Timing is the whole lot. That was the lesson discovered in a current Tax Court docket case that resulted in a misplaced charitable deduction and capital features tax. This is what occurred.

Background

Industrial Metal Treating Corp., or CSTC, was based in 1927 by the Hoensheid household. Over time, the corporate carried out nicely and remained within the household.

By 2014, Scott Hoensheid and his two brothers, Craig P. Hoensheid and Kurt L. Hoensheid, held equal pursuits in CSTC. That very same yr, Kurt introduced that he wished out, and the remaining brothers had been reluctant to tackle debt to purchase his shares—so that they appeared into promoting the enterprise. To assist, they engaged a monetary adviser and usually agreed on a goal value of $80 million.

Inside months, there was curiosity, and on April 1, 2015, HCI Fairness Companions—HCI—submitted a letter of intent to accumulate CSTC for $92 million.

The Donation

Across the similar time—in mid-April 2015—Scott Hoensheid began discussing the prospect of building a Constancy Charitable donor-advised fund. He meant to contribute sure of his CSTC inventory, as one among his advisers famous, “to keep away from some capital features.”

This is not a novel idea—donating appreciated belongings to charity is usually thought of a win-win for taxpayers. Usually, not solely do you keep away from paying the capital features, however you additionally get the advantage of the charitable deduction for the inventory’s truthful market worth. The timing, nevertheless, is necessary.

And this is the place Scott Hoensheid bought into bother. His advisers informed him he wanted to make the reward earlier than the sale to keep away from any “anticipatory project of revenue.” It is a doctrine that’s been round for awhile and was famously memorialized in Lucas v. Earl, 281 U.S. 111 (1930). It stands for the concept that revenue is taxed to the one that has the suitable to obtain it. I can’t merely signal my paycheck away to another person, for instance, and declare that the tax doesn’t apply to me.

On this case, Scott was reluctant to “pull the set off” and wished to delay the donation as a lot as attainable. He was involved that if the sale didn’t undergo, he would have relinquished most of his shares, and his brothers might find yourself proudly owning extra inventory than he did.

On April 23, the events executed a nonbinding letter of intent for HCI to accumulate CSTC for $107 million. Weeks later, on June 1, Scott’s representatives despatched Constancy Charitable a Letter of Understanding outlining his plan to donate the inventory, however didn’t specify the variety of shares. He adopted up by emailing one among his advisers, “I don’t need to switch the inventory till we’re 99% positive we’re closing.”

CSTC held its annual board assembly almost two weeks later. On the assembly, the corporate accepted the request to switch shares of CSTC to Constancy Charitable—the variety of shares nonetheless wanted to be clarified. The next day, HCI accepted the acquisition, topic to the completion of due diligence. The deal finally closed on July 15.

On November 18, 2015, Constancy Charitable despatched a contribution affirmation letter acknowledging a charitable contribution of 1,380.400 shares of CSTC. The letter additionally indicated that Constancy Charitable had acquired the shares on June 11, 2015.

Submitting & Disallowance

Taxpayers (plural, since Scott filed a joint revenue tax return along with his spouse) claimed a charitable deduction for the reward of the inventory. The IRS disallowed the deduction on the idea that his appraisal was inadequate, and issued a discover of deficiency that included a penalty.

The taxpayers appealed, and in response, the IRS amended its reply to assert that the sale itself was an anticipatory project of revenue and that he would additionally need to pay tax on the capital achieve.

Tax Court docket

The Tax Court docket checked out a number of facets of the case. Particularly, for the reason that inventory was bought instantly after the sale, the Court docket discovered that the donor should (1) give the appreciated property away completely and divest of title (2) “earlier than the property offers rise to revenue by means of a sale.” That meant that when the title was transferred was clearly at subject.

The Hoensheids argued that they made the reward on June 11, pointing to Constancy Charitable’s affirmation letter. Nonetheless, the IRS argued that the reward was not accomplished till at the least July 13, when Constancy Charitable acquired a inventory certificates. In the end, the Court docket discovered that the taxpayers failed to ascertain that any of the weather of a sound reward had been current on June 11—as an alternative, the Court docket discovered that title to the shares was transferred on July 13.

The Court docket additionally dominated that to keep away from an anticipatory project of revenue, the taxpayers needed to bear at the least some danger on the time of contribution that the sale wouldn’t shut. Right here, the taxpayers did not have any actual danger since they held onto the shares so long as attainable. The Court docket discovered that by the point the shares had been truly gifted, the transaction with HCI had “proceeded too far down the street to allow petitioners to flee taxation on the achieve attributable to the donated shares.” In different phrases, the revenue was already attributable to them and couldn’t merely be assigned to a different particular person or entity like a charity.

Conclusion

For probably the most half, the case didn’t go the Hoensheids’ means. Whereas the Court docket discovered that they made a sound reward of the CSTC shares, the date of the reward was held to be on July 13—too late to keep away from the popularity of achieve. Their proper to proceeds from the sale, the Court docket dominated, grew to become mounted earlier than the reward.

The Hoensheids additionally missed out on a charitable contribution deduction as a result of they lacked a correct appraisal.

However there was some excellent news for petitioners—the Court docket discovered the taxpayers had affordable trigger for his or her underpayment. Particularly, the anticipatory project of revenue subject was not “so clear minimize” that the taxpayers ought to have recognized it was unreasonable to depend on recommendation from their tax skilled. Because of this, they weren’t accountable for a piece 6662(a) penalty.

Classes

There are numerous takeaways from this case. On the prime? Take note of timing and the principles—these particulars matter. The failure to substantiate the charitable reward with a correct appraisal, as required, and the hassle to hold onto the shares till the final minute proved to be the undoing for the taxpayers.

The taxpayers did, nevertheless, well seek the advice of with tax and monetary professionals— and so they stored good information. Whereas that finally did not end in a whole win, it did assist mitigate their losses.

The case is Property of Scott M. Hoensheid, et al. v. Commissioner (T.C. Memo 2023-34). You’ll be able to learn it right here.