Florida Banking March 2024

on virtual certainty of the deal, but on his failure to comply with the Section 178(f)(8) substantiation requirements (see callout box). Given the size of the purported deduction, requirements set for in number 5 applied. The IRS argued that the contemporaneous written acknowledgment from the DAF was ineffective. Although the Court stated that it applies the rules strictly and that the doctrine of substantial compliance is inapplicable, it held that the IRS was wrong, and the acknowledgment was in compliance. The IRS also argued that the valuation by the representative of the investment banking firm did not constitute a qualified appraisal, as required. On this issue, the Tax Court flipped and described the qualifications as directory not mandatory, but ironically found for the IRS nonetheless. Among the issues were that the individual who did the valuation was not a credentialed appraiser, regularly providing reports for fees, and that the appraisal itself contained errors that even if it had been prepared by an individual with the appropriate bona fides, the product itself was insufficient. Thus, no charitable contribution deduction was allowed. One could question the jurisprudence of punishing a donor so significantly for what could be characterized as a minor technicality. After all, the shares were valued based on the purchase price, so what better indication of the “willing buyer/willing seller” test? However, these tax rules, now codified in the statute, were established after Congress was made aware of significant abuse stemming from the overvaluation of property contributed to charities. See Abusive Tax Shelters: Hearing Before the S. Subcomm. On Oversight of the Internal Revenue Serv. of the S. Comm. on Fin., 98th Cong. 71 (1983) (statement of Robert G. Woodward, Acting Tax Legis. Couns., Dep't of Treasury) The result is the rules as we now have them, and the Court was correct in its application. The lesson here is that taxpayers, their advisors, and tax preparers should be careful to abide by the rules. TRIPLE WHAMMY: In this case, we have seen a double whammy – the income on the donated shares was taxed to Mr. Hoensheid, and his income tax deduction on the donation was denied, but there is another shoe to drop. Under state law, the transfer to his DAF was effective, so not only did he have to pay tax on the proceeds relative to those shares with no deduction, he also didn’t get the proceeds. They rightfully belong to his DAF.

On the other hand, the mere anticipation or expectation of income at the time of the gift does not establish that a donor’s right to income is fixed. Instead, the Tax Court looks to several other factors that bear upon whether the sale of shares was virtually certain to occur at the time of a purported gift as part of the same transaction. Relevant factors may include (1) any legal obligation to sell by the donee, (2) the actions already taken by the parties to effect the transaction, (3) the remaining unresolved transactional contingencies, and (4) the status of the corporate formalities required to finalize the transaction. See Jones v. United States, 531 F.2d 1343, 1345 (6th Cir. 1976); Allen v. Commissioner, 66 T.C. 340, 346 (1976). In a 2023 case, some of the relevant facts can be summarized in this timeline: Day 1: Company board of directors approves sale of company and approves shareholder contributing some shares to a DAF. Days 2+: Sale of company successfully negotiated, but not closed. Day 32: DAF receives stock certificate; seller pays over $10 million in bonuses and dividends to sweep all cash out of the company. Day 33: Sales agreement modified to reflect shares at DAF. Day 34: Sale of company completed. One of the issues in the case resulted from the donor/shareholder not reporting capital gains on the shares contributed to the DAF. In Tax Court, the IRS successfully argued that all gains were to be taxed to the donor due to acts that suggested the sale was a virtual certainty. One of the key points the Court made was that it was considered highly improbable that the sellers would have emptied the company of its working capital if the transaction had even a small risk of not consummating ( Estate of Hoensheid v. Comm., T.C. Memo. 2023-34). The lesson to be learned from Hoensheid on assignment of income is that transfers, whether to a tax exempt entity or other taxpayer, will be effective when executed while there is still a meaningful possibility that the contemplated sale will not take place. While we know that some clients wish only to transfer once they are certain the deal will close, the advice to them is that likely by such time, it is too late. Charitable Deduction Substantiation Requirements Continuing on with Hoensheid, we add these facts: Day 150: DAF sends letter acknowledging receipt of the shares on Day One. Day 200: Investment banking firm provided, for free, an unsigned letter valuing the shares donated to the charity – but reflected the wrong date. On his tax return, Mr. Hoensheid took a $3.2 million charitable contribution deduction. The IRS successfully denied the deduction. This was not based

Setting Share Value in a Buy-Sell Agreement that Binds the IRS

Two brothers, Thomas and Michael Connelley, owned a company and established a buy-sell agreement. Two of its key provisions, both common, play a key role in this case. First, the agreement provided that at the death of one of the shareholders, the surviving brother Five Lessons, Continued on page 18

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