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Fidelity Loses Early Bid to Toss Philanthropy Tax Lawsuit (1)

March 3, 2020, 2:36 PMUpdated: March 3, 2020, 7:14 PM

Fidelity Investments Charitable Gift Fund will continue to face a lawsuit involving a $100 million stock-based donation after a federal district court in California denied its motion for a ruling ahead of trial.

At the center of the case are questions surrounding donor-advised funds, a type of charitable-giving vehicle to which donors contribute money or assets with a fund sponsor who distributes the donations to charitable causes.

Fidelity argued that Emily and Malcolm Fairbairn admitted they gave up legal control over their donated stock both in their discovery responses and in their 2017 federal tax returns—where they claimed a tax deduction for the donated stock.

But the court said that “legal control” wasn’t defined for the Fairbairns at the time of the discovery response. It also held that even if a legally enforceable promise over how to handle the donated stock would disqualify the Fairbairns’ tax claims, the IRS could take action to recover an improper deduction.

“Fidelity would be held to its promises, and the Fairbairns would suffer the consequences, if any, of enforcing those promises,” wrote Magistrate Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California.

(Fidelity and the Fairbairns have consented to the jurisdiction of a magistrate judge in the case.)

What It Could Mean

Letting the case proceed is significant because it keeps scrutiny on donations to donor-advised funds, said Roger Colinvaux, a professor at the Columbus School of Law whose work focuses on tax-exempt organizations.

Sponsoring organizations are on notice to be careful about “making representations to donors about the donors’ continuing post-donation ability to retain influence,” he said.

And donors should be aware that efforts to retain control over what happens after a donation cast doubt on their ability to claim the charitable deduction, he said.

Karl Mill, an associate at Adler & Colvin who focuses on nonprofit issues, echoed that message.

“If the case goes the Fairbairns’ way, that signals that, even if everyone gets the paperwork right, aggressive salesmanship could undercut the organization and/or the donor’s deduction in the event of a dispute or audit,” he said.

Added Loss for Fidelity

The court also granted the Fairbairns’ motion to have some of Fidelity’s legal defenses rejected. Fidelity argued, for instance, that the Fairbairns couldn’t bring their claims because they had “unclean hands” given that, Fidelity alleged, Emily Fairbairn used material, non-public information to manipulate the stock price.

But the court questioned whether the facts, even when read in the most generous light for Fidelity, supported making that inference. In any event, Corley said, it wouldn’t be enough for the unclean-hands defense.

“Even if Fidelity Charitable had identified evidence sufficient to support an inference that Ms. Fairbairn’s conduct was in some way illegal, Fidelity Charitable has failed to show it was prejudiced as a result of her alleged misconduct,” she said.

Peter K. Stris, partner at Stris & Maher LLP and counsel for the Fairbairns, didn’t return a request for comment. Alan Evan Schoenfeld, partner at Wilmer Cutler Pickering Hale and Dorr LLP and counsel for Fidelity Charitable, didn’t return a request for comment.

—With assistance from Colleen Murphy.

The case is Fairbairn v. Fid. Invs. Charitable Gift Fund, N.D. Cal., No. 3:18-cv-04881, order denying motion for summary judgment 3/2/20.

(Updates adding further details and comment.)

To contact the reporter on this story: Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Jo-el J. Meyer at jmeyer@bloomberglaw.com

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