Charitable Gifts of Closely Held Stock Have Their Tax Advantages
Most people know that stocks listed on a major stock exchange may be donated to a charity as a tax deductible charitable gift. By donating such stock which has appreciated to a charitable organization, a donor can avoid federal capital gains tax and state income tax that would otherwise be imposed on the proceeds from the sale of the stock. Donors are eligible for a federal income tax deduction in the amount of the fair market value of the stock. Such gifts are acceptable to the charity because they can be readily sold on an exchange if the stock does not fit in the charity’s investment models.
If the stock is closely held and not listed on an exchange, the charity can also accept such stock under certain circumstances. The proposed gift to the charity should be discussed with the charity staff well before any sale commitments are made to determine whether such a gift fits within the charity’s donor acceptance policy and what tax regulations apply to the gift.
The ideal situation is the sale by a principal shareholder in a closely held corporation to an unrelated employee of that corporation of a few shares of stock which has a very low acquisition cost basis to the donor. Other situations may arise where a prospective buyer is accumulating a stock position slowly over time in a closely held corporation.
In most situations, a sale of the unlisted stock by the charity must be possible and a buyer available before the gift is completed. The donor should obtain an appraisal of the stock and submit it to the charity for review. The charity, not the donor, must sign any agreement with the buyer to sell the stock in order for the donor to take a charitable tax deduction for the gift. The agreement is based on the appraisal.
Because the stock is not regularly traded on a recognized stock exchange, it is necessary for the charity, as a selling charitable donee organization, to file IRS form 8282 with the IRS and give the donor a copy. A donor of noncash charitable gifts with a value of more than $500.00 must file IRS form 8283 with his or her tax return. The charity will usually prepare this form and give it to the donor. Complete interest charitable contributions are exempt from gift tax filing requirements.
Donors can take a charitable deduction for the full value of the closely held stock gifts and other charitable gifts made during a year of up to 30% of reported adjusted gross income if the charity is a public charity, generally, one which receives more than two-thirds of its income from donations. The excess deduction can be carried forward for the next succeeding five years. If the charity is a private foundation, generally, one which receives more than one-third of its income from investments, the deduction is not so advantageous. In that case, the charitable deduction for the closely held stock gift is limited to the cost basis of the closely held stock, and only 20% of annual adjusted gross income can be offset with a five year carry forward.
Charities do not usually accept closely held stock to hold as part of their portfolios. It is possible, but actions required to avoid tax complications for the donor and receiving entity make such an arrangement less attractive than the immediate sale.
Donors usually want to reserve a right to specify whether, when and if the stock is to be sold. Such a restriction or reservation can jeopardize the tax exempt status of a community foundation to which the stock is given and, at any charity, turn the gift into a donor advised fund for which excise taxes may be due. If the gift is to a private foundation, it is possible that other excise taxes will apply.
Other alternatives where there is not an immediate sale are a charitable lead trust or a charitable remainder trust. If the donor places the closely held stock in a charitable remainder trust, the trust would probably have to sell the stock within five years to avoid an excess business holding, which would subject the trust to other excise taxes. Holding S corporation stock presents further problems for these trusts. The receiving entity may be either disqualified from holding the closely held stock, or it may be prevented from taking potential passed through corporate loss.
Donating closely held stock can benefit charitable organizations and deliver tax advantages to the donor. It is best to consult a tax attorney or tax adviser before making such decisions.
Spencer G. Nauman Jr., is the senior partner of the Harrisburg law firm Nauman, Smith, Shissler and Hall, LLP, Harrisburg’s oldest law firm. Mr. Nauman has been a lawyer with the firm for more than 40 years and his primary practice areas are corporate, probate/estate planning, taxation and insurance. Mr. Nauman represents several community foundations and the state community foundation organization. He is serving or has served as Director and President of business as well as community health, educational and social service organizations.