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November 24, 1992



The opinion of the court was delivered by: GERARD L. GOETTEL


 This action arises out of a tax assessment made by the Internal Revenue Service on plaintiffs Leonard and Joyce Greene. The IRS determined that the plaintiff were required to report as income the gain realized from the sale of certain commodity futures contracts that was donated to a private foundation run by plaintiffs.


 Plaintiffs Leonard and Joyce Greene, *fn1" residents of Westchester County, founded the Institute for Socioeconomic Studies in the early 1970s. The Institute is an exempt private operating foundation under 26 U.S.C. § 501(c)(3). In 1974, the IRS issued plaintiffs, who file their tax returns jointly, a Private Letter Ruling regarding the tax treatment of donations of futures contracts to a charitable organization. The Ruling held they would be entitled to a charitable contribution deduction equal to the value of the donated futures contracts and that no gain need be recognized when the charity sold them. Between 1974 and 1980, plaintiffs reported on the federal tax returns the charitable contributions made to the Institute for Greene's entire equity in the futures contracts.

 In 1981, § 1256 of the Internal Revenue Code was amended to provide that all commodities futures contracts acquired and positions established after June 23, 1981 were to be marked to market at year end and the gains (or losses), regardless of how long they had been held, would be characterized as 60% long-term and 40% short-term capital gains (or losses). 26 U.S.C. § 1256. Section 170 of the Code does not permit a charitable donation deduction for the value of donated property which would have been short-term gain to the taxpayer if the taxpayer had sold the property.

 Since only long-term gain was deemed to be deductible "capital gain property" under 26 U.S.C. § 170(b)(1)(C)(iv) and short-term gains were therefore non-deductible, plaintiffs donated only the long-term portion of the futures contracts, deemed by § 1256 to be 60% of gains, if any, realized from their sale.

 In 1982, Greene entered into an agreement under which he donated the long-term capital gains of selected futures contracts from his personal accounts at Merrill Lynch and retained for himself the short-term capital gains. For the most part, the selected futures were sold the same day that the donation was made and the portions of the proceeds representing the long-term capital gains was transferred to an account maintained at Merrill Lynch by the Institute.

 Greene chose the selected futures contracts according to the funding needs of the Institute and the existence of unrealized gains in them. The contracts were then transferred to a Special Account held with Merrill Lynch over which Greene had given power of attorney to two accountants, Harry Reiner and Ralph Spector, acting as trustees on behalf of the Institute. *fn2" As we noted above, the donated contracts were sold on the same day or shortly after the gift was made. The portion of the proceeds representing the long-term gain was transferred to the Institute's account at Merrill Lynch. The proceeds representing the short-term capital gain was transferred to Greene's personal account at Merrill Lynch. The aggregate fair market value of these futures contracts on their sale dates in 1982 totalled approximately $ 856,000. Applying the new tax laws on donations of futures contracts, $ 513,583 of the Greenes' sale was long-term gain and $ 342,388 was short-term gain.

 The Internal Revenue Code limits charitable contribution deductions to 30% of a taxpayer's adjusted gross income. 26 U.S.C. § 170(b). For the Greenes, this meant that their charitable contribution deduction was limited to $ 345,184, an amount they claimed on their 1982 tax return. The remaining $ 168,398 they claimed as a potential carryforward and they paid the taxes on the $ 342,388 of short-term gain from the futures sales.

 In September 1990, the IRS sent plaintiffs a Notice of Deficiency for 1982 for over $ 90,000 plus an additional $ 22,598 for substantial underpayments of tax. The IRS had determined that the full fair market value of the futures contracts sales was included in plaintiff's 1982 taxable income. The IRS also disallowed the deductions claimed by plaintiffs between 1983 and 1987. Plaintiffs paid the assessed deficiency and later filed a claim for a refund which was disallowed by the IRS. In May 1991, plaintiffs commenced the present action seeking a $ 249,012 refund plus interest from the date of payment.

 Before the court today are the government's motion for summary judgment and the plaintiffs' cross-motion for summary judgment. The United States contends that the IRS correctly determined that the entire gain from the futures sales was taxable income for the Greenes and the transfer of a portion to the Institute was a taxable anticipatory assignment of income. Defendant argues that the 1974 private letter only applies to transactions in that year and the facts and law contemplated in that letter differ from the case at bar.

 Plaintiffs obviously disagree. They argue that the 1974 letter approved the donations and their donations were made in reliance upon it. In addition, plaintiffs contend that the step transaction theory, which says that separate, interrelated transactions are treated as one for tax purposes, is irrelevant. They also maintain that no assignment of income occurred.


 To prevail on a motion for summary judgment, the moving party must demonstrate "that there is no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The court's function is not to resolve disputed issues of facts but solely to determine if such genuine issues of fact exist. All ambiguities must be resolved and all inferences drawn in favor of the party defending against the motion. Rattner v. Netburn, 930 F.2d 204, 209 (2d Cir. 1991); Eastway Construction Corp. v. City of New York, 762 F.2d 243, 249 (2nd Cir. 1985), cert. denied, 484 U.S. 918, 98 L. Ed. 2d 226, 108 S. Ct. 269 (1987). At oral argument, the parties agreed that it is not the underlying evidentiary facts which are disputed so much as the conclusions to be drawn from them.

 The deduction of charitable contributions is governed by § 170 of the Internal Revenue Code. The Code distinguishes between property that is donated to a charity in kind and property that is first sold by the donor and the proceeds are given to the charity. If the donation is property other than money, the amount of the contribution is deemed the fair market value of the property at the time of donation. See Treas. Reg. § 1.170A-1(c)(1). For capital gain property, the deduction is limited to 30% of the taxpayer's adjusted gross income. 26 U.S.C. § 170(b)(1)(C)(i). When such contribution is for the entire interest in the property, no gain is realized by the taxpayer donor when the property is subsequently sold by the charity.

 A. Anticipatory Assignment Issue

 The government argues that the donation represented an anticipatory assignment of income because Greene only donated an interest in a portion of the income realized on the sales of the futures contracts. Defendant argues that since Greene in effect earned the income, the fact that he then diverted a portion of it to the Institute does not shield him from tax liability. Defendant notes that Greene knew how much the Institute needed for its operations and chose to donate the particular futures contracts whose gains, if realized immediately, would meet those needs. The Institute, says the government, did not bear any risk in the commodities market but was simply the recipient of an assignment of the realized long-term gains, a donation of appreciated property that is the substantial equivalent of an assignment of a portion of realized income.

 Plaintiffs argue that the assignment of income theory is inapplicable since no contract for the sale of the property existed before the donation was made. Thus, plaintiff's say, the donor's right to receive at least some of the proceeds had not matured to the point that the gain from the sale should be deemed the donor's income. Plaintiffs argue that Greene neither controlled the value of the donated interests nor retained any legal right to receive any matured unrealized gains their sale might produce.

 When assessing the purported donation of appreciated property, "[a] gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives to income by way of a sale." Humacid Co. v. Commissioner, 42 T.C. 894, 913 (1964). Where a taxpayer has rights to the proceeds of a donated property that have so matured or ripened that he has a right to the gain, he is taxable on those proceeds even though he purports to transfer the property to someone else. Morgan Guaranty Trust Co. v. United States, 218 Ct. Cl. 57, 585 F.2d 988, 994 (Ct. Cl. 1978) (quoting S.C. Johnson & Son, Inc. v. Commissioner, 63 T.C. 778, 786 (1975)). In short, if a fixed right to income had matured at the time the transfer was made, the proceeds would be considered income to the taxpayer irrespective of the purported donation. Morgan Guaranty, 585 F.2d at 995. Applying the assignment of income doctrine must be done on a case-by-case basis. Harrison v. Schaffner, 312 U.S. 579, 85 L. Ed. 1055, 61 S. Ct. 759 (1941).

 In this case, the question becomes whether Greene's interests in the short-term capital gains had matured to the point where one could say that he had a right to the gain. Greene was a member of the Board of Directors for the recipient Institute as well as its President. This fact alone does not require Greene's donation to be considered income to Greene. See S.C. Johnson & Son, Inc. v. Commissioner, 63 T.C. 778 (1975). However, one might infer that as both donor and President of the recipient charity Greene was in a position to insure that the futures would be ...

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