Friday April 19, 2024

Rev. Rul. 67-178

GiftLaw Note: Donor made a gift of stock to charity with a "gentleman's understanding" that the charity would sell the stock back to the donor for its fair market value. The donor also expected to receive a step up in basis when he repurchased the stock from the charity. However, under the facts, the IRS determined that the donor never intended to give up rights of ownership in the stock and that the stock was held by the charity under an agreement that it would be sold back to the donor. Based on these facts, the IRS held that the transaction was a sham and that it would disregard the effect of the transaction, namely a step up in basis for the donor. The donor would, however, receive a charitable deduction for the purchase price he paid to reacquire the stock, but the stock would retain its original cost basis.

January, 1967

When a donor transfers, without consideration, stock to a charitable organization under a "gentlemen's agreement" which allows him to reacquire the stock one month later at its then fair market value, the amount of the cash paid to the organization in reacquiring the stock, and not the fair market value of the stock when transferred, is a charitable contribution within the meaning of section 170 of the Internal Revenue Code of 1954, and is deductible to the extent provided by such section. The basis of the stock in the hands of the donor remains the same as it was before he transferred the stock.

Advice has been requested whether, under the circumstances described below, a taxpayer who transfers shares of stock to a charitable organization without consideration, and who later reacquires them from the organization at their fair market value at the time of reacquisition, is entitled to a charitable contribution deduction based on the fair market value of the stock at the time of his transfer, or on the cost of reacquisition, and whether such transaction will affect the basis of his stock.

The taxpayer in the instant case transferred, without consideration, 300 shares of stock in M Corporation, having a fair market value of 4 x dollars per share, to an organization described in section 170(c) 65 of the Internal Revenue Code of 1954. The taxpayer's adjusted basis in the stock was 2 x dollars per share. During the month following the transfer and in the same taxable year, the taxpayer repurchased the 300 shares at 4 x dollars per share. The books of M reflected both changes in ownership.

The charitable organization had in its possession a large number of shares of stock of M which had been received from other donors. While such shares were allegedly held for sale to any prospective purchaser, the majority of them (as well as the shares acquired from the taxpayer) were, in fact, held under a "gentlemen's agreement" for resale to the donors. The transactions were handled in this manner for the purpose of enabling the donors to obtain a charitable deduction and to acquire a stepped-up basis for the stock while avoiding the recognition of gain.

Section 170(a) of the Code provides, in part, as follows:

(1) General rule. - There shall be allowed as a deduction any charitable contribution * * * payment of which is made within the taxable year.

It is clear that the taxpayer has made a charitable contribution within the taxable year. The questions, however, are (1) in which of the transactions was the contribution effected, and (2) whether the transfer and repurchase of the stock under such a "gentlemen's agreement" should affect the basis of the stock.

It is well settled that the Internal Revenue Service will look to the substance of a transaction. Commissioner v. Court Holding Co., 324 U.S. 331 (1945), Ct. D. 1636, C.B. 1945, 58. Upon a determination that the form employed to carry out a transaction is unreal or a sham, the Service may disregard its effect. Higgins v. John Thomas Smith, 308 U.S. 473 (1940), Ct. D. 1434, C.B. 1940-1, 127.

In the instant case title to the stock was actually transferred on the books of the corporation. Nevertheless, the facts indicate that the taxpayer had no intention of relinquishing his rights of ownership in the stock; that the stock was held by the donee under an agreement for return to the donor in the form of a sale; and that by means of this device the donor hoped to obtain a stepped-up basis for such stock.

On the basis of these facts, the transfer and repurchase of the stock are to be disregarded. However, the amount paid in order to reacquire the stock is a charitable contribution within the meaning of section 170 of the Code and is deductible in the year paid in the manner and to the extent provided by such section. The basis of the stock in the hands of the taxpayer after his reacquisition remains the same as it was before he transferred the stock.