By Nicolette Silva, JD
Director of Donor Relations
This article also appeared in the March/April 2021 Clearwater Bar Association Res Ipsa Loquitur
For the right client, a charitable gift of long-term, privately held business interests (“Private Stock”) to an organization classified as a public charity[1] can be a “win-win” solution. This type of gift typically allows taxpayers to avoid long-term capital gains tax while also obtaining a deduction equivalent to the Fair Market Value (“FMV”) of the gift, up to 30% of the taxpayer’s ordinary income. The Internal Revenue Service (“IRS”) has issued reporting rules for these types of gifts that must be followed to receive the deduction.[2]
In addition to the reporting requirements, the actual transaction must be carefully structured for the taxpayer to reap the benefits of the gift. As you could guess, charities generally are not interested in being subject to the liabilities associated with owning a business. Thus, the charity—and usually the taxpayer—prefer that the Private Stock be sold as soon as possible following the gift. However, it is imperative that the Private Stock not be subject to an existing, legally enforceable obligation to sell.[3]
Recent Guidance from the U.S. Tax Court
The prohibition on pre-arranged sales is particularly important given a recent case decided by the U.S. Tax Court.[4] In Dickinson, the IRS argued that a taxpayer’s gift of closely held stock was subject to restrictions requiring the charity to tender the stock for redemption. Therefore, according to the IRS, the transaction should be treated as a sale and subsequent donation of the proceeds of the sale, with the taxpayer realizing the gain and receiving the deduction. Luckily for the taxpayer, the U.S. Tax Court disagreed, holding that the taxpayer “made an absolute gift” of the stock “before the stock gave rise to income by the way of sale.” Although the taxpayer won, this case is a good reminder for attorneys to be cautious when structuring gifts of Private Stock.
A Gift of Private Stock in Action
The Community Foundation of Tampa Bay (“CFTB”) recently received one of these gifts from a local philanthropic business owner. At the suggestion of his attorney, the taxpayer and his family decided that a gift of their shares of the company to CFTB would provide tax advantages and further the family’s philanthropic goals. CFTB sold its portion of the company and is in the process of dispersing the $9.98 million in proceeds from the sale to charities selected by the family (94 charities in total, both local and national). When using a community foundation for these types of gifts, donors have the option to put the proceeds in a donor advised fund, create an endowment for specific charities or causes, or create a scholarship fund.
[1] Classified under U.S. Tax Code section 170(b)(1)(A)
[2] See Rev. Rul. 59-60
[3] See Rev. Rul. 78-197, 1978-1 C.B. 83 and Palmer v. Commissioner, 62 T.C. 684 (1974)
[4] Dickinson v. Commissioner, T.C. Memo 2020-128
