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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 organizations selected by the cardholders. For the fourth calendar quarter, these transfers will be made before the end of the calendar year. The cardholders do not receive anything in exchange for the payments to charitable organizations of their rebates.
Instead of causing the company to pay their rebates to a charitable organization, however, cardholders may obtain the rebates for their personal use. Unless they advise the company of their intention to obtain the rebates for themselves, cardholders' rebates are automatically paid over to the designated charities. When the company makes a payment to a charitable organization on behalf of a cardholder, the company provides the organization with the amount of the cardholder's contribution, together with the cardholder's name and address. The company also provides each cardholder with an annual statement reflecting the total amount transferred to a charitable organization on behalf of that cardholder.
The IRS concluded that these rebates paid to charitable organizations are gifts to the organizations by the cardholders. In finding satisfaction of the requirements that a gift be made voluntarily and with charitable intent, the IRS observed that each cardholder has the choice of directing the company to refund rebates to the cardholder or to transfer them to a charitable organization. Moreover, the cardholders also have the opportunity to select the charitable organizations that will receive payments of their rebates. The IRS ruled that the opportunity to decide whether payments will be made to a charity, together with the ability to designate the charity to receive the payments, renders
