The Tax Law of Charitable Giving. Bruce R. Hopkins

with “virtual certainty” that the contracts would be sold, but only to have had knowledge that gains from the sales were a “reasonable probability.”²⁰¹ There is little distinction between “reasonable probabilities” and “realities and substance.”

      When control is clearly present, however, the courts are far more likely to conclude that there has been an anticipatory assignment of income. Thus, in one case, a majority stockholder in a closely held corporation donated part of his holdings to nine charitable organizations approximately nine months after the corporation adopted a plan of liquidation. The court, finding an assignment of income, wrote:

The shareholders' vote is the critical turning point because it provides the necessary evidence of [the] taxpayer's intent to convert his corporation into its essential elements of investment basis and, if it has been successful, the resulting gains. This initial evidence of the taxpayer's intent to liquidate is reinforced by the corporation's contracting to sell its principal assets and the winding-up of its business functions. In the face of this manifest intent, only evidence to the contrary could rebut the presumption that the taxpayer was, in fact, liquidating his corporation. Yet here the record is barren of any evidence that the taxpayer had any intent other than that of following through on the dissolution. The liquidation had proceeded to such a point where we may infer that it was patently never [the] taxpayer's intention that his donees should exercise any ownership in a viable corporation, but merely that they should participate in the proceeds of liquidation.²⁰²

      Thus, the court concluded that the gift was an assignment of the liquidation proceeds.

In a similar case, a court held that a majority shareholder's contribution of stock in a corporation that was about to be liquidated constituted an anticipatory assignment of liquidation proceeds, and that the taxpayer was not entitled to exclude from gross income the capital gains resulting from the distribution.²⁰³ The court identified three reasons why it was unlikely that the plan of liquidation would be abandoned: (1) The plan of liquidation had been adopted in conformity with federal tax law, which requires that the liquidation must occur within one year to avoid a taxable gain on the sale of assets; (2) the donee, although holding a majority of the stock, did not have the requisite two-thirds control to unilaterally prevent the liquidation; and (3) the donee's policy was to liquidate shares of stock given to it.

The court wrote, “Realistically considered, in the light of all the circumstances, the transfer of the stock . . . to [the charitable organization recipient] was an anticipatory assignment of the liquidation proceeds.”²⁰⁴ Thus, the reality was that the liquidation of the contributed stock was certain before the stock was donated to the charitable organization.

In another case, a court held that the contribution of stock warrants to charitable organizations was not an anticipatory assignment of income, and that what otherwise would have been taxable capital gain was not recognized in the hands of the donors.²⁰⁵ It found that the charitable donees were not legally bound, nor could they be compelled, to sell their warrants. The government's contention that the donors' rights to receive the proceeds of the stock transaction had “ripened to a practical certainty” at the time of the gifts and that there was a pending “global” transaction for the purchase and sale of the stock involved at the time of the gifts²⁰⁶ was rejected. The position of the IRS in the case was seen as being in “stark contrast” to the agency's stance as articulated in a revenue ruling;²⁰⁷ the court ruled that the IRS was bound by its ruling, which the court characterized as a “concession.”²⁰⁸

This body of law has been applied in the donor-advised fund context,²⁰⁹ where the sponsoring organization has a policy of immediate liquidation of contributed securities. The IRS was of the view that these transactions should be treated in substance as a taxable redemption of the securities by the donor, followed by a charitable contribution of the redemption proceeds. When the case was litigated, the court disagreed with the government and respected the form of these transactions. The court held that the donor contributed the property “absolutely” and parted with title to it, and that the donor made the contributions before the securities gave rise to income by way of sale, thus avoiding the assignment-of-income doctrine.²¹⁰

A case is pending in the U.S. Tax Court involving a sale by a group of individuals of 87 percent of their stock in a company and a charitable contribution of the remaining shares. The sale by the individuals was for a combination of cash and notes; the sale by the charity was for cash only. The individuals agreed with the purchasing company to “use all reasonable efforts” to cause the charity to tender its shares to the purchaser. These individuals claimed charitable contributions for their gifts. The IRS is contending that the charity agreed in advance to sell its shares to the purchaser and that all steps in the transaction were prearranged, and thus that the individuals are liable for tax under the step transaction doctrine.²¹¹

      The import of this body of law is not a particular concern for donee charitable organizations. They receive the contributed items and can treat them as gifts. The matter, however, essentially goes to the question of deductibility of the transfers (or the extent of deductibility) and whether the transferor must recognize income or capital gain as the result of the transaction.

(i) Rebate Plans

Users of certain types of credit cards make a deductible charitable contribution when a percentage of the price of an item (less an administration fee) purchased with the card at a participating retailer is transferred to a charitable organization selected by the cardholder.²¹²

A company sponsors a series of credit and debit cards that are identified with the company's name. These cards are issued to cardholders throughout the country by banks that have entered into license agreements with the company; the banks may charge an annual fee to the cardholders. The company negotiates agreements with retailers, pursuant to which a percentage of the purchase price is transferred to the company when one of these cards is used to purchase an item from a participating retailer. When they first receive their company cards, and periodically thereafter, cardholders receive a list of participating retailers. They also are informed of the percentage of the retail purchase price that each participating retailer will pay to the company. After a sale by a participating retailer to a cardholder, the agreed-upon percentage of the purchase price is transferred to the company by the bank (or its agent) that processes the transaction. Of this amount, an administration fee—approximately 20 percent—is retained by the company.

      The balance of the amount transferred to the company is placed in a custodial account maintained by the company on behalf of each cardholder; these amounts are considered to be rebates. When they apply for one of these cards, applicants are asked to designate a charitable organization to which they want to have their rebates paid. Cardholders are free to change the designation at any time by notifying the company. Rebates earned appear as a line item on the cardholders' monthly statements from the issuing banks. If the cardholder returns to the retailer an item of merchandise purchased with one of these cards, the amount of the corresponding rebate is deducted from the rebate amount held in the cardholder's custodial account. At the end of each calendar quarter, the company transfers rebates that have accumulated in the various custodial accounts to the charitable