Charitable Gifts of Publicly Traded Securities
By Jackie Jacobs
Many people mistakenly believe that all donations of appreciated securities are deductible at full fair market value, but only long-term appreciated securities (those held for at least one year and a day) are eligible for a full deduction. For individuals who hold short-term appreciated securities, there is little or no tax difference between donating the stock or selling the stock and donating the proceeds.
When appreciated securities held for more than a year are donated to the Columbus Jewish Foundation or another public charity, the donor generally enjoys an income tax deduction for the asset’s full fair market value and avoids tax on the capital gain. This is probably the best known and most widely used tax benefit for charitable gifts.
Donors may use this deduction up to a limit of 30 percent of their “contribution base,” i.e., adjusted gross income computed without any net operating loss carryback. Donors to a private foundation have a deduction up to a limit of only 20 percent. Donations beyond this limit may be carried forward for up to five tax years.
Gifts of securities held for one year or less do not receive the same favorable tax treatment as gifts of long-term securities. Although the general rule is that the fair market value of contributed securities is deductible, the deduction is reduced by the amount of gain that would be treated as short-term capital gain or ordinary income had the property been sold. In effect, only the basis of gifts of short-term appreciated securities may be deducted.
Bonds, like stock, generally are held as capital assets. A bond held for more than 12 months qualifies as a long-term security for determining the charitable deduction.
However, if the bond had original issue discount (OID), the difference between the stated redemption price and the issue price generally is taxable as interest income as it accrues. The amount recognized as OID each year increases the bondholder’s basis.
If the bond is sold, any accrued OID that has not been recognized is taxable as ordinary income, and the difference between the proceeds and the holder’s basis (increased by recognized OID) is capital gain or loss. A gift to charity of a bond with OID will give rise to ordinary income to the donor as if the bond had been sold.
Similarly, the disposition of market discount bonds acquired for less than the stated redemption price, or in the case of an OID bond, for less than their issue price plus accrued OID, gives rise to ordinary income to the extent of accrued market discount allocable to the period the seller—or donor—held the bond.
As a result, in the case of gifts of OID or market discount bonds held for more than 12 months, the donor’s fair market value deduction will be reduced by ordinary income recognized on the transfer.
If you are considering a gift of depreciated securities, it is more advantageous to sell the securities and contribute the proceeds, rather than donate the securities. This is because you may deduct the fair market value of a charitable gift of either long-term or short-term depreciated securities, but the loss on the securities is not deductible.
Incentive stock options are by definition non-transferable, except at death. When contributing stock acquired through the exercise of an incentive stock option, donors may be entitled to a fair market value deduction, provided that they held the stock for more than one year from the date the option was exercised.
However, if it has not been at least two years from the date the option was granted, the donor will be required to recognize the difference between the exercise price and fair market value on the date of exercise as ordinary income.
When a donor is considering a taxable sale of securities by acceptance of a tender offer or by redemption, it may be more attractive to make a gift of the securities for the reasons described above. It is crucial that the gift be completed before the donor has committed to sell or is legally obligated to do so. Otherwise the donor will be taxed on the gain. The Ninth Circuit upheld the tax court decision in Ferguson that imputed gain to the donor where, at the time of a gift of appreciated stock, a cash tender offer was outstanding and enough shares already had been tendered to approve the merger.
The timing of gifts is important. The contribution of securities is completed and deductible only when the donor unconditionally relinquishes control to the charity or its agent. The contribution should also be made before a donor has committed to a taxable sale. Otherwise, the donor will be taxed on any gain.
A gift of stock is effective on the date the donor delivers a properly endorsed stock certificate to the charity. If a stock certificate is mailed, the gift is effective on the date of mailing to the charity or its agent if received in due course. Because an endorsed stock certificate is negotiable, the donor should consider sending an unendorsed certificate and, by separate mail, an executed stock power.
Transfer of a stock certificate mailed or delivered to the donor’s broker or to the issuing corporation or its agent is not effective until the stock is delivered to the charity or transferred on the issuer’s books.
Where stock is held in “street name” and the donor uses a broker to transfer the securities, the gift will not be considered complete until the stock is transferred on the corporation’s books. However, when the donor and charity have the same broker, the gift is complete when the broker transfers the shares to the charity’s account. For this reason, if the timing of a gift is crucial, a donor’s broker may suggest establishing an account for the charity so the broker can act as its agent. More typically, the broker will wire transfer the securities through the Depository Trust Corporation (DTC). The Internal Revenue Service regards DTC as the donor’s agent, so the gift is not complete until the shares are credited to the charity’s account.
For a gift to a trust to be effective—including charitable remainder or lead trusts—the instrument creating the trust must be executed by both donor and trustee prior to the transfer of the gift.
In summary, gifts of securities, particularly those that have been held for more than a year, can produce significant tax deductions and allow you to make substantial contributions to charity. But before making any gift, it pays to consider the following factors: appreciation or depreciation in the value of the securities, holding period, and the nature of the securities.
Many people have benefitted from recent increases in the value of their assets because the stock market has risen dramatically. Gifts of appreciated property are especially attractive because you can receive both an income tax deduction and bypass the capital gain. Fortunately, in nearly all cases, such gifts can be deducted in full during the year of the gift or over a period of several years.
Feel free to contact me at (614) 338-2365 should you have questions about the about the benefits of charitable gifts of publicly traded securities.
Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.
Article appears as originally published in the Ohio Jewish Chronicle, September 11, 2014.