U.S. Tax Court: Charitable deduction denied, donor must realize capital gains shares sold by donee
The court did relieve the taxpayers of understatement penalties under section 6662.
Donor of shares subsequently sold by donee must realize capital gains on shares
The U.S. Tax Court on March 15, 2023, released a memorandum opinion holding that the taxpayers were not entitled to a charitable contribution deduction with respect to a donation of shares in a family business because they failed to obtain a qualified appraisal for the shares. In addition, the court held that when the donee subsequently sold the shares, the taxpayers realized and recognized capital gain with respect to the donated shares as a result of application of the assignment of income doctrine because their right to the proceeds of the already negotiated sale of the business were fixed before the gift of the shares was made.
The court did, however, relieve the taxpayers of accuracy-related underpayment penalties under section 6662 due to reasonable reliance on their tax advisor’s incorrect advice.
The case is: Estate of Hoensheid v. Commissioner, T.C. Memo 2023-24 (March 15, 2023). Read the Tax Court’s opinion [PDF 398 KB]
Summary
The taxpayer and his two brothers were equal owners in a long-held family business. One of the brothers wanted to retire, so the brothers decided to sell the business.
The taxpayer and his wife decided to donate a portion of the taxpayer’s shares to charity prior to the sale and were advised by their tax advisor that the charitable gift of the shares would have to occur before a definitive agreement to sell the business was in place.
The couple delayed the donation until two days before the business sale closed, allegedly out of concern that if the business sale did not go through, the taxpayer’s brothers would own more stock in the family business than he did.
The Tax Court found that because the taxpayers’ charitable gift of the shares occurred at a time when the sale of the shares was a virtual certainty, the taxpayers must realize capital gains on the sale of the shares. Moreover, because the taxpayers failed to provide a qualified appraisal for the shares at the time of the gift, they were not entitled to a charitable contribution deduction.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Ruth Madrigal | ruthmadrigal@kpmg.com
Preston Quesenberry | pquesenberry@kpmg.com
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.