Rauenhorst v. Comm'r of Internal Revenue, 1982–00.

Citation119 T.C. 157,119 T.C. No. 9
Decision Date07 October 2002
Docket NumberNo. 1982–00.,1982–00.
PartiesGerald A. and Henrietta V. RAUENHORST, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Taxpayers petitioned for redetermination of deficiencies arising from disallowance of charitable gift. Taxpayer moved for partial summary judgment. The Tax Court, Ruwe, J., held that taxpayers did not anticipatorily assign income by making charitable gift of stock warrants after third-party's letter of intent to purchase stock.

Decision for Taxpayer. Ps owned stock warrants in NMG. WCP sent a letter to NMG regarding its intention to purchase all the issued and outstanding stock of NMG. Ps then assigned their warrants to four charitable institutions. At the time of the assignments, the donees were under no legal obligation, and could not be compelled, to sell the warrants. The donees subsequently sold their warrants to WCP. R determined that the contributions by Ps were anticipatory assignments of income. Ps moved for partial summary judgment arguing that the anticipatory assignment of income doctrine does not apply where donees are not legally obligated, and cannot be compelled, to sell contributed property. Ps rely on Rev. Rul. 78–197, 1978–1 C.B. 83. R argues that he is not bound by his ruling but has neither withdrawn nor modified that ruling.Held: Rev. Rul. 78–197, supra, provides that, in the case of a charitable contribution of stock, the Internal Revenue Service will treat proceeds of the sale of the stock as income to the donor only if at the time of the gift, the donee is legally bound, or can be compelled, to sell the shares. We treat Rev. Rul. 78–197, supra, as a concession in the instant case. See Walker v. Commissioner, 101 T.C. 537, 1993 WL 516197 (1993). There remains no genuine issue of material fact regarding whether the charitable donees were legally obligated, or could be compelled, to sell the stock warrants at the time of the assignments by Ps. Accordingly, Ps are entitled to judgment as a matter of law.John K. Steffen, Walter A. Pickhardt, and David R. Brennan, for petitioners.

David L. Zoss, for respondent.

OPINION

RUWE, J.

The matter is before us on petitioners' motion for partial summary judgment pursuant to Rule 121.1 Respondent determined a deficiency of $1,322,295 in petitioners' Federal income taxes, and an accuracy-related penalty of $264,459 pursuant to section 6662(a), for 1993. The issue for decision is whether the transfer of stock warrants to four charitable institutions was an anticipatory assignment of the proceeds from a sale of those warrants.

Background

At the time of filing the petition, petitioners resided in Naples, Florida. Petitioners were the only partners of Arbeit & Co. (Arbeit), a general partnership.2 NMG, Inc. (NMG), was a Delaware corporation which did business as George Rice & Sons.

On March 31, 1992, Arbeit and NMG executed an agreement which required that Arbeit surrender 2,500 shares of NMG series A preferred stock, a subordinated promissory note, and certain previously issued NMG warrants. Pursuant to this same agreement, NMG issued to Arbeit a senior subordinated promissory note of $5 million and a junior subordinated promissory note of $2.4 million. NMG also issued a warrant which gave Arbeit the right to purchase 772.14 shares of NMG class A common stock at an exercise price of $1 per share. Before November 12, 1993, Arbeit, Sieben Investment Co., Berkeley Atlantic Income, Ltd., and BG Services, Ltd., held warrants to purchase NMG class A common stock in the following amounts:

+-------------------------------+
                ¦Warrantholder¦Number of Shares ¦
                +-------------------------------¦
                ¦                               ¦
                +-------------------------------¦
                ¦Arbeit       ¦772.14           ¦
                +-------------+-----------------¦
                ¦Sieben       ¦18.36            ¦
                +-------------+-----------------¦
                ¦Berkeley     ¦115.41           ¦
                +-------------+-----------------¦
                ¦BG Services  ¦230.82           ¦
                +-------------+-----------------¦
                ¦Total        ¦1,136.73         ¦
                +-------------------------------+
                

Before December 22, 1993, NMG's outstanding stock consisted of 2,400 shares of class A common stock and 660 shares of series B preferred stock that were convertible share for share into NMG common stock. NMG's stock was owned as follows:

+-----------------------------------------------------------------------------+
                ¦Shareholder    ¦Shares of Common¦Common Stock Ownership  ¦Shares of Preferred¦
                ¦               ¦Stock           ¦Percentage              ¦Stock              ¦
                +-----------------------------------------------------------------------------¦
                ¦                                                                             ¦
                +-----------------------------------------------------------------------------¦
                ¦Grossberg      ¦1,176           ¦49.00%                  ¦660                ¦
                ¦family 1       ¦                ¦                        ¦                   ¦
                +---------------+----------------+------------------------+-------------------¦
                ¦E. James Cooper¦349             ¦14.54                   ¦0                  ¦
                +---------------+----------------+------------------------+-------------------¦
                ¦John J.        ¦349             ¦14.54                   ¦0                  ¦
                ¦Woodlock       ¦                ¦                        ¦                   ¦
                +---------------+----------------+------------------------+-------------------¦
                ¦Randolph K.    ¦349             ¦14.54                   ¦0                  ¦
                ¦Ginsberg       ¦                ¦                        ¦                   ¦
                +---------------+----------------+------------------------+-------------------¦
                ¦John J. Zamora ¦177             ¦7.38                    ¦0                  ¦
                +---------------+----------------+------------------------+-------------------¦
                ¦Total          ¦2,400           ¦100.00                  ¦660                ¦
                +-----------------------------------------------------------------------------+
                

If all preferred shares were converted into NMG common shares, and if all warrants were exercised, the following would represent the percentage ownership of NMG shares as of September 28, 1993:

+---------------------------------------------------------------------------+
                ¦Shareholders and Warrantholders¦Shares of Common Stock¦Ownership Percentage¦
                +---------------------------------------------------------------------------¦
                ¦                                                                           ¦
                +---------------------------------------------------------------------------¦
                ¦Grossberg family               ¦1,836.00              ¦43.75%              ¦
                +-------------------------------+----------------------+--------------------¦
                ¦E. James Cooper                ¦349.00                ¦8.32                ¦
                +-------------------------------+----------------------+--------------------¦
                ¦John J. Woodlock               ¦349.00                ¦8.32                ¦
                +-------------------------------+----------------------+--------------------¦
                ¦Randolph K. Ginsberg           ¦349.00                ¦8.32                ¦
                +-------------------------------+----------------------+--------------------¦
                ¦John J. Zamora                 ¦177.00                ¦4.22                ¦
                +-------------------------------+----------------------+--------------------¦
                ¦Arbeit                         ¦772.14                ¦18.40               ¦
                +-------------------------------+----------------------+--------------------¦
                ¦Sieben                         ¦18.36                 ¦0.44                ¦
                +-------------------------------+----------------------+--------------------¦
                ¦Berkeley                       ¦115.41                ¦2.75                ¦
                +-------------------------------+----------------------+--------------------¦
                ¦BG Services                    ¦230.82                ¦5.50                ¦
                +-------------------------------+----------------------+--------------------¦
                ¦Total                          ¦4,196.73              ¦1  100.00           ¦
                +---------------------------------------------------------------------------+
                

1. The Grossberg family consisted of Ewel Grossberg and June Marion Grossberg, in their capacities as trustees of the Grossberg Trust of 1983, and their children, Linda Finkel and Alan B. Grossberg.

1. As a result of rounding the percentages, the total should actually be 100.02 percent.

On September 28, 1993, World Color Press, Inc. (WCP), wrote a letter to the chairman of the board of directors of NMG, Ewel Grossberg, in which it stated its intention to purchase all the issued and outstanding shares of NMG on the terms and conditions outlined in the letter. This letter of intent was signed by Robert G. Burton, as chairman, president, and CEO of WCP. The letter was accepted by Ewel Grossberg, as chairman of NMG; by Randolph K. Ginsberg, as president of NMG; by Jim Cooper, as vice president of manufacturing of NMG; and by John Woodlock, as vice president of finance of NMG. On October 22, 1993, WCP's board of directors adopted a resolution to negotiate and to enter into the agreement for the purchase of all the issued and outstanding capital stock of NMG.

On November 9, 1993, Arbeit executed an assignment of its rights in the NMG warrant to four institutions: (1) The University of St. Thomas; (2) Marquette University; (3) the Mayo Foundation; and (4) the Archdiocese of St. Paul and Minneapolis, Catholic Community Foundation. The rights to purchase 772.14 shares of NMG class A common stock were allocated as follows: (1) University of St. Thomas, 260.00 shares; (2) Marquette University, 130.00 shares; (3) Mayo Foundation, 190.00 shares; (4) Archdiocese of St. Paul and Minneapolis, 190.00 shares; and (5) Arbeit, 2.14 shares. The donee institutions were organizations described in section 170(c)(2).

On November 9, 1993, the general manager of Arbeit wrote a letter to the chief financial officer of NMG...

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