Transfer of stock warrants to charity was not an anticipatory assignment of income.

• Author: Kautter, David J.

In Gerald A. Rauenhorst, 119 TC No. 9 (2002), the Tax Court granted a couple's motion for partial summary judgment, finding the IRS was bound by Rev. Rul. 78-197; thus, the couple's transfer of their stock warrants to four charities was not an anticipatory assignment of income.

Facts

Gerald and Henrietta Rauenhorst owned stock warrants in NMG, Inc. On Sept. 28, 1993, World Color Press, Inc. (WCP) sent a letter to NMG, stating its intention to purchase all of that company's issued and outstanding stock. NMG's officers accepted the letter of intent, which by its terms was "nonbinding." On Oct. 22, 1993, WCP's board of directors adopted a resolution to negotiate and enter into an agreement to purchase all of NMG's issued and outstanding stock.

On Nov. 9, 1993, the taxpayers executed an assignment of their stock warrants to four charities. On Nov. 12, 1993, NMG's warrant ledger was updated to show the ownership change. One week later, each donee signed a warrant purchase and sale agreement, in which he or she agreed to sell his or her reissued NMG warrants to WCP before 1994.

Representatives of each donee signed affidavits stating that, before execution, there were no agreements among the donee charity, the taxpayers or any other party to sell the stock warrants.

On Nov. 22, 1993, NMG, its stockholders and WCP executed an agreement to purchase of all of NMG's issued and outstanding stock. WCP acquired all of the NMG stock and all of the issued and outstanding warrants to purchase NMG stock in a transaction that closed on Dec. 22, 1993. As part of this transaction, the donees sold their warrants.

The taxpayers did not report any gain from the sale of the institutions' warrants on their 1993 Federal return. In 1999, the IRS issued them a deficiency notice, stating that the donation of the warrants to the charities was an anticipatory assignment of income, resulting in more than $4 million in capital gains in 1993.

Analysis

In Rev. Rul. 78-197, the Service stated that it would treat the proceeds from a charitable contribution followed by a redemption of a donee's stock, under facts similar to Palmer, 62TC 684 (1974), as donor income if the donee is legally bound or can be compelled by the corporation to surrender the shares for redemption. The taxpayers relied on Palmer and also on Carrington, 476 F2d 704 (5th Cir. 1973), arguing that the anticipatory-assignment-of-income doctrine did not apply, because the conditions did not apply.

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