No, not a misspelling of the Mozart-Da Ponte classic. This is about what almost all charities do almost all the time when they get gifts of closely-held corporate stock…they redeem the stock with the corporation for cash to fund their charitable operations, because there is no public market for closely-held stock.

But IRS claims that what Fidelity Investments Charitable Gift Fund (Fidelity) did with the closely-held corporate stock Jon Dickinson and Helen Dickenson, 2020 T. C. Memo. 128, filed 9/3/20, donated to Fidelity was really Jon’s  sale of his stock to the corporation (triggering taxable gain), and then a charitable donation of the cash he got thereby. That’s because as soon as Jon donated the stock to Fidelity, Fidelity promptly redeemed the stock with the issuing corporation. Of course there was paperwork by Jon and the corporation approving the transfer of stock to Fidelity, stating the Fidelity could do whatever it wanted with the stock, no strings attached, and Fidelity is a legit 501(c)(3). IRS claims “nudge nudge, wink wink, say no more,” of course Fidelity was going to redeem.

Yes, but.

Judge Travis A. (“Tag”) Greaves says caselaw is clear: the donor must part with the shares completely before the stuff gives rise to income by way of sale.

On the first part, IRS has to show specific facts that Jon didn’t part with the stock completely. All IRS had was that Fidelity always redeemed closely held stock. Judge Tag: “…a preexisting understanding among the parties that the donee would redeem donated stock does not convert a postdonation redemption into a predonation redemption. Furthermore, neither a pattern of stock donations followed by donee redemptions, a stock donation closely followed by a donee redemption, nor selection of a donee on the basis of the donee’s internal policy of redeeming donated stock suggests that the donor failed to transfer all his rights in the donated stock.” 2020 T. C. Memo. 128, at p. 7. (Citations omitted).

Next, income by way of sale raises the question of assignment of income. Deals that move one party’s income to another (always a tax-indifferent or lower rate of tax) are taxable to the mover, not the movant. But the redemption has to be nearly certain, so that there’s income to assign. There was no plan of liquidation in place, and no corporate resolution allowing Jon to redeem when he made the gift to Fidelity.

“The parties point us to Rev. Rul. 78-197, 1978-1 C.B. 83, a “bright-line” rule… which focuses on the donee’s control over the disposition of the appreciated property. 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. The ultimate question… is whether the redemption and the shareholder’s corresponding right to income had already crystallized at the time of the gift. Regardless of whether the donee’s obligation to redeem the stock may suggest the donor had a fixed right to redemption income at the time of the donation, …respondent does not allege that petitioner husband had any such right in this case. Accordingly, respondent’s resort to Rev. Rul. 78-197, supra, is unavailing.” 2020 T. C. Memo. 128, at pp. 9-10. (Emphasis by the Court). (Citations omitted).

Judge Tag doesn’t consider legislative intent (see my blogpost “Settlements,” 8/31/20), so why should he consider Rev. Rul.s?

Taishoff says of course there was a deal to redeem in advance. The charity needs to do its charitable thing, not hold stock in a closely-held for which there is no public market. Since there is no public market, the charity has no choice but get the stock redeemed for cash. And closely-held corporations are closely held to keep the good stuff for the insiders, who don’t want charities with boards of trustees checking out the cookie jar for insider fingerprints. And heavy-hitting insiders in closely-helds who need a quick charitable write-off to offset a big capital gain when the closely-held goes public can do a sale-and-gift mix-and-match, selling some stock and giving away some.

Whatever, IRS loses summary J.