Hoensheid v. Comm'r of Internal Revenue
| Docket Number | 18606-19 |
| Decision Date | 15 March 2023 |
| Parties | ESTATE OF SCOTT M. HOENSHEID, DECEASED, ANNE M. HOENSHEID, PERSONAL REPRESENTATIVE, AND ANNE M. HOENSHEID, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
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
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 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.
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.
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.
Fidelity Charitable Gift Fund (Fidelity Charitable) is a tax-exempt 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 donor-advised fund program, donors can establish a giving account with Fidelity Charitable by completing and submitting a donor application 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.
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 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.
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...
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