In Uncategorized on 09/26/2018 at 17:18

The words of the Sweet Swan of Avon will serve to describe the appraisal in Marc Chrem and Esther Chrem, et al., 2018 T. C. Memo. 164, filed 9/26/18, but only if IRS prevails on the trial. No summary J either to Marc and Esther (and their sisters, cousins, aunts and other family who comprise the als), or to IRS, which claims assignment of income based on the give-and-go from Marc and Esther and the als of 13% their stock in the Hong Kong C Corp the family owned to a certain 501(c)(3) and over to the ESOP of a US Sub S they also owned.

The Hong Kong C Corp did testing and quality control for the US Sub S and got paid commissions. The Sub S’ ESOP wanted to buy 100% of Hong Kong’s stock to cut out the commissions, achieve vertical integration, get Hong Kong’s intangibles (trademarks), and of course get $27 million out of the ESOP at capital gains rates.

The family agreed to sell 87% of Hong Kong to the ESOP for cash and notes, and certain members donated an aggregate of 13% to the 501(c)(3).

But the ESOP buyout was all-or-nothing, so the 501(c)(3) had to come in or the US S Corp would have to reverse merge or squeeze out the 501(c)(3) at the same price per share as the family were getting for their Hong Kong shares, within 60 days, or all bets were off.

But since both Hong Kong and the US Sub S were under common command and control, ERISA required a FMV appraisal of the shares. The family got this from an admittedly competent appraiser, and the numbers worked.


The family members whose contributions to the 501(c)(3) exceeded the $5K cutoff didn’t attach the appraisal to their 8283s, the appraisal expressly stated it was for ERISA purposes and not income tax, and the 13% the 501(c)(3) was donated was valued as if the 501(c)(3)’s shares were already part of the deal. In the last-named, the IRS claims the valuation was wrong because the 13% shares were worth much less if valued separately (minority discount, y’know). IRS argues the appraiser valued the deal as one deal, when there were two.

The family argues reasonable cause and substantial compliance on the appraisal.

Judge Albert G (“Scholar Al”) Lauber has this one.

“This Court has previously considered the assignment of income doctrine as applied to charitable contributions. In the typical scenario, the taxpayer donates to a charity stock that is about to be acquired by the issuing corporation via redemption, or by another corporation via merger or acquisition. In determining whether the taxpayer has assigned income in these circumstances, one relevant question is whether the prospective acquisition is a mere expectation or a virtual certainty. “More than expectation or anticipation of income is required before the assignment of income doctrine applies.” Greene v. United States, 13 F.3d 577, 582 (2d Cir. 1994).

“Another relevant question is whether the charity is obligated, or can be compelled by one of the parties to the transaction, to surrender the donated shares to the acquirer. Rev. Rul. 78-197, 1978-1 C.B. 83 (1978); see Rauenhorst v. Commissioner, 119 T.C. 157, 166 (2002) (finding ‘the donee’s control to be * * * an important factor’). The existence of an ‘understanding’ among the parties, or the fact that transactions occur simultaneously or according to prearranged steps, may be relevant in answering that question. See, e.g., Blake v. Commissioner, 697 F.2d 473, 480 (2d Cir. 1982) (stating that an ‘understanding’ among the parties need not be ‘legally enforceable under state law’), aff’g T.C. Memo. 1981-579; Ferguson v. Commissioner, 108 T.C. 244 (1997) (finding assignment of income with respect to proceeds of merger that occurred contemporaneously with charitable contribution), aff’d, 174 F.3d 997 (9th Cir. 1999).” 2018 T. C. Memo. 164, at pp. 12-13.

But questions of fact obtrude. Was the Hong Kong – US Sub S deal a lead-pipe cinch? Second, when did the family give the stock to the 501(c)(3), before or after the 501(c)(3) agreed to go with the deal?

“The parties also dispute the dates on which relevant events occurred. Petitioners assert that they transferred their shares to [501(c)(3)] on December 5 and there appears to be documentary evidence arguably supporting that assertion. Respondent contends that [501(c)(3)] did not acquire ownership of its 900 shares until (at the earliest) December 10, allegedly after [501(c)(3)] unconditionally agreed to sell the 900 shares to [US Sub S]. That contention derives arguable support from other documentary evidence, as well as from [appraiser]’s description of the proposed transaction, which recited that petitioners would transfer 900 shares to [501(c)(3)] ‘[s]imultaneously with [US Sub S]’s acquisition of the 6,100 shares.’”  2018 T. C. Memo. 164, at p. 14.

Also in doubt is the extent to which 501(c)(3) was obligated to go ahead and sell the shares it just got for $4.05 million. The only evidence in the record is that the family told the 501(c)(3) to do it. Of course, as Judge Scholar Al points out with his usual perspicacity, if 501(c)(3) doesn’t go along, the deal collapses and 501(c)(3) is left with “a 13% minority interest in a closely held Hong Kong corporation, the market value of which might be questionable.” 2018 T. C. Memo. 164, at p. 15.

If I had been advising 501(c)(3), I might suggest agreeing to go along for another half-million or so deductible cash contribution. But they didn’t ask me.

Howbeit, there be fact questions.

As for substantial compliance and reasonable reliance, although the appraisal was both unattached and not directed to income taxes, the family claims the appraiser signed the 8283s, there was no need for a minority discount for the 501(c)(3) shares as those shares weren’t being sold separately, and the family relied on their trusty CPA.

“The record as it stands now is silent concerning the advice (if any) that the CPA provided petitioners regarding the Empire report and whether they relied in good faith on whatever advice she may have supplied. For these reasons, we conclude that petitioners’ ability to rely on the “reasonable cause” defense of section 170(f)(11)(A)(ii)(II) presents genuine disputes of material fact that are not susceptible to resolution by summary judgment.” 2018 T. C. Memo. 164, at p. 25.

So try the assignment of income and the reasonable reliance issues.






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