Update: A couple of times in the past year a federal court case was summarized that deals with the gift of stock to a donor advised fund, Fairbain v. Fidelity Investments Charitable Gift Fund, a California federal District Court case. The dispute dealt with restrictions imposed on the donors’ transfer of stock to a donor advised fund, and whether those restrictions, post-gift, could be enforced, and the implications of imposing restrictions on assets gifted to a public charity. [A donor advised fund is exclusively controlled by a public charity, hence the ability to claim large charitable income tax deductions for gifts to the DAF.]

The donors to the Fidelity Charitable Gift Fund (DAF), former hedge fund managers, faced a one-time federal income tax liability of $250 million in 2017 (resulting from deferred unreported income earned in foreign jurisdictions.) In late 2017 the donors decided to mitigate their impending income tax liability by making a large gift of almost $100 million of a start-up company, Energous, to the DAF. The Energous stock was set for an IPO . The Energous stock was worth about $3 a share before the IPO and it was targeted to be worth $12 a share shortly after the IPO.

In order to maximize their gift of Energous stock to the DAF, the donors, who were savvy investors, provided instructions and limitations to the DAF with regard to when, and how much, of the Energous stock could be sold by the DAF at any one time. The gifts of the Energous stock to the DAF was made in the last two days of 2017.

The donors claim was that the DAF agreed to the limitations on when and how much of the Energous stock could be sold by the DAF to maximize its value on its liquidation, thus preserving the value and amount that would be gifted by the donors to the DAF. This,  in turn, would result in a much larger charitable income tax deduction available to the donors. The claimed agreed upon restrictions precluded a sale of the Energous stock by the DAF when it was trading below a certain price, the amount that could be sold at one time, and the possible delay of the sale of some of the Energous stock until early into 2018 if the delay was directed by the donors.

Contrary to this alleged ‘agreement’ on when and how much of the Energous stock could be sold, the DAF promptly liquidated all of the transferred Energous stock given to it in a three hour trading period on December 31. This resulted in a dramatic drop in the price received by the DAF for the Energous shares that it sold. Consequently,  this abrupt liquidation of all of the Energous stock at one time caused the donors to lose about $30 million in income tax charitable deductions.

The donors sued the DAF for misrepresentation, breach of contract, negligence, and a violation of California’s Unfair Practice Act. The DAF responded that: (i) its published policy was to promptly liquidate all gifts made to the DAF (which the donors opted to ignore); and (ii) the donors could not claim an income tax charitable deduction if they did not give complete dominion and control over the gifted Energous stock to the ‘public charity.’ If the charity does not own and control the asset, there is no charitable income tax deduction.

The decision previously reported the trial judge’s response to ‘dueling’ motions for summary judgment filed by both the donors and the DAF. The trial judge denied both motions. In doing so, the judge made an interesting observation that if the donors were successful in their claim that the DAF had breach their ‘contract’ with regard to the liquidation of the gifted Energous stock, there was a good chance that the donors would also not be entitled to claim a charitable income tax deduction, which would mean not only more income taxes to pay, but also probably interest and an gross underreporting of taxable income penalty. This passing observation by the trial judge was a judges indirect way of saying to the donors, ‘be careful what you ask for, because you may not like the result.’ Sadly, the donors ignored the judge’s ‘invitation’ to settle the case while they could.

On February 26, 2021 the trial judge issued his opinion after several days of trial last fall. The judge found that the DAF did not breach any contract, nor did it act negligently in its abrupt liquidation of the Energous stock in a three hour window period on the last day of the calendar year. The donors were able to keep their income tax charitable deduction, but not at the amount that they claimed on their Form 1040 tax return.

It is too soon to tell if the donors decide to appeal the trial judge’s decision.