Would this come under Step Transaction Doctrine

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    btw: I am glad nobody hijacked my login-id. I was worried for a bit. I am the same as my other/previous name sake, and I swear on my First Dependent!

    Also, it feels good to be the first one to post.

    Anyway.. my Q is as below:

    If A cannot use a charitable gift deduction because of the high Standard deduction, would it be Okay if A gifts some appreciated securities to B, and after some time passes B gifts to a DAF controlled by A?

    Would this come under step doctrine. what is the qualitative gradation under which such practice is looked down upon.. by IRS, accountants, common folks.. thanks.

    • This topic was modified 3 years, 3 months ago by 47percent.
    Kaye Thomas

    Congratulations! You’re number 1!

    Did you really think there were enough fans of Mitt Romney here that someone would steal your login?

    For those who are wondering, in this context, DAF is donor advised fund, basically a private foundation without the prestige — or the headaches. You contribute to a fund qualifying as a public charity that keeps your dollars in a separate account and agrees to consider (and as a practical matter, nearly always follow) your subsequent advice as to disbursement of those dollars to one or more operating charities. Presumably the goal here is to allow B to claim a charitable deduction that would be of no value on A’s tax return.

    I don’t think step transaction is the concern here. IRS would likely argue there was no completed gift from A to B, because the donation was prearranged, and B was merely acting as A’s agent. Even if there is a reasonable time lag between the two transactions, the IRS has a strong argument based on the fact that A controls the DAF, together with the fact that what B gave to the DAF is what A gifted to B. Issues like these are fact-based, of course, and it would help if A has a history of gifts to B that are not transferred to A’s DAF, or if B for some reason has a history of contributing to A’s DAF from B’s separate resources. It would be harder for IRS to challenge if, after a reasonable time lag, B contributes to a DAF controlled by B, with the understanding that B would value A’s subsequent thoughts on how to advise the charity on disbursement of this fund. There are various reasons A might not like this idea, but they would have to be weighed against the audit risk in the structure as originally proposed.


    Hello Kaye.. Thanks so much for your thoughts. Let me be the first one to ask a follow up too!

    Obviously I had my doubts and hence my question in the first place.

    That said, I can see how this can be argued that it is perfectly legal. My thinking is as follows.

    1) Crummey Trusts are an accepted (litigated and probably grudgingly tolerated) strategy, whereby 30+ days of unfettered control of gifted amount constitutes a current and completed gift.

    2) The original donor himself can donate to the DAF and get a legal charitable deduction, even though retains control. That has already been blessed by the IRS and donating to DAF is a legitimate charitable deduction.

    3) As to the last remaining obstacle of B receiving the deduction as a benefit: I don’t see why this should be an issue as:
    a) any gift can be further donated to generate charitable deduction, and
    b) There is nothing inherently wrong in A intending to donate the “option of charitable deduction” as an associated benefit along with the original gift to B.

    The above three points combined together would lead me to believe this should pass muster — although the burden of the argument may be on us.

    btw: My login-id reference is my goal to asymptotically approach the ideal goal of zero taxes — as in Romney’s reference; not necessarily because I am a fan of his! Aren’t we all aiming for that goal?!

    • This reply was modified 3 years, 3 months ago by 47percent.
    Kaye Thomas

    You make excellent points, and for all I know they might be enough to get by. The part of this that looks worst to me, though, is B contributing to a DAF controlled by A. My sense is that this is unusual enough to create the impression that B is acting on behalf of A. I’d have the same discomfort if we replace the DAF with a public charity (say, A’s alma mater) to which A contributes regularly and with which B has no connection or contribution history. And appearances get worse if proceeds end up satisfying a pledge made by A. In the end, surrounding facts matter in determining whether an IRS agent will feel this is an abuse and (assuming the issue is contested in court) whether a judge will feel that A and B stepped out of bounds. If it smells bad enough to them, they can make the factual findings that would disallow the deduction.

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