing documents, we will have a much better handle on this
come Wednesday or Thursday of this week.” Petitioner added: “Once we
know the share values, I am confident Andrea will execute the stock
assignment as required.” The next day, July 7, petitioner emailed Mr.
Bear to inform him that CSTC would “sweep the cash from the company
prior to closing and distribute it to the brothers.” That same day, Mr.
Bear emailed Mr. Chisholm and Ryan Boland, Fidelity Charitable’ s vice
president for national corporate and executive giving. In the email Mr.
Bear noted that he was “concerned” with the clause in the Minority
Stock Purchase Agreement appointing petitioner as seller’s
representative for Fidelity Charitable; Mr. Bear suggested that the
clause instead appoint one of CSTC’s corporate attorneys as seller’s
representative. Also on July 7, petitioner executed an amendment to
CSTC’s Change in Control Bonus Plan, specifying that the impending
sale to HCI would constitute a change in control and thus trigger bonus
payments to key employees.
8
[*8] On July 9, 2015, CSTC prepared a revised draft of the
Contribution and Stock Purchase Agreement. In this revised draft,
counsel for CSTC had partially filled in the recital relating to the gift
transfer to read in relevant part: “On July . . . 2015, [petitioner]
transferred 1,380 shares of Common Stock to The Fidelity Investments
Charitable Gift Fund.” Furthermore, the revised draft added that one
of the conditions precedent to the obligations of the buyer was that “[t]he
Fidelity Investments Charitable Gift Fund shall have executed and
delivered to HCI and the Buyer the Minority Stock Purchase
Agreement.” 7
In a reply to Mr. Bear’s email the same day, Mr. Boland agreed
that “[o]ne of the corporate attorneys would be a much better fit, from
our perspective.” Later that same day, Mr. Bear informed Mr. Boland
in an email that “it looks like Scott has arrived at 1380 shares—which
will come out to about $3,000,000” and that Mr. Bear would “have the
stock certificate shortly.” Petitioner in a subsequent email to Messrs.
Bear and Balamucki noted that “Andrea is completing the Stock
transfer of 1380 shares to the Charitable account” and requested his
account number from Fidelity Charitable. Mr. Bear then forwarded the
email to Messrs. Boland and Chisholm and requested the account
number. Mr. Chisholm replied to Mr. Bear the following morning,
Friday, July 10, noting that “it appears as though Scott does not yet have
a Giving Account created with us” and providing a link to the account
setup process on Fidelity Charitable’s website. Later that day,
petitioner set up an online giving account with Fidelity Charitable.
Additionally, on July 10, 2015, HCI prepared a revised draft of
the Contribution and Stock Purchase Agreement. Nevertheless, the
share contribution provision was still missing a specific date when
petitioner transferred the shares to Fidelity Charitable. However, this
draft update did propose to resolve the environmental liability issue by
including a provision by which the sellers would indemnify HCI and
CSTC Holdings for any damages arising out of matters or liabilities
identified in the environmental due diligence report. 8 The
7 The July 9, 2015, draft also proposed to resolve issues relating to the
postclosing bonus and equity participation plans of CSTC and the postclosing
treatment of any excess real property.
8 The draft also accepted CSTC’s proposed addition of provisions addressing
the postclosing bonus and equity participation plans and the postclosing treatment of
excess real property, with minor changes.
9
[*9] environmental indemnification provision was the primary
substantive addition made in the July 10 draft.
Three significant actions were taken on July 10. First, CSTC paid
out employee bonuses totaling $6,102,862 pursuant to its newly
amended Change in Control Bonus Plan. Second, CSTC submitted to
the Michigan Department of Licensing and Regulatory Affairs an
amendment to its Articles of Incorporation, signed by petitioner, which
provided for actions requiring a shareholder meeting and vote to be
taken upon written consent of the shareholders—a change requested by
HCI. Third, Ms. Kanski forwarded to Mr. Bear the updated draft of the
Minority Stock Purchase Agreement dated July 15 and asked Mr. Bear
to forward it to Fidelity Charitable for signature; the next morning
(Saturday, July 11), Mr. Bear forwarded the email from Fidelity
Charitable to Messrs. Boland and Chisholm. In Ms. Kanski’s initial
email to Mr. Bear, Ms. Kanski noted that “the closing has been pushed
back to Tuesday, at the earliest.” Ms. Kanski also noted that “the
definition of seller’s representative will be revised from Scott to Clark
Hill.” The draft Minority Stock Purchase Agreement was dated July 13
and included a warranty that Fidelity Charitable “is the record and
beneficial owner of and has good and valid title to the Shares, free and
clear of any and all Liens.”
At 4:38 a.m. on July 13, 2015, the Contribution and Stock
Purchase Agreement underwent a redline comparison against the prior
revised updated draft on behalf of HCI. This revised draft had already
accepted the environmental liability provision into the text. The share
contribution provision still did not specify the date on which petitioner
transferred the shares to Fidelity Charitable. Later that morning, at
7:56 a.m., Mr. Bear once more emailed Mr. Boland to request signatures
from Fidelity Charitable on the Minority Stock Purchase Agreement, as
the parties were “hoping to close . . . the next day.” At 9:08 a.m., Mr.
Boland responded: “It is important that we receive the stock certificate
before we reach a conclusion on the sale/redemption. Did the stock
certificate go out yet?” At 9:13 a.m., Mr. Bear swiftly alerted Ms. Kanski
to the problem, informing her that “Fidelity will not sign off on anything
until they see the stock certificate. As far as they know, they don’t have
any shares to sell.” At Mr. Bear’s request, Ms. Kanski emailed him a
PDF stock certificate, which Mr. Bear forwarded by email to Mr. Boland
at 9:30 a.m. The stock certificate was numbered 1670, was signed by
10
[*10] petitioner but undated, and stated that 1,380.40 shares of CSTC
common stock were owned by Fidelity Charitable. 9
At 1:21 p.m., counsel for HCI emailed counsel for CSTC, noting
that “I know CSTC will be issuing a certificate to the Gift Fund” and
asking whether “the transfer to the gift fund has occurred yet.” At 3:24
p.m., counsel for CSTC responded that “[y]es, the transfer to the Gift
Fund has occurred” and attached a printout spreadsheet that purported
to list CSTC shareholders, numbers of shares held, and dates of
issuance. The relevant page of the printout was dated July 13, 2015,
and displayed a disposition entry for certificate No. 1654 with a date of
“7/10/2015” and a note stating: “Cancelled: Scott transferred 1,380.50
Fidelity Investments.” 10 The printout also displayed an issuance entry
for certificate No. 1670 stating that 1,380 shares had been issued to
Fidelity Charitable. At 5:22 p.m., Mr. Boland emailed Mr. Bear with an
attached signature page, signed by Mr. Boland on behalf of Fidelity
Charitable, for the Minority Stock Purchase Agreement. At 6:43 p.m.,
counsel for CSTC forwarded signature pages for a number of
transaction-related documents, including the written consents by the
board of CSTC, to petitioner and his two brothers requesting their
signatures.
Early on the morning of July 14, Mr. Bear forwarded the
signature pages from Fidelity Charitable to Ms. Kanski, who forwarded
them to CSTC’s counsel. Later that day, counsel for CSTC circulated a
revised draft of the Contribution and Stock Purchase Agreement, which
filled in the share contribution provision to specify that petitioner had
transferred the shares on July 10, 2015. The final draft made minimal
changes to the prior circulated drafts. 11 Additionally, on July 14, CSTC
made a pro rata distribution, characterized as a dividend, of $4,796,352
to petitioner and his two brothers; Fidelity Charitable did not
9 During the examination of petitioners’ 2015 return, Ms. Kanski produced a
copy of a stock certificate stamped “cancelled,” which she received from petitioner that
included an additional typewritten date field of June 11, 2015.
10 The fractional amount of .50 appears to have been a clerical error.
11 The primary change was a slight revision to a provision for payment of
compensation to the retired brothers Mark and Kurt Hoensheid to cover the cost of
their health insurance, specifying that compensation would terminate upon either
(1) the retirees’ becoming eligible for Medicare or (2) a defined liquidity event’s
occurring.
11
[*11] participate in the distribution. The distribution represented
nearly all of the remaining cash within CSTC.
On July 15, HCI, CSTC Holdings, petitioner, and his two brothers
executed signatures on a final Contribution and Stock Purchase
Agreement, which was approved by CSTC’s shareholders and board that
same day. The final agreement included the share contribution
provision, which specified that petitioner had transferred 1,380 shares
to Fidelity Charitable on “July 10, 2015.” The final agreement provided
for petitioner and his two brothers to exchange shares in CSTC for
shares in the new CSTC Holdings, in an amount sufficient to constitute
51% ownership of CSTC Holdings. HCI agreed to contribute cash to
CSTC Holdings in exchange for shares in a number sufficient to
constitute 49% ownership of the common stock of CSTC Holdings. 12
CSTC Holdings then agreed to purchase the remainder of the
outstanding shares of CSTC owned by petitioner and his two brothers,
as well as the 1,380 shares owned by Fidelity Charitable. On July 15, a
representative from Clark Hill signed on behalf of Fidelity Charitable a
document titled “Irrevocable Stock Power.” The document represented
that Fidelity Charitable “does hereby sell, assign and transfer” the 1,380
shares to CSTC Holdings. The document also stated that Fidelity
Charitable “does hereby irrevocably constitute and appoint (blank
space) as attorney to transfer the said stock on the books of the
Corporation with full power of substitution in the premises.” Fidelity
Charitable received $2,941,966 in cash proceeds from the sale, which
was deposited into petitioners’ giving account.
At closing, petitioners received $21,330,818 in cash, 50,000 shares
of CSTC Holdings common stock, and a subordinated promissory note of
$5 million. In October 2015 petitioner and his two brothers received a
postclosing distribution of excess working capital from CSTC totaling
$1,093,878. Additionally, in August, October, and November 2016,
petitioner and his two brothers received another distribution relating to
CSTC’s 2015 tax refunds.
IV. The Contribution Confirmation Letter, Tax Return, & Appraisal
On November 18, 2015, Fidelity Charitable sent petitioners a
contribution confirmation letter acknowledging a charitable
12 The agreement also provided for HCI to receive shares of nonvoting
convertible preferred stock in CSTC Holdings and a subordinated promissory note for
$2 million.
12
[*12] contribution from them of 1,380.400 shares of CSTC stock. 13 The
letter indicated, inter alia, that Fidelity Charitable received the shares
of CSTC stock on June 11, 2015, and stated that “Fidelity Charitable
has exclusive legal control over the contributed asset, and this
contribution is irrevocable and cannot be refunded.” The letter further
stated that “Fidelity Charitable did not provide any goods or services in
exchange for or in consideration of this contribution.” Fidelity
Charitable also provided petitioners with a yearend account statement,
which reported a received date of June 11, 2015, for the shares of CSTC
stock and stated that “[a]ny error must be reported to Fidelity
Charitable within 60 days.”
On November 30, 2015, petitioner emailed Ms. Kanski, asking:
“What date did we donate the stock to Fidelity Charitable?” He stated
that “FINNEA is playing dumb toward providing the appraisal and I
have asked Plante Moran.” Several minutes later, petitioner sent a
subsequent email to Ms. Kanski: “I think I found it: 6/11/15,” and
copying text that appeared to be from Fidelity Charitable’s
documentation. On December 18, Ms. Kanski emailed petitioner to
inform him that she had asked Mr. Hensien of Clark Hill “to light a fire
under FINNEA regarding the appraisal.”
Ms. Kanski supervised the preparation of petitioners’ 2015
federal income tax return and signed the return as the preparer. The
return was timely filed with the Internal Revenue Service (IRS) on April
14, 2016. Petitioners did not report any capital gains associated with
the sale of the 1,380 shares and claimed a noncash charitable
contribution deduction of $3,282,511.
Petitioners attached to their return a Form 8283, Noncash
Charitable Contributions, reporting a contribution of $3,282,511
relating to the 1,380 shares of CSTC stock and a date of contribution of
June 11, 2015. The declaration of appraiser section on the Form 8283
13 On July 15, 2015, Fidelity Charitable apparently sent petitioners an initial
contribution confirmation letter for the receipt of the shares of CSTC stock. By
unsigned letter dated November 18, 2015, Fidelity Charitable informed petitioners
that “[d]ue to an error made by one of our contribution representatives, a contribution
confirmation dated July 15, 2015 was mailed to you noting the incorrect party for tax
deduction purposes.” That letter further stated that “[t]his error has now been
corrected,” that “a new confirmation letter has been mailed,” and that petitioners
“must disregard the contribution confirmation letter that was previously sent to you,
dated July 15, 2015.” Petitioners did not produce a copy of the initial, apparently
erroneous, contribution confirmation letter.
13
[*13] was signed by Brian Dragon as appraiser, and the donee
acknowledgment section was signed by a representative of Fidelity
Charitable. Attached to the Form 8283 was a document entitled “CSTC
Fidelity Gift Fund Valuation,” which purported to be a qualified
appraisal that Mr. Dragon prepared with respect to the “CSTC Fidelity
Gift Fund.” According to the appraisal, Mr. Dragon determined that the
1,380 shares of CSTC stock had a value of $3,282,511 as of June 11,
2015, which was $340,545 higher than the actual proceeds Fidelity
Charitable received from the sale of those shares to HCI on July 15,
2015. The appraisal included a brief biography of Mr. Dragon (which
did not address whether Mr. Dragon had appraisal experience or
qualifications), a valuation summary, the Forms 8283 and 8282, Donee
Information Return, and a number of transactional documents relating
to the acquisition by HCI. The appraisal attached a final version of the
Minority Stock Purchase Agreement, which included an amended clause
appointing Clark Hill as seller’s representative.
The valuation summary page included three columns with
different valuation scenarios. Each valuation started with an enterprise
value of $105 million (the total consideration per the Contribution and
Stock Purchase Agreement) and then made various adjustments. The
first scenario added to the value the amount of capital expenditure
reimbursement and subtracted the amount of transaction fees (both of
which were accounted for in the transaction with HCI) to arrive at a
value of $103,118,311 and thus a proportional value of $2,941,966 (i.e.,
the actual amount of proceeds received by Fidelity Charitable). The
second scenario also added to the value the amount of additional
postclosing payments received by petitioner and his two brothers (but
not Fidelity Charitable), which related to excess working capital and
CSTC’s tax refunds, and subtracted minor adjustments, to arrive at a
value of $105,697,329 and thus a proportional value of $3,015,546.
Finally, the third scenario also added to the value $9,357,335 of “Cash
& Equivalents,” to arrive at a value of $115,054,664 and thus a
proportional value of $3,282,511 (i.e., the claimed appraisal value).
The appraisal report valued the CSTC stock as of June 11 but did
not expressly disclose a date of contribution for the shares. The
appraisal included a page that listed a number of traditional valuation
approaches and quoted from a section of Rev. Rul. 59-60, 1959-1 C.B.
237, that discusses valuation of securities. On the following page the
appraisal stated that FINNEA “elected not to contemplate the
aforementioned traditional valuation methods in favor of the empirical
valuation resulting from its thorough marketing efforts below.” In the
14
[*14] space below, the appraisal contained the scope of services for
which FINNEA had been engaged, copied from the text of its letter of
engagement with CSTC. The appraisal did not further explain the
empirical method used in the appraisal. Neither did it include a
statement that it was prepared for federal income tax purposes.
Mr. Dragon had previously performed valuations on a limited
basis, including one estate tax valuation, but had not previously
prepared an appraisal substantiating a charitable contribution of shares
in a closely held corporation. Mr. Dragon did not charge an additional
fee for the appraisal in addition to what he and FINNEA had already
received as fees in the transaction with HCI; nor did Mr. Dragon and
petitioners execute a separate engagement letter for him to perform the
appraisal. While petitioners received a quote from a national accounting
firm, Plante Moran, to complete an appraisal, they ultimately decided
to have Mr. Dragon prepare the report instead.
A Form 8282 was prepared for petitioners. Signed by a
representative of Fidelity Charitable, it reported the receipt of
petitioners’ entire interest in 1,380.400 shares of CSTC stock on June
11, 2015. A representative of Fidelity Charitable later signed an
amended Form 8282, which reflected the receipt of 1,380 shares of CSTC
stock from petitioners, rather than 1,380.400.
V. The Examination & Notice of Deficiency
By letter dated December 19, 2017, petitioners were informed
that the Commissioner had selected their 2015 return for examination.
Ms. Kanski represented petitioners during the examination. On
December 6, 2018, John Copenhagen, an IRS group manager,
electronically signed a Civil Penalty Approval Form approving the
assessment of a penalty under section 6662 against petitioners. By
letter dated December 6, 2018, respondent proposed to disallow in full
petitioners’ charitable contribution deduction and to assess a penalty
under section 6662.
On October 9, 2019, respondent issued to petitioners a notice of
deficiency, determining a deficiency of $647,489, resulting from the
disallowance of the claimed charitable contribution deduction, and a
penalty of $129,498 under section 6662(a).
Petitioner’s timely Petition was filed on October 15, 2019. On
December 16, 2019, respondent filed an Answer. Respondent’s counsel
received approval to request assessment of an additional penalty under
15
[*15] section 6662(a) on February 19, 2020, in an email from, her
immediate supervisor at the IRS Office of Chief Counsel. On August 25,
2020, respondent filed an amended Answer, asserting an increased
deficiency and an increased section 6662(a) penalty, due to application
of the anticipatory assignment of income doctrine.
OPINION
In general, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
proving that those determinations are erroneous. Rule 142(a)(1); Welch
v. Helvering, 290 U.S. 111, 115 (1933); Kearns v. Commissioner, 979 F.2d
1176, 1178 (6th Cir. 1992), aff’g T.C. Memo. 1991-320. Moreover,
deductions are a matter of legislative grace, and taxpayers must
demonstrate their entitlement to the deductions claimed. INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992). However, the
Commissioner bears the burden of proof with respect to new matters or
increases in deficiency pleaded in his answer. Rule 142(a)(1). In his
amended Answer, respondent first asserted an increase in deficiency on
the grounds that petitioners made an anticipatory assignment of income
of their proceeds from the sale of CSTC shares to HCI. Consequently,
the burden is on petitioners only with respect to (1) whether they made
a valid gift of shares to Fidelity Charitable and (2) whether they are
entitled to a charitable contribution deduction. Respondent bears the
burden with respect to whether petitioners realized and recognized
gains pursuant to the anticipatory assignment of income doctrine.
The burden of proof on factual issues may be shifted to the
Commissioner if the taxpayer introduces “credible evidence” with
respect thereto and satisfies recordkeeping and other requirements. See
§ 7491(a)(1) and (2). Petitioners have not sought to shift the burden with
respect to any factual issue.
Gross income means “all income from whatever source derived,”
including “[g]ains derived from dealings in property.” § 61(a)(3). In
general, a taxpayer must realize and recognize gains on a sale or other
disposition of appreciated property. See § 1001(a)–(c). However, a
taxpayer typically does not recognize gain when disposing of appreciated
property via gift or charitable contribution. See Taft v. Bowers, 278 U.S.
470, 482 (1929); Guest v. Commissioner, 77 T.C. 9, 21 (1981); see also
§ 1015(a) (providing for carryover basis of gifts). A taxpayer may also
generally deduct the fair market value of property contributed to a
qualified charitable organization. See § 170(a)(1); Treas. Reg.
16
[*16] § 1.170A-1(c)(1). Contributions of appreciated property are thus
tax advantaged compared to cash contributions; when a contribution of
property is structured properly, a taxpayer can both avoid paying tax on
the unrealized appreciation in the property and deduct the property’s
fair market value. See, e.g., Dickinson v. Commissioner, T.C. Memo.
2020-128, at *5. The use of a donor-advised fund further optimizes 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.”
Fairbairn v. Fid. Invs. Charitable Gift Fund, No. 18-cv-04881, 2021 WL
754534, at *2 (N.D. Cal. Feb. 26, 2021).
We apply a two-part test when determining whether to respect
the form of a charitable contribution of appreciated property followed by
a sale by the donee. The donor must (1) give the appreciated property
away absolutely and divest of title (2) “before the property gives rise to
income by way of a sale.” Humacid Co. v. Commissioner, 42 T.C. 894,
913 (1964). The first prong incorporates the section 170(c) requirement
that the taxpayer make a valid gift 14 of property, see Jones v.
Commissioner, 129 T.C. 146, 150 (2007), aff’d, 560 F.3d 1196 (10th Cir.
2009), while the second prong incorporates the anticipatory assignment
of income doctrine, see Dickinson, T.C. Memo. 2020-128, at *8.
Accordingly, we first must determine whether petitioners made a valid
gift of the CSTC shares to Fidelity Charitable and, if so, on what date
the gift was made. We must then determine the tax consequences,
including eligibility for a charitable contribution deduction, of any gift
by petitioners.
I. Valid Gift of Shares of Stock
“Ordinarily, a contribution is made at the time delivery is
effected.” Treas. Reg. § 1.170A-1(b). The regulations further provide
that “[i]f a taxpayer unconditionally delivers or mails a properly
endorsed stock certificate to a charitable donee or the donee’s agent, the
gift is completed on the date of delivery.” 15 Id. However, the regulations
do not define what constitutes delivery. See, e.g., Dyer v. Commissioner,
14 We use the term “gift” synonymously here with the term “charitable
contribution.” See Seed v. Commissioner, 57 T.C. 265, 275 (1971).
15 The regulations alternatively provide, in relevant part, that “[i]f the donor
delivers the stock certificate to his bank or broker as the donor’s agent, or to the issuing
corporation or its agent, for transfer into the name of the donee, the gift is completed
on the date the stock is transferred on the books of the corporation.” Treas. Reg.
§ 1.170A-1(b).
17
[*17] T.C. Memo. 1990-51, 58 T.C.M. (CCH) 1321, 1323; Brotzler v.
Commissioner, T.C. Memo. 1982-615, 44 T.C.M. (CCH) 1478, 1480;
Alioto v. Commissioner, T.C. Memo. 1980-360, 40 T.C.M. (CCH) 1147,
1154, aff’d, 692 F.2d 762 (9th Cir. 1982). Accordingly, we must first look
to state law for the threshold determination of whether petitioners
divested themselves of their property rights via gift. 16 See United States
v. Nat’l Bank of Com., 472 U.S. 713, 722 (1985) (concluding that state
law determines property rights and federal law classifies them for
appropriate tax treatment); Jones, 129 T.C. at 150 (“In order to make a
valid gift for Federal tax purposes, a transfer must at least effect a valid
gift under the applicable State law.”); Greer v. Commissioner, 70 T.C.
294, 304 (1978) (applying state gift law requirements to charitable
contribution of property), aff’d on another issue, 634 F.2d 1044 (6th Cir.
1980); Kissling v. Commissioner, T.C. Memo. 2020-153, at *22 (“Whether
delivery is effected is a question of state law.”). In doing so, we apply
state law in the manner in which the highest court of the state has
indicated that it would apply the law. See Commissioner v. Estate of
Bosch, 387 U.S. 456, 465 (1967). Where the state’s highest court is
silent, we must discern and apply the state law, giving “proper regard”
to the state’s lower courts. See Julia R. Swords Tr. v. Commissioner,
142 T.C. 317, 342 (2014) (quoting Commissioner v. Estate of Bosch, 387
U.S. at 465).
As to the choice of state law, both parties focused their state law
briefing on Michigan law, and we cannot discern a choice of law principle
that would suggest the parties’ understanding is incorrect. Accordingly,
we apply the law of the state of petitioners’ domicile, Michigan, with
respect to whether and when petitioners made a valid gift of the CSTC
shares. See Macatawa Bank v. Wipperfurth, 822 N.W.2d 237, 238 (Mich.
Ct. App. 2011) (“The longstanding rule in Michigan is that ‘the situs of
intangible assets is the domicile of the owner unless fixed by some
positive law.’” (quoting Brown v. O’Donnell (In re Rapoport’s Est.), 26
N.W.2d 777, 781 (Mich. 1947))); see also Malkan v. Commissioner, 54
16 This Court has at times applied its own longstanding test for a valid inter
vivos gift. See Guest, 77 T.C. at 16 (quoting Weil v. Commissioner, 31 B.T.A. 899, 906
(1934), aff’d, 82 F.2d 561 (5th Cir. 1936)). This test, while more extensive on its face
than what is required under Michigan law, shares the same core elements: “donative
intent, delivery by the donor and acceptance by the donee.” Goldstein v. Commissioner,
89 T.C. 535, 542 (1987) (distilling the Weil test); see Estate of Sommers v.
Commissioner, T.C. Memo. 2013-8, at *43 n.20 (analyzing validity of gift under
principles consistent with both federal and state law); Estate of Dubois v.
Commissioner, T.C. Memo. 1994-210, 1994 WL 184393, at *2 (reaching conclusion that
no valid gift was made under both federal and state law).
18
[*18] T.C. 1305, 1314 n.3 (1970) (applying law of the situs to determine
validity of gift of shares of stock).
In determining the validity of a gift, Michigan law requires a
showing of (1) donor intent to make a gift; (2) actual or constructive
delivery of the subject matter of the gift; and (3) donee acceptance. 17 See
Davidson v. Bugbee, 575 N.W.2d 574, 576 (Mich. Ct. App. 1997) (citing
Molenda v. Simonson, 11 N.W.2d 835, 836 (Mich. 1943)); see also United
States v. Four Hundred Seventy Seven (477) Firearms, 698 F. Supp. 2d
894, 902 (E.D. Mich. 2010) (applying Michigan law).
Petitioners and respondent each advance different dates for when
petitioners made a gift to Fidelity Charitable of the CSTC shares.
Petitioners argue that a gift was made on June 11, 2015, and they point
to petitioner’s testimony and Fidelity Charitable’s corrected
contribution confirmation letter, which both claim June 11 as the date
of the gift. Respondent argues that a valid gift was not made until at
least July 13, 2015, when Fidelity Charitable first received a stock
certificate from petitioners’ representatives. 18 We will examine each of
three required elements for a valid gift in turn.
17 Petitioners alternatively direct us to Article 8 of the Uniform Commercial
Code (UCC), as adopted by Michigan, which on its face is applicable to gift transfers of
certificated securities. See Mich. Comp. Laws § 440.1201(2)(cc) (2015) (“‘Purchase’
means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security
interest, issue or reissue, gift, or any other voluntary transaction creating an interest
in property.” (Emphasis added.)); id. (dd); id. § 440.8301(1)(a) and (b) (delivery of
certificated security occurs when purchaser or third party acting on their behalf
“acquires possession of the security certificate”). While the Michigan Supreme Court
does not appear to have expressly addressed the issue, we do not read the UCC
provisions as disturbing the longstanding Michigan common law test. See id.
§ 440.8302 cmt. 2 (“Article 8 does not determine whether a property interest in
certificated or uncertificated security is acquired under other law, such as the law of
gifts, trusts, or equitable remedies.”); id. § 440.1103(2) (stating that “principles of law
and equity” supplement UCC provisions); see also Young v. Young, 393 S.E.2d 398, 401
(Va. 1990) (“The common law requirements of delivery and acceptance are not removed
by those provisions of the [UCC] pertaining to the transfer of securities.”).
18 Respondent raises a separate issue with regard to the dividend paid out by
CSTC on July 14 to petitioner and the two brothers, but not paid to Fidelity Charitable,
speculating that petitioners did not make a valid gift of the shares. Respondent’s
contention appears to be foreclosed by Michigan law, which provides that retention of
a dividend does not preclude a valid gift of the underlying shares. See Cook v. Fraser,
299 N.W. 113, 114 (Mich. 1941) (citing Ford v. Ford, 259 N.W. 138 (Mich. 1935)); In re
Estate of Prinstein, No. 252682, 2005 WL 1459575, at *1 (Mich. Ct. App. June 21, 2005)
(“[T]he fact that a donor collects dividends on a security does not make an inter-vivos
gift of that security invalid.”).
19
[*19] A. Present Intent
The determination of a party’s subjective intent at some historical
point is necessarily a highly fact-bound issue. When deciding such an
issue, we must determine “whether a witness’s testimony is credible
based on objective facts, the reasonableness of the testimony, the
consistency of statements made by the witness, and the demeanor of the
witness.” Ebert v. Commissioner, T.C. Memo. 2015-5, at *5–6; see also
Estate of Kluener v. Commissioner, 154 F.3d 630, 636 (6th Cir. 1998),
aff’g in relevant part T.C. Memo. 1996-519. If contradicted by the
objective facts in the record, we will not “accept the self-serving
testimony of [the taxpayer] . . . as gospel.” Tokarski v. Commissioner,
87 T.C. 74, 77 (1986); see Davis v. Commissioner, 88 T.C. 122, 143 (1987),
aff’d, 866 F.2d 852 (6th Cir. 1989).
We start with petitioner’s contemporaneous emails and the
contemporaneous transactional documents, which we consider to be
especially probative evidence with respect to his intent. On June 1,
petitioner first expressed in an email that he wanted to wait to make
the gift of the shares to Fidelity Charitable until the last possible
moment, when he was “99% sure” that the sale to HCI would close.
Petitioner’s subsequent actions and communications were consistent
with that intent. On June 11, petitioner and his two brothers executed
the Consent to Assignment agreement, an act that demonstrated
petitioner’s generalized future intent to make a gift. However, the
Consent to Assignment cannot establish that, as of June 11, such an
intent was sufficiently present and specific. See Czarski v. Bonk, 124
F.3d 197, 1997 WL 535773, at *4 (6th Cir. 1997) (unpublished table
decision) (applying Michigan law and finding no evidence establishing
purported donor’s “specific intent” with respect to the particular
property). On its face, the Consent to Assignment agreement failed to
specify a number of shares to be contributed, suggesting that petitioner
had not yet decided that key detail. Similarly, the original stock
certificate, which was prepared on or sometime after June 11, failed to
specify an effective date, again suggesting that a date would be decided
upon later. 19 On July 6, petitioner stated in an email that he was still
19 We note that copies of the Consent to Assignment agreement and stock
certificate that were produced to the Commissioner during the examination appear to
have been modified and backdated to specify, respectively, a number of shares and an
effective date that were not originally present at the time of the transaction. We find
such inconsistencies to be significant in evaluating petitioners’ claim that the gift was
made on June 11. Cf. Ferguson v. Commissioner, 174 F.3d 997, 1000 (9th Cir. 1999)
20
[*20] “not totally sure of the shares being transferred to the charitable
fund yet.” That email confirms that, as of July 6, the details of the
contribution were still in flux. Indeed, three days later, on July 9, Mr.
Bear emailed Mr. Boland to inform him that “it looks like Scott has
arrived at 1380 shares.”
At trial, petitioner testified that he believed the number of shares
to be donated was set at 1,380 on June 11. That testimony is squarely
contradicted by the Consent to Assignment agreement, petitioner’s
July 6 email, and Mr. Bear’s July 9 email. See, e.g., Richardson v.
Commissioner, T.C. Memo. 1984-595, 49 T.C.M. (CCH) 67, 73–74
(concluding that taxpayer’s characterization of date of contribution was
not credible where in conflict with “documents written
contemporaneously with the donation”). Petitioner also testified that
his July 6 email was referring to a potential donation of a second tranche
of shares, a theoretical event which apparently never took place. The
record contains no evidence supporting the claim that petitioners
attempted to make (or even contemplated) two separate gifts of CSTC
shares. We find petitioner’s self-serving testimony as to his intent to be
incredible.
The record does not support a finding of present intent to make a
gift until July 9 when petitioner settled on a number of 1,380 shares.
From that point on, petitioner took a number of actions that confirmed
his present intent to transfer. On July 9 or 10 petitioner delivered the
physical stock certificate to Ms. Kanski’s office. Similarly, on July 10
petitioner created an online giving account with Fidelity Charitable.
Taken together, these actions provide sufficient credible evidence of
petitioner’s intent. We conclude that, as of July 9, petitioner had present
intent to make a gift.
B. Delivery
At bottom, the delivery requirement generally contemplates an
“open and visible change of possession” of the donated property.
Shepard v. Shepard, 129 N.W. 201, 208 (Mich. 1910); Davis v.
Zimmerman, 40 Mich. 24, 27 (1879). As the term itself suggests,
manually providing tangible property to the donee is the classic form of
delivery. See, e.g., Restatement (Second) of Property § 31.1 cmt. b (Am.
L. Inst. 1992) (describing the “simplest” form of delivery as the donor’s
(questioning purported date of contribution where “the original handwritten date in a
printed box entitled ‘date of donation’ . . . had been completely scratched out” and a
new date written next to it), aff’g 108 T.C. 244 (1997).
21
[*21] “plac[ing] the subject matter of the gift in the hands of the
intended donee”). Similarly, manually providing to the donee a stock
certificate that represents intangible shares of stock is traditionally
sufficient delivery. See Philip Mechem, Gifts of Corporation Shares, 20
Ill. L. Rev. 9, 15–16 (1925–1926) (collecting cases). However, the
determination of what constitutes delivery is inherently context-specific
and depends upon the “nature of the subject-matter of the gift” and the
“situation and circumstances of the parties.” Shepard, 129 N.W. at 208
(“[N]o absolute rule can be laid down as to what will constitute a
sufficient delivery . . . .”).
Delivery need not necessarily be actual. Constructive delivery
may be effected where property is delivered into the possession of
another on behalf of the donee. See, e.g., In re Van Wormer’s Estate, 238
N.W. 210, 212 (Mich. 1931) (finding constructive delivery where stock
certificate was issued in the name of donee and deposited at bank).
Whether constructive or actual, delivery “must be unconditional and
must place the property within the dominion and control of the donee”
and “beyond the power of recall by the donor.” In re Casey Estate, 856
N.W.2d 556, 563 (Mich. Ct. App. 2014) (citing Osius v. Dingell, 134
N.W.2d 657, 659 (Mich. 1965)); see Geisel v. Burg, 276 N.W. 904, 908
(Mich. 1937) (finding no valid gift where certificates of deposit were
never placed beyond donor’s control). If constructive or actual delivery
of the gift property occurs, its later retention by the donor is not
sufficient to defeat the gift. See Estate of Morris v. Morris, No. 336304,
2018 WL 2024582, at *5 (Mich. Ct. App. May 1, 2018) (citing Jackman
v. Jackman, 260 N.W. 769, 770 (Mich. 1935)); see also Garrison v. Union
Tr. Co., 129 N.W. 691, 692 (Mich. 1911).
With respect to delivery, neither Mr. Hoensheid nor Ms. Kanski
was able to credibly identify a specific action taken on June 11 that
placed the shares within Fidelity Charitable’s dominion and control. 20
See Czarski, 1997 WL 535773, at *4 (finding no evidence that donor took
any action that would constitute delivery or place gift property in
donee’s dominion and control); see also Reed Smith Shaw & McClay v.
Commissioner, T.C. Memo. 1998-64, 1998 WL 62393, at *8 (declining to
credit uncorroborated self-serving testimony regarding actions
20 In his testimony, petitioner implied a belief that the execution of the Consent
to Assignment agreement had effected a transfer. Execution of the Consent to
Assignment agreement did not purport to transfer ownership of any portion of
petitioner’s shares; instead, it merely allowed him the ability to transfer shares in the
future.
22
[*22] purportedly taken to effect transfer of shares to trust). Instead,
petitioner’s and Ms. Kanski’s trial testimony suggested that the
physical, partially completed stock certificate remained on petitioner’s
desk until July 9 or 10, 2015, at which point it was dropped off at Ms.
Kanski’s office. Consequently, delivery to Fidelity Charitable could not
have taken place before July 9 or 10, because petitioner retained
dominion and control of the shares while the physical certificate was
sitting on his desk. Cf. In re Casey Estate, 856 N.W.2d at 563 (finding
no delivery where donor retained property in his safe and could thus
change the combination at any time to preclude access by purported
donee).
The same principle is applicable to the three or four days when
the physical certificate was in Ms. Kanski’s office, before the forwarding
of the PDF share certificate to Fidelity Charitable. The Minority Stock
Purchase Agreement’s seller representative clause, as executed, named
Ms. Kanski’s firm, Clark Hill, as the seller’s representative of Fidelity
Charitable. That designation raises the question of whether Ms.
Kanski’s possession of the certificate constituted delivery to Fidelity
Charitable. However, we cannot conclude that providing the certificate
to Ms. Kanski removed the shares from petitioner’s power of recall.
Petitioners have not provided any evidence to indicate that Ms. Kanski
could have disregarded an instruction from petitioner—her client—to
return or simply discard the stock certificate before July 13. See Osius,
134 N.W.2d at 656 (stating that a valid gift “must invest ownership in
the donee beyond the power of recall by the donor”); Snyder v. Snyder,
92 N.W. 353, 354 (Mich. 1902) (“The retaining of any control in the
hands of the donor over the subject of the gift renders it invalid.”); see
also Londen v. Commissioner, 45 T.C. 106, 109 (1965) (finding it
“unlikely” that corporation’s secretary “would have refused to honor a
countermand of the transfer instructions issued by [the taxpayer]”);
Morrison v. Commissioner, T.C. Memo. 1987-112, 53 T.C.M. (CCH) 251,
255 (finding no evidence that if taxpayer had “countermanded her
instructions to transfer the stock, [her broker] would have refused to
halt the transfer”). Thus, we conclude that the stock certificate, while
in the possession of Ms. Kanski, was subject to recall by petitioner at
any time and was not within the dominion and control of Fidelity
Charitable, precluding delivery. See Londen, 45 T.C. at 109; Zipp v.
Commissioner, 28 T.C. 314, 324–25 (1957) (finding retention of stock
certificates by donor’s attorney to preclude a valid gift), aff’d, 259 F.2d
119 (6th Cir. 1958); Bucholz v. Commissioner, 13 T.C. 201, 204 (1949)
(finding no valid gift where taxpayer instructed custodian of corporate
23
[*23] books to prepare stock certificates but remained undecided about
ultimate gift).
In some jurisdictions, transfer of shares on the books of the
corporation can, in certain circumstances, constitute delivery of an inter
vivos gift of shares. See, e.g., Wilmington Tr. Co. v. Gen. Motors Corp.,
51 A.2d 584, 594 (Del. Ch. 1947); Chi. Title & Tr. Co. v. Ward, 163 N.E.
319, 322 (Ill. 1928); Brewster v. Brewster, 114 A.2d 53, 57 (Md. 1955).
However, the Michigan Supreme Court does not appear to have
addressed whether transfer on the books of a corporation alone can
constitute delivery of a valid gift of certificated shares of stock. In
several older tax cases, the U.S. Court of Appeals for the Sixth Circuit—
to which an appeal in this case would lie, absent stipulation to the
contrary—has stated that transfer on the books of a corporation
constitutes delivery of shares of stock, apparently as a matter of federal
common law. See Lawton v. Commissioner, 164 F.2d 380, 384 (6th Cir.
1947), rev’g 6 T.C. 1093 (1946); Bardach v. Commissioner, 90 F.2d 323,
326 (6th Cir. 1937), rev’g 32 B.T.A. 517 (1935); Marshall v.
Commissioner, 57 F.2d 633, 634 (6th Cir. 1932), aff’g in part, rev’g in
part 19 B.T.A. 1260 (1930). We have previously observed that, in this
line of cases, the transfers on the books of the corporation were bolstered
by other objective actions that evidenced a change in possession and
thus a gift. See Jolly’s Motor Livery Co. v. Commissioner, T.C. Memo.
1957-231, 16 T.C.M. (CCH) 1048, 1073 (distinguishing Bardach and
Marshall and instead concluding that taxpayer failed to make a valid
gift under Tennessee law); see also Bucholz, 13 T.C. at 204; Campbell v.
Commissioner, T.C. Memo. 1979-411, 39 T.C.M. (CCH) 287, 289. We
would thus be hesitant to conclude that transfer on the books of CSTC
would be sufficient here as a matter of law, given the apparent split of
authorities on the issue and lack of state law precedent. See Fletcher
Cyclopedia of the Law of Corporations § 5684 (West 2022) (“Generally, a
transfer of stock from the donor to the donee on the corporate books,
standing alone, is not sufficient to constitute a valid gift, at least with
regard to a close corporation where the donor is in control[.]”); Mark S.
Rhodes, Transfer of Stock § 6:3 (7th ed. 2021) (“There is a division of
authority as to whether a mere transfer on the books of the corporation
without delivery of the certificate constitutes a valid gift of stock.”);
Mechem, Gifts of Corporation Shares, supra, at 25–26 (describing view
that transfer on the books of the corporation effects only the relationship
between new shareholder and corporation, while delivery of certificate
separately transfers ownership of shares as property between persons).
24
[*24] However, even assuming arguendo that a transfer on the
corporate books is sufficient to constitute delivery of certificated shares
of stock in Michigan, we are still unable to find on the record before us
that such a transfer occurred. The primary relevant evidence produced
by petitioners is the printout of a purported stock ledger. The printout,
which has a report date of July 13, shows an entry issuing 1,380 shares
to Fidelity Charitable on July 10. At trial, however, petitioner testified
that the printout was not from CSTC’s official stock ledger but appeared
to him instead to have been prepared by one of CSTC’s attorneys.
Indeed, petitioners themselves have at no point asserted that a gift
occurred on July 10 and have not produced any evidence to corroborate
such a transfer on the books of CSTC. We thus attribute little weight to
the printout, given petitioners’ failure to corroborate it with credible
evidence. See Sellers v. Commissioner, T.C. Memo. 1977-70, 36 T.C.M.
(CCH) 305, 312 (observing that self-serving corporate records are
relevant evidence but “the weight to be accorded them is dependent upon
their completeness and credibility”), aff’d, 592 F.2d 227 (4th Cir. 1979).
Consequently, the record is insufficient to support a conclusion that
delivery of the shares was made on July 10 via transfer on the books of
CSTC.
Finally, we look to Mr. Bear’s July 13 email of the PDF stock
certificate to Fidelity Charitable. That email provides the strongest
documentary evidence of the shares’ leaving petitioner’s dominion and
control. Providing Fidelity Charitable with a copy of a stock certificate
issued in its name was an objective act evidencing an “open and visible
change of possession.” Shepard, 129 N.W. at 208. Further, we find that
this act placed the shares of CSTC in Fidelity Charitable’s dominion and
control, by providing Fidelity Charitable with an instrument that it
could present to CSTC and exercise its rights as shareholder. Nor did
any postdelivery retention by petitioner of a stock certificate render
delivery ineffectual. See id. (stating that donor’s postdelivery retention
of stock certificates was “immaterial” to validity of gift). On the basis of
the foregoing, we conclude that delivery of the shares of CSTC did not
occur before July 13.
C. Acceptance
Donee acceptance of a gift is generally “presumed if the gift is
beneficial to the donee.” Davidson, 575 N.W.2d at 576; see Osius, 134
N.W.2d at 660; Dunlap v. Dunlap, 53 N.W. 788, 790 (Mich. 1892) (“The
donation being for [the donees’] advantage, they will be deemed to have
accepted it, unless the contrary appears.”). Petitioners seek to reinforce
25
[*25] that presumption by relying on the corrected contribution
confirmation letter and yearend account statement from Fidelity
Charitable, both of which stated that the shares were contributed (and
thus presumably accepted by Fidelity Charitable) on June 11. Both
Fidelity Charitable’s guidelines and the yearend account statement note
that donors are able to request corrections of both contribution
confirmation letters and account statements. Petitioners did not
produce a copy of the original contribution confirmation letter, dated
July 15, 2015, that they received from Fidelity Charitable. Such
evidence could have confirmed whether Fidelity Charitable consistently
understood the date of contribution to be June 11 and what errors were
present in the original letter. Petitioners’ failure to produce such
evidence within their control gives rise to a presumption that it would
be unfavorable to their case. See Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir.
1947). Given our conclusions above that neither the present intent nor
the delivery requirement was met on June 11, we do not consider the
corrected documentation from Fidelity Charitable to be reliable evidence
with respect to the date of acceptance.
In contrast, Mr. Boland’s July 13 email is the more convincing
evidence and rebuts any presumption that acceptance took place on an
earlier date. In that email Mr. Boland represented that he would need
the stock certificate before he could take action with respect to the sale
of shares to HCI. As Mr. Boland later testified, Fidelity Charitable
typically required receipt of a stock certificate as a precondition to its
acceptance of a gift when dealing with a contribution of closely held,
certificated securities. Later on July 13, after receiving the stock
certificate, Mr. Boland on behalf of Fidelity Charitable executed the
Minority Stock Purchase Agreement under warranty of good title. That
act is sufficient to establish acceptance by Fidelity Charitable. We
conclude that acceptance occurred on July 13.
D. Conclusion
Petitioners have failed to establish that any of the elements of a
valid gift was present on June 11, 2015. Instead, as a matter of state
law, we find that petitioners made a valid gift of CSTC shares by
effecting delivery on July 13. We thus conclude that petitioners divested
themselves of title to the shares on July 13. See Humacid Co., 42 T.C.
at 913.
26
[*26] II. Anticipatory Assignment of Income
The anticipatory assignment of income doctrine is a longstanding
“first principle of income taxation.” Commissioner v. Banks, 543 U.S.
426, 434 (2005) (quoting Commissioner v. Culbertson, 337 U.S. 733, 739–
40 (1949)). The doctrine recognizes that income is taxed “to those who
earn or otherwise create the right to receive it,” Helvering v. Horst, 311
U.S. 112, 119 (1940), and that tax cannot be avoided “by anticipatory
arrangements and contracts however skillfully devised,” Lucas v. Earl,
281 U.S. 111, 115 (1930). A person with a fixed right to receive income
from property thus cannot avoid taxation by arranging for another to
gratuitously take title before the income is received. See Helvering v.
Horst, 311 U.S. at 115–17; Ferguson, 108 T.C. at 259. This principle is
applicable, for instance, where a taxpayer gratuitously assigns wage
income that the taxpayer has earned but not yet received, see Lucas v.
Earl, 281 U.S. at 114–15, or gratuitously transfers a debt instrument
carrying accrued but unpaid interest, see Austin v. Commissioner, 161
F.2d 666, 668 (6th Cir. 1947), aff’g 6 T.C. 593 (1946).
We deem the donor to have effectively realized income and then
assigned that income to another when the donor has an already fixed or
vested right to the unpaid income. See Cold Metal Process Co. v.
Commissioner, 247 F.2d 864, 872–73 (6th Cir. 1957) (focusing on
whether right to future income from assigned property was contingent
or vested at the time of assignment), rev’g 25 T.C. 1333 (1956); Estate of
Applestein v. Commissioner, 80 T.C. 331, 342 (1983); Friedman v.
Commissioner, 41 T.C. 428, 435 (1963) (describing doctrine as focused
on “whether the income had been earned so that the right to payment at
a future date existed when the gift was made”), aff’d, 346 F.2d 506 (6th
Cir. 1965). The same principle is often applicable where a taxpayer
gratuitously transfers shares of stock that are subject to a pending, pre-
negotiated transaction and thus carry a fixed right to proceeds of the
transaction. See Ferguson, 108 T.C. at 259; Rollins v. United States, 302
F. Supp. 812, 817–18 (W.D. Tex. 1969); see also Commissioner v. Court
Holding Co., 324 U.S. 331, 334 (1945) (“A sale by one person cannot be
transformed for tax purposes into a sale by another by using the latter
as a conduit through which to pass title.”).
In determining whether an anticipatory assignment of income
has occurred with respect to a gift of shares of stock, we look to the
realities and substance of the underlying transaction, rather than to
formalities or hypothetical possibilities. See Jones v. United States, 531
F.2d 1343, 1345 (6th Cir. 1976) (en banc); Allen v. Commissioner, 66 T.C.
27[*27] 340, 346 (1976) (adopting Jones’s approach); see also Cook v.
Commissioner, 5 T.C. 908, 911 (1945). In general, a donor’s right to
income from shares of stock is fixed if a transaction involving those
shares has become “practically certain to occur” by the time of the gift,
“despite the remote and hypothetical possibility of abandonment.”
Jones, 531 F.2d at 1346. In contrast, “[t]he mere anticipation or
expectation of income” at the time of the gift does not establish that a
donor’s right to income is fixed. Ferguson, 108 T.C. at 257; see S.C.
Johnson & Son, Inc. v. Commissioner, 63 T.C. 778, 785 (1975) (rejecting
Commissioner’s argument that right to income was fixed when there
was only a “reasonable probability” of income from appreciated
property).
As a preliminary matter, petitioners seek to rely on our recent
nonprecedential decision in Dickinson, T.C. Memo. 2020-128. There, the
taxpayer made several contributions to Fidelity Charitable of shares in
a privately held corporation of which he was the chief financial officer.
Id. at *2–3. On each occasion, the taxpayer’s contributions to Fidelity
Charitable were shortly followed by redemptions of those shares by the
corporation. Id. at *3. Applying the Humacid test, we looked to whether
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.”
Id. at *8. We determined to respect the form of the transaction, because
the redemption “was not a fait accompli at the time of the gift” and thus
the taxpayer “did not avoid receipt of redemption proceeds” by
contributing his shares. Id. at *9.
In reaching this holding, we found it evident from the record in
Dickinson that the redemptions would not have occurred but for the
taxpayer’s charitable contributions; thus there could be no “practically
certain to occur” realization event for the taxpayer to avoid at the time
of the gift. Id. This point is the key distinguishing factor between
Dickinson and petitioners’ case. Here, the record establishes that
petitioners’ charitable contribution would not have been made but for
the impending sale to HCI. Unlike in Dickinson, the timing of the sale
and petitioners’ gift raises a question as to whether at the time of gift
the sale was virtually certain to occur. Thus, Dickinson’s rationale does
not avail petitioners.
We must also initially address the role of the Commissioner’s
prior issued guidance, which petitioners have raised. In Rauenhorst v.
Commissioner, 119 T.C. 157, 173 (2002), we held that, “[u]nder the
circumstances” of that case, the Commissioner was bound not to argue
28
[*28] against his own subregulatory guidance, as expressed in Rev. Rul.
78-197, 1978-1 C.B. 83. 21 In Rauenhorst, we treated Rev. Rul. 78-197 as
a binding concession by the Commissioner that precluded him from
relying in that case on factors other than the donee’s obligation to sell
contributed property in his anticipatory assignment argument.
However, we also recognized in Rauenhorst, 119 T.C. at 171, the
axiom that “revenue rulings are not binding on this Court, or other
Federal courts.” See Dickinson, T.C. Memo. 2020-128, at *10 (“This
Court has not adopted Rev. Rul. 78-197 as the test for resolving
anticipatory assignment of income issues and does not do so today.”
(citations omitted)). For a taxpayer to rely on a revenue ruling, the facts
of the taxpayer’s transaction must be “substantially the same as those
considered in the revenue ruling.” Barnes Grp., Inc. v. Commissioner,
T.C. Memo. 2013-109, at *37–38, aff’d, 593 F. App’x 7 (2d Cir. 2014); see
Syzygy Ins. Co. v. Commissioner, T.C. Memo. 2019-34, at *47–48; see
also Statement of Procedural Rules, 26 C.F.R. § 601.601(d)(2)(v)(a), (e).
On the particular facts of this case, we do not find respondent’s
arguments to be sufficiently contrary to Rev. Rul. 78-197 to constitute a
disavowal of his published guidance. See Rev. Rul. 78-197, 1978-1 C.B.
at 83 (describing its application as only to “proceeds of a redemption of
stock under facts similar to those in Palmer”); cf. Rauenhorst, 119 T.C.
at 182–83 (focusing on Commissioner’s argument that courts are not
bound by revenue rulings and his reliance on a case 22 that had been
distinguished by the Commissioner in a prior private letter ruling).
While we consider a donee’s legal obligation to sell as “significant
to the assignment of income analysis,” Ferguson, 108 T.C. at 259, it “is
only one factor to be considered in ascertaining the ‘realities and
substance’ of the transaction,” Allen, 66 T.C. at 348 (quoting Jones, 531
F.2d at 1345). Instead, “the ultimate question is whether the transferor,
considering the reality and substance of all the circumstances, had a
fixed right to income in the property at the time of transfer.” Ferguson,
21In Rev. Rul. 78-197, 1978-1 C.B. at 83, in the wake of our decision in Palmer
v. Commissioner, 62 T.C. 684 (1974), aff’d on other issue, 523 F.2d 1308 (8th Cir. 1975),
the Commissioner advised that, “under facts similar to those in Palmer,” he would
treat a charitable contribution of stock followed by a redemption as an anticipatory
assignment of income “only if the donee is legally bound, or can be compelled by the
corporation, to surrender the shares for redemption.” Palmer involved a taxpayer’s
contribution of shares of stock in his controlled corporation to a charitable foundation
of which he was a trustee, followed by a redemption of the shares by the corporation.
22 Blake v. Commissioner, 697 F.2d 473, 480–81 (2d Cir. 1982) (declining to rely
on Rev. Rul. 78-197), aff’g T.C. Memo. 1981-579.
29
[*29] 108 T.C. at 259; see Dickinson, T.C. Memo. 2020-128, at *10. We
thus look to several other factors that bear upon whether the sale of
shares was virtually certain to occur at the time of petitioners’ gift. In
this case the relevant factors include (1) any legal obligation to sell by
the donee, (2) the actions already taken by the parties to effect the
transaction, see Ferguson, 106 T.C. at 264, (3) the remaining unresolved
transactional contingencies, see Robert L. Peterson Irrevocable Tr. #2 v.
Commissioner, T.C. Memo. 1986-267, 51 T.C.M. (CCH) 1300, 1316, aff’d
sub nom. Peterson v. Commissioner, 822 F.2d 1093 (8th Cir. 1987), and
(4) the status of the corporate formalities required to finalize the
transaction, see Estate of Applestein, 80 T.C. at 345–46.
A. Fidelity Charitable’s Obligation to Sell
We turn first to whether Fidelity Charitable did in fact have an
obligation to sell the CSTC shares. We conclude that respondent has
not established that Fidelity Charitable had any legal obligation to sell
the shares. 23 As petitioners point out, the terms and conditions of
Fidelity Charitable’s Letter of Understanding expressly disclaimed any
such obligation. In addition, respondent has not sufficiently established
the existence of any informal, prearranged understanding between
petitioners and Fidelity Charitable that might otherwise constitute an
obligation. See Greene v. United States, 13 F.3d 577, 583 (2d Cir. 1994);
see also Chrem, T.C. Memo. 2018-164, at *13. This factor weighs against
an anticipatory assignment of income but is not dispositive. See
Ferguson, 108 T.C. at 259.
23 In Chrem v. Commissioner, T.C. Memo. 2018-164, we suggested that a donor-
advised fund’s sponsoring organization may be subject to fiduciary duties that might
impose a legal obligation to sell contributed shares constituting a small minority
interest in a closely held corporation. Id. at *15 (“If it refused to tender its shares and
the entire transaction were scuttled, [the sponsoring organization] would apparently
be left holding a 13% minority interest in a closely held Hong Kong corporation, the
market value of which might be questionable.”); see also Grove v. Commissioner, 490
F.2d 241, 248 (2d Cir. 1973) (Oakes, J. dissenting) (looking to New York trust law and
observing that offering donated shares for redemption was “the only practice which a
university treasurer could correctly take and still meet his own statutory obligations
as a fiduciary”), aff’g T.C. Memo. 1972-98. Respondent did not present arguments or
testimony as to what, if any, fiduciary duties Fidelity Charitable might have owed that
would compel it to sell the CSTC shares to HCI. Accordingly, lacking the benefit of
meaningful briefing on the subject, we cannot find that Fidelity Charitable was in fact
legally obligated to sell the contributed shares by way of fiduciary duty.
30
[*30] B. Bonuses & Shareholder Distributions
Next, we look to what acts CSTC and HCI took to effect the
transaction before the July 13, 2015, gift. As of that date, a number of
acts had already taken place that may suggest the transaction was a
virtual certainty. One week before the gift, HCI had caused the
incorporation of a new holding company subsidiary to acquire the CSTC
shares. Three days before the gift, CSTC had amended its Articles of
Incorporation to allow for written shareholder consent, an action
requested by HCI. Most significantly, however, the “cash sweeping”
actions taken by CSTC strongly suggest that the transaction with HCI
was a virtual certainty before the gift on July 13.
On July 7, 2015 petitioner amended CSTC’s Change in Control
Bonus Plan in order to specify that CSTC “desire [sic] that the
consummation of the Investment Transaction result in payments to
eligible Grantees under the Plan.” That same day, petitioner stated in
an email that CSTC would “sweep the cash from the company prior to
closing and distribute it to the brothers.” As of July 7, CSTC and
petitioner thus considered the transaction with HCI so certain to occur
that they took action to trigger the bonus payouts, consistent with the
plan to sweep CSTC’s cash before closing. On July 10, 2015, CSTC then
paid out approximately $6.1 million in employee bonuses and, a few days
later on July 14, distributed approximately $4.7 million to petitioner and
his two brothers as shareholders. While the July 14 distribution took
place the day after the gift, petitioner’s statement on July 7 evidences
that the decision to make the distribution had already been made as of
that date, if not well formally authorized by CSTC. See Mich. Comp.
Laws § 450.1345(1) and (2). We thus find that, before July 13, CSTC
and petitioner had distributed and/or determined to distribute over $10
million out of the corporation.
Moreover, we consider it highly improbable that petitioner and
his two brothers would have emptied CSTC of its working capital if the
transaction had even a small risk of not consummating. Absent its
working capital, CSTC was no longer a going concern until the
transaction was finalized. See Cook, 5 T.C. at 911 (finding assignment
of income where donor of shares was “well aware that the corporate
activities had all but ceased except for the actual distribution in
liquidation”); see also Apt v. Birmingham, 89 F. Supp. 361, 393 (N.D.
Iowa 1950) (stating that gain may be realized when “for all practical
purposes corporate stock had no further purposes to fulfill” aside from
underlying transaction). The bonus payouts and distributions do not
31
[*31] appear from the record to have been in any way contingent on the
final execution of the purchase agreement. Accordingly, we conclude
that, once made, the bonus payouts and distributions could not be
clawed back and had tax consequences upon receipt for the participating
employees and shareholders, including petitioner himself.
In the reality of the transaction, the cash sweeps were thus highly
significant conditions precedent to consummating the transaction with
HCI. Cf. Kinsey v. Commissioner, 58 T.C. 259, 265–66 (1972) (finding
right to income on shares from liquidation was fixed where “a
substantial portion of [corporation’s] assets were distributed prior to the
date of the gift”), aff’d, 477 F.2d 1058 (2d Cir. 1973). As of July 13, 2015,
the CSTC shares were essentially “hollow receptacles” for conveying
proceeds of the transaction with HCI, “rather than an interest in a viable
corporation.” Estate of Applestein, 80 T.C. at 345–46; see Hudspeth v.
United States, 471 F.2d 275, 279 (8th Cir. 1972) (describing donated
shares as “merely empty vessels by which the taxpayer conveyed the
liquidation proceeds”). The cash sweep strongly weighs in favor of a
conclusion that the sale was a virtual certainty and thus petitioners’
right to income from the shares was fixed as of July 13, 2015.
C. Unresolved Sale Contingencies
Next, we look to what unresolved sale contingencies remained
between the parties as of the July 13, 2015, gift. See Robert L. Peterson
Irrevocable Tr. #2, 51 T.C.M. (CCH) at 1316–19 (focusing on various
contingencies that taxpayers argued precluded their right to sale
proceeds from becoming fixed before a gift). Petitioners argue that the
transaction with HCI was still being negotiated up until the closing on
July 15. Petitioners rely on petitioner’s trial testimony, where he
identified several negotiated issues, including an environmental
liability, employee compensation arrangements, and excess real estate.
At trial petitioner testified that he and HCI “basically negotiated right
up until the day before we closed”—i.e., July 14, 2015.
However, the record does not bear out the substance of
petitioner’s characterization. The identified employee compensation
and excess real estate issues appear to have been resolved in drafts of
the agreement prepared before July 13, 2015. At trial, a representative
of HCI characterized the environmental liability issue as “the one
probably biggest item of negotiation” resolved before closing. On July
10, 2015, HCI’s counsel prepared a draft with a new seller indemnity
provision addressing the environmental liability issue. By 4:38 a.m. on
32
[*32] the morning of July 13, when HCI’s counsel next ran a redline
comparison of a new draft, the environmental liability provision had
already been accepted into the draft agreement. Given that the written
drafts memorialized the negotiations between the parties, we find that
the parties had resolved the environmental liability issue before the
contribution to Fidelity Charitable.
Moreover, the only substantive change made to the drafts after
the contribution to Fidelity Charitable was a minor revision to the
provision for ongoing compensation to Mark and Kurt to cover the cost
of their health insurance. We thus find that none of the unresolved
contingencies remaining on July 13, 2015, were substantial enough to
have posed even a small risk of the overall transaction’s failing to close.
See Robert L. Peterson Irrevocable Tr. #2, 51 T.C.M. (CCH) at 1319
(concluding that remaining contingencies “at best . . . represent remote
and hypothetical possibilities that the stock purchase would be
abandoned”); cf. Martin v. Machiz, 251 F. Supp. 381, 389 (D. Md. 1966)
(finding no assignment of income where, at time of gift of shares, parties
had “substantial” disagreements about closing date and buyer’s
insistence on a surety bond as security for breach of warranty). We find
that petitioner, consistent with his “99% sure” statement, waited until
all material details had been agreed to with HCI before he transferred
the shares to Fidelity Charitable. See Malkan, 54 T.C. at 1314 (“Even
though [the taxpayer] had discussed creating the trusts for several
months, he did not establish them until the parties had agreed upon the
details of the sale.”). The absence of significant unresolved
contingencies also weighs in favor of the sale of shares to HCI being a
virtual certainty.
D. Corporate Formalities
Finally, we look to the status of the corporate formalities
necessary for effecting the transaction. See Estate of Applestein, 80 T.C.
at 345–46 (finding that taxpayer’s right to sale proceeds from shares had
“virtually ripened” upon shareholders’ approval of proposed merger
agreement). Under Michigan law, a proposed plan to exchange shares
must generally be approved by a majority of the corporation’s
shareholders. See Mich. Comp. Laws § 450.1703a(2)(d); id.§ 450.1407(1). Formal shareholder approval of a transaction has often
proven to be sufficient to demonstrate that a right to income from shares
was fixed before a subsequent transfer. See Ferguson, 108 T.C. at 262;
see also Hudspeth, 471 F.2d at 279. However, such approval is not
necessary for a right to income to be fixed, when other actions taken
33
[*33] establish that a transaction was virtually certain to occur. See
Ferguson, 104 T.C. at 262–63 (rejecting taxpayer’s “attempt to impose
formalistic obstacle[]” of formal shareholder approval); see also
Hudspeth, 471 F.2d at 280 (describing final resolution to dissolve
corporation as a “mere formality” where shareholders and board had
already approved plan of liquidation, despite “remote, hypothetically
possible abandonment[]” of that plan); Kinsey, 58 T.C. at 265–66.
On June 11, 2015, petitioner and his two brothers (the sole
shareholders of CSTC) unanimously approved pursuing a sale of all
outstanding stock of CSTC to HCI. On July 15 they provided written
consent to the final Contribution and Stock Purchase Agreement with
HCI. However, viewed in the light of the reality of the transaction, the
record shows that final written consent was a foregone conclusion. As a
practical matter, finalizing the transaction with HCI presented
petitioner and his two brothers with the opportunity to partially (or
fully, as in Kurt’s case) cash out of CSTC at a significant premium over
their initial target price of $80 million. See Ferguson v. Commissioner,
174 F.3d at 1004–05 (considering formal shareholder approval to be
unnecessary where shareholders were receiving substantial premium).
From HCI’s perspective, it also believed it was acquiring CSTC at a fair
price and, as of July 13, had resolved the environmental liability issue,
its final significant due diligence concern. See id. at 1005. All three
Hoensheid brothers, and particularly petitioner, were involved in
negotiating the transaction, making their approval all but assured as of
July 13, 2015. Cf. Perry v. Commissioner, T.C. Memo. 1976-381, 35
T.C.M. (CCH) 1718, 1724 (concluding that shareholder approval of sale
was not just a “rubber stamp” where corporation was not “a closely held
corporation controlled by the same individuals who negotiated the
[a]greement”). We conclude that formal shareholder approval was
purely ministerial, as any decision by the brothers not to approve the
sale was, as of July 13, “remote and hypothetical.” Jones, 531 F.2d at
1346; see Allen, 66 T.C. at 347 (finding assignment of income despite
parties not completing “purely ministerial act of executing quitclaim
deed” before transfer). This factor is neutral as to whether petitioners’
right to income was fixed.
E. Conclusion
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. On the record before us, viewed in the light
34
[*34] of the realities and substance of the transaction, we are convinced
that petitioners’ delay in transferring the CSTC shares until two days
before closing eliminated any such risk and made the sale a virtual
certainty. Petitioners’ right to income from the sale of CSTC shares was
thus fixed as of the gift on July 13, 2015. We hold that petitioners
recognized gain on the sale of the 1,380 appreciated shares of CSTC
stock.
We echo prior decisions in recognizing that our holding does not
specify a bright line for donors to stop short of in structuring charitable
contributions of appreciated stock before a sale. See Allen, 66 T.C. at
346 (rejecting proposed bright-line rule approach and noting that
“drawing lines is part of the daily grist of judicial life”); see also Harrison
v. Schaffner, 312 U.S. 579, 583–84 (1941). However, as petitioners’ tax
counsel seems to have recognized in her advice to petitioner, “any tax
lawyer worth [her] fees would not have recommended that a donor make
a gift of appreciated stock” so close to the closing of a sale. Ferguson v.
Commissioner, 174 F.3d at 1006; see Allen, 66 T.C. at 346 (recognizing
that realities and substance approach puts “a premium on consulting
one’s lawyer early enough in the game”). By July 13, 2015, the
transaction with HCI had simply “proceeded too far down the road to
enable petitioners to escape taxation on the gain attributable to the
donated shares.” Allen, 66 T.C. at 348.
III. Charitable Contribution Deduction
We have concluded that petitioners did make a valid gift, and
although we have determined that gift to be an assignment of income,
petitioners may nevertheless be entitled to a charitable contribution
deduction under section 170. Section 170(a)(1) allows as a deduction
any charitable contribution (as defined in subsection (c)) payment of
which is made within the taxable year. “A charitable contribution is a
gift of property to a charitable organization made with charitable intent
and without the receipt or expectation of receipt of adequate
consideration.” Palmolive Bldg. Invs., LLC v. Commissioner, 149 T.C.
380, 389 (2017) (citing Hernandez v. Commissioner, 490 U.S. 680, 690
(1989)). Section 170(f)(8)(A) provides that “[n]o deduction shall be
allowed . . . for any contribution of $250 or more unless the taxpayer
substantiates the contribution by a contemporaneous written
acknowledgement of the contribution by the donee organization that
meets the requirements of subparagraph (B).” For contributions of
property in excess of $500,000, the taxpayer must also attach to the
35
[*35] return a “qualified appraisal” prepared in accordance with
generally accepted appraisal standards. § 170(f)(11)(D) and (E).
Here, the contributed CSTC shares had a value in excess of
$500,000, and petitioners were thus required to substantiate their
claimed deduction with both a contemporaneous written
acknowledgement (CWA) and a qualified appraisal. Respondent asserts
that petitioners have failed to satisfy both requirements and thus are
not entitled to a charitable contribution deduction for the gift of the
CSTC shares to Fidelity Charitable.
A. CWA
A CWA must include, inter alia, the amount of cash and a
description of any property contributed. § 170(f)(8)(B). A CWA is
contemporaneous if obtained by the taxpayer before the earlier of either
(1) the date the relevant tax return was filed or (2) the due date of the
relevant tax return. § 170(f)(8)(C). Section 170(f)(18)(B) adds a specific
requirement for donor-advised funds that any CWA include a statement
that the donee “has exclusive legal control over the assets contributed.”
We construe the requirements of section 170(f)(8)(B) strictly and do not
apply the doctrine of substantial compliance to excuse defects in a CWA.
See 15 W. 17th St. LLC v. Commissioner, 147 T.C. 557, 562 (2016). The
contribution confirmation letter issued by Fidelity Charitable was
contemporaneous, acknowledged receipt of 1,380.400 shares of CSTC
stock, and contained the applicable statements required by the statute,
including the “exclusive legal control” statement.
Respondent argues that the contribution confirmation letter
failed to satisfy section 170(f)(8)(B) because it described petitioners’
contribution as shares of stock rather than cash. Respondent’s
argument conflates the issues in this case. As a matter of state law, we
have held that petitioners made a valid gift of CSTC shares to Fidelity
Charitable. However, for federal income tax purposes, we have
classified those shares as carrying a fixed right to income as of July 13,
2015, such that petitioners effectively realized and recognized gains
before transfer. That second holding does not disturb our conclusion
that petitioners made a valid gift of stock. See Commissioner v. Tower,
327 U.S. 280, 287–88 (1946) (citing Lucas v. Earl, 281 U.S. at 114–15)
(distinguishing between gift of stock’s validity under state law and its
treatment for federal tax purposes); see also Vercio v. Commissioner, 73
T.C. 1246, 1253 (1980) (observing that anticipatory assignments of
36
[*36] income “are not recognized as dispositive for Federal income tax
purposes despite their validity under applicable State law”).
We construe the section 170(f)(8)(B) requirement that a CWA
include a description of the “property” contributed in the light of the
settled principle that the Code “creates no property rights but merely
attaches consequences, federally defined, to rights created under state
law.” Nat’l Bank of Com., 472 U.S. at 722 (quoting United States v. Bess,
357 U.S. 51, 55 (1958)). While the ultimate question of “whether a state-
law right constitutes ‘property’ or ‘rights to property’ is a matter of
federal law,” id. at 727, the answer to that question “largely depends
upon state law,” see United States v. Craft, 535 U.S. 274, 278 (2002); see
also Patel v. Commissioner, 138 T.C. 395, 403–04 (2012) (applying state
law as to whether contributed property was a partial interest for
purposes of section 170(f)(3)). We do not interpret section 170(f)(8)(B) to
require that a donee ascertain and correctly describe a contributed
property interest in accordance with how that interest should be
classified for federal tax law purposes. It is sufficient here that the CWA
provided by Fidelity Charitable described the contributed property as
shares of stock. We conclude that the CWA issued by Fidelity Charitable
satisfied the requirements of section 170(f)(8)(B).
B. Qualified Appraisal
In the early 1980s Congress was made aware of significant abuse
of section 170 stemming from overvaluation of property contributed to
charities. See Abusive Tax Shelters: Hearing Before the S. Subcomm. On
Oversight of the Internal Revenue Serv. of the S. Comm. on Fin., 98th
Cong. 71 (1983) (statement of Robert G. Woodward, Acting Tax Legis.
Couns., Dep’t of Treasury) (“We are very concerned with the problem of
the widespread abuse of the charitable contribution provision.”); id. at
151 (statement of M. Bernard Aidinoff, Chairman, Section of Tax’n of
Am. Bar Ass’n) (“Inflating the value of assets has been a particular
abuse in the charitable area, and I have got to say that it is an abuse
engaged in by ordinary taxpayers.”); Staff of J. Comm. on Tax’n, 98th
Cong., Background on Tax Shelters, JCS-29-83, at 34 (J. Comm. Print
1983) (detailing high volume of charitable contribution deduction audits
and noting difficulty for IRS in detecting instances of excessive
deductions at the administrative level). Congress responded by enacting
new substantiation requirements, in order to assist the IRS in detecting
overvalued contributions and to deter taxpayers from playing the “audit
lottery.” See Staff of S. Comm. on Fin., Explanation of Provisions
Approved by the Committee on March 21, 1984, S. Prt. 98-169 (Vol. I),
37
[*37] at 444–45 (S. Comm. Print 1984); H.R. Rep. No. 98-861, at 998
(1984) (Conf. Rep.), as reprinted in 1984-3 C.B. (Vol. 2) 1, 252; see also
Staff of J. Comm. on Tax’n, General Explanation of the Revenue
Provisions of the Deficit Reduction Act of 1984, JCS-41-84, at 504
(J. Comm. Print 1984) (describing new substantiation requirements as
intended to be “more effective in deterring taxpayers from inflating
claimed deductions than relying solely on the uncertainties of the audit
process and on penalties”). In particular, Congress added an off-Code
provision directing the Secretary of the Treasury to promulgate
regulations requiring taxpayers to obtain and attach to their returns a
“qualified appraisal” when claiming deductions for charitable
contributions of property exceeding certain dollar amounts. See Deficit
Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a), 98 Stat.
494, 691–93. In DEFRA, Congress defined a qualified appraisal as an
appraisal prepared by a qualified appraiser that included certain
enumerated information and “such additional information as the
Secretary prescribes in such regulations.” Id. § 155(a)(4), 98 Stat. at
692. Temporary regulations swiftly followed, see Temp. Treas. Reg.
§ 1.170A-13T (1984), setting out extensive requirements with respect to
what constituted a qualified appraisal; final regulations were later
issued with similarly extensive requirements, see Treas. Reg.
§ 1.170A-13.
Twenty years later, Congress amended section 170 to codify a
qualified appraisal requirement. See § 170(f)(11) (as amended by
American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 883, 118
Stat. 1418, 1631–32); H.R. Rep. No. 108-755, at 746 (2004) (Conf. Rep.),
as reprinted in 2004 U.S.C.C.A.N. 1341, 1784. Two years after that,
Congress again acted in response to publicized reports of questionable
appraisal practices, amending section 170 to enumerate requirements
for an individual to be a qualified appraiser. See Pension Protection Act
of 2006, Pub. L. No. 109-280, § 1219(b)(1), 120 Stat. 780, 1084–85; Staff
of J. Comm. on Tax’n, 109th Cong., General Explanation of Tax
Legislation Enacted in the 109th Cong., JCS-1-07, at 606 (J. Comm.
Print 2007).
Section 170(f)(11)(A)(i) now 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
38
[*38] qualified appraisal to the return. Section 170(f)(11)(E)(i) provides
that a qualified appraisal means,
with respect to any property, an appraisal of such property
which—
(I) is treated for purposes of this paragraph as
a qualified appraisal under regulations or other
guidance prescribed by the Secretary, and
(II) is conducted by a qualified appraiser in
accordance with generally accepted appraisal
standards and any regulations or other guidance
prescribed under subclause (I).
The regulations in turn provide that a qualified appraisal is an
appraisal document that, inter alia, (1) “[r]elates to an appraisal that is
made” no earlier than 60 days before the date of contribution and (2) is
“prepared, signed, and dated by a qualified appraiser.” Treas. Reg.
§ 1.170A-13(c)(3)(i). Treasury Regulation § 1.170A-13(c)(3)(ii) requires
that a qualified appraisal itself include, inter alia:
(1) “[a] description of the property in sufficient detail for a person
who is not generally familiar with the type of property to ascertain that
the property that was appraised is the property that was (or will be)
contributed;”
(2) “[t]he date (or expected date) of contribution to the donee;”
(3) “[t]he name, address, and . . . identifying number of the
qualified appraiser;”
(4) “[t]he qualifications of the qualified appraiser;”
(5) “a statement that the appraisal was prepared for income tax
purposes;”
(6) “[t]he date (or dates) on which the property was appraised;”
(7) “[t]he appraised fair market value . . . of the property on the
date (or expected date) of contribution;” and
(8) the method of and specific basis for the valuation.
39
[*39] Turning back to the statute, section 170(f)(11)(E)(ii) provides that
a “qualified appraiser” is an individual who
(I) has earned an appraisal designation from a
recognized professional appraiser organization or has
otherwise met minimum education and experience
requirements set forth in regulations,
(II) regularly performs appraisals for which the
individual receives compensation, and
(III) meets such other requirements as may be
prescribed . . . in regulations or other guidance.
An appraiser must also demonstrate “verifiable education and
experience in valuing the type of property subject to the appraisal.” Id.
cl. (iii)(I). The regulations add that the appraiser must include in the
appraisal summary a declaration that he or she (1) “either holds himself
or herself out to the public as an appraiser or performs appraisals on a
regular basis;” (2) is “qualified to make appraisals of the type of property
being valued;” (3) is not an excluded person specified in paragraph
(c)(5)(iv) of the regulation; and (4) understands the consequences of a
“false or fraudulent overstatement” of the property’s value. Treas. Reg.
§ 1.170A-13(c)(5)(i). Finally, the regulations prohibit a fee arrangement
for a qualified appraisal “based, in effect, on a percentage . . . of the
appraised value of the property.” Id. subpara. (6)(i).
Respondent contends that petitioners’ appraisal is not a qualified
appraisal because it (1) did not include the statement that it was
prepared for federal income tax purposes; (2) included the incorrect date
of June 11 as the date of contribution; (3) included a premature date of
appraisal; (4) did not sufficiently describe the method for the valuation;
(5) was not signed by Mr. Dragon or anyone from FINNEA; (6) did not
include Mr. Dragon’s qualifications as an appraiser; (7) did not describe
the property in sufficient detail; and (8) did not include an explanation
of the specific basis for the valuation. Aside from petitioners’ already-
rejected claim that the June 11 date of contribution was correct,
petitioners do not meaningfully dispute that their appraisal had at least
some defects. As a consequence, petitioners do not argue that they
strictly complied with the qualified appraisal requirement. Instead, they
rely on the doctrine of substantial compliance and the statutory
reasonable cause defense to excuse any defects.
40
[*40] 1. Substantial Compliance
We have previously held that the qualified appraisal
requirements are directory, rather than mandatory, as the requirements
“do not relate to the substance or essence of whether or not a charitable
contribution was actually made.” See Bond v. Commissioner, 100 T.C.
32, 41 (1993). We thus may apply the doctrine of substantial compliance
to excuse a failure to strictly comply with the qualified appraisal
requirements. See id. As demonstrated by the relevant legislative
history, the purpose of the qualified appraisal requirements is “to
provide the IRS with information sufficient to evaluate claimed
deductions and assist it in detecting overvaluations of donated
property.” Costello v. Commissioner, T.C. Memo. 2015-87, at *17; see
Cave Buttes, LLC v. Commissioner, 147 T.C. 338, 349–50 (2016);
Hendrix v. United States, No. 2:09-CV-132, 2010 WL 2900391, at *6
(S.D. Ohio July 21, 2010) (“[T]he purpose of the qualified appraisal is to
‘show the work’ so as to obviate the injection of unfounded guessing into
the tax scheme.”). Accordingly, if the appraisal discloses sufficient
information for the Commissioner to evaluate the reliability and
accuracy of a valuation, we may deem the requirements satisfied. Bond,
100 T.C. at 41–42; see Hewitt v. Commissioner, 109 T.C. 258, 265 & n.10
(1997) (describing substantial compliance as applicable where the
taxpayer has “provided most of the information required” or made
omissions “solely through inadvertence”), aff’d, 166 F.3d 332 (4th Cir.
1998). Substantial compliance allows for minor or technical defects but
does not excuse taxpayers from the requirement to disclose information
that goes to the “essential requirements of the governing statute.”
Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34, at *12
(quoting Estate of Clause v. Commissioner, 122 T.C. 115, 122 (2004)).
We thus generally decline to apply substantial compliance where a
taxpayer’s appraisal either (1) fails to meet substantive requirements in
the regulations or (2) omits entire categories of required information.
See Costello, T.C. Memo. 2015-87, at *24; see also Alli v. Commissioner,
T.C. Memo. 2014-15, at *54 (observing that substantial compliance
“should not be liberally applied”).
Petitioners’ appraisal is deficient with respect to several key
substantive requirements. We start with Mr. Dragon’s status as an
appraiser. We have previously described the requirement that an
appraiser be qualified as the “most important requirement” of the
regulations. Mohamed v. Commissioner, T.C. Memo. 2012-152, 2012
WL 1937555, at *4. Respondent argues that Mr. Dragon was not a
qualified appraiser, asserting that Mr. Dragon performed valuations
41
[*41] infrequently, did not hold himself out as an appraiser, and has no
certifications from a professional appraiser organization. 24 Petitioners
counter that Mr. Dragon was qualified because he has prepared “dozens
of business valuations” over the course of his 20+ year career as an
investment banker, including some valuations of closely held
automotive businesses.
Mr. Dragon’s mere familiarity with the type of property being
valued does not by itself make him qualified. See, e.g., Brannan Sand
& Gravel Co. v. Commissioner, T.C. Memo. 2020-76, at *9–10, *15
(finding that attorney’s familiarity with type of property being valued
and awareness of typical asking price was insufficient to satisfy
qualified appraiser requirement). Mr. Dragon does not have appraisal
certifications and does not hold himself out as an appraiser. We found
Mr. Dragon’s own words at trial about his appraisal experience to be
particularly instructive. Mr. Dragon testified that he conducted
valuations “briefly” and only “on a limited basis” before starting at
FINNEA in 2014—the year before the appraisal. Mr. Dragon also
testified that he now performs (presumably gratis) business valuations
for prospective clients “once or twice a year” in order to solicit their
business for FINNEA. We find Mr. Dragon’s uncontroverted testimony
sufficient to establish that he does not “regularly perform[] appraisals
for which [he] receives compensation.” See § 170(f)(11)(E)(ii)(II).
Petitioners have failed to show that Mr. Dragon was a qualified
appraiser.
We have previously described the requirement that an appraiser
be qualified as one of the substantive requirements of the regulations.
See Alli, T.C. Memo. 2014-15, at *56–57 (“[O]btaining an appraisal from
a nonqualified appraiser does not constitute substantial compliance.”)
Absent an appraisal prepared by a qualified appraiser, the
Commissioner cannot effectively verify whether a reported charitable
contribution has been properly valued. See Mohamed v. Commissioner,
24 Respondent also argues that Mr. Dragon is precluded under the fee
arrangement rule in Treasury Regulation § 1.170A-13(c)(6)(i) from serving as a
qualified appraiser because of the value-based fee he and FINNEA received from CSTC
for effecting the transaction with HCI: 1% of the transaction’s value up to $80 million
and 5% of the transaction’s value over $80 million. By its plain terms, the fee
arrangement rule is limited to fees that are effectively based on an appraised value
(i.e., where the appraiser is incentivized to inflate a valuation in order to receive a
higher fee); there was no such fee in this case, and we do not understand the rule to
apply to a fee, like the one Mr. Dragon received, that is based on actual value received
in a separate arm’s-length transaction.
42
[*42] 2012 WL 1937555, at *7–8. We find that consideration to be
heightened in the context of valuing a minority interest in a closely held
family corporation, which often presents difficult questions for even an
experienced appraiser. See, e.g., Rabenhorst v. Commissioner, T.C.
Memo. 1996-92, 1996 WL 86215, at *2. We thus conclude that in
engaging a nonqualified appraiser, petitioners failed to demonstrate
substantial compliance.
Next, leaving aside the separate issue of whether Mr. Dragon was
actually qualified, the appraisal itself failed to sufficiently describe any
of Mr. Dragon’s relevant qualifications and valuation experience. See
Treas. Reg. § 1.170A-13(c)(3)(ii)(F). Mr. Dragon’s biography provided no
information relevant to his valuation experience and described only
general corporate finance experience and his business school education.
As noted above, Mr. Dragon testified at trial that he did have some
limited experience in valuation before the appraisal at issue. The failure
to include a description of such experience in the appraisal was a
substantive defect. We have previously described the qualifications
requirement as important because it “provide[s] necessary context
permitting the IRS to evaluate a claimed deduction.” Alli, T.C. Memo.
2014-15, at *35 (first citing Hendrix, 2010 WL 2900391, at *5 (“Without,
for example, the appraiser’s education and background information, it
would be difficult if not impossible to gauge the reliability of an
appraisal that forms the foundation of a deduction.”); and then citing
Bruzewicz v. United States, 604 F. Supp. 2d 1197, 1205 (N.D. Ill. 2009)
(describing qualifications requirement as providing IRS with ability to
“determine whether the valuation in an appraisal report is competent
and credible evidence”)). The absence of Mr. Dragon’s relevant
qualifications further confirms our conclusion that petitioners’ appraisal
failed to substantially comply, as the defect deprived the Commissioner
of information necessary to evaluate whether the appraisal was reliable.
Lastly, petitioners’ appraisal is substantively deficient in stating
an incorrect date of contribution. We have described the date
requirement as intended to enable the Commissioner “to compare the
appraisal and contribution dates for purposes of isolating fluctuations
in the property’s fair market value between those dates.” Rothman v.
Commissioner, T.C. Memo. 2012-163, 2012 WL 2094306, at *15,
supplemented and vacated on other grounds, T.C. Memo. 2012-218. An
incorrect date of contribution may be excused if it reflects only a minor
typographical error. See Friedberg v. Commissioner, T.C. Memo. 2011-
238, 2011 WL 4550136, at *10 (finding substantial compliance where
date discrepancies were “merely typographical errors”), supplemented
43
[*43] by T.C. Memo. 2013-224. However, omission of the correct date of
contribution is generally significant and will weigh against a conclusion
of substantial compliance. See, e.g., Presley v. Commissioner, T.C.
Memo. 2018-171, at *78, aff’d, 790 F. App’x 914 (10th Cir. 2019);
Costello, T.C. Memo. 2015-87, at *24–25; Alli, T.C. Memo. 2014-15,
at *24; Smith v. Commissioner, T.C. Memo. 2007-368, 2007 WL
4410771, at *18–19, aff’d, 364 F. App’x 317 (9th Cir. 2009).
Petitioners’ reported June 11, 2015, date of contribution was
incorrect, and thus the June 11 valuation date was premature by
approximately a month. In Cave Buttes, LLC, 147 T.C. at 355, we
concluded that a taxpayer’s appraisal was in substantial compliance,
despite finding a several-week discrepancy between the actual date of
contribution and the date of valuation. That conclusion, however, was
conditioned on the fact there was no “significant event that would
obviously affect the value of the property in those two or three weeks.”
Id. Here, in contrast, the period between June 11 and July 13, 2015,
encompassed CSTC’s initial bonus payouts of approximately $6.1
million, which had a significant effect on the value of the shares. In
addition, as we have concluded above, the underlying transaction with
HCI became virtually certain to occur in the period after June 11. The
significance of these intervening developments is clear in part from the
$340,545 discrepancy between the June 11 appraised value and the
actual proceeds received by Fidelity Charitable for the shares on
July 15. The misreporting of the date of contribution prevented the
Commissioner from effectively double-checking the accuracy of the
appraised value—a concern that relates to the “essential requirements
of the governing statute” and thus further confirms that petitioners
cannot demonstrate substantial compliance. See Estate of Evenchik,
T.C. Memo. 2013-34, at *12.
This is not the rare case “where a taxpayer does all that is
reasonably possible, but nonetheless fails to comply with the specific
requirements of a provision.” Durden v. Commissioner, T.C. Memo.
2012-140, 103 T.C.M. (CCH) 1762, 1763 (citing Samueli v.
Commissioner, 132 T.C. 336, 345 (2009)). Petitioners’ failure to satisfy
multiple substantive requirements of the regulations, paired with the
appraisal’s other more minor defects, precludes them from establishing
substantial compliance.
44
[*44] 2. Reasonable Cause
Although petitioners are unable to establish substantial
compliance, their defective appraisal may nevertheless be excused if
petitioners had reasonable cause for their noncompliance. Taxpayers
who fail to comply with the qualified appraisal requirements may still
be entitled to charitable contribution deductions if they show that their
noncompliance is “due to reasonable cause and not to willful neglect.”
§ 170(f)(11)(A)(ii)(II). We have construed the reasonable cause defense
in section 170(f)(11)(A)(ii)(II) similarly to the defense applicable to
numerous other Code provisions that prescribe penalties and additions
to tax. See § 6664(c)(1); see also Chrem, T.C. Memo. 2018-164, at *18–
19; Crimi v. Commissioner, T.C. Memo. 2013-51, at *98–99. Reasonable
cause thus requires that a taxpayer “have exercised ordinary business
care and prudence as to the challenged item.” Crimi, T.C. Memo. 2013-
51, at *99 (citing United States v. Boyle, 469 U.S. 241 (1985)). To show
reasonable cause due to reliance on a professional adviser, we generally
require that a taxpayer show (1) that their adviser was a competent
professional with sufficient expertise to justify reliance; (2) that the
taxpayer provided the adviser necessary and accurate information; and
(3) that the taxpayer actually relied in good faith on the adviser’s
judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43,
99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).
Respondent argues that petitioners cannot show reliance in good
faith, because petitioner—not Ms. Kanski—made the decision to have
Mr. Dragon perform the appraisal without verifying that he was
sufficiently qualified. Respondent suggests that petitioner’s decision to
have Mr. Dragon perform the appraisal, despite receiving a quote from
a national accounting firm, was largely motivated by the fact that Mr.
Dragon would not charge an additional fee for the work. Petitioners
argue that they have satisfied each factor of the Neonatology test with
respect to the defective appraisal. Petitioners argue that Ms. Kanski
was closely involved in reviewing the appraisal, meeting with Mr.
Dragon, and advising petitioners that the appraisal met the statutory
and regulatory requirements.
Petitioners have established that Ms. Kanski was competent and
professionally experienced in tax and estate planning issues. See 106
Ltd. v. Commissioner, 136 T.C. 67, 77 (2011) (finding taxpayer’s
longtime personal attorney and return preparers to be adequately
competent professionals with respect to taxpayer), aff’d, 684 F.3d 84(D.C. Cir. 2012). In addition, Ms. Kanski was involved both in reviewing
45
[*45] drafts of the transactional documents and in the ongoing
discussions with petitioners’ wealth advisers about the contribution.
She thus had the underlying knowledge necessary to procure a qualified
appraisal of the shares.
However, Ms. Kanski’s handling of the process does not
necessarily insulate petitioners from the consequences of the defective
appraisal. See Stough v. Commissioner, 144 T.C. 306, 323 (2015)
(“Unconditional reliance on a tax return preparer or C.P.A. does not by
itself constitute reasonable reliance in good faith; taxpayers must also
exercise ‘[d]iligence and prudence’.” (quoting Estate of Stiel v.
Commissioner, T.C. Memo. 2009-278, 2009 WL 4877742, at *2)).
Petitioner is an experienced and sophisticated businessman. See Treas.
Reg. § 1.6664-4(c)(1) (stating that “[a]ll facts and circumstances must be
taken into account in determining whether a taxpayer has reasonably
relied in good faith on advice” and that “the taxpayer’s education,
sophistication and business experience will be relevant”). Petitioner
made a business decision to have CSTC’s transactional adviser conduct
the appraisal gratis, rather than engage a national accounting firm on
a paid basis. Given Mr. Dragon’s admittedly limited experience and
unfamiliarity with the qualified appraisal process, such a decision did
not demonstrate ordinary business care and prudence. See, e.g., Webster
v. Commissioner, T.C. Memo. 1992-538, 1992 WL 220112, at *4
(describing taxpayer’s decision to engage unqualified adviser as “not a
technical matter, but one calling for ordinary human wisdom and careful
deliberation”). Petitioners have not provided credible evidence, aside
from self-serving uncorroborated testimony, that they reasonably relied
upon Ms. Kanski’s judgment in proceeding with that unwise course of
action. 25
In addition, petitioner’s close involvement in the contribution and
transaction requires us to cast a skeptical eye to his claim that he relied
in good faith on Ms. Kanski as to the appraisal’s incorrect date of
contribution. The record firmly establishes that petitioner did not
transfer the shares to Fidelity Charitable on June 11. The transactional
25 We do not ignore Ms. Kanski’s email of April 16, in which she asked Mr.
Hensien to inquire whether FINNEA could perform the appraisal as it “would seem to
be the most efficient method.” Ms. Kanski’s preliminary inquiry to a colleague on
behalf of petitioners does not speak to whether she ultimately exercised her judgment
to advise petitioners that Mr. Dragon was qualified to conduct the appraisal nor to
whether petitioners actually relied on that judgment. See, e.g., Pankratz v.
Commissioner, T.C. Memo. 2021-26, at *26. The record is devoid of credible evidence
on this point.
46
[*46] documents, petitioner’s contemporaneous emails, and the
retention of the undated physical stock certificate strongly suggest that
petitioner knew or at least should have known that the shares were not
contributed to Fidelity Charitable on June 11. See Treas. Reg. § 1.6664-
4(c)(1)(ii) (stating that for reliance to constitute reasonable cause “the
advice must not be based upon a representation or assumption which
the taxpayer knows, or has reason to know, is unlikely to be true”); see
also Exelon Corp. v. Commissioner, 906 F.3d 513, 529 (7th Cir. 2018),
aff’g 147 T.C. 230 (2016); Blum v. Commissioner, 737 F.3d 1303, 1318
(10th Cir. 2013), aff’g T.C. Memo. 2012-16. Consequently, we also
conclude that petitioners have failed to establish good faith reliance on
Ms. Kanski’s judgment that the appraisal properly reported the
required information, because petitioner knew or should have known
that the date of contribution (and thus the date of valuation) was
incorrect.
We find that petitioners did not have reasonable cause for their
failure to procure a qualified appraisal. Consequently, we must sustain
respondent’s determination to disallow their charitable contribution
deduction.
IV. Section 6662(a) Penalty
Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on any
underpayment of tax required to be show on a return that is attributable
to negligence, disregard of rules or regulations, or a substantial
understatement of income tax. Negligence includes “any failure to make
a reasonable attempt to comply” with the Code, § 6662(c), or a failure “to
keep adequate books and records or to substantiate items properly,”
Treas. Reg. § 1.6662-3(b)(1). An understatement of income tax is
“substantial” if it exceeds the greater of 10% of the tax required to be
shown on the return or $5,000. § 6662(d)(1)(A).
Respondent argues that petitioners are liable for a penalty under
section 6662(a) on the basis of both negligence and a substantial
understatement of income tax. Generally, the Commissioner bears the
initial burden of production of establishing via sufficient evidence that
a taxpayer is liable for penalties and additions to tax; once this burden
is met, the taxpayer must carry the burden of proof with regard to
defenses such as reasonable cause. § 7491(c); see Higbee v.
Commissioner, 116 T.C. 438, 446–47 (2001). However, the
Commissioner bears the burden of proof with respect to a new penalty
or increase in the amount of a penalty asserted in his answer. See Rader
47
[*47] v. Commissioner, 143 T.C. 376, 389 (2014) (citing Rule 142(a)),
aff’d in part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015);
see also RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 38–39
(2017), aff’d sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir.
2019).
Respondent has conceded that petitioners are not liable for the
section 6662(a) penalty determined in the notice of deficiency, which
related to the disallowed charitable contribution deduction. Instead, in
his amended Answer, respondent asserted a new section 6662(a)
penalty, which relates to his argument that petitioners underreported
capital gains because of an anticipatory assignment of income.
Consequently, respondent bears the burden of proving that no
affirmative defense, such as reasonable cause, exculpates petitioners
from a section 6662(a) penalty. See Full-Circle Staffing, LLC v.
Commissioner, T.C. Memo. 2018-66, at *43, aff’d in part, appeal
dismissed in part, 832 F. App’x 854 (5th Cir. 2020).
As part of the burden of production, respondent must satisfy
section 6751(b) by producing evidence of written approval of the penalty
by an immediate supervisor, made before formal communication of the
penalty to petitioners. See Graev v. Commissioner, 149 T.C. 485, 493
(2017), supplementing and overruling in part 147 T.C. 460 (2016); see
also Clay v. Commissioner, 152 T.C. 223, 246 (2019), aff’d, 990 F.3d 1296(11th Cir. 2021). Here, the emailed approval by the immediate
supervisor of respondent’s counsel is sufficient to establish compliance
with section 6751(b) before formal communication to petitioners of the
section 6662(a) penalty. See Estate of Morrissette v. Commissioner, T.C.
Memo. 2021-60, at *119 (“Emails may constitute written supervisory
approval.”).
However, section 6664(c)(1) provides that a section 6662 penalty
will not be imposed for any portion of an underpayment if the taxpayers
show that (1) they had reasonable cause and (2) acted in good faith with
respect to that underpayment. A taxpayer’s mere reliance “on an
information return or on the advice of a professional tax adviser or an
appraiser does not necessarily demonstrate reasonable cause and good
faith.” Treas. Reg. § 1.6664-4(b)(1). That reliance must be reasonable,
and the taxpayer must act in good faith. Id. In evaluating whether
reliance is reasonable, a taxpayer’s “education, sophistication and
business experience will be relevant.” Id. para. (c)(1). A taxpayer’s
“honest misunderstanding of fact or law that is reasonable in light of all
48
[*48] of the facts and circumstances” may also constitute reasonable
cause. Id. para. (b).
While we have held that petitioners did not have reasonable cause
for their failure to comply with the qualified appraisal requirement,
petitioners’ liability for an accuracy-related penalty presents a separate
issue—and one for which respondent bears the burden of proof.
Accordingly, respondent must show that (1) Ms. Kanski was not a
competent professional with sufficient expertise to justify reliance;
(2) petitioners failed to provide her with necessary and accurate
information; or (3) petitioners did not actually rely in good faith on her
judgment. See Neonatology Assocs., P.A., 115 T.C. at 99; see also Full-
Circle Staffing, LLC, T.C. Memo. 2018-66, at *43–44.
We have already found that Ms. Kanski was competent and
experienced and that she was provided with the necessary details of the
transaction and contribution. The record establishes that Ms. Kanski
advised petitioners that their deadline to contribute the shares and
avoid capital gains was “prior to execution of the definitive purchase
agreement.” Petitioner did not follow Ms. Kanski’s supplemental advice
to have the paperwork for the contribution ready to go “well before the
signing of the definitive purchase agreement.” Petitioner’s statements
that he “would rather wait as long as possible to pull the trigger” until
he was “99% sure” the sale would close suggest some disregard of his
counsel’s advice as to the timing of the contribution. See, e.g., Medieval
Attractions N.V. v. Commissioner, T.C. Memo. 1996-455, 1996 WL
583322, at *61 (“[The taxpayers] cannot claim reliance on their advisers’
advice if they failed to follow it.”). However, while petitioners
disregarded Ms. Kanski’s cautionary note as to the timing, they did
adhere to the literal thrust of her advice: that “execution of the definitive
purchase agreement” was the firm deadline to contribute the shares and
avoid capital gains. The anticipatory assignment of income issue (and
thus the underlying accuracy of Ms. Kanski’s advice) was the subject of
contention by the parties in this case. We do not consider the
anticipatory assignment of income issue to be so clear cut that petitioner
should have known it was unreasonable to rely on Ms. Kanski’s advice.
See Robert L. Peterson Irrevocable Tr. #2, 51 T.C.M. (CCH) at 1321
(finding reasonable cause for accuracy-related penalty where
anticipatory assignment of income issue was “vigorously litigated” with
“facts going in both directions”). While Ms. Kanski’s advice on an issue
of substantive tax law was ultimately incorrect, we conclude that it was
reasonable for petitioner to rely on it. See Boyle, 469 U.S. at 251.
49
[*49] Further, respondent has failed to establish any bad faith with
respect to petitioners’ reliance on the advice.
We conclude that respondent has failed to establish that
petitioners did not have reasonable cause under section 6664(c)(1) for
their underpayment of tax. We will not sustain respondent’s
determination of a section 6662(a) penalty.
V. Conclusion
For the foregoing reasons, we hold that (1) petitioners made a
valid gift of the CSTC shares on July 13, 2015; (2) petitioners realized
and recognized gain because their right to proceeds from the sale became
fixed before the gift; (3) petitioners are not entitled to a charitable
contribution deduction; and (4) petitioners are not liable for a section
6662(a) penalty. We have considered all of the arguments made and
facts presented by the parties in reaching our decision and, to the extent
they are not addressed herein, we find them to be moot, irrelevant, or
without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.