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Tax Court OKs Big Tax Break to CFO for Donated Property


The Tax Law provides a unique benefit for gifts of appreciated property to qualified charitable organizations. If certain requirements are met, you can claim a charitable deduction based on the property’s current fair market value (FMV).

Sep 10th 2020
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The Tax Court recently approved this tax break in a new case, Dickinson, TC Memo 2020-128, 9/3/20, where an executive contributed shares of company stock to a donor-advised fund (DAF).

Background: Generally, if you donate property to charity, the deduction is based on the initial cost of the property. However, if you donate property that would have qualified for long-term capital gain if you had sold it instead—in other words, you’ve owned it for more than one year—you can deduct the FMV on the date of the donation. Best of all, you never have to pay any tax on the appreciation in value.

For instance, say you acquired securities for $2,5000, held them for five years and donated them when they were worth $10,000. You can deduct the full $10,000 without reporting any taxable income.

To facilitate charitable donations, some companies offer DAFs to their eligible employees. Typically, the DAF operates through a sponsoring organization associated with a well-known financial institution. This provides employees with discretion over allocation of funds and a current tax deduction for contributions.

Facts: In the new case, the taxpayer, a resident of Florida, was the chief financial officer and a shareholder of a large privately-owned engineering and consulting firm. However, he was not on the board of directors. During an undisclosed period of time, the taxpayer acquired stock in the company.

In each of these years, the board of directors authorized shareholders to donate their shares to a DAF operated by Fidelity. The taxpayer chose to participate in the Fidelity DAF. Fidelity immediately sold the shares back to the firm as per the terms of the agreement.

As a result of these events, the taxpayer claimed a charitable deduction, presumably based on the repurchase price of the shares. This enabled him to claim a large charitable deduction without paying any tax on the appreciation of value in the shares.

But the IRS argued that the donation of the shares was part of a larger transaction. It said that each donation should be treated as a redemption of the shares and then as a charitable contribution of the proceeds. Therefore, the taxpayer should have reported the appreciation in value as taxable income.

Nevertheless, the Tax Court sided with the taxpayer. It stated that there was a bona fide transfer of shares before there was any formal or larger transaction where the shares would be liquidated for a fixed price. Therefore, the taxpayer doesn’t owe any tax on the appreciation of value.

Tax action now: Inform your clients about the tax benefits of these arrangements. Donations must be made be December 31 to qualify for deductions on 2020 returns.  

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