United States Tax Court

United States Tax Court

T.C. Memo. 2023-34

ESTATE OF SCOTT M. HOENSHEID, DECEASED, ANNE M.

HOENSHEID, PERSONAL REPRESENTATIVE,

AND ANNE M. HOENSHEID,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 18606-19.

Filed March 15, 2023.

—————

Steven S. Brown, William Gibbs Sullivan, and Adam M. Ansari, for

petitioners.

Megan E. Heinz, Alexandra E. Nicholaides, and Lauren M. Simasko, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NEGA, Judge: This case is before the Court on a Petition filed in

response to a statutory notice of deficiency issued to petitioners for the

tax year 2015. It involves the contribution of appreciated shares of stock

in a closely held corporation to a charitable organization that

administers donor-advised funds for tax-exempt purposes under section

501(c)(3). 1 The contribution was made near contemporaneously with the

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and all Rule references are to the Tax Court Rules of Practice and

Procedure.

Served 03/15/23

2

[*2] selling of those shares to a third party. After concessions, 2 the

issues for decision are (1) whether and when petitioners made a valid

contribution of the shares of stock; (2) whether petitioners had

unreported capital gain income due to their right to proceeds from the

sale of those shares becoming fixed before the gift; (3) whether

petitioners are entitled to a charitable contribution deduction; and

(4) whether petitioners are liable for an accuracy-related penalty under

section 6662(a) with respect to an underpayment of tax.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The

Stipulations of Facts and the attached Exhibits are incorporated herein

by this reference. Petitioners resided in Michigan when their Petition

was timely filed.

I.

Commercial Steel Treating Corp. (CSTC)

CSTC was founded in 1927 by Ralph Hoensheid (Mr. Hoensheid)

and members of the Hoensheid family. CSTC has historically engaged

in the business of heat-treating metal fasteners for use in automobiles

and other commercial vehicles. Mr. Hoensheid’s son, Merle, later

established a separate manufacturing facility in order to provide

engineered coatings for fasteners, which was incorporated as a

subsidiary of CSTC, named Curtis Metal Finishing Co. The ownership

of CSTC remained in the family, and as of January 1, 2015, CSTC was

owned by Mr. Hoensheid’s grandchildren Scott Hoensheid (petitioner)

and his two brothers Craig P. Hoensheid and Kurt L. Hoensheid (two

brothers) with each holding an equal one-third share of the outstanding

stock. As of June 11, 2015, petitioner, his two brothers, Jack R. Howard,

and William A. Penner made up the board of directors of CSTC.

II.

Fidelity Charitable

Fidelity Charitable Gift Fund (Fidelity Charitable) is a taxexempt charitable organization under section 501(c)(3).

Fidelity

Charitable is primarily engaged in administering donor-advised funds

as a sponsoring organization. Under Fidelity Charitable’s donoradvised fund program, donors can establish a giving account with

Fidelity Charitable by completing and submitting a donor application

2 Respondent has conceded that petitioners are not liable for a penalty under

section 6662(a) with respect to the underpayment determined in the notice of

deficiency resulting from a disallowed charitable contribution deduction.

3

[*3] and making an irrevocable cash or noncash asset contribution.

After a giving account is established and a contribution made, donors

have retained advisory privileges over three things: (1) how to invest the

funds, (2) which public charities will receive grants, and (3) the timeline

for making grants, subject to some minimum activity requirements.

Fidelity Charitable typically requires proof of transfer in the form of a

stock certificate and formal acceptance by Fidelity Charitable to

complete a contribution of shares of a privately held corporation that

issues stock certificates. The general policy of Fidelity Charitable is to

liquidate noncash contributed assets as quickly as possible after

contribution.

III.

The Transaction & Contribution

In the fall of 2014 Kurt informed petitioner and Craig of his

intention to retire from CSTC. Petitioner and Craig did not want CSTC

to incur debt to finance a redemption of Kurt’s 33% interest in CSTC, so

they instead decided to pursue a potential sale of CSTC. 3 As of

December 12, 2014, CSTC had established an amended Change in

Control Bonus Plan, which granted certain employees a potential right

to bonus compensation in the event of a change in control of CSTC, such

as a transfer of more than 80% of CSTC’s stock to third parties.

In the end, CSTC chose to engage FINNEA Group as its financial

adviser in connection with a sale of CSTC. FINNEA Group is a sell-side

investment banking firm. Brian Dragon, senior managing director of

FINNEA was the main collaborator for CSTC and petitioner. Both

petitioner and Mr. Dragon considered $80 million to be a fair target price

for CSTC. Thus, the engagement letter executed by petitioner on behalf

of CSTC stated that CSTC would pay FINNEA a fee of 1% of the

ultimate transaction’s value up to $80 million and 5% of the ultimate

transaction’s value over $80 million. The engagement letter, however,

did not include any mention of appraisal or valuation services in

connection with the transaction.

In early 2015 FINNEA began soliciting bids for CSTC and

received several letters of intent to purchase the company from

interested private equity firms.

HCI Equity Partners (HCI), a

Washington, D.C. based private equity firm which focuses in part on

acquiring companies in the automotive industry, was one of the

3 Two other brothers, Mark Hoensheid and Ralph Hoensheid, had retired from

CSTC in previous years.

4

[*4] interested parties. On April 1, 2015, HCI submitted a letter of

intent to acquire CSTC for total consideration of $92 million.

Meanwhile, in mid-April 2015, petitioner began discussing the

prospect of establishing a Fidelity Charitable donor-advised fund to

make a presale charitable contribution of some of his CSTC stock with

his wealth advisers, Richard Balamucki and Casey Bear, and Andrea

Kanski, his longtime tax and estate planning attorney at Clark Hill

PLC.

On April 16, 2015, Ms. Kanski emailed John Hensien, a corporate

attorney at Clark Hill and CSTC’s merger and acquisition partner. In

the email, Ms. Kanski mentioned that petitioner was considering

donating some of his CSTC stock to charity “to avoid some capital gains”

and noted that “the transfer would have to take place before there is a

definitive agreement in place.” Ms. Kanski also requested that Mr.

Hensien inquire as to FINNEA’s capability to prepare a qualified

appraisal to establish the value of the charitable gift; “since they have

the numbers, it would seem to be the most efficient method.”

On April 20, 2015, after discussions with representatives of

Fidelity Charitable, Mr. Balamucki emailed petitioner and Ms. Kanski

to inform them that Fidelity Charitable had brought up a “concept called

the ‘anticipatory assignment of income’ which makes the timing of the

gift very important.” Mr. Balamucki added that “it must be a completed

gift before any purchase agreement is executed or else the IRS can come

back and try and impose the capital gains tax on the gift.” Fidelity

Charitable provided petitioners’ wealth advisers with a Letter of

Understanding to be executed in advance of the gift. On April 21, 2015,

Ms. Kanski responded to Mr. Balamucki and petitioner, stating that

“the deadline to assign the stock to a donor advised fund is prior to

execution of the definitive purchase agreement” and suggesting that

they “gather the forms and documents from Fidelity so we’re ready to go

and the paperwork is done well before the signing of the definitive

purchase agreement.” Petitioner responded in an email to Ms. Kanski

with the following:

Anne and I have agreed that we want to put 3.5MM in the

fund, but I would rather wait as long as possible to pull the

trigger. If we do it and the sale does not go through, I guess

my brothers could own more stock than I and I am not sure

if it can be reversed. I have not definitively given Richard

a number. Please know this and help us plan accordingly.

5

[*5] On April 23, HCI, CSTC, petitioner, and his two brothers

executed a nonbinding letter of intent, 4 establishing the parties’ mutual

interest in HCI’s acquisition of CSTC for total consideration of $107

million. The letter of intent did not include any breakup fee provision

to compensate HCI if the transaction was not finalized. After the

execution of the letter of intent, HCI began the process of conducting

due diligence into CSTC’s business and financial operations.

In mid-May counsel for HCI and CSTC began negotiating a

contribution and stock purchase agreement based on the terms of the

letter of intent. Ms. Kanski was not involved in the drafting process but

was provided with copies of each draft and was kept up to date on the

progress of the negotiations. On May 21, 2015, Ms. Kanski noted in an

email to Messrs. Balamucki and Bear and petitioner: “We now have a

draft purchase and sale agreement; do you have the information from

Fidelity for my review?” Petitioner responded that he had not yet signed

the Letter of Understanding document provided by Fidelity Charitable;

Ms. Kanski replied that she “want[ed] to make sure that nothing slips

and all of your advisors are on the same page so that there are no issues

with the charitable deduction.” On May 22, pursuant to 16 C.F.R.

§ 803.5(b), petitioner executed a notarized Affidavit of Acquired Person

on behalf of CSTC, representing that CSTC had “a good faith intention

of completing the transaction.”

On June 1, Mr. Bear emailed to Kurt Chisholm, a representative

of Fidelity Charitable, a Letter of Understanding signed by petitioner

which described the planned donation as being of shares of CSTC stock

but did not specify the number of shares. The terms and conditions of

that Letter of Understanding stated inter alia that (1) “As holder of the

Asset, Fidelity Charitable is not and will not be under any obligation to

redeem, sell, or otherwise transfer the asset” and (2) “No contribution is

complete until formally accepted by Fidelity Charitable.” Furthermore

on June 1, 2015, petitioner emailed Ms. Kanski requesting that she

prepare a shareholder consent agreement allowing him to transfer a

portion of his stock to Fidelity Charitable. 5 In the email, petitioner

reiterated to Ms. Kanski that “I do not want to transfer the stock until

we are 99% sure we are closing.”

4 The letter of intent was binding on the parties with respect to confidentiality

and a 60-day exclusivity period for negotiations.

5 Petitioner and his two brothers were parties to a Buy-Sell Agreement that

restricted their ability to dispose of their shares of CSTC stock.

6

[*6] On June 11, 2015, CSTC held its annual shareholders meeting,

at which petitioner and his two brothers were present and unanimously

approved petitioner’s request for “ratification of the sale of all

outstanding stock of Commercial Steel Treating Corporation to HCI.”

As part of that approval, petitioner and his two brothers

“acknowledge[d] that they have been involved throughout the process,

understand and accept all terms associated with the transaction;” the

minutes also noted that “a formal Consent Resolution authorizing the

recapitalization will be developed as part of the closing documents” and

“will be distributed for all Board members [sic] signature.” Craig and

Kurt also unanimously approved petitioner’s request to be able to

transfer a portion of his stock to Fidelity Charitable and executed a

Consent to Assignment agreement to that effect. The Consent to

Assignment agreement had a blank space for the parties to specify the

number of shares and stated that the consent governed “only the

number of shares identified above.” However, that field was left blank

and not filled in on June 11, when the parties signed the agreement, nor

on June 15, 2015, when petitioner emailed a copy of the signed

agreement to Ms. Kanski. 6

Immediately following the shareholder meeting, CSTC held a

board meeting. The directors unanimously approved petitioner’s

request to be able to transfer a portion of his shares to Fidelity

Charitable. The directors also unanimously approved a resolution to

dissolve CSTC’s Incentive Compensation Plan for executives and to

distribute all remaining balances “prior to the recapitalization of the

corporation.” At some point after the June 11, 2015, board meeting,

petitioner had a stock certificate partially prepared for the eventual

transfer to Fidelity Charitable. Petitioner kept the incomplete stock

certificate on his office desk until July 9 or 10, 2015, when he dropped it

off at Ms. Kanski’s office.

On June 12, 2015, HCI’s Investment Committee and managing

partners unanimously approved the acquisition of CSTC, subject to

completion of their financial and business due diligence. On June 30,

consultants hired by HCI completed and delivered a due diligence report

6 During the examination of petitioners’ 2015 return, Ms. Kanski produced to

the examining revenue agent a copy of the Consent to Assignment agreement, with a

number of “1380” shares hand-written onto the blank line. At trial petitioner

confirmed his handwriting inserting the number of shares and testified that he had

prepared and signed the agreement on June 11, 2015, before his two brothers signed

it.

7

[*7] addressing potential environmental liability issues arising out of

CSTC’s existing facilities.

Negotiations between CSTC and HCI began to gather steam. On

July 1, HCI’s counsel prepared a revised draft of the Contribution and

Stock Purchase Agreement. This draft, dated July 1, 2015, included a

new, partially blank recital (share contribution provision) stating in

relevant part: “On June 2015, Scott M. Hoenshied [sic] transferred . . .

shares of Common Stock to . . . .” Furthermore, on July 1, HCI prepared

and circulated the initial draft of the Minority Stock Purchase

Agreement for a purchase of shares from Fidelity Charitable. The draft

Minority Stock Purchase Agreement included a clause appointing

petitioner as seller’s representative with authority to, inter alia,

(1) accept delivery of, on behalf of the Seller [Fidelity Charitable], all

such documents as may be deemed . . . to be appropriate to consummate

this Agreement;” and (2) “to endorse and to deliver on behalf of the Seller

[Fidelity Charitable], certificates representing the Shares.” Counsel for

CSTC forwarded the draft to petitioner with this message: “Attached is

the initial draft of the purchase agreement for the shares you

have/intend to gift.”

On July 6, 2015, HCI caused the organization of a Delaware

corporation, CSTC Holdings, Inc., for the purpose of acquiring shares of

CSTC. That same day petitioner emailed Messrs. Bear, Balamucki, and

Hensien and Ms. Kanski, circulating the draft Minority Stock Purchase

Agreement and stating inter alia: “We are not totally sure of the shares

being transferred to the charitable fund yet” and “[h]opefully, and based

on the closing documents, we will have a much better handle on this

come Wednesday or Thursday of this week.” Petitioner added: “Once we

know the share values, I am confident Andrea will execute the stock

assignment as required.” The next day, July 7, petitioner emailed Mr.

Bear to inform him that CSTC would “sweep the cash from the company

prior to closing and distribute it to the brothers.” That same day, Mr.

Bear emailed Mr. Chisholm and Ryan Boland, Fidelity Charitable’ s vice

president for national corporate and executive giving. In the email Mr.

Bear noted that he was “concerned” with the clause in the Minority

Stock Purchase Agreement appointing petitioner as seller’s

representative for Fidelity Charitable; Mr. Bear suggested that the

clause instead appoint one of CSTC’s corporate attorneys as seller’s

representative. Also on July 7, petitioner executed an amendment to

CSTC’s Change in Control Bonus Plan, specifying that the impending

sale to HCI would constitute a change in control and thus trigger bonus

payments to key employees.

8

[*8] On July 9, 2015, CSTC prepared a revised draft of the

Contribution and Stock Purchase Agreement. In this revised draft,

counsel for CSTC had partially filled in the recital relating to the gift

transfer to read in relevant part: “On July . . . 2015, [petitioner]

transferred 1,380 shares of Common Stock to The Fidelity Investments

Charitable Gift Fund.” Furthermore, the revised draft added that one

of the conditions precedent to the obligations of the buyer was that “[t]he

Fidelity Investments Charitable Gift Fund shall have executed and

delivered to HCI and the Buyer the Minority Stock Purchase

Agreement.” 7

In a reply to Mr. Bear’s email the same day, Mr. Boland agreed

that “[o]ne of the corporate attorneys would be a much better fit, from

our perspective.” Later that same day, Mr. Bear informed Mr. Boland

in an email that “it looks like Scott has arrived at 1380 shares—which

will come out to about $3,000,000” and that Mr. Bear would “have the

stock certificate shortly.” Petitioner in a subsequent email to Messrs.

Bear and Balamucki noted that “Andrea is completing the Stock

transfer of 1380 shares to the Charitable account” and requested his

account number from Fidelity Charitable. Mr. Bear then forwarded the

email to Messrs. Boland and Chisholm and requested the account

number. Mr. Chisholm replied to Mr. Bear the following morning,

Friday, July 10, noting that “it appears as though Scott does not yet have

a Giving Account created with us” and providing a link to the account

setup process on Fidelity Charitable’s website. Later that day,

petitioner set up an online giving account with Fidelity Charitable.

Additionally, on July 10, 2015, HCI prepared a revised draft of

the Contribution and Stock Purchase Agreement. Nevertheless, the

share contribution provision was still missing a specific date when

petitioner transferred the shares to Fidelity Charitable. However, this

draft update did propose to resolve the environmental liability issue by

including a provision by which the sellers would indemnify HCI and

CSTC Holdings for any damages arising out of matters or liabilities

identified in the environmental due diligence report. 8 The

The July 9, 2015, draft also proposed to resolve issues relating to the

postclosing bonus and equity participation plans of CSTC and the postclosing

treatment of any excess real property.

7

8 The draft also accepted CSTC’s proposed addition of provisions addressing

the postclosing bonus and equity participation plans and the postclosing treatment of

excess real property, with minor changes.

9

[*9] environmental indemnification provision

substantive addition made in the July 10 draft.

was

the

primary

Three significant actions were taken on July 10. First, CSTC paid

out employee bonuses totaling $6,102,862 pursuant to its newly

amended Change in Control Bonus Plan. Second, CSTC submitted to

the Michigan Department of Licensing and Regulatory Affairs an

amendment to its Articles of Incorporation, signed by petitioner, which

provided for actions requiring a shareholder meeting and vote to be

taken upon written consent of the shareholders—a change requested by

HCI. Third, Ms. Kanski forwarded to Mr. Bear the updated draft of the

Minority Stock Purchase Agreement dated July 15 and asked Mr. Bear

to forward it to Fidelity Charitable for signature; the next morning

(Saturday, July 11), Mr. Bear forwarded the email from Fidelity

Charitable to Messrs. Boland and Chisholm. In Ms. Kanski’s initial

email to Mr. Bear, Ms. Kanski noted that “the closing has been pushed

back to Tuesday, at the earliest.” Ms. Kanski also noted that “the

definition of seller’s representative will be revised from Scott to Clark

Hill.” The draft Minority Stock Purchase Agreement was dated July 13

and included a warranty that Fidelity Charitable “is the record and

beneficial owner of and has good and valid title to the Shares, free and

clear of any and all Liens.”

At 4:38 a.m. on July 13, 2015, the Contribution and Stock

Purchase Agreement underwent a redline comparison against the prior

revised updated draft on behalf of HCI. This revised draft had already

accepted the environmental liability provision into the text. The share

contribution provision still did not specify the date on which petitioner

transferred the shares to Fidelity Charitable. Later that morning, at

7:56 a.m., Mr. Bear once more emailed Mr. Boland to request signatures

from Fidelity Charitable on the Minority Stock Purchase Agreement, as

the parties were “hoping to close . . . the next day.” At 9:08 a.m., Mr.

Boland responded: “It is important that we receive the stock certificate

before we reach a conclusion on the sale/redemption. Did the stock

certificate go out yet?” At 9:13 a.m., Mr. Bear swiftly alerted Ms. Kanski

to the problem, informing her that “Fidelity will not sign off on anything

until they see the stock certificate. As far as they know, they don’t have

any shares to sell.” At Mr. Bear’s request, Ms. Kanski emailed him a

PDF stock certificate, which Mr. Bear forwarded by email to Mr. Boland

at 9:30 a.m. The stock certificate was numbered 1670, was signed by

10

[*10] petitioner but undated, and stated that 1,380.40 shares of CSTC

common stock were owned by Fidelity Charitable. 9

At 1:21 p.m., counsel for HCI emailed counsel for CSTC, noting

that “I know CSTC will be issuing a certificate to the Gift Fund” and

asking whether “the transfer to the gift fund has occurred yet.” At 3:24

p.m., counsel for CSTC responded that “[y]es, the transfer to the Gift

Fund has occurred” and attached a printout spreadsheet that purported

to list CSTC shareholders, numbers of shares held, and dates of

issuance. The relevant page of the printout was dated July 13, 2015,

and displayed a disposition entry for certificate No. 1654 with a date of

“7/10/2015” and a note stating: “Cancelled: Scott transferred 1,380.50

Fidelity Investments.” 10 The printout also displayed an issuance entry

for certificate No. 1670 stating that 1,380 shares had been issued to

Fidelity Charitable. At 5:22 p.m., Mr. Boland emailed Mr. Bear with an

attached signature page, signed by Mr. Boland on behalf of Fidelity

Charitable, for the Minority Stock Purchase Agreement. At 6:43 p.m.,

counsel for CSTC forwarded signature pages for a number of

transaction-related documents, including the written consents by the

board of CSTC, to petitioner and his two brothers requesting their

signatures.

Early on the morning of July 14, Mr. Bear forwarded the

signature pages from Fidelity Charitable to Ms. Kanski, who forwarded

them to CSTC’s counsel. Later that day, counsel for CSTC circulated a

revised draft of the Contribution and Stock Purchase Agreement, which

filled in the share contribution provision to specify that petitioner had

transferred the shares on July 10, 2015. The final draft made minimal

changes to the prior circulated drafts. 11 Additionally, on July 14, CSTC

made a pro rata distribution, characterized as a dividend, of $4,796,352

to petitioner and his two brothers; Fidelity Charitable did not

9 During the examination of petitioners’ 2015 return, Ms. Kanski produced a

copy of a stock certificate stamped “cancelled,” which she received from petitioner that

included an additional typewritten date field of June 11, 2015.

10 The fractional amount of .50 appears to have been a clerical error.

11 The primary change was a slight revision to a provision for payment of

compensation to the retired brothers Mark and Kurt Hoensheid to cover the cost of

their health insurance, specifying that compensation would terminate upon either

(1) the retirees’ becoming eligible for Medicare or (2) a defined liquidity event’s

occurring.

11

[*11] participate in the distribution. The distribution represented

nearly all of the remaining cash within CSTC.

On July 15, HCI, CSTC Holdings, petitioner, and his two brothers

executed signatures on a final Contribution and Stock Purchase

Agreement, which was approved by CSTC’s shareholders and board that

same day. The final agreement included the share contribution

provision, which specified that petitioner had transferred 1,380 shares

to Fidelity Charitable on “July 10, 2015.” The final agreement provided

for petitioner and his two brothers to exchange shares in CSTC for

shares in the new CSTC Holdings, in an amount sufficient to constitute

51% ownership of CSTC Holdings. HCI agreed to contribute cash to

CSTC Holdings in exchange for shares in a number sufficient to

constitute 49% ownership of the common stock of CSTC Holdings. 12

CSTC Holdings then agreed to purchase the remainder of the

outstanding shares of CSTC owned by petitioner and his two brothers,

as well as the 1,380 shares owned by Fidelity Charitable. On July 15, a

representative from Clark Hill signed on behalf of Fidelity Charitable a

document titled “Irrevocable Stock Power.” The document represented

that Fidelity Charitable “does hereby sell, assign and transfer” the 1,380

shares to CSTC Holdings. The document also stated that Fidelity

Charitable “does hereby irrevocably constitute and appoint (blank

space) as attorney to transfer the said stock on the books of the

Corporation with full power of substitution in the premises.” Fidelity

Charitable received $2,941,966 in cash proceeds from the sale, which

was deposited into petitioners’ giving account.

At closing, petitioners received $21,330,818 in cash, 50,000 shares

of CSTC Holdings common stock, and a subordinated promissory note of

$5 million. In October 2015 petitioner and his two brothers received a

postclosing distribution of excess working capital from CSTC totaling

$1,093,878. Additionally, in August, October, and November 2016,

petitioner and his two brothers received another distribution relating to

CSTC’s 2015 tax refunds.

IV.

The Contribution Confirmation Letter, Tax Return, & Appraisal

On November 18, 2015, Fidelity Charitable sent petitioners a

contribution confirmation letter acknowledging a charitable

12 The agreement also provided for HCI to receive shares of nonvoting

convertible preferred stock in CSTC Holdings and a subordinated promissory note for

$2 million.

12

[*12] contribution from them of 1,380.400 shares of CSTC stock. 13 The

letter indicated, inter alia, that Fidelity Charitable received the shares

of CSTC stock on June 11, 2015, and stated that “Fidelity Charitable

has exclusive legal control over the contributed asset, and this

contribution is irrevocable and cannot be refunded.” The letter further

stated that “Fidelity Charitable did not provide any goods or services in

exchange for or in consideration of this contribution.” Fidelity

Charitable also provided petitioners with a yearend account statement,

which reported a received date of June 11, 2015, for the shares of CSTC

stock and stated that “[a]ny error must be reported to Fidelity

Charitable within 60 days.”

On November 30, 2015, petitioner emailed Ms. Kanski, asking:

“What date did we donate the stock to Fidelity Charitable?” He stated

that “FINNEA is playing dumb toward providing the appraisal and I

have asked Plante Moran.” Several minutes later, petitioner sent a

subsequent email to Ms. Kanski: “I think I found it: 6/11/15,” and

copying text that appeared to be from Fidelity Charitable’s

documentation. On December 18, Ms. Kanski emailed petitioner to

inform him that she had asked Mr. Hensien of Clark Hill “to light a fire

under FINNEA regarding the appraisal.”

Ms. Kanski supervised the preparation of petitioners’ 2015

federal income tax return and signed the return as the preparer. The

return was timely filed with the Internal Revenue Service (IRS) on April

14, 2016. Petitioners did not report any capital gains associated with

the sale of the 1,380 shares and claimed a noncash charitable

contribution deduction of $3,282,511.

Petitioners attached to their return a Form 8283, Noncash

Charitable Contributions, reporting a contribution of $3,282,511

relating to the 1,380 shares of CSTC stock and a date of contribution of

June 11, 2015. The declaration of appraiser section on the Form 8283

13 On July 15, 2015, Fidelity Charitable apparently sent petitioners an initial

contribution confirmation letter for the receipt of the shares of CSTC stock. By

unsigned letter dated November 18, 2015, Fidelity Charitable informed petitioners

that “[d]ue to an error made by one of our contribution representatives, a contribution

confirmation dated July 15, 2015 was mailed to you noting the incorrect party for tax

deduction purposes.” That letter further stated that “[t]his error has now been

corrected,” that “a new confirmation letter has been mailed,” and that petitioners

“must disregard the contribution confirmation letter that was previously sent to you,

dated July 15, 2015.” Petitioners did not produce a copy of the initial, apparently

erroneous, contribution confirmation letter.

13

[*13] was signed by Brian Dragon as appraiser, and the donee

acknowledgment section was signed by a representative of Fidelity

Charitable. Attached to the Form 8283 was a document entitled “CSTC

Fidelity Gift Fund Valuation,” which purported to be a qualified

appraisal that Mr. Dragon prepared with respect to the “CSTC Fidelity

Gift Fund.” According to the appraisal, Mr. Dragon determined that the

1,380 shares of CSTC stock had a value of $3,282,511 as of June 11,

2015, which was $340,545 higher than the actual proceeds Fidelity

Charitable received from the sale of those shares to HCI on July 15,

2015. The appraisal included a brief biography of Mr. Dragon (which

did not address whether Mr. Dragon had appraisal experience or

qualifications), a valuation summary, the Forms 8283 and 8282, Donee

Information Return, and a number of transactional documents relating

to the acquisition by HCI. The appraisal attached a final version of the

Minority Stock Purchase Agreement, which included an amended clause

appointing Clark Hill as seller’s representative.

The valuation summary page included three columns with

different valuation scenarios. Each valuation started with an enterprise

value of $105 million (the total consideration per the Contribution and

Stock Purchase Agreement) and then made various adjustments. The

first scenario added to the value the amount of capital expenditure

reimbursement and subtracted the amount of transaction fees (both of

which were accounted for in the transaction with HCI) to arrive at a

value of $103,118,311 and thus a proportional value of $2,941,966 (i.e.,

the actual amount of proceeds received by Fidelity Charitable). The

second scenario also added to the value the amount of additional

postclosing payments received by petitioner and his two brothers (but

not Fidelity Charitable), which related to excess working capital and

CSTC’s tax refunds, and subtracted minor adjustments, to arrive at a

value of $105,697,329 and thus a proportional value of $3,015,546.

Finally, the third scenario also added to the value $9,357,335 of “Cash

& Equivalents,” to arrive at a value of $115,054,664 and thus a

proportional value of $3,282,511 (i.e., the claimed appraisal value).

The appraisal report valued the CSTC stock as of June 11 but did

not expressly disclose a date of contribution for the shares. The

appraisal included a page that listed a number of traditional valuation

approaches and quoted from a section of Rev. Rul. 59-60, 1959-1 C.B.

237, that discusses valuation of securities. On the following page the

appraisal stated that FINNEA “elected not to contemplate the

aforementioned traditional valuation methods in favor of the empirical

valuation resulting from its thorough marketing efforts below.” In the

14

[*14] space below, the appraisal contained the scope of services for

which FINNEA had been engaged, copied from the text of its letter of

engagement with CSTC. The appraisal did not further explain the

empirical method used in the appraisal. Neither did it include a

statement that it was prepared for federal income tax purposes.

Mr. Dragon had previously performed valuations on a limited

basis, including one estate tax valuation, but had not previously

prepared an appraisal substantiating a charitable contribution of shares

in a closely held corporation. Mr. Dragon did not charge an additional

fee for the appraisal in addition to what he and FINNEA had already

received as fees in the transaction with HCI; nor did Mr. Dragon and

petitioners execute a separate engagement letter for him to perform the

appraisal. While petitioners received a quote from a national accounting

firm, Plante Moran, to complete an appraisal, they ultimately decided

to have Mr. Dragon prepare the report instead.

A Form 8282 was prepared for petitioners. Signed by a

representative of Fidelity Charitable, it reported the receipt of

petitioners’ entire interest in 1,380.400 shares of CSTC stock on June

11, 2015. A representative of Fidelity Charitable later signed an

amended Form 8282, which reflected the receipt of 1,380 shares of CSTC

stock from petitioners, rather than 1,380.400.

V.

The Examination & Notice of Deficiency

By letter dated December 19, 2017, petitioners were informed

that the Commissioner had selected their 2015 return for examination.

Ms. Kanski represented petitioners during the examination. On

December 6, 2018, John Copenhagen, an IRS group manager,

electronically signed a Civil Penalty Approval Form approving the

assessment of a penalty under section 6662 against petitioners. By

letter dated December 6, 2018, respondent proposed to disallow in full

petitioners’ charitable contribution deduction and to assess a penalty

under section 6662.

On October 9, 2019, respondent issued to petitioners a notice of

deficiency, determining a deficiency of $647,489, resulting from the

disallowance of the claimed charitable contribution deduction, and a

penalty of $129,498 under section 6662(a).

Petitioner’s timely Petition was filed on October 15, 2019. On

December 16, 2019, respondent filed an Answer. Respondent’s counsel

received approval to request assessment of an additional penalty under

15

[*15] section 6662(a) on February 19, 2020, in an email from, her

immediate supervisor at the IRS Office of Chief Counsel. On August 25,

2020, respondent filed an amended Answer, asserting an increased

deficiency and an increased section 6662(a) penalty, due to application

of the anticipatory assignment of income doctrine.

OPINION

In general, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of

proving that those determinations are erroneous. Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933); Kearns v. Commissioner, 979 F.2d

1176, 1178 (6th Cir. 1992), aff’g T.C. Memo. 1991-320. Moreover,

deductions are a matter of legislative grace, and taxpayers must

demonstrate their entitlement to the deductions claimed. INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

However, the

Commissioner bears the burden of proof with respect to new matters or

increases in deficiency pleaded in his answer. Rule 142(a)(1). In his

amended Answer, respondent first asserted an increase in deficiency on

the grounds that petitioners made an anticipatory assignment of income

of their proceeds from the sale of CSTC shares to HCI. Consequently,

the burden is on petitioners only with respect to (1) whether they made

a valid gift of shares to Fidelity Charitable and (2) whether they are

entitled to a charitable contribution deduction. Respondent bears the

burden with respect to whether petitioners realized and recognized

gains pursuant to the anticipatory assignment of income doctrine.

The burden of proof on factual issues may be shifted to the

Commissioner if the taxpayer introduces “credible evidence” with

respect thereto and satisfies recordkeeping and other requirements. See

§ 7491(a)(1) and (2). Petitioners have not sought to shift the burden with

respect to any factual issue.

Gross income means “all income from whatever source derived,”

including “[g]ains derived from dealings in property.” § 61(a)(3). In

general, a taxpayer must realize and recognize gains on a sale or other

disposition of appreciated property. See § 1001(a)–(c). However, a

taxpayer typically does not recognize gain when disposing of appreciated

property via gift or charitable contribution. See Taft v. Bowers, 278 U.S.

470, 482 (1929); Guest v. Commissioner, 77 T.C. 9, 21 (1981); see also

§ 1015(a) (providing for carryover basis of gifts). A taxpayer may also

generally deduct the fair market value of property contributed to a

qualified charitable organization.

See § 170(a)(1); Treas. Reg.

16

[*16] § 1.170A-1(c)(1). Contributions of appreciated property are thus

tax advantaged compared to cash contributions; when a contribution of

property is structured properly, a taxpayer can both avoid paying tax on

the unrealized appreciation in the property and deduct the property’s

fair market value. See, e.g., Dickinson v. Commissioner, T.C. Memo.

2020-128, at *5. The use of a donor-advised fund further optimizes a

contribution by allowing a donor “to get an immediate tax deduction but

defer the actual donation of the funds to individual charities until later.”

Fairbairn v. Fid. Invs. Charitable Gift Fund, No. 18-cv-04881, 2021 WL

754534, at *2 (N.D. Cal. Feb. 26, 2021).

We apply a two-part test when determining whether to respect

the form of a charitable contribution of appreciated property followed by

a sale by the donee. The donor must (1) give the appreciated property

away absolutely and divest of title (2) “before the property gives rise to

income by way of a sale.” Humacid Co. v. Commissioner, 42 T.C. 894,

913 (1964). The first prong incorporates the section 170(c) requirement

that the taxpayer make a valid gift 14 of property, see Jones v.

Commissioner, 129 T.C. 146, 150 (2007), aff’d, 560 F.3d 1196 (10th Cir.

2009), while the second prong incorporates the anticipatory assignment

of income doctrine, see Dickinson, T.C. Memo. 2020-128, at *8.

Accordingly, we first must determine whether petitioners made a valid

gift of the CSTC shares to Fidelity Charitable and, if so, on what date

the gift was made. We must then determine the tax consequences,

including eligibility for a charitable contribution deduction, of any gift

by petitioners.

I.

Valid Gift of Shares of Stock

“Ordinarily, a contribution is made at the time delivery is

effected.” Treas. Reg. § 1.170A-1(b). The regulations further provide

that “[i]f a taxpayer unconditionally delivers or mails a properly

endorsed stock certificate to a charitable donee or the donee’s agent, the

gift is completed on the date of delivery.” 15 Id. However, the regulations

do not define what constitutes delivery. See, e.g., Dyer v. Commissioner,

We use the term “gift” synonymously here with the term “charitable

contribution.” See Seed v. Commissioner, 57 T.C. 265, 275 (1971).

14

15 The regulations alternatively provide, in relevant part, that “[i]f the donor

delivers the stock certificate to his bank or broker as the donor’s agent, or to the issuing

corporation or its agent, for transfer into the name of the donee, the gift is completed

on the date the stock is transferred on the books of the corporation.” Treas. Reg.

§ 1.170A-1(b).

17

[*17] T.C. Memo. 1990-51, 58 T.C.M. (CCH) 1321, 1323; Brotzler v.

Commissioner, T.C. Memo. 1982-615, 44 T.C.M. (CCH) 1478, 1480;

Alioto v. Commissioner, T.C. Memo. 1980-360, 40 T.C.M. (CCH) 1147,

1154, aff’d, 692 F.2d 762 (9th Cir. 1982). Accordingly, we must first look

to state law for the threshold determination of whether petitioners

divested themselves of their property rights via gift. 16 See United States

v. Nat’l Bank of Com., 472 U.S. 713, 722 (1985) (concluding that state

law determines property rights and federal law classifies them for

appropriate tax treatment); Jones, 129 T.C. at 150 (“In order to make a

valid gift for Federal tax purposes, a transfer must at least effect a valid

gift under the applicable State law.”); Greer v. Commissioner, 70 T.C.

294, 304 (1978) (applying state gift law requirements to charitable

contribution of property), aff’d on another issue, 634 F.2d 1044 (6th Cir.

1980); Kissling v. Commissioner, T.C. Memo. 2020-153, at *22 (“Whether

delivery is effected is a question of state law.”). In doing so, we apply

state law in the manner in which the highest court of the state has

indicated that it would apply the law. See Commissioner v. Estate of

Bosch, 387 U.S. 456, 465 (1967). Where the state’s highest court is

silent, we must discern and apply the state law, giving “proper regard”

to the state’s lower courts. See Julia R. Swords Tr. v. Commissioner,

142 T.C. 317, 342 (2014) (quoting Commissioner v. Estate of Bosch, 387

U.S. at 465).

As to the choice of state law, both parties focused their state law

briefing on Michigan law, and we cannot discern a choice of law principle

that would suggest the parties’ understanding is incorrect. Accordingly,

we apply the law of the state of petitioners’ domicile, Michigan, with

respect to whether and when petitioners made a valid gift of the CSTC

shares. See Macatawa Bank v. Wipperfurth, 822 N.W.2d 237, 238 (Mich.

Ct. App. 2011) (“The longstanding rule in Michigan is that ‘the situs of

intangible assets is the domicile of the owner unless fixed by some

positive law.’” (quoting Brown v. O’Donnell (In re Rapoport’s Est.), 26

N.W.2d 777, 781 (Mich. 1947))); see also Malkan v. Commissioner, 54

16 This Court has at times applied its own longstanding test for a valid inter

vivos gift. See Guest, 77 T.C. at 16 (quoting Weil v. Commissioner, 31 B.T.A. 899, 906

(1934), aff’d, 82 F.2d 561 (5th Cir. 1936)). This test, while more extensive on its face

than what is required under Michigan law, shares the same core elements: “donative

intent, delivery by the donor and acceptance by the donee.” Goldstein v. Commissioner,

89 T.C. 535, 542 (1987) (distilling the Weil test); see Estate of Sommers v.

Commissioner, T.C. Memo. 2013-8, at *43 n.20 (analyzing validity of gift under

principles consistent with both federal and state law); Estate of Dubois v.

Commissioner, T.C. Memo. 1994-210, 1994 WL 184393, at *2 (reaching conclusion that

no valid gift was made under both federal and state law).

18

[*18] T.C. 1305, 1314 n.3 (1970) (applying law of the situs to determine

validity of gift of shares of stock).

In determining the validity of a gift, Michigan law requires a

showing of (1) donor intent to make a gift; (2) actual or constructive

delivery of the subject matter of the gift; and (3) donee acceptance. 17 See

Davidson v. Bugbee, 575 N.W.2d 574, 576 (Mich. Ct. App. 1997) (citing

Molenda v. Simonson, 11 N.W.2d 835, 836 (Mich. 1943)); see also United

States v. Four Hundred Seventy Seven (477) Firearms, 698 F. Supp. 2d

894, 902 (E.D. Mich. 2010) (applying Michigan law).

Petitioners and respondent each advance different dates for when

petitioners made a gift to Fidelity Charitable of the CSTC shares.

Petitioners argue that a gift was made on June 11, 2015, and they point

to petitioner’s testimony and Fidelity Charitable’s corrected

contribution confirmation letter, which both claim June 11 as the date

of the gift. Respondent argues that a valid gift was not made until at

least July 13, 2015, when Fidelity Charitable first received a stock

certificate from petitioners’ representatives. 18 We will examine each of

three required elements for a valid gift in turn.

17 Petitioners alternatively direct us to Article 8 of the Uniform Commercial

Code (UCC), as adopted by Michigan, which on its face is applicable to gift transfers of

certificated securities. See Mich. Comp. Laws § 440.1201(2)(cc) (2015) (“‘Purchase’

means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security

interest, issue or reissue, gift, or any other voluntary transaction creating an interest

in property.” (Emphasis added.)); id. (dd); id. § 440.8301(1)(a) and (b) (delivery of

certificated security occurs when purchaser or third party acting on their behalf

“acquires possession of the security certificate”). While the Michigan Supreme Court

does not appear to have expressly addressed the issue, we do not read the UCC

provisions as disturbing the longstanding Michigan common law test. See id.

§ 440.8302 cmt. 2 (“Article 8 does not determine whether a property interest in

certificated or uncertificated security is acquired under other law, such as the law of

gifts, trusts, or equitable remedies.”); id. § 440.1103(2) (stating that “principles of law

and equity” supplement UCC provisions); see also Young v. Young, 393 S.E.2d 398, 401

(Va. 1990) (“The common law requirements of delivery and acceptance are not removed

by those provisions of the [UCC] pertaining to the transfer of securities.”).

18 Respondent raises a separate issue with regard to the dividend paid out by

CSTC on July 14 to petitioner and the two brothers, but not paid to Fidelity Charitable,

speculating that petitioners did not make a valid gift of the shares. Respondent’s

contention appears to be foreclosed by Michigan law, which provides that retention of

a dividend does not preclude a valid gift of the underlying shares. See Cook v. Fraser,

299 N.W. 113, 114 (Mich. 1941) (citing Ford v. Ford, 259 N.W. 138 (Mich. 1935)); In re

Estate of Prinstein, No. 252682, 2005 WL 1459575, at *1 (Mich. Ct. App. June 21, 2005)

(“[T]he fact that a donor collects dividends on a security does not make an inter-vivos

gift of that security invalid.”).

19

[*19] A.

Present Intent

The determination of a party’s subjective intent at some historical

point is necessarily a highly fact-bound issue. When deciding such an

issue, we must determine “whether a witness’s testimony is credible

based on objective facts, the reasonableness of the testimony, the

consistency of statements made by the witness, and the demeanor of the

witness.” Ebert v. Commissioner, T.C. Memo. 2015-5, at *5–6; see also

Estate of Kluener v. Commissioner, 154 F.3d 630, 636 (6th Cir. 1998),

aff’g in relevant part T.C. Memo. 1996-519. If contradicted by the

objective facts in the record, we will not “accept the self-serving

testimony of [the taxpayer] . . . as gospel.” Tokarski v. Commissioner,

87 T.C. 74, 77 (1986); see Davis v. Commissioner, 88 T.C. 122, 143 (1987),

aff’d, 866 F.2d 852 (6th Cir. 1989).

We start with petitioner’s contemporaneous emails and the

contemporaneous transactional documents, which we consider to be

especially probative evidence with respect to his intent. On June 1,

petitioner first expressed in an email that he wanted to wait to make

the gift of the shares to Fidelity Charitable until the last possible

moment, when he was “99% sure” that the sale to HCI would close.

Petitioner’s subsequent actions and communications were consistent

with that intent. On June 11, petitioner and his two brothers executed

the Consent to Assignment agreement, an act that demonstrated

petitioner’s generalized future intent to make a gift. However, the

Consent to Assignment cannot establish that, as of June 11, such an

intent was sufficiently present and specific. See Czarski v. Bonk, 124

F.3d 197, 1997 WL 535773, at *4 (6th Cir. 1997) (unpublished table

decision) (applying Michigan law and finding no evidence establishing

purported donor’s “specific intent” with respect to the particular

property). On its face, the Consent to Assignment agreement failed to

specify a number of shares to be contributed, suggesting that petitioner

had not yet decided that key detail. Similarly, the original stock

certificate, which was prepared on or sometime after June 11, failed to

specify an effective date, again suggesting that a date would be decided

upon later. 19 On July 6, petitioner stated in an email that he was still

19 We note that copies of the Consent to Assignment agreement and stock

certificate that were produced to the Commissioner during the examination appear to

have been modified and backdated to specify, respectively, a number of shares and an

effective date that were not originally present at the time of the transaction. We find

such inconsistencies to be significant in evaluating petitioners’ claim that the gift was

made on June 11. Cf. Ferguson v. Commissioner, 174 F.3d 997, 1000 (9th Cir. 1999)

20

[*20] “not totally sure of the shares being transferred to the charitable

fund yet.” That email confirms that, as of July 6, the details of the

contribution were still in flux. Indeed, three days later, on July 9, Mr.

Bear emailed Mr. Boland to inform him that “it looks like Scott has

arrived at 1380 shares.”

At trial, petitioner testified that he believed the number of shares

to be donated was set at 1,380 on June 11. That testimony is squarely

contradicted by the Consent to Assignment agreement, petitioner’s

July 6 email, and Mr. Bear’s July 9 email. See, e.g., Richardson v.

Commissioner, T.C. Memo. 1984-595, 49 T.C.M. (CCH) 67, 73–74

(concluding that taxpayer’s characterization of date of contribution was

not credible where in conflict with “documents written

contemporaneously with the donation”). Petitioner also testified that

his July 6 email was referring to a potential donation of a second tranche

of shares, a theoretical event which apparently never took place. The

record contains no evidence supporting the claim that petitioners

attempted to make (or even contemplated) two separate gifts of CSTC

shares. We find petitioner’s self-serving testimony as to his intent to be

incredible.

The record does not support a finding of present intent to make a

gift until July 9 when petitioner settled on a number of 1,380 shares.

From that point on, petitioner took a number of actions that confirmed

his present intent to transfer. On July 9 or 10 petitioner delivered the

physical stock certificate to Ms. Kanski’s office. Similarly, on July 10

petitioner created an online giving account with Fidelity Charitable.

Taken together, these actions provide sufficient credible evidence of

petitioner’s intent. We conclude that, as of July 9, petitioner had present

intent to make a gift.

B.

Delivery

At bottom, the delivery requirement generally contemplates an

“open and visible change of possession” of the donated property.

Shepard v. Shepard, 129 N.W. 201, 208 (Mich. 1910); Davis v.

Zimmerman, 40 Mich. 24, 27 (1879). As the term itself suggests,

manually providing tangible property to the donee is the classic form of

delivery. See, e.g., Restatement (Second) of Property § 31.1 cmt. b (Am.

L. Inst. 1992) (describing the “simplest” form of delivery as the donor’s

(questioning purported date of contribution where “the original handwritten date in a

printed box entitled ‘date of donation’ . . . had been completely scratched out” and a

new date written next to it), aff’g 108 T.C. 244 (1997).

21

[*21] “plac[ing] the subject matter of the gift in the hands of the

intended donee”). Similarly, manually providing to the donee a stock

certificate that represents intangible shares of stock is traditionally

sufficient delivery. See Philip Mechem, Gifts of Corporation Shares, 20

Ill. L. Rev. 9, 15–16 (1925–1926) (collecting cases). However, the

determination of what constitutes delivery is inherently context-specific

and depends upon the “nature of the subject-matter of the gift” and the

“situation and circumstances of the parties.” Shepard, 129 N.W. at 208

(“[N]o absolute rule can be laid down as to what will constitute a

sufficient delivery . . . .”).

Delivery need not necessarily be actual. Constructive delivery

may be effected where property is delivered into the possession of

another on behalf of the donee. See, e.g., In re Van Wormer’s Estate, 238

N.W. 210, 212 (Mich. 1931) (finding constructive delivery where stock

certificate was issued in the name of donee and deposited at bank).

Whether constructive or actual, delivery “must be unconditional and

must place the property within the dominion and control of the donee”

and “beyond the power of recall by the donor.” In re Casey Estate, 856

N.W.2d 556, 563 (Mich. Ct. App. 2014) (citing Osius v. Dingell, 134

N.W.2d 657, 659 (Mich. 1965)); see Geisel v. Burg, 276 N.W. 904, 908

(Mich. 1937) (finding no valid gift where certificates of deposit were

never placed beyond donor’s control). If constructive or actual delivery

of the gift property occurs, its later retention by the donor is not

sufficient to defeat the gift. See Estate of Morris v. Morris, No. 336304,

2018 WL 2024582, at *5 (Mich. Ct. App. May 1, 2018) (citing Jackman

v. Jackman, 260 N.W. 769, 770 (Mich. 1935)); see also Garrison v. Union

Tr. Co., 129 N.W. 691, 692 (Mich. 1911).

With respect to delivery, neither Mr. Hoensheid nor Ms. Kanski

was able to credibly identify a specific action taken on June 11 that

placed the shares within Fidelity Charitable’s dominion and control. 20

See Czarski, 1997 WL 535773, at *4 (finding no evidence that donor took

any action that would constitute delivery or place gift property in

donee’s dominion and control); see also Reed Smith Shaw & McClay v.

Commissioner, T.C. Memo. 1998-64, 1998 WL 62393, at *8 (declining to

credit uncorroborated self-serving testimony regarding actions

20 In his testimony, petitioner implied a belief that the execution of the Consent

to Assignment agreement had effected a transfer. Execution of the Consent to

Assignment agreement did not purport to transfer ownership of any portion of

petitioner’s shares; instead, it merely allowed him the ability to transfer shares in the

future.

22

[*22] purportedly taken to effect transfer of shares to trust). Instead,

petitioner’s and Ms. Kanski’s trial testimony suggested that the

physical, partially completed stock certificate remained on petitioner’s

desk until July 9 or 10, 2015, at which point it was dropped off at Ms.

Kanski’s office. Consequently, delivery to Fidelity Charitable could not

have taken place before July 9 or 10, because petitioner retained

dominion and control of the shares while the physical certificate was

sitting on his desk. Cf. In re Casey Estate, 856 N.W.2d at 563 (finding

no delivery where donor retained property in his safe and could thus

change the combination at any time to preclude access by purported

donee).

The same principle is applicable to the three or four days when

the physical certificate was in Ms. Kanski’s office, before the forwarding

of the PDF share certificate to Fidelity Charitable. The Minority Stock

Purchase Agreement’s seller representative clause, as executed, named

Ms. Kanski’s firm, Clark Hill, as the seller’s representative of Fidelity

Charitable. That designation raises the question of whether Ms.

Kanski’s possession of the certificate constituted delivery to Fidelity

Charitable. However, we cannot conclude that providing the certificate

to Ms. Kanski removed the shares from petitioner’s power of recall.

Petitioners have not provided any evidence to indicate that Ms. Kanski

could have disregarded an instruction from petitioner—her client—to

return or simply discard the stock certificate before July 13. See Osius,

134 N.W.2d at 656 (stating that a valid gift “must invest ownership in

the donee beyond the power of recall by the donor”); Snyder v. Snyder,

92 N.W. 353, 354 (Mich. 1902) (“The retaining of any control in the

hands of the donor over the subject of the gift renders it invalid.”); see

also Londen v. Commissioner, 45 T.C. 106, 109 (1965) (finding it

“unlikely” that corporation’s secretary “would have refused to honor a

countermand of the transfer instructions issued by [the taxpayer]”);

Morrison v. Commissioner, T.C. Memo. 1987-112, 53 T.C.M. (CCH) 251,

255 (finding no evidence that if taxpayer had “countermanded her

instructions to transfer the stock, [her broker] would have refused to

halt the transfer”). Thus, we conclude that the stock certificate, while

in the possession of Ms. Kanski, was subject to recall by petitioner at

any time and was not within the dominion and control of Fidelity

Charitable, precluding delivery. See Londen, 45 T.C. at 109; Zipp v.

Commissioner, 28 T.C. 314, 324–25 (1957) (finding retention of stock

certificates by donor’s attorney to preclude a valid gift), aff’d, 259 F.2d

119 (6th Cir. 1958); Bucholz v. Commissioner, 13 T.C. 201, 204 (1949)

(finding no valid gift where taxpayer instructed custodian of corporate

23

[*23] books to prepare stock certificates but remained undecided about

ultimate gift).

In some jurisdictions, transfer of shares on the books of the

corporation can, in certain circumstances, constitute delivery of an inter

vivos gift of shares. See, e.g., Wilmington Tr. Co. v. Gen. Motors Corp.,

51 A.2d 584, 594 (Del. Ch. 1947); Chi. Title & Tr. Co. v. Ward, 163 N.E.

319, 322 (Ill. 1928); Brewster v. Brewster, 114 A.2d 53, 57 (Md. 1955).

However, the Michigan Supreme Court does not appear to have

addressed whether transfer on the books of a corporation alone can

constitute delivery of a valid gift of certificated shares of stock. In

several older tax cases, the U.S. Court of Appeals for the Sixth Circuit—

to which an appeal in this case would lie, absent stipulation to the

contrary—has stated that transfer on the books of a corporation

constitutes delivery of shares of stock, apparently as a matter of federal

common law. See Lawton v. Commissioner, 164 F.2d 380, 384 (6th Cir.

1947), rev’g 6 T.C. 1093 (1946); Bardach v. Commissioner, 90 F.2d 323,

326 (6th Cir. 1937), rev’g 32 B.T.A. 517 (1935); Marshall v.

Commissioner, 57 F.2d 633, 634 (6th Cir. 1932), aff’g in part, rev’g in

part 19 B.T.A. 1260 (1930). We have previously observed that, in this

line of cases, the transfers on the books of the corporation were bolstered

by other objective actions that evidenced a change in possession and

thus a gift. See Jolly’s Motor Livery Co. v. Commissioner, T.C. Memo.

1957-231, 16 T.C.M. (CCH) 1048, 1073 (distinguishing Bardach and

Marshall and instead concluding that taxpayer failed to make a valid

gift under Tennessee law); see also Bucholz, 13 T.C. at 204; Campbell v.

Commissioner, T.C. Memo. 1979-411, 39 T.C.M. (CCH) 287, 289. We

would thus be hesitant to conclude that transfer on the books of CSTC

would be sufficient here as a matter of law, given the apparent split of

authorities on the issue and lack of state law precedent. See Fletcher

Cyclopedia of the Law of Corporations § 5684 (West 2022) (“Generally, a

transfer of stock from the donor to the donee on the corporate books,

standing alone, is not sufficient to constitute a valid gift, at least with

regard to a close corporation where the donor is in control[.]”); Mark S.

Rhodes, Transfer of Stock § 6:3 (7th ed. 2021) (“There is a division of

authority as to whether a mere transfer on the books of the corporation

without delivery of the certificate constitutes a valid gift of stock.”);

Mechem, Gifts of Corporation Shares, supra, at 25–26 (describing view

that transfer on the books of the corporation effects only the relationship

between new shareholder and corporation, while delivery of certificate

separately transfers ownership of shares as property between persons).

24

[*24] However, even assuming arguendo that a transfer on the

corporate books is sufficient to constitute delivery of certificated shares

of stock in Michigan, we are still unable to find on the record before us

that such a transfer occurred. The primary relevant evidence produced

by petitioners is the printout of a purported stock ledger. The printout,

which has a report date of July 13, shows an entry issuing 1,380 shares

to Fidelity Charitable on July 10. At trial, however, petitioner testified

that the printout was not from CSTC’s official stock ledger but appeared

to him instead to have been prepared by one of CSTC’s attorneys.

Indeed, petitioners themselves have at no point asserted that a gift

occurred on July 10 and have not produced any evidence to corroborate

such a transfer on the books of CSTC. We thus attribute little weight to

the printout, given petitioners’ failure to corroborate it with credible

evidence. See Sellers v. Commissioner, T.C. Memo. 1977-70, 36 T.C.M.

(CCH) 305, 312 (observing that self-serving corporate records are

relevant evidence but “the weight to be accorded them is dependent upon

their completeness and credibility”), aff’d, 592 F.2d 227 (4th Cir. 1979).

Consequently, the record is insufficient to support a conclusion that

delivery of the shares was made on July 10 via transfer on the books of

CSTC.

Finally, we look to Mr. Bear’s July 13 email of the PDF stock

certificate to Fidelity Charitable. That email provides the strongest

documentary evidence of the shares’ leaving petitioner’s dominion and

control. Providing Fidelity Charitable with a copy of a stock certificate

issued in its name was an objective act evidencing an “open and visible

change of possession.” Shepard, 129 N.W. at 208. Further, we find that

this act placed the shares of CSTC in Fidelity Charitable’s dominion and

control, by providing Fidelity Charitable with an instrument that it

could present to CSTC and exercise its rights as shareholder. Nor did

any postdelivery retention by petitioner of a stock certificate render

delivery ineffectual. See id. (stating that donor’s postdelivery retention

of stock certificates was “immaterial” to validity of gift). On the basis of

the foregoing, we conclude that delivery of the shares of CSTC did not

occur before July 13.

C.

Acceptance

Donee acceptance of a gift is generally “presumed if the gift is

beneficial to the donee.” Davidson, 575 N.W.2d at 576; see Osius, 134

N.W.2d at 660; Dunlap v. Dunlap, 53 N.W. 788, 790 (Mich. 1892) (“The

donation being for [the donees’] advantage, they will be deemed to have

accepted it, unless the contrary appears.”). Petitioners seek to reinforce

25

[*25] that presumption by relying on the corrected contribution

confirmation letter and yearend account statement from Fidelity

Charitable, both of which stated that the shares were contributed (and

thus presumably accepted by Fidelity Charitable) on June 11. Both

Fidelity Charitable’s guidelines and the yearend account statement note

that donors are able to request corrections of both contribution

confirmation letters and account statements. Petitioners did not

produce a copy of the original contribution confirmation letter, dated

July 15, 2015, that they received from Fidelity Charitable. Such

evidence could have confirmed whether Fidelity Charitable consistently

understood the date of contribution to be June 11 and what errors were

present in the original letter. Petitioners’ failure to produce such

evidence within their control gives rise to a presumption that it would

be unfavorable to their case. See Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir.

1947). Given our conclusions above that neither the present intent nor

the delivery requirement was met on June 11, we do not consider the

corrected documentation from Fidelity Charitable to be reliable evidence

with respect to the date of acceptance.

In contrast, Mr. Boland’s July 13 email is the more convincing

evidence and rebuts any presumption that acceptance took place on an

earlier date. In that email Mr. Boland represented that he would need

the stock certificate before he could take action with respect to the sale

of shares to HCI. As Mr. Boland later testified, Fidelity Charitable

typically required receipt of a stock certificate as a precondition to its

acceptance of a gift when dealing with a contribution of closely held,

certificated securities. Later on July 13, after receiving the stock

certificate, Mr. Boland on behalf of Fidelity Charitable executed the

Minority Stock Purchase Agreement under warranty of good title. That

act is sufficient to establish acceptance by Fidelity Charitable. We

conclude that acceptance occurred on July 13.

D.

Conclusion

Petitioners have failed to establish that any of the elements of a

valid gift was present on June 11, 2015. Instead, as a matter of state

law, we find that petitioners made a valid gift of CSTC shares by

effecting delivery on July 13. We thus conclude that petitioners divested

themselves of title to the shares on July 13. See Humacid Co., 42 T.C.

at 913.

26

[*26] II.

Anticipatory Assignment of Income

The anticipatory assignment of income doctrine is a longstanding

“first principle of income taxation.” Commissioner v. Banks, 543 U.S.

426, 434 (2005) (quoting Commissioner v. Culbertson, 337 U.S. 733, 739–

40 (1949)). The doctrine recognizes that income is taxed “to those who

earn or otherwise create the right to receive it,” Helvering v. Horst, 311

U.S. 112, 119 (1940), and that tax cannot be avoided “by anticipatory

arrangements and contracts however skillfully devised,” Lucas v. Earl,

281 U.S. 111, 115 (1930). A person with a fixed right to receive income

from property thus cannot avoid taxation by arranging for another to

gratuitously take title before the income is received. See Helvering v.

Horst, 311 U.S. at 115–17; Ferguson, 108 T.C. at 259. This principle is

applicable, for instance, where a taxpayer gratuitously assigns wage

income that the taxpayer has earned but not yet received, see Lucas v.

Earl, 281 U.S. at 114–15, or gratuitously transfers a debt instrument

carrying accrued but unpaid interest, see Austin v. Commissioner, 161

F.2d 666, 668 (6th Cir. 1947), aff’g 6 T.C. 593 (1946).

We deem the donor to have effectively realized income and then

assigned that income to another when the donor has an already fixed or

vested right to the unpaid income. See Cold Metal Process Co. v.

Commissioner, 247 F.2d 864, 872–73 (6th Cir. 1957) (focusing on

whether right to future income from assigned property was contingent

or vested at the time of assignment), rev’g 25 T.C. 1333 (1956); Estate of

Applestein v. Commissioner, 80 T.C. 331, 342 (1983); Friedman v.

Commissioner, 41 T.C. 428, 435 (1963) (describing doctrine as focused

on “whether the income had been earned so that the right to payment at

a future date existed when the gift was made”), aff’d, 346 F.2d 506 (6th

Cir. 1965). The same principle is often applicable where a taxpayer

gratuitously transfers shares of stock that are subject to a pending, prenegotiated transaction and thus carry a fixed right to proceeds of the

transaction. See Ferguson, 108 T.C. at 259; Rollins v. United States, 302

F. Supp. 812, 817–18 (W.D. Tex. 1969); see also Commissioner v. Court

Holding Co., 324 U.S. 331, 334 (1945) (“A sale by one person cannot be

transformed for tax purposes into a sale by another by using the latter

as a conduit through which to pass title.”).

In determining whether an anticipatory assignment of income

has occurred with respect to a gift of shares of stock, we look to the

realities and substance of the underlying transaction, rather than to

formalities or hypothetical possibilities. See Jones v. United States, 531

F.2d 1343, 1345 (6th Cir. 1976) (en banc); Allen v. Commissioner, 66 T.C.

27

[*27] 340, 346 (1976) (adopting Jones’s approach); see also Cook v.

Commissioner, 5 T.C. 908, 911 (1945). In general, a donor’s right to

income from shares of stock is fixed if a transaction involving those

shares has become “practically certain to occur” by the time of the gift,

“despite the remote and hypothetical possibility of abandonment.”

Jones, 531 F.2d at 1346. In contrast, “[t]he mere anticipation or

expectation of income” at the time of the gift does not establish that a

donor’s right to income is fixed. Ferguson, 108 T.C. at 257; see S.C.

Johnson & Son, Inc. v. Commissioner, 63 T.C. 778, 785 (1975) (rejecting

Commissioner’s argument that right to income was fixed when there

was only a “reasonable probability” of income from appreciated

property).

As a preliminary matter, petitioners seek to rely on our recent

nonprecedential decision in Dickinson, T.C. Memo. 2020-128. There, the

taxpayer made several contributions to Fidelity Charitable of shares in

a privately held corporation of which he was the chief financial officer.

Id. at *2–3. On each occasion, the taxpayer’s contributions to Fidelity

Charitable were shortly followed by redemptions of those shares by the

corporation. Id. at *3. Applying the Humacid test, we looked to whether

the redemption “was practically certain to occur at the time of the gift”

and “would have occurred whether the shareholder made the gift or not.”

Id. at *8. We determined to respect the form of the transaction, because

the redemption “was not a fait accompli at the time of the gift” and thus

the taxpayer “did not avoid receipt of redemption proceeds” by

contributing his shares. Id. at *9.

In reaching this holding, we found it evident from the record in

Dickinson that the redemptions would not have occurred but for the

taxpayer’s charitable contributions; thus there could be no “practically

certain to occur” realization event for the taxpayer to avoid at the time

of the gift. Id. This point is the key distinguishing factor between

Dickinson and petitioners’ case. Here, the record establishes that

petitioners’ charitable contribution would not have been made but for

the impending sale to HCI. Unlike in Dickinson, the timing of the sale

and petitioners’ gift raises a question as to whether at the time of gift

the sale was virtually certain to occur. Thus, Dickinson’s rationale does

not avail petitioners.

We must also initially address the role of the Commissioner’s

prior issued guidance, which petitioners have raised. In Rauenhorst v.

Commissioner, 119 T.C. 157, 173 (2002), we held that, “[u]nder the

circumstances” of that case, the Commissioner was bound not to argue

28

[*28] against his own subregulatory guidance, as expressed in Rev. Rul.

78-197, 1978-1 C.B. 83. 21 In Rauenhorst, we treated Rev. Rul. 78-197 as

a binding concession by the Commissioner that precluded him from

relying in that case on factors other than the donee’s obligation to sell

contributed property in his anticipatory assignment argument.

However, we also recognized in Rauenhorst, 119 T.C. at 171, the

axiom that “revenue rulings are not binding on this Court, or other

Federal courts.” See Dickinson, T.C. Memo. 2020-128, at *10 (“This

Court has not adopted Rev. Rul. 78-197 as the test for resolving

anticipatory assignment of income issues and does not do so today.”

(citations omitted)). For a taxpayer to rely on a revenue ruling, the facts

of the taxpayer’s transaction must be “substantially the same as those

considered in the revenue ruling.” Barnes Grp., Inc. v. Commissioner,

T.C. Memo. 2013-109, at *37–38, aff’d, 593 F. App’x 7 (2d Cir. 2014); see

Syzygy Ins. Co. v. Commissioner, T.C. Memo. 2019-34, at *47–48; see

also Statement of Procedural Rules, 26 C.F.R. § 601.601(d)(2)(v)(a), (e).

On the particular facts of this case, we do not find respondent’s

arguments to be sufficiently contrary to Rev. Rul. 78-197 to constitute a

disavowal of his published guidance. See Rev. Rul. 78-197, 1978-1 C.B.

at 83 (describing its application as only to “proceeds of a redemption of

stock under facts similar to those in Palmer”); cf. Rauenhorst, 119 T.C.

at 182–83 (focusing on Commissioner’s argument that courts are not

bound by revenue rulings and his reliance on a case 22 that had been

distinguished by the Commissioner in a prior private letter ruling).

While we consider a donee’s legal obligation to sell as “significant

to the assignment of income analysis,” Ferguson, 108 T.C. at 259, it “is

only one factor to be considered in ascertaining the ‘realities and

substance’ of the transaction,” Allen, 66 T.C. at 348 (quoting Jones, 531

F.2d at 1345). Instead, “the ultimate question is whether the transferor,

considering the reality and substance of all the circumstances, had a

fixed right to income in the property at the time of transfer.” Ferguson,

21 In Rev. Rul. 78-197, 1978-1 C.B. at 83, in the wake of our decision in Palmer

v. Commissioner, 62 T.C. 684 (1974), aff’d on other issue, 523 F.2d 1308 (8th Cir. 1975),

the Commissioner advised that, “under facts similar to those in Palmer,” he would

treat a charitable contribution of stock followed by a redemption as an anticipatory

assignment of income “only if the donee is legally bound, or can be compelled by the

corporation, to surrender the shares for redemption.” Palmer involved a taxpayer’s

contribution of shares of stock in his controlled corporation to a charitable foundation

of which he was a trustee, followed by a redemption of the shares by the corporation.

22 Blake v. Commissioner, 697 F.2d 473, 480–81 (2d Cir. 1982) (declining to rely

on Rev. Rul. 78-197), aff’g T.C. Memo. 1981-579.

29

[*29] 108 T.C. at 259; see Dickinson, T.C. Memo. 2020-128, at *10. We

thus look to several other factors that bear upon whether the sale of

shares was virtually certain to occur at the time of petitioners’ gift. In

this case the relevant factors include (1) any legal obligation to sell by

the donee, (2) the actions already taken by the parties to effect the

transaction, see Ferguson, 106 T.C. at 264, (3) the remaining unresolved

transactional contingencies, see Robert L. Peterson Irrevocable Tr. #2 v.

Commissioner, T.C. Memo. 1986-267, 51 T.C.M. (CCH) 1300, 1316, aff’d

sub nom. Peterson v. Commissioner, 822 F.2d 1093 (8th Cir. 1987), and

(4) the status of the corporate formalities required to finalize the

transaction, see Estate of Applestein, 80 T.C. at 345–46.

A.

Fidelity Charitable’s Obligation to Sell

We turn first to whether Fidelity Charitable did in fact have an

obligation to sell the CSTC shares. We conclude that respondent has

not established that Fidelity Charitable had any legal obligation to sell

the shares. 23 As petitioners point out, the terms and conditions of

Fidelity Charitable’s Letter of Understanding expressly disclaimed any

such obligation. In addition, respondent has not sufficiently established

the existence of any informal, prearranged understanding between

petitioners and Fidelity Charitable that might otherwise constitute an

obligation. See Greene v. United States, 13 F.3d 577, 583 (2d Cir. 1994);

see also Chrem, T.C. Memo. 2018-164, at *13. This factor weighs against

an anticipatory assignment of income but is not dispositive. See

Ferguson, 108 T.C. at 259.

23 In Chrem v. Commissioner, T.C. Memo. 2018-164, we suggested that a donor-

advised fund’s sponsoring organization may be subject to fiduciary duties that might

impose a legal obligation to sell contributed shares constituting a small minority

interest in a closely held corporation. Id. at *15 (“If it refused to tender its shares and

the entire transaction were scuttled, [the sponsoring organization] would apparently

be left holding a 13% minority interest in a closely held Hong Kong corporation, the

market value of which might be questionable.”); see also Grove v. Commissioner, 490

F.2d 241, 248 (2d Cir. 1973) (Oakes, J. dissenting) (looking to New York trust law and

observing that offering donated shares for redemption was “the only practice which a

university treasurer could correctly take and still meet his own statutory obligations

as a fiduciary”), aff’g T.C. Memo. 1972-98. Respondent did not present arguments or

testimony as to what, if any, fiduciary duties Fidelity Charitable might have owed that

would compel it to sell the CSTC shares to HCI. Accordingly, lacking the benefit of

meaningful briefing on the subject, we cannot find that Fidelity Charitable was in fact

legally obligated to sell the contributed shares by way of fiduciary duty.

30

[*30] B.

Bonuses & Shareholder Distributions

Next, we look to what acts CSTC and HCI took to effect the

transaction before the July 13, 2015, gift. As of that date, a number of

acts had already taken place that may suggest the transaction was a

virtual certainty. One week before the gift, HCI had caused the

incorporation of a new holding company subsidiary to acquire the CSTC

shares. Three days before the gift, CSTC had amended its Articles of

Incorporation to allow for written shareholder consent, an action

requested by HCI. Most significantly, however, the “cash sweeping”

actions taken by CSTC strongly suggest that the transaction with HCI

was a virtual certainty before the gift on July 13.

On July 7, 2015 petitioner amended CSTC’s Change in Control

Bonus Plan in order to specify that CSTC “desire [sic] that the

consummation of the Investment Transaction result in payments to

eligible Grantees under the Plan.” That same day, petitioner stated in

an email that CSTC would “sweep the cash from the company prior to

closing and distribute it to the brothers.” As of July 7, CSTC and

petitioner thus considered the transaction with HCI so certain to occur

that they took action to trigger the bonus payouts, consistent with the

plan to sweep CSTC’s cash before closing. On July 10, 2015, CSTC then

paid out approximately $6.1 million in employee bonuses and, a few days

later on July 14, distributed approximately $4.7 million to petitioner and

his two brothers as shareholders. While the July 14 distribution took

place the day after the gift, petitioner’s statement on July 7 evidences

that the decision to make the distribution had already been made as of

that date, if not well formally authorized by CSTC. See Mich. Comp.

Laws § 450.1345(1) and (2). We thus find that, before July 13, CSTC

and petitioner had distributed and/or determined to distribute over $10

million out of the corporation.

Moreover, we consider it highly improbable that petitioner and

his two brothers would have emptied CSTC of its working capital if the

transaction had even a small risk of not consummating. Absent its

working capital, CSTC was no longer a going concern until the

transaction was finalized. See Cook, 5 T.C. at 911 (finding assignment

of income where donor of shares was “well aware that the corporate

activities had all but ceased except for the actual distribution in

liquidation”); see also Apt v. Birmingham, 89 F. Supp. 361, 393 (N.D.

Iowa 1950) (stating that gain may be realized when “for all practical

purposes corporate stock had no further purposes to fulfill” aside from

underlying transaction). The bonus payouts and distributions do not

31

[*31] appear from the record to have been in any way contingent on the

final execution of the purchase agreement. Accordingly, we conclude

that, once made, the bonus payouts and distributions could not be

clawed back and had tax consequences upon receipt for the participating

employees and shareholders, including petitioner himself.

In the reality of the transaction, the cash sweeps were thus highly

significant conditions precedent to consummating the transaction with

HCI. Cf. Kinsey v. Commissioner, 58 T.C. 259, 265–66 (1972) (finding

right to income on shares from liquidation was fixed where “a

substantial portion of [corporation’s] assets were distributed prior to the

date of the gift”), aff’d, 477 F.2d 1058 (2d Cir. 1973). As of July 13, 2015,

the CSTC shares were essentially “hollow receptacles” for conveying

proceeds of the transaction with HCI, “rather than an interest in a viable

corporation.” Estate of Applestein, 80 T.C. at 345–46; see Hudspeth v.

United States, 471 F.2d 275, 279 (8th Cir. 1972) (describing donated

shares as “merely empty vessels by which the taxpayer conveyed the

liquidation proceeds”). The cash sweep strongly weighs in favor of a

conclusion that the sale was a virtual certainty and thus petitioners’

right to income from the shares was fixed as of July 13, 2015.

C.

Unresolved Sale Contingencies

Next, we look to what unresolved sale contingencies remained

between the parties as of the July 13, 2015, gift. See Robert L. Peterson

Irrevocable Tr. #2, 51 T.C.M. (CCH) at 1316–19 (focusing on various

contingencies that taxpayers argued precluded their right to sale

proceeds from becoming fixed before a gift). Petitioners argue that the

transaction with HCI was still being negotiated up until the closing on

July 15. Petitioners rely on petitioner’s trial testimony, where he

identified several negotiated issues, including an environmental

liability, employee compensation arrangements, and excess real estate.

At trial petitioner testified that he and HCI “basically negotiated right

up until the day before we closed”—i.e., July 14, 2015.

However, the record does not bear out the substance of

petitioner’s characterization. The identified employee compensation

and excess real estate issues appear to have been resolved in drafts of

the agreement prepared before July 13, 2015. At trial, a representative

of HCI characterized the environmental liability issue as “the one

probably biggest item of negotiation” resolved before closing. On July

10, 2015, HCI’s counsel prepared a draft with a new seller indemnity

provision addressing the environmental liability issue. By 4:38 a.m. on

32

[*32] the morning of July 13, when HCI’s counsel next ran a redline

comparison of a new draft, the environmental liability provision had

already been accepted into the draft agreement. Given that the written

drafts memorialized the negotiations between the parties, we find that

the parties had resolved the environmental liability issue before the

contribution to Fidelity Charitable.

Moreover, the only substantive change made to the drafts after

the contribution to Fidelity Charitable was a minor revision to the

provision for ongoing compensation to Mark and Kurt to cover the cost

of their health insurance. We thus find that none of the unresolved

contingencies remaining on July 13, 2015, were substantial enough to

have posed even a small risk of the overall transaction’s failing to close.

See Robert L. Peterson Irrevocable Tr. #2, 51 T.C.M. (CCH) at 1319

(concluding that remaining contingencies “at best . . . represent remote

and hypothetical possibilities that the stock purchase would be

abandoned”); cf. Martin v. Machiz, 251 F. Supp. 381, 389 (D. Md. 1966)

(finding no assignment of income where, at time of gift of shares, parties

had “substantial” disagreements about closing date and buyer’s

insistence on a surety bond as security for breach of warranty). We find

that petitioner, consistent with his “99% sure” statement, waited until

all material details had been agreed to with HCI before he transferred

the shares to Fidelity Charitable. See Malkan, 54 T.C. at 1314 (“Even

though [the taxpayer] had discussed creating the trusts for several

months, he did not establish them until the parties had agreed upon the

details of the sale.”).

The absence of significant unresolved

contingencies also weighs in favor of the sale of shares to HCI being a

virtual certainty.

D.

Corporate Formalities

Finally, we look to the status of the corporate formalities

necessary for effecting the transaction. See Estate of Applestein, 80 T.C.

at 345–46 (finding that taxpayer’s right to sale proceeds from shares had

“virtually ripened” upon shareholders’ approval of proposed merger

agreement). Under Michigan law, a proposed plan to exchange shares

must generally be approved by a majority of the corporation’s

shareholders.

See Mich. Comp. Laws § 450.1703a(2)(d); id.

§ 450.1407(1). Formal shareholder approval of a transaction has often

proven to be sufficient to demonstrate that a right to income from shares

was fixed before a subsequent transfer. See Ferguson, 108 T.C. at 262;

see also Hudspeth, 471 F.2d at 279. However, such approval is not

necessary for a right to income to be fixed, when other actions taken

33

[*33] establish that a transaction was virtually certain to occur. See

Ferguson, 104 T.C. at 262–63 (rejecting taxpayer’s “attempt to impose

formalistic obstacle[]” of formal shareholder approval); see also

Hudspeth, 471 F.2d at 280 (describing final resolution to dissolve

corporation as a “mere formality” where shareholders and board had

already approved plan of liquidation, despite “remote, hypothetically

possible abandonment[]” of that plan); Kinsey, 58 T.C. at 265–66.

On June 11, 2015, petitioner and his two brothers (the sole

shareholders of CSTC) unanimously approved pursuing a sale of all

outstanding stock of CSTC to HCI. On July 15 they provided written

consent to the final Contribution and Stock Purchase Agreement with

HCI. However, viewed in the light of the reality of the transaction, the

record shows that final written consent was a foregone conclusion. As a

practical matter, finalizing the transaction with HCI presented

petitioner and his two brothers with the opportunity to partially (or

fully, as in Kurt’s case) cash out of CSTC at a significant premium over

their initial target price of $80 million. See Ferguson v. Commissioner,

174 F.3d at 1004–05 (considering formal shareholder approval to be

unnecessary where shareholders were receiving substantial premium).

From HCI’s perspective, it also believed it was acquiring CSTC at a fair

price and, as of July 13, had resolved the environmental liability issue,

its final significant due diligence concern. See id. at 1005. All three

Hoensheid brothers, and particularly petitioner, were involved in

negotiating the transaction, making their approval all but assured as of

July 13, 2015. Cf. Perry v. Commissioner, T.C. Memo. 1976-381, 35

T.C.M. (CCH) 1718, 1724 (concluding that shareholder approval of sale

was not just a “rubber stamp” where corporation was not “a closely held

corporation controlled by the same individuals who negotiated the

[a]greement”). We conclude that formal shareholder approval was

purely ministerial, as any decision by the brothers not to approve the

sale was, as of July 13, “remote and hypothetical.” Jones, 531 F.2d at

1346; see Allen, 66 T.C. at 347 (finding assignment of income despite

parties not completing “purely ministerial act of executing quitclaim

deed” before transfer). This factor is neutral as to whether petitioners’

right to income was fixed.

E.

Conclusion

To avoid an anticipatory assignment of income on the

contribution of appreciated shares of stock followed by a sale by the

donee, a donor must bear at least some risk at the time of contribution

that the sale will not close. On the record before us, viewed in the light

34

[*34] of the realities and substance of the transaction, we are convinced

that petitioners’ delay in transferring the CSTC shares until two days

before closing eliminated any such risk and made the sale a virtual

certainty. Petitioners’ right to income from the sale of CSTC shares was

thus fixed as of the gift on July 13, 2015. We hold that petitioners

recognized gain on the sale of the 1,380 appreciated shares of CSTC

stock.

We echo prior decisions in recognizing that our holding does not

specify a bright line for donors to stop short of in structuring charitable

contributions of appreciated stock before a sale. See Allen, 66 T.C. at

346 (rejecting proposed bright-line rule approach and noting that

“drawing lines is part of the daily grist of judicial life”); see also Harrison

v. Schaffner, 312 U.S. 579, 583–84 (1941). However, as petitioners’ tax

counsel seems to have recognized in her advice to petitioner, “any tax

lawyer worth [her] fees would not have recommended that a donor make

a gift of appreciated stock” so close to the closing of a sale. Ferguson v.

Commissioner, 174 F.3d at 1006; see Allen, 66 T.C. at 346 (recognizing

that realities and substance approach puts “a premium on consulting

one’s lawyer early enough in the game”). By July 13, 2015, the

transaction with HCI had simply “proceeded too far down the road to

enable petitioners to escape taxation on the gain attributable to the

donated shares.” Allen, 66 T.C. at 348.

III.

Charitable Contribution Deduction

We have concluded that petitioners did make a valid gift, and

although we have determined that gift to be an assignment of income,

petitioners may nevertheless be entitled to a charitable contribution

deduction under section 170. Section 170(a)(1) allows as a deduction

any charitable contribution (as defined in subsection (c)) payment of

which is made within the taxable year. “A charitable contribution is a

gift of property to a charitable organization made with charitable intent

and without the receipt or expectation of receipt of adequate

consideration.” Palmolive Bldg. Invs., LLC v. Commissioner, 149 T.C.

380, 389 (2017) (citing Hernandez v. Commissioner, 490 U.S. 680, 690

(1989)). Section 170(f)(8)(A) provides that “[n]o deduction shall be

allowed . . . for any contribution of $250 or more unless the taxpayer

substantiates the contribution by a contemporaneous written

acknowledgement of the contribution by the donee organization that

meets the requirements of subparagraph (B).” For contributions of

property in excess of $500,000, the taxpayer must also attach to the

35

[*35] return a “qualified appraisal” prepared in accordance with

generally accepted appraisal standards. § 170(f)(11)(D) and (E).

Here, the contributed CSTC shares had a value in excess of

$500,000, and petitioners were thus required to substantiate their

claimed deduction with both a contemporaneous written

acknowledgement (CWA) and a qualified appraisal. Respondent asserts

that petitioners have failed to satisfy both requirements and thus are

not entitled to a charitable contribution deduction for the gift of the

CSTC shares to Fidelity Charitable.

A.

CWA

A CWA must include, inter alia, the amount of cash and a

description of any property contributed. § 170(f)(8)(B). A CWA is

contemporaneous if obtained by the taxpayer before the earlier of either

(1) the date the relevant tax return was filed or (2) the due date of the

relevant tax return. § 170(f)(8)(C). Section 170(f)(18)(B) adds a specific

requirement for donor-advised funds that any CWA include a statement

that the donee “has exclusive legal control over the assets contributed.”

We construe the requirements of section 170(f)(8)(B) strictly and do not

apply the doctrine of substantial compliance to excuse defects in a CWA.

See 15 W. 17th St. LLC v. Commissioner, 147 T.C. 557, 562 (2016). The

contribution confirmation letter issued by Fidelity Charitable was

contemporaneous, acknowledged receipt of 1,380.400 shares of CSTC

stock, and contained the applicable statements required by the statute,

including the “exclusive legal control” statement.

Respondent argues that the contribution confirmation letter

failed to satisfy section 170(f)(8)(B) because it described petitioners’

contribution as shares of stock rather than cash. Respondent’s

argument conflates the issues in this case. As a matter of state law, we

have held that petitioners made a valid gift of CSTC shares to Fidelity

Charitable. However, for federal income tax purposes, we have

classified those shares as carrying a fixed right to income as of July 13,

2015, such that petitioners effectively realized and recognized gains

before transfer. That second holding does not disturb our conclusion

that petitioners made a valid gift of stock. See Commissioner v. Tower,

327 U.S. 280, 287–88 (1946) (citing Lucas v. Earl, 281 U.S. at 114–15)

(distinguishing between gift of stock’s validity under state law and its

treatment for federal tax purposes); see also Vercio v. Commissioner, 73

T.C. 1246, 1253 (1980) (observing that anticipatory assignments of

36

[*36] income “are not recognized as dispositive for Federal income tax

purposes despite their validity under applicable State law”).

We construe the section 170(f)(8)(B) requirement that a CWA

include a description of the “property” contributed in the light of the

settled principle that the Code “creates no property rights but merely

attaches consequences, federally defined, to rights created under state

law.” Nat’l Bank of Com., 472 U.S. at 722 (quoting United States v. Bess,

357 U.S. 51, 55 (1958)). While the ultimate question of “whether a statelaw right constitutes ‘property’ or ‘rights to property’ is a matter of

federal law,” id. at 727, the answer to that question “largely depends

upon state law,” see United States v. Craft, 535 U.S. 274, 278 (2002); see

also Patel v. Commissioner, 138 T.C. 395, 403–04 (2012) (applying state

law as to whether contributed property was a partial interest for

purposes of section 170(f)(3)). We do not interpret section 170(f)(8)(B) to

require that a donee ascertain and correctly describe a contributed

property interest in accordance with how that interest should be

classified for federal tax law purposes. It is sufficient here that the CWA

provided by Fidelity Charitable described the contributed property as

shares of stock. We conclude that the CWA issued by Fidelity Charitable

satisfied the requirements of section 170(f)(8)(B).

B.

Qualified Appraisal

In the early 1980s Congress was made aware of significant abuse

of section 170 stemming from overvaluation of property contributed to

charities. See Abusive Tax Shelters: Hearing Before the S. Subcomm. On

Oversight of the Internal Revenue Serv. of the S. Comm. on Fin., 98th

Cong. 71 (1983) (statement of Robert G. Woodward, Acting Tax Legis.

Couns., Dep’t of Treasury) (“We are very concerned with the problem of

the widespread abuse of the charitable contribution provision.”); id. at

151 (statement of M. Bernard Aidinoff, Chairman, Section of Tax’n of

Am. Bar Ass’n) (“Inflating the value of assets has been a particular

abuse in the charitable area, and I have got to say that it is an abuse

engaged in by ordinary taxpayers.”); Staff of J. Comm. on Tax’n, 98th

Cong., Background on Tax Shelters, JCS-29-83, at 34 (J. Comm. Print

1983) (detailing high volume of charitable contribution deduction audits

and noting difficulty for IRS in detecting instances of excessive

deductions at the administrative level). Congress responded by enacting

new substantiation requirements, in order to assist the IRS in detecting

overvalued contributions and to deter taxpayers from playing the “audit

lottery.” See Staff of S. Comm. on Fin., Explanation of Provisions

Approved by the Committee on March 21, 1984, S. Prt. 98-169 (Vol. I),

37

[*37] at 444–45 (S. Comm. Print 1984); H.R. Rep. No. 98-861, at 998

(1984) (Conf. Rep.), as reprinted in 1984-3 C.B. (Vol. 2) 1, 252; see also

Staff of J. Comm. on Tax’n, General Explanation of the Revenue

Provisions of the Deficit Reduction Act of 1984, JCS-41-84, at 504

(J. Comm. Print 1984) (describing new substantiation requirements as

intended to be “more effective in deterring taxpayers from inflating

claimed deductions than relying solely on the uncertainties of the audit

process and on penalties”). In particular, Congress added an off-Code

provision directing the Secretary of the Treasury to promulgate

regulations requiring taxpayers to obtain and attach to their returns a

“qualified appraisal” when claiming deductions for charitable

contributions of property exceeding certain dollar amounts. See Deficit

Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, § 155(a), 98 Stat.

494, 691–93. In DEFRA, Congress defined a qualified appraisal as an

appraisal prepared by a qualified appraiser that included certain

enumerated information and “such additional information as the

Secretary prescribes in such regulations.” Id. § 155(a)(4), 98 Stat. at

692. Temporary regulations swiftly followed, see Temp. Treas. Reg.

§ 1.170A-13T (1984), setting out extensive requirements with respect to

what constituted a qualified appraisal; final regulations were later

issued with similarly extensive requirements, see Treas. Reg.

§ 1.170A-13.

Twenty years later, Congress amended section 170 to codify a

qualified appraisal requirement. See § 170(f)(11) (as amended by

American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 883, 118

Stat. 1418, 1631–32); H.R. Rep. No. 108-755, at 746 (2004) (Conf. Rep.),

as reprinted in 2004 U.S.C.C.A.N. 1341, 1784. Two years after that,

Congress again acted in response to publicized reports of questionable

appraisal practices, amending section 170 to enumerate requirements

for an individual to be a qualified appraiser. See Pension Protection Act

of 2006, Pub. L. No. 109-280, § 1219(b)(1), 120 Stat. 780, 1084–85; Staff

of J. Comm. on Tax’n, 109th Cong., General Explanation of Tax

Legislation Enacted in the 109th Cong., JCS-1-07, at 606 (J. Comm.

Print 2007).

Section 170(f)(11)(A)(i) now provides that “no deduction shall be

allowed . . . for any contribution of property for which a deduction of

more than $500 is claimed unless such person meets the requirements

of subparagraphs (B), (C), and (D), as the case may be.” Subparagraph

(D) is the relevant one here, requiring that, for contributions for which

a deduction in excess of $500,000 is claimed, the taxpayer attach a

38

[*38] qualified appraisal to the return. Section 170(f)(11)(E)(i) provides

that a qualified appraisal means,

with respect to any property, an appraisal of such property

which—

(I) is treated for purposes of this paragraph as

a qualified appraisal under regulations or other

guidance prescribed by the Secretary, and

(II) is conducted by a qualified appraiser in

accordance with generally accepted appraisal

standards and any regulations or other guidance

prescribed under subclause (I).

The regulations in turn provide that a qualified appraisal is an

appraisal document that, inter alia, (1) “[r]elates to an appraisal that is

made” no earlier than 60 days before the date of contribution and (2) is

“prepared, signed, and dated by a qualified appraiser.” Treas. Reg.

§ 1.170A-13(c)(3)(i). Treasury Regulation § 1.170A-13(c)(3)(ii) requires

that a qualified appraisal itself include, inter alia:

(1) “[a] description of the property in sufficient detail for a person

who is not generally familiar with the type of property to ascertain that

the property that was appraised is the property that was (or will be)

contributed;”

(2) “[t]he date (or expected date) of contribution to the donee;”

(3) “[t]he name, address, and . . . identifying number of the

qualified appraiser;”

(4) “[t]he qualifications of the qualified appraiser;”

(5) “a statement that the appraisal was prepared for income tax

purposes;”

(6) “[t]he date (or dates) on which the property was appraised;”

(7) “[t]he appraised fair market value . . . of the property on the

date (or expected date) of contribution;” and

(8) the method of and specific basis for the valuation.

39

[*39] Turning back to the statute, section 170(f)(11)(E)(ii) provides that

a “qualified appraiser” is an individual who

(I) has earned an appraisal designation from a

recognized professional appraiser organization or has

otherwise met minimum education and experience

requirements set forth in regulations,

(II) regularly performs appraisals for which the

individual receives compensation, and

(III) meets such other requirements as may be

prescribed . . . in regulations or other guidance.

An appraiser must also demonstrate “verifiable education and

experience in valuing the type of property subject to the appraisal.” Id.

cl. (iii)(I). The regulations add that the appraiser must include in the

appraisal summary a declaration that he or she (1) “either holds himself

or herself out to the public as an appraiser or performs appraisals on a

regular basis;” (2) is “qualified to make appraisals of the type of property

being valued;” (3) is not an excluded person specified in paragraph

(c)(5)(iv) of the regulation; and (4) understands the consequences of a

“false or fraudulent overstatement” of the property’s value. Treas. Reg.

§ 1.170A-13(c)(5)(i). Finally, the regulations prohibit a fee arrangement

for a qualified appraisal “based, in effect, on a percentage . . . of the

appraised value of the property.” Id. subpara. (6)(i).

Respondent contends that petitioners’ appraisal is not a qualified

appraisal because it (1) did not include the statement that it was

prepared for federal income tax purposes; (2) included the incorrect date

of June 11 as the date of contribution; (3) included a premature date of

appraisal; (4) did not sufficiently describe the method for the valuation;

(5) was not signed by Mr. Dragon or anyone from FINNEA; (6) did not

include Mr. Dragon’s qualifications as an appraiser; (7) did not describe

the property in sufficient detail; and (8) did not include an explanation

of the specific basis for the valuation. Aside from petitioners’ alreadyrejected claim that the June 11 date of contribution was correct,

petitioners do not meaningfully dispute that their appraisal had at least

some defects. As a consequence, petitioners do not argue that they

strictly complied with the qualified appraisal requirement. Instead, they

rely on the doctrine of substantial compliance and the statutory

reasonable cause defense to excuse any defects.

40

[*40]

1.

Substantial Compliance

We have previously held that the qualified appraisal

requirements are directory, rather than mandatory, as the requirements

“do not relate to the substance or essence of whether or not a charitable

contribution was actually made.” See Bond v. Commissioner, 100 T.C.

32, 41 (1993). We thus may apply the doctrine of substantial compliance

to excuse a failure to strictly comply with the qualified appraisal

requirements. See id. As demonstrated by the relevant legislative

history, the purpose of the qualified appraisal requirements is “to

provide the IRS with information sufficient to evaluate claimed

deductions and assist it in detecting overvaluations of donated

property.” Costello v. Commissioner, T.C. Memo. 2015-87, at *17; see

Cave Buttes, LLC v. Commissioner, 147 T.C. 338, 349–50 (2016);

Hendrix v. United States, No. 2:09-CV-132, 2010 WL 2900391, at *6

(S.D. Ohio July 21, 2010) (“[T]he purpose of the qualified appraisal is to

‘show the work’ so as to obviate the injection of unfounded guessing into

the tax scheme.”). Accordingly, if the appraisal discloses sufficient

information for the Commissioner to evaluate the reliability and

accuracy of a valuation, we may deem the requirements satisfied. Bond,

100 T.C. at 41–42; see Hewitt v. Commissioner, 109 T.C. 258, 265 & n.10

(1997) (describing substantial compliance as applicable where the

taxpayer has “provided most of the information required” or made

omissions “solely through inadvertence”), aff’d, 166 F.3d 332 (4th Cir.

1998). Substantial compliance allows for minor or technical defects but

does not excuse taxpayers from the requirement to disclose information

that goes to the “essential requirements of the governing statute.”

Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34, at *12

(quoting Estate of Clause v. Commissioner, 122 T.C. 115, 122 (2004)).

We thus generally decline to apply substantial compliance where a

taxpayer’s appraisal either (1) fails to meet substantive requirements in

the regulations or (2) omits entire categories of required information.

See Costello, T.C. Memo. 2015-87, at *24; see also Alli v. Commissioner,

T.C. Memo. 2014-15, at *54 (observing that substantial compliance

“should not be liberally applied”).

Petitioners’ appraisal is deficient with respect to several key

substantive requirements. We start with Mr. Dragon’s status as an

appraiser. We have previously described the requirement that an

appraiser be qualified as the “most important requirement” of the

regulations. Mohamed v. Commissioner, T.C. Memo. 2012-152, 2012

WL 1937555, at *4. Respondent argues that Mr. Dragon was not a

qualified appraiser, asserting that Mr. Dragon performed valuations

41

[*41] infrequently, did not hold himself out as an appraiser, and has no

certifications from a professional appraiser organization. 24 Petitioners

counter that Mr. Dragon was qualified because he has prepared “dozens

of business valuations” over the course of his 20+ year career as an

investment banker, including some valuations of closely held

automotive businesses.

Mr. Dragon’s mere familiarity with the type of property being

valued does not by itself make him qualified. See, e.g., Brannan Sand

& Gravel Co. v. Commissioner, T.C. Memo. 2020-76, at *9–10, *15

(finding that attorney’s familiarity with type of property being valued

and awareness of typical asking price was insufficient to satisfy

qualified appraiser requirement). Mr. Dragon does not have appraisal

certifications and does not hold himself out as an appraiser. We found

Mr. Dragon’s own words at trial about his appraisal experience to be

particularly instructive. Mr. Dragon testified that he conducted

valuations “briefly” and only “on a limited basis” before starting at

FINNEA in 2014—the year before the appraisal. Mr. Dragon also

testified that he now performs (presumably gratis) business valuations

for prospective clients “once or twice a year” in order to solicit their

business for FINNEA. We find Mr. Dragon’s uncontroverted testimony

sufficient to establish that he does not “regularly perform[] appraisals

for which [he] receives compensation.” See § 170(f)(11)(E)(ii)(II).

Petitioners have failed to show that Mr. Dragon was a qualified

appraiser.

We have previously described the requirement that an appraiser

be qualified as one of the substantive requirements of the regulations.

See Alli, T.C. Memo. 2014-15, at *56–57 (“[O]btaining an appraisal from

a nonqualified appraiser does not constitute substantial compliance.”)

Absent an appraisal prepared by a qualified appraiser, the

Commissioner cannot effectively verify whether a reported charitable

contribution has been properly valued. See Mohamed v. Commissioner,

24 Respondent also argues that Mr. Dragon is precluded under the fee

arrangement rule in Treasury Regulation § 1.170A-13(c)(6)(i) from serving as a

qualified appraiser because of the value-based fee he and FINNEA received from CSTC

for effecting the transaction with HCI: 1% of the transaction’s value up to $80 million

and 5% of the transaction’s value over $80 million. By its plain terms, the fee

arrangement rule is limited to fees that are effectively based on an appraised value

(i.e., where the appraiser is incentivized to inflate a valuation in order to receive a

higher fee); there was no such fee in this case, and we do not understand the rule to

apply to a fee, like the one Mr. Dragon received, that is based on actual value received

in a separate arm’s-length transaction.

42

[*42] 2012 WL 1937555, at *7–8. We find that consideration to be

heightened in the context of valuing a minority interest in a closely held

family corporation, which often presents difficult questions for even an

experienced appraiser. See, e.g., Rabenhorst v. Commissioner, T.C.

Memo. 1996-92, 1996 WL 86215, at *2. We thus conclude that in

engaging a nonqualified appraiser, petitioners failed to demonstrate

substantial compliance.

Next, leaving aside the separate issue of whether Mr. Dragon was

actually qualified, the appraisal itself failed to sufficiently describe any

of Mr. Dragon’s relevant qualifications and valuation experience. See

Treas. Reg. § 1.170A-13(c)(3)(ii)(F). Mr. Dragon’s biography provided no

information relevant to his valuation experience and described only

general corporate finance experience and his business school education.

As noted above, Mr. Dragon testified at trial that he did have some

limited experience in valuation before the appraisal at issue. The failure

to include a description of such experience in the appraisal was a

substantive defect. We have previously described the qualifications

requirement as important because it “provide[s] necessary context

permitting the IRS to evaluate a claimed deduction.” Alli, T.C. Memo.

2014-15, at *35 (first citing Hendrix, 2010 WL 2900391, at *5 (“Without,

for example, the appraiser’s education and background information, it

would be difficult if not impossible to gauge the reliability of an

appraisal that forms the foundation of a deduction.”); and then citing

Bruzewicz v. United States, 604 F. Supp. 2d 1197, 1205 (N.D. Ill. 2009)

(describing qualifications requirement as providing IRS with ability to

“determine whether the valuation in an appraisal report is competent

and credible evidence”)). The absence of Mr. Dragon’s relevant

qualifications further confirms our conclusion that petitioners’ appraisal

failed to substantially comply, as the defect deprived the Commissioner

of information necessary to evaluate whether the appraisal was reliable.

Lastly, petitioners’ appraisal is substantively deficient in stating

an incorrect date of contribution. We have described the date

requirement as intended to enable the Commissioner “to compare the

appraisal and contribution dates for purposes of isolating fluctuations

in the property’s fair market value between those dates.” Rothman v.

Commissioner, T.C. Memo. 2012-163, 2012 WL 2094306, at *15,

supplemented and vacated on other grounds, T.C. Memo. 2012-218. An

incorrect date of contribution may be excused if it reflects only a minor

typographical error. See Friedberg v. Commissioner, T.C. Memo. 2011238, 2011 WL 4550136, at *10 (finding substantial compliance where

date discrepancies were “merely typographical errors”), supplemented

43

[*43] by T.C. Memo. 2013-224. However, omission of the correct date of

contribution is generally significant and will weigh against a conclusion

of substantial compliance. See, e.g., Presley v. Commissioner, T.C.

Memo. 2018-171, at *78, aff’d, 790 F. App’x 914 (10th Cir. 2019);

Costello, T.C. Memo. 2015-87, at *24–25; Alli, T.C. Memo. 2014-15,

at *24; Smith v. Commissioner, T.C. Memo. 2007-368, 2007 WL

4410771, at *18–19, aff’d, 364 F. App’x 317 (9th Cir. 2009).

Petitioners’ reported June 11, 2015, date of contribution was

incorrect, and thus the June 11 valuation date was premature by

approximately a month. In Cave Buttes, LLC, 147 T.C. at 355, we

concluded that a taxpayer’s appraisal was in substantial compliance,

despite finding a several-week discrepancy between the actual date of

contribution and the date of valuation. That conclusion, however, was

conditioned on the fact there was no “significant event that would

obviously affect the value of the property in those two or three weeks.”

Id. Here, in contrast, the period between June 11 and July 13, 2015,

encompassed CSTC’s initial bonus payouts of approximately $6.1

million, which had a significant effect on the value of the shares. In

addition, as we have concluded above, the underlying transaction with

HCI became virtually certain to occur in the period after June 11. The

significance of these intervening developments is clear in part from the

$340,545 discrepancy between the June 11 appraised value and the

actual proceeds received by Fidelity Charitable for the shares on

July 15. The misreporting of the date of contribution prevented the

Commissioner from effectively double-checking the accuracy of the

appraised value—a concern that relates to the “essential requirements

of the governing statute” and thus further confirms that petitioners

cannot demonstrate substantial compliance. See Estate of Evenchik,

T.C. Memo. 2013-34, at *12.

This is not the rare case “where a taxpayer does all that is

reasonably possible, but nonetheless fails to comply with the specific

requirements of a provision.” Durden v. Commissioner, T.C. Memo.

2012-140, 103 T.C.M. (CCH) 1762, 1763 (citing Samueli v.

Commissioner, 132 T.C. 336, 345 (2009)). Petitioners’ failure to satisfy

multiple substantive requirements of the regulations, paired with the

appraisal’s other more minor defects, precludes them from establishing

substantial compliance.

44

[*44]

2.

Reasonable Cause

Although petitioners are unable to establish substantial

compliance, their defective appraisal may nevertheless be excused if

petitioners had reasonable cause for their noncompliance. Taxpayers

who fail to comply with the qualified appraisal requirements may still

be entitled to charitable contribution deductions if they show that their

noncompliance is “due to reasonable cause and not to willful neglect.”

§ 170(f)(11)(A)(ii)(II). We have construed the reasonable cause defense

in section 170(f)(11)(A)(ii)(II) similarly to the defense applicable to

numerous other Code provisions that prescribe penalties and additions

to tax. See § 6664(c)(1); see also Chrem, T.C. Memo. 2018-164, at *18–

19; Crimi v. Commissioner, T.C. Memo. 2013-51, at *98–99. Reasonable

cause thus requires that a taxpayer “have exercised ordinary business

care and prudence as to the challenged item.” Crimi, T.C. Memo. 201351, at *99 (citing United States v. Boyle, 469 U.S. 241 (1985)). To show

reasonable cause due to reliance on a professional adviser, we generally

require that a taxpayer show (1) that their adviser was a competent

professional with sufficient expertise to justify reliance; (2) that the

taxpayer provided the adviser necessary and accurate information; and

(3) that the taxpayer actually relied in good faith on the adviser’s

judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43,

99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

Respondent argues that petitioners cannot show reliance in good

faith, because petitioner—not Ms. Kanski—made the decision to have

Mr. Dragon perform the appraisal without verifying that he was

sufficiently qualified. Respondent suggests that petitioner’s decision to

have Mr. Dragon perform the appraisal, despite receiving a quote from

a national accounting firm, was largely motivated by the fact that Mr.

Dragon would not charge an additional fee for the work. Petitioners

argue that they have satisfied each factor of the Neonatology test with

respect to the defective appraisal. Petitioners argue that Ms. Kanski

was closely involved in reviewing the appraisal, meeting with Mr.

Dragon, and advising petitioners that the appraisal met the statutory

and regulatory requirements.

Petitioners have established that Ms. Kanski was competent and

professionally experienced in tax and estate planning issues. See 106

Ltd. v. Commissioner, 136 T.C. 67, 77 (2011) (finding taxpayer’s

longtime personal attorney and return preparers to be adequately

competent professionals with respect to taxpayer), aff’d, 684 F.3d 84

(D.C. Cir. 2012). In addition, Ms. Kanski was involved both in reviewing

45

[*45] drafts of the transactional documents and in the ongoing

discussions with petitioners’ wealth advisers about the contribution.

She thus had the underlying knowledge necessary to procure a qualified

appraisal of the shares.

However, Ms. Kanski’s handling of the process does not

necessarily insulate petitioners from the consequences of the defective

appraisal. See Stough v. Commissioner, 144 T.C. 306, 323 (2015)

(“Unconditional reliance on a tax return preparer or C.P.A. does not by

itself constitute reasonable reliance in good faith; taxpayers must also

exercise ‘[d]iligence and prudence’.” (quoting Estate of Stiel v.

Commissioner, T.C. Memo. 2009-278, 2009 WL 4877742, at *2)).

Petitioner is an experienced and sophisticated businessman. See Treas.

Reg. § 1.6664-4(c)(1) (stating that “[a]ll facts and circumstances must be

taken into account in determining whether a taxpayer has reasonably

relied in good faith on advice” and that “the taxpayer’s education,

sophistication and business experience will be relevant”). Petitioner

made a business decision to have CSTC’s transactional adviser conduct

the appraisal gratis, rather than engage a national accounting firm on

a paid basis. Given Mr. Dragon’s admittedly limited experience and

unfamiliarity with the qualified appraisal process, such a decision did

not demonstrate ordinary business care and prudence. See, e.g., Webster

v. Commissioner, T.C. Memo. 1992-538, 1992 WL 220112, at *4

(describing taxpayer’s decision to engage unqualified adviser as “not a

technical matter, but one calling for ordinary human wisdom and careful

deliberation”). Petitioners have not provided credible evidence, aside

from self-serving uncorroborated testimony, that they reasonably relied

upon Ms. Kanski’s judgment in proceeding with that unwise course of

action. 25

In addition, petitioner’s close involvement in the contribution and

transaction requires us to cast a skeptical eye to his claim that he relied

in good faith on Ms. Kanski as to the appraisal’s incorrect date of

contribution. The record firmly establishes that petitioner did not

transfer the shares to Fidelity Charitable on June 11. The transactional

25 We do not ignore Ms. Kanski’s email of April 16, in which she asked Mr.

Hensien to inquire whether FINNEA could perform the appraisal as it “would seem to

be the most efficient method.” Ms. Kanski’s preliminary inquiry to a colleague on

behalf of petitioners does not speak to whether she ultimately exercised her judgment

to advise petitioners that Mr. Dragon was qualified to conduct the appraisal nor to

whether petitioners actually relied on that judgment. See, e.g., Pankratz v.

Commissioner, T.C. Memo. 2021-26, at *26. The record is devoid of credible evidence

on this point.

46

[*46] documents, petitioner’s contemporaneous emails, and the

retention of the undated physical stock certificate strongly suggest that

petitioner knew or at least should have known that the shares were not

contributed to Fidelity Charitable on June 11. See Treas. Reg. § 1.66644(c)(1)(ii) (stating that for reliance to constitute reasonable cause “the

advice must not be based upon a representation or assumption which

the taxpayer knows, or has reason to know, is unlikely to be true”); see

also Exelon Corp. v. Commissioner, 906 F.3d 513, 529 (7th Cir. 2018),

aff’g 147 T.C. 230 (2016); Blum v. Commissioner, 737 F.3d 1303, 1318

(10th Cir. 2013), aff’g T.C. Memo. 2012-16. Consequently, we also

conclude that petitioners have failed to establish good faith reliance on

Ms. Kanski’s judgment that the appraisal properly reported the

required information, because petitioner knew or should have known

that the date of contribution (and thus the date of valuation) was

incorrect.

We find that petitioners did not have reasonable cause for their

failure to procure a qualified appraisal. Consequently, we must sustain

respondent’s determination to disallow their charitable contribution

deduction.

IV.

Section 6662(a) Penalty

Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on any

underpayment of tax required to be show on a return that is attributable

to negligence, disregard of rules or regulations, or a substantial

understatement of income tax. Negligence includes “any failure to make

a reasonable attempt to comply” with the Code, § 6662(c), or a failure “to

keep adequate books and records or to substantiate items properly,”

Treas. Reg. § 1.6662-3(b)(1). An understatement of income tax is

“substantial” if it exceeds the greater of 10% of the tax required to be

shown on the return or $5,000. § 6662(d)(1)(A).

Respondent argues that petitioners are liable for a penalty under

section 6662(a) on the basis of both negligence and a substantial

understatement of income tax. Generally, the Commissioner bears the

initial burden of production of establishing via sufficient evidence that

a taxpayer is liable for penalties and additions to tax; once this burden

is met, the taxpayer must carry the burden of proof with regard to

defenses such as reasonable cause.

§ 7491(c); see Higbee v.

Commissioner, 116 T.C. 438, 446–47 (2001).

However, the

Commissioner bears the burden of proof with respect to a new penalty

or increase in the amount of a penalty asserted in his answer. See Rader

47

[*47] v. Commissioner, 143 T.C. 376, 389 (2014) (citing Rule 142(a)),

aff’d in part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015);

see also RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 38–39

(2017), aff’d sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir.

2019).

Respondent has conceded that petitioners are not liable for the

section 6662(a) penalty determined in the notice of deficiency, which

related to the disallowed charitable contribution deduction. Instead, in

his amended Answer, respondent asserted a new section 6662(a)

penalty, which relates to his argument that petitioners underreported

capital gains because of an anticipatory assignment of income.

Consequently, respondent bears the burden of proving that no

affirmative defense, such as reasonable cause, exculpates petitioners

from a section 6662(a) penalty. See Full-Circle Staffing, LLC v.

Commissioner, T.C. Memo. 2018-66, at *43, aff’d in part, appeal

dismissed in part, 832 F. App’x 854 (5th Cir. 2020).

As part of the burden of production, respondent must satisfy

section 6751(b) by producing evidence of written approval of the penalty

by an immediate supervisor, made before formal communication of the

penalty to petitioners. See Graev v. Commissioner, 149 T.C. 485, 493

(2017), supplementing and overruling in part 147 T.C. 460 (2016); see

also Clay v. Commissioner, 152 T.C. 223, 246 (2019), aff’d, 990 F.3d 1296

(11th Cir. 2021). Here, the emailed approval by the immediate

supervisor of respondent’s counsel is sufficient to establish compliance

with section 6751(b) before formal communication to petitioners of the

section 6662(a) penalty. See Estate of Morrissette v. Commissioner, T.C.

Memo. 2021-60, at *119 (“Emails may constitute written supervisory

approval.”).

However, section 6664(c)(1) provides that a section 6662 penalty

will not be imposed for any portion of an underpayment if the taxpayers

show that (1) they had reasonable cause and (2) acted in good faith with

respect to that underpayment. A taxpayer’s mere reliance “on an

information return or on the advice of a professional tax adviser or an

appraiser does not necessarily demonstrate reasonable cause and good

faith.” Treas. Reg. § 1.6664-4(b)(1). That reliance must be reasonable,

and the taxpayer must act in good faith. Id. In evaluating whether

reliance is reasonable, a taxpayer’s “education, sophistication and

business experience will be relevant.” Id. para. (c)(1). A taxpayer’s

“honest misunderstanding of fact or law that is reasonable in light of all

48

[*48] of the facts and circumstances” may also constitute reasonable

cause. Id. para. (b).

While we have held that petitioners did not have reasonable cause

for their failure to comply with the qualified appraisal requirement,

petitioners’ liability for an accuracy-related penalty presents a separate

issue—and one for which respondent bears the burden of proof.

Accordingly, respondent must show that (1) Ms. Kanski was not a

competent professional with sufficient expertise to justify reliance;

(2) petitioners failed to provide her with necessary and accurate

information; or (3) petitioners did not actually rely in good faith on her

judgment. See Neonatology Assocs., P.A., 115 T.C. at 99; see also FullCircle Staffing, LLC, T.C. Memo. 2018-66, at *43–44.

We have already found that Ms. Kanski was competent and

experienced and that she was provided with the necessary details of the

transaction and contribution. The record establishes that Ms. Kanski

advised petitioners that their deadline to contribute the shares and

avoid capital gains was “prior to execution of the definitive purchase

agreement.” Petitioner did not follow Ms. Kanski’s supplemental advice

to have the paperwork for the contribution ready to go “well before the

signing of the definitive purchase agreement.” Petitioner’s statements

that he “would rather wait as long as possible to pull the trigger” until

he was “99% sure” the sale would close suggest some disregard of his

counsel’s advice as to the timing of the contribution. See, e.g., Medieval

Attractions N.V. v. Commissioner, T.C. Memo. 1996-455, 1996 WL

583322, at *61 (“[The taxpayers] cannot claim reliance on their advisers’

advice if they failed to follow it.”). However, while petitioners

disregarded Ms. Kanski’s cautionary note as to the timing, they did

adhere to the literal thrust of her advice: that “execution of the definitive

purchase agreement” was the firm deadline to contribute the shares and

avoid capital gains. The anticipatory assignment of income issue (and

thus the underlying accuracy of Ms. Kanski’s advice) was the subject of

contention by the parties in this case. We do not consider the

anticipatory assignment of income issue to be so clear cut that petitioner

should have known it was unreasonable to rely on Ms. Kanski’s advice.

See Robert L. Peterson Irrevocable Tr. #2, 51 T.C.M. (CCH) at 1321

(finding reasonable cause for accuracy-related penalty where

anticipatory assignment of income issue was “vigorously litigated” with

“facts going in both directions”). While Ms. Kanski’s advice on an issue

of substantive tax law was ultimately incorrect, we conclude that it was

reasonable for petitioner to rely on it. See Boyle, 469 U.S. at 251.

49

[*49] Further, respondent has failed to establish any bad faith with

respect to petitioners’ reliance on the advice.

We conclude that respondent has failed to establish that

petitioners did not have reasonable cause under section 6664(c)(1) for

their underpayment of tax.

We will not sustain respondent’s

determination of a section 6662(a) penalty.

V.

Conclusion

For the foregoing reasons, we hold that (1) petitioners made a

valid gift of the CSTC shares on July 13, 2015; (2) petitioners realized

and recognized gain because their right to proceeds from the sale became

fixed before the gift; (3) petitioners are not entitled to a charitable

contribution deduction; and (4) petitioners are not liable for a section

6662(a) penalty. We have considered all of the arguments made and

facts presented by the parties in reaching our decision and, to the extent

they are not addressed herein, we find them to be moot, irrelevant, or

without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.