Quick background. Donors (husband and wife) claimed Fidelity failed to follow their investment advice on a $100 million gift to Fidelity's Donor Advised Fund (DAF) resulting in damages for diminution of their charitable deduction and funds available to benefit charity. Donors made their gifts to their DAF on Dec. 28 and 29, 2018 and allege they instructed Fidelity how and when to sell their large blocks of stock in the following year. Fidelity denied all donors' claims.

Last year, Fidelity's motion in a U.S. district court to dismiss donors' complaint was denied and a jury trial in California was expected this spring. Now the trial is subject to postponement due to the coronavirus crisis.

Now the latest development. Last month, a U.S. district court denied Fidelity's motion for summary judgment on its affirmative defenses of estoppel, waiver and unclean hands. So the case will go forward. (U.S. District Court, Northern District of California: Emily Fairbairn v. Fidelity Investments Charitable Gift Fund, Order re: motions for summary judgment, RE: Dkt. Nos. 134, 136 (March 2, 2020). The summary judgment motions were denied by U.S. Magistrate Judge Jacqueline Scott Corley.)

What's at stake? For donors: damages for claimed reduction of their charitable deductions and the reduced amount placed in their DAF. For Fidelity, having to pay damages and a possible blot on its lily-white escutcheon.

How the donors will fare with the IRS isn't discussed by the court (other than to recite donors' claims that Fidelity's actions resulted in decreased charitable deductions for them).

My Speculations How the IRS Will View the Donors' Gifts:

  • Assuming Fidelity received 700,000 Energous shares on Dec. 28, 2018 and had ownership on that date, that's the delivery date for determining the value of donors' gift (no matter how or when Fidelity sold those shares).
  • Assuming Fidelity received 1.2 million Energous shares on Dec. 29, 2018 and had ownership on that date, that's the delivery date for determining the value of donors' gift (no matter how or when Fidelity sold those shares.

IRS will, I believe, follow these valuation rules:

  • When there's a market for securities on a stock exchange, in an over-the-counter market or otherwise, fair market value is the mean between the highest and lowest quoted selling prices on the date the gift is delivered. Reg. §§20.2031-2(b), 25.2512-2 (b).
  • Exception—adjustments for "blockage" may affect fair market value. A large block of stock may depress the market, driving prices downward. Reg. §§20.2031-2(e), 25.2512-2(e).

Suppose the facts alleged by d are found to be true. Although they made their gifts to the DAF on Dec. 28 and 29, 2018 they directed that their shares not be sold until 2019, the following year.

Query. When a transfer is made to charity but the charity is directed not to sell the assets until a later date, can this be construed as some type of split-interest gift not meeting any of the split interests that qualify for income and gift tax charitable deductions? Just asking.

And another thing. Suppose donors' succeed in collecting damages for the additional taxes they paid based on their claim of diminished tax savings resulting from smaller charitable deductions. Won't the money received as damages be subject to federal and California income taxes? So could donors claim additional damages "to make them whole" for the additional income taxes? Some kind of circular computation?

Conrad Teitell is a principal at Cummings & Lockwood in Stamford, Conn.