Contents
Contents Contents
GIFTS OF MONEY AND PROPERTYThe step transaction doctrine occasionally appears in IRS private letter rulingsas well. In one instance, an individual planned to fund a charitable remaindertrust 86 with a significant block of stock of a particular corporation. It wasanticipated that the trust would sell most, if not all, of this stock in order todiversify its assets. The stock first had to be offered to the corporation, under aright of first refusal, which allowed the corporation to redeem the stock for itsfair market value. The donor was the sole initial trustee of the trust.The IRS focused on whether the trust would be legally bound to redeem thestock. Although it did not answer that question, it assumed that to be the caseand also assumed that the trust could not be compelled by the corporation toredeem the stock. Thus, the IRS held that the transfer of the stock by the donor tothe trust, followed by the redemption, would not be recharacterized for federalincome tax purposes as a redemption of the stock by the corporation followed bya contribution of the redemption proceeds to the trust. The IRS also held that thesame principles would apply if the stock were sold rather than redeemed. Thisholding assumed that the donor had not prearranged a sale of the stock beforecontributing it to the trust under circumstances in which the trust would be obligatedto complete the sales transaction. 87In another situation, an individual planned to contribute a musical instrumentto a charitable remainder trust. The instrument was used in the donor’sprofession; the donor was not a dealer in this type of instrument, nor was itdepreciated for tax purposes. Again, the issue was presented: If the trust subsequentlysold the instrument for a gain, would that gain have to be recognized bythe donor? The IRS presumed that there was no prearranged sales contractlegally requiring the trust to sell the instrument following the gift. With this presumption,the IRS was able to hold that any later gain on a sale of the instrumentwould not be taxable to the donor. 88§ 4.9 CHARITABLE PLEDGESThe making of a pledge does not give rise to a federal income tax charitable contributiondeduction. The deduction that is occasioned, such as it may be, isdetermined as of the time the pledge is satisfied. 89The enforceability of a pledge is a matter of state law. Some states require theexistence of consideration as a prerequisite to the existence of an enforceablepledge; other states will enforce a pledge on broader, social grounds.Usually, a pledge is made by a potential donor in the form of a written statement—apromise to the potential charitable donee of one or more contributionsin the future. An example of the rule is that a pledge of a stock option to a charitableorganization produces an income tax charitable deduction in the year in86 See Chapter 12.87 Priv. Ltr. Rul. 9452020.88 Priv. Ltr. Rul. 9452026. An application of the step transaction doctrine, albeit not entailing a charitable contribution,was made available when a court disregarded a series of transactions entered into by a family involvingthe purchase of ranch properties and subsequent tax-free exchanges of these properties with familycontrolledentities. True v. United States, 190 F.3d 1165 (10th Cir. 1999).89 Rev. Rul. 55-410, 1955-1 C.B. 297. 142
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- Page 334: C H A P T E R F I V E5Fundamentals
- Page 338: § 5.3 PLANNED GIFTS: CORE CONCEPTS
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GIFTS OF MONEY AND PROPERTYThe step transaction doctrine occasionally appears in IRS private letter rulingsas well. In one instance, an individual planned to fund a charitable remaindertrust 86 with a significant block of stock of a particular corporation. It wasanticipated that the trust would sell most, if not all, of this stock in order todiversify its assets. The stock first had to be offered to the corporation, under aright of first refusal, which allowed the corporation to redeem the stock for itsfair market value. The donor was the sole initial trustee of the trust.The IRS focused on whether the trust would be legally bound to redeem thestock. Although it did not answer that question, it assumed that to be the caseand also assumed that the trust could not be compelled by the corporation toredeem the stock. Thus, the IRS held that the transfer of the stock by the donor tothe trust, followed by the redemption, would not be recharacterized for federalincome tax purposes as a redemption of the stock by the corporation followed bya contribution of the redemption proceeds to the trust. The IRS also held that thesame principles would apply if the stock were sold rather than redeemed. Thisholding assumed that the donor had not prearranged a sale of the stock beforecontributing it to the trust under circumstances in which the trust would be obligatedto complete the sales transaction. 87In another situation, an individual planned to contribute a musical instrumentto a charitable remainder trust. The instrument was used in the donor’sprofession; the donor was not a dealer in this type of instrument, nor was itdepreciated for tax purposes. Again, the issue was presented: If the trust subsequentlysold the instrument for a gain, would that gain have to be recognized bythe donor? The IRS presumed that there was no prearranged sales contractlegally requiring the trust to sell the instrument following the gift. With this presumption,the IRS was able to hold that any later gain on a sale of the instrumentwould not be taxable to the donor. 88§ 4.9 CHARITABLE PLEDGESThe making of a pledge does not give rise to a federal income tax charitable contributiondeduction. The deduction that is occasioned, such as it may be, isdetermined as of the time the pledge is satisfied. 89The enforceability of a pledge is a matter of state law. Some states require theexistence of consideration as a prerequisite to the existence of an enforceablepledge; other states will enforce a pledge on broader, social grounds.Usually, a pledge is made by a potential donor in the form of a written statement—apromise to the potential charitable donee of one or more contributionsin the future. An example of the rule is that a pledge of a stock option to a charitableorganization produces an income tax charitable deduction in the year in86 See Chapter 12.87 Priv. Ltr. Rul. 9452020.88 Priv. Ltr. Rul. 9452026. An application of the step transaction doctrine, albeit not entailing a charitable contribution,was made available when a court disregarded a series of transactions entered into by a family involvingthe purchase of ranch properties and subsequent tax-free exchanges of these properties with familycontrolledentities. True v. United States, 190 F.3d 1165 (10th Cir. 1999).89 Rev. Rul. 55-410, 1955-1 C.B. 297. 142