The late Scott Hoensheid did make a charitable gift to Fidelity Charitable Gift Fund, a donor-directed 501(c)(3). And if a gift is made without expectation of tangible reward, out of disinterested love and affection, then the late Scott’s gift of $3.5 million worth of his family’s closely-held corporate stock was certainly a gift. Scott got absolutely nothing for it, except a major capital gains hit. He got no charitable deduction. He did duck the enhanced Section 6662(a) understatement chop via his trusty tax attorney.

Judge Nega tells why trying to time your gift to the minute before the stock sale becomes subject to a definite agreement doesn’t work. The case is Estate of Scott M. Hoensheid, Deceased, Anne M.  Hoensheid, Personal Representative, and Anne M. Hoensheid, T. C. Memo. 2023-34, filed 5/15/23.

Before he became the late Scott, he was afraid that if he made the gift of stock to Fidelity and the deal to sell the family business cratered, his brothers would have more stock than he. Scott and siblings apparently didn’t make the Psalm 113, verse 1 cut. So Scott said he didn’t want the gift to go final “until we are 99% sure we are closing.” T. C. Memo. 2023-34, at p. 5.

After negotiations for sale of the corporate stock are virtually completed,  massive change-of-control bonuses are paid out, and the corp stripped of whatever cash it had thereafter, Scott’s backdated gift was made and the deal closed.

Judge Nega deconstructs. Scott’s trial testimony is less than stellar. The piece of paper from Fidelity that was later corrected never makes it into evidence, drawing a negative inference that the gift was accepted when it had to be for tax purposes. There’s endless “intercourse” between Scott, his trusty tax attorney, and his financial adviser, which all gets into the record. Oh, those e-mails!

Scott decided to save money by having his financial adviser do the appraisal of the stock, notwithstanding his trusty tax attorney suggested using a major accounting firm with creds, although said adviser’s appraisal qualifications were submarginal.

Taishoff says when there’s big bucks on the line, don’t get silly about fees.

This is an assignment of income case. Fidelity’s standard policy was to sell closely-held stock as soon as it got any, although it wasn’t obligated to do so. So IRS claims what really happened was that Fidelity was Scott’s agent, unloading the stock to the buyer of the business. See my blogpost “Cosi Fan Tutti,” 9/3/20.

Judge Nega trudges through MI law as to what constitutes a gift. There’s a gift here, but it was completed when the sale was a 99% certainty.

So assignment of income. But a fallback is that, if there was a taxable assignment of income but a real gift, shouldn’t there be a charitable deduction? Yes, if the appraisal is good. Here it isn’t, because of the unqualified appraiser; substantial compliance can’t cure a dud appraisal. And Scott’s good faith reliance is lacking, as he ignored the suggestion to get a qualified appraiser.

But Scott’s trusty tax attorney saves him from IRS’ enhanced chop. IRS has burden of proof when its amended answer increases the chop sought.

Takeaway- Maybe it’s better to trust your brothers than to trust to luck.