“There have been numerous cases and rulings over the years, many of which apply multiple and sometimes competing legal theories. There are various judges who have decided similar cases in the same jurisdiction using different and sometimes inconsistent legal theories and standards. There are some judges who have apparently decided to develop their own subjective standards for taxing donors who have “gone too far,” presumably to prevent aggressive taxpayers from employing a bright-line, objective standard that allows them to avoid taxation when the gifted asset is sold. In short, there are rules, but it depends on the judge.”

Emanuel J. Kallina and Tara Lynn Angulo provide members with commentary on the evolving judicial standards governing charitable gifts of appreciated property.[i]

Emanuel J. Kallina, was educated at Bowdoin College (BA), the University of Maryland School of Law (J.D.), and New York University School of Law (LL.M. in Taxation). He is licensed to practice law in Maryland and the District of Columbia, and is admitted to practice before the U.S. Fourth Circuit Court of Appeals, the U.S. District Court for the Districts of Maryland and D.C., and the U.S. Tax Court. While Mr. Kallina currently focuses his practice on estate and charitable planning for high net worth individuals, he has practiced extensively over the years in the related fields of business law, corporate tax law, partnerships, and real estate.

Tara L. Angulo received her Bachelor of Science degree in Criminal Justice Studies, with a focus on Human Services Administration, from the University of Phoenix, AZ, in 2012. She also obtained her Master of Arts degree in Law, with a focus on Advanced Paralegal Studies, from Regent University, VA, in 2020. Mrs. Angulo has a wide range of legal skills acquired both academically and professionally. She is a current member of the National Association of Charitable Gift Planners and has attended numerous seminars on charitable and estate planning. She has also obtained her Chartered Advisor in Philanthropy (CAP) Designation with the American College of Financial Services. Mrs. Angulo is currently attending Vermont Law and Graduate School, where she is pursuing her Juris Doctorate. She is expected to graduate with the Class of 2026.

Here is their commentary:

COMMENT:

Introduction

How does a taxpayer give an appreciated, non-cash asset to charity, knowing the charity will sell it in redemption or to a third party, and yet avoid being taxed on the inherent gain? How much time needs to elapse between the gift to the charity and the sale by the charity? How far may a donor go in arranging a sale of the asset before making the gift to charity?

There have been numerous cases and rulings over the years, many of which apply multiple and sometimes competing legal theories. There are various judges who have decided similar cases in the same jurisdiction using different and sometimes inconsistent legal theories and standards. There are some judges who have apparently decided to develop their own subjective standards for taxing donors who have “gone too far,” presumably to prevent aggressive taxpayers from employing a bright-line, objective standard that allows them to avoid taxation when the gifted asset is sold.

In short, there are rules, but it depends on the judge.

One reason this area lacks clear authority is that the most important cases have been decided by individual judges, with no one judge speaking definitively for an entire court, such as the Tax Court. For example, there were pro-taxpayer decisions in Palmer (Judge Simpson), Greene (Judge Goettel), Rauenhorst (Judge Ruwe), and Dickenson (Judge Greaves), and pro-IRS decisions in Blake (Judge Raum), Ferguson (Judge Halpern), and Hoensheid (Judge Nega). There was no en banc decision by the currently active (19) Tax Court Judges which could help solidify the law in this area, much less a decision by the Supreme Court.

Another reason for the lack of clarity is that some of the legal theories employed are illogical. For example, some judges have stated a “pre-arranged plan”[ii] on the part of the charity to sell a gifted asset is fatal. But common sense tells us a non-cash gift must be sold. From a policy standpoint, Congress and IRS want non-cash gifts to be liquidated and sold, so the proceeds from the sale can be used to fulfill the donee’s charitable purposes.[iii] In fact, if a charity failed to liquidate an asset and obtain cash to fulfill its charitable purposes, it might be in jeopardy of losing its charitable status.[iv] Thus, if a gift is made of a non-cash asset, the pre-arranged plan is to sell the asset!

Some of the legal theories IRS has employed, and courts have entertained, should not be given serious consideration. For example, IRS argued the “step transaction doctrine” in the seminal cases of Palmer and Blake to tax the donor on gifts of appreciated stock to charity. However, this doctrine historically is employed in complex corporate reorganizations involving multiple interrelated transactions and not in cases involving gifts to charity.[v]

To answer the question “how far is too far,” it is best to ignore illogical and misplaced legal theories and focus on an accepted legal doctrine, namely the concept of “assignment of income,” where the person earning the fruits (i.e., income) from an asset should pay the taxes. On this issue, there is significant legal authority.