Double whammy! Be careful to properly time pre-sale gifts of appreciated stock to charity

One solution often discussed among business owners looking to minimize taxes from the potential sale of their business is the pre-sale gift of stock to charity. In these discussions, one of the main topics of conversation involves timing. In particular, how much time should they allow between the gift and the ultimate sale of the company?

On one hand, business owners have an interest in not making the gift prematurely out of fear that if the hoped for sale does not occur, they will have a smaller interest in the company. On the other hand, advisors often recommend making the gift well in advance of any sale to avoid the potential negative tax consequences of cutting it too close.

In its March 15, 2023 opinion in Estate of Scott M. Hoensheid v. Commissioner (T.C. Memo 2023-34), the Tax Court addressed what can happen when the gift and sale occur in close proximity. The result was a double whammy for the taxpayer — tax on the gain attributable to the shares contributed to charity and no charitable deduction.

Estate of Hoensheid facts

Ralph Hoensheid founded Commercial Steel Treating Corp. (CSTC) in 1927. CSTC remained in the family and, as of Jan. 1, 2015, was owned equally by Ralph’s grandchildren, Scott Hoensheid and his two brothers, Craig P. Hoensheid and Kurt L. Hoensheid.

In the fall of 2014, Kurt informed his brothers that he wished to retire, but instead of incurring debt to finance the redemption of Kurt’s interest, the brothers decided to pursue a potential sale of the company.

On April 1, 2015, a private equity firm (HCI) submitted a letter of intent to acquire CSTC. Thereafter, in mid-April 2015, Scott began discussing the prospect of making a pre-sale contribution of CSTC stock to a Fidelity donor advised fund (DAF). However, in emails to his estate planning attorney, Scott indicated that he “would rather wait as long as possible” to fund the DAF and did “not want to transfer the stock until we are 99% sure we are closing.”

The exact date of transfer to the DAF was disputed but, ultimately, the court decided Scott divested himself of title and made a valid gift on July 13 — two days before the sale of CSTC closed.

Two years after closing, the IRS selected Scott’s 2015 tax return for examination and sought to (1) apply the anticipatory assignment of income doctrine to charge the capital gains tax attributable to the gifted shares to Scott and (2) disallow the charitable deduction.