The Tax Law of Charitable Giving. Bruce R. Hopkins
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two types of transfers. A federal district court ruled that a gift to a charitable organization of the long-term capital gains in certain commodity futures contracts gave rise to a charitable contribution deduction for the transfer of that property, and that the transaction was not an anticipatory assignment of income.189 The case turned on the court's finding that the donor did not retain control over the timing of the sales of the futures contracts by the recipient charitable organization.
The case concerned an individual who formed a charitable organization in the early 1970s and had been president of it since it was established. The organization had a board of trustees that, the court concluded, the founder did not control. From time to time, the founder contributed futures contracts to the organization and claimed charitable contribution deductions for these transfers. Indeed, in 1974, he obtained a private letter ruling from the IRS holding that the contributions gave rise to charitable contribution deductions for the value of the futures contracts and that he need not recognize any gain when the organization sold the contracts. In 1981, however, the federal tax law changed. Beginning with that year, all commodities futures contracts acquired and positions established had to be marked to market at year-end, and the gains (or losses) had to be characterized as being 60 percent long-term capital gains (or losses) and 40 percent short-term gains (or losses), regardless of how long the contracts had been held.190 This law change posed a problem for the donor, because the charitable deduction for a gift of short-term capital gain property is confined to the donor's basis in the property191; there is no deduction for the full fair market value of the property (as there is for most gifts of long-term capital gain property192). He decided to solve the problem by donating to the organization only the long-term gain portion of futures contracts. In 1982, this individual entered into an agreement under which he contributed to the charitable organization the long-term capital gains of selected futures contracts from his personal accounts at a brokerage house and retained for himself the short-term capital gains. For the most part, the selected contracts were sold on the same day that the gift was made and the portions of the proceeds representing the long-term capital gains were transferred to an account of the organization at the same brokerage house. The donor chose the futures contracts to be donated according to the funding needs of the organization and the amount of unrealized long-term capital gains inherent in them. Once the contracts were transferred to a special account, they were to be sold, pursuant to a standing instruction.
On audit for 1982, the IRS took the position that the full amount of the capital gains on the sales of these contracts was includible in this individual's taxable income. The IRS also disallowed the charitable contribution deductions for that year and prior years. The IRS's position rested on two arguments, one of which was that the transfers of portions of the gain to the organization were taxable anticipatory assignments of income.193
The anticipatory assignment rationale had this individual not making gifts of the futures contracts but, instead, giving to the charity money in an amount equal to 60 percent of the contracts sold; he was characterized as receiving the gain and then diverting a portion of it to the organization in an attempt to shield himself from tax liability. The government contended that the organization did not bear any risk in the commodities market, but was simply the recipient of an assignment of the realized long-term capital gains. By contrast, the individual contended that the assignment-of-income theory was inapplicable because no contract for the sale of the property was in existence before the donation was made. His argument was that his right to receive at least some of the proceeds had not matured to the point where a gain from the sale should be deemed to be his income. He argued that he neither controlled the value of the donated interests nor retained any legal right to receive any matured unrealized long-term capital gains that might be realized on sales of the futures contracts.
The court was somewhat troubled by the fact that, as both a director and the president of the organization, as well as the one who timed the initial transfers, this individual appeared to be in a position to ensure that the futures contracts would be sold immediately and that the short-term gains would flow to him at the time of his choosing, while taxes on the long-term gains were avoided. The court conceded that the “retention of the short-term gains gave the transaction more the appearance of an income assignment.”194 Nonetheless, the pivotal and deciding issue involved the standing instruction and this individual's influence over it. The evidence showed that the decision to shift contracts to the special account was that of the full board of trustees of the organization and not its president. Thus, the court held that this individual did not have control over the timing of the disposition of the futures contracts once they were transferred to the special account of the charitable organization. The court ruled that “the donation of the contracts' long-term capital gain, while less tangible than many other forms of gifts, should still be considered a donation of the property.”195 The court also held that this individual's “donations of their [the contracts'] long-term capital gain should not properly be considered an anticipatory assignment of income.”196 Under the court ruling, the donor was not taxable on the long-term capital gain contributed to the foundation, and the charitable deduction was upheld.
An earlier case also illustrated application of the assignment-of-income doctrine. Under the facts of that case, the directors of an insurance company adopted a plan of liquidation, which the corporation's stockholders promptly and overwhelmingly approved. Thereafter, the company obtained approval from the department of insurance in the state in which it operated for the issuance of reinsurance agreements, and for the sale of goodwill and fixed assets to another insurance company. The directors of the company then approved several liquidation arrangements and authorized notification to the stockholders that the first liquidating dividends would be exchanged for stock later that year.
After the liquidation arrangements were approved and before the liquidating distributions began, one of the stockholders contributed stock in the corporation to various public charities. The distributions were subsequently made as planned, and the process of liquidation was soon thereafter completed. The stockholder claimed a charitable contribution deduction for the gift of the stock. The IRS allowed the charitable deduction but, viewing the transactions as anticipatory assignments of income in the form of the liquidation proceeds, taxed the donor on the income subsequently paid to the charities (equivalent to the long-term capital gain generated by the liquidation). A court upheld the IRS's position.197
The outcome of this case turned on the likelihood of completion of the liquidation proceedings. The lower court found that the shareholders of the company could have abandoned the liquidation proceedings after these gifts were made and thus that the contribution should not be treated as an anticipatory assignment of the liquidation proceeds. The appellate court, however, decided that, under the facts, the “realities and substance” rather than “hypothetical possibilities” of the matter showed that the donor expected the liquidation proceedings to be completed and that the likelihood of rescission of the proceedings was remote.198 The fact that the donor was not a controlling shareholder of the liquidating company was not “pivotal” to the court's determination.199
A comparison of these two cases shows how fine the line of demarcation in this area can be. In the more recent of the two cases, control was the determining factor; in the other, control was “only one factor” in the determination.200 In the