PGDC 12-01 Gifts of Restricted Stock

8/14/2019 PGDC 12-01 Gifts of Restricted Stock

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Issues to Consider When Making and Accepting Gifts of Restricted Stock

Published on December 19, 2001 - 1:00am

When a donor makes a gift of "restricted" or "non-publicly traded" stock to a charity, complex issues arise that

may not be present if the gift is one of "publicly traded" stock. In this issue of Gift Planner's Digest, New York

attorneys Jennifer Franklin and David Shevlin discuss the issues involved in donating restricted stock from both

the donor's and the charity's perspectives. In particular, this article discusses the timing considerations of

making a gift of restricted stock that are especially relevant as the year-end quickly approaches.

by Jennifer L. Franklin and David A. Shevlin

Jennifer Franklin is an attorney at Simpson Thacher & Bartlett where she works in the Exempt Organizations and Tax

Groups. She advises a variety of international and domestic exempt organizations, including both private foundations andpublic charities, and has worked on several transactions involving hospitals and other health-care organizations.

Jennifer's professional associations include membership with the Exempt Organizations Committee of the American Bar

Association Section of Taxation, where she currently serves as the Secretary of that Committee. Jennifer is also a member of

the New York State Bar Association's Section of Taxation. She earned her J.D. degree at Duke University where she graduated

Magna Cum Laude, and earned her B.S. degree from Georgetown University where she also graduated Magna Cum Laude.

David Shevlin is counsel at Simpson Thacher & Bartlett where he works in the Exempt Organizations and Corporate Groups.

He advises a variety of international and domestic exempt organizations, including both private foundations and public

charities. David regularly speaks and writes on topics of relevance to private foundations and public charities. His

professional associations include membership with the Exempt Organizations Committee of the American Bar Association

Section of Taxation. David is also currently working with the Non Profit Coordinating Committee of New York and the Non

Profit Organizations Committee of The New York County Lawyers' Association to respond to recent proposed legislation

amending the New York Not-for-Profit Corporation Law.

David earned his J.D. at New York University where he graduated Magna Cum Laude and was named a member of Order of

the Coif, and earned his B.S. degree from Cornell University, where he was named a Presidential Scholar.

The authors can be reached [email protected] and [email protected] and wish to gratefully acknowledge the

assistance of Victoria B. Bjorklund in the preparation of this article.

When a donor makes a gift of "restricted" or "non-publicly traded" stock to a charity, complex issues arise that may not be

present if the gift is one of "publicly traded" stock. This article discusses the issues involved in donating restricted stock from

both the donor's and the charity's perspectives. In particular, this article discusses the timing considerations of making a gift

of restricted stock that are especially relevant as the year-end approaches.Restricted Stock Versus Publicly

traded Stock

To begin with, it is important to understand the fundamental differences between publicly traded stock and restricted stock.For a company to conduct a public offering in the United States of shares of a class of its stock, the company must file a

registration statement with the Securities and Exchange Commission. Once the SEC declares the registration statement"effective," the company may consummate the public offering and sale of the registered shares. Usually, the company willsimultaneously arrange for the stock to be listed on a national securities exchange, such as The New York Stock Exchange or

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the NASDAQ. The shares that are registered with the SEC and listed on the relevant exchange are "publicly traded." All othershares are considered restricted stock. Absent any other restrictions, the federal securities laws permit charities that receivedonations of publicly traded stock to freely and immediately dispose of such stock.

When a company files a registration statement with the SEC to make a public offering, it registers a definitive number ofshares of a class of its stock; it does not necessarily register all of the outstanding shares of that class. For example, prior toits initial public offering, a company may have issued and outstanding two million shares of common stock. However, the

company and its investment banker might determine that market conditions are such that it would be wise to only conduct apublic offering of one million shares. The other one million shares of common stock remain restricted stock, even thoughthere are shares of common stock that are now publicly traded and freely tradable.

In addition to the federal securities law concepts of publicly traded stock and restricted stock, the code1 defines the terms"non-publicly traded stock," "non-publicly traded securities," and "publicly traded securities" in the context of substantiatingand valuing a donor's gift. Those definitions are discussed later in this article under the heading "Issues for the Donor toConsider -- Substantiating a Gift of Restricted Stock."Issues for the Donor to Consider Determining the Tax Year of Contribution of a Gift of Restricted Stock

The date of contribution of restricted stock is an important issue for a donor, particularly when a donor is making a gift of suchstock close to the end of the year. A donor's failure to complete the gift by December 31st will result in the delay of thedonor's charitable contribution deduction for a year and can create an unpleasant situation for all parties involved. The

following discussion sets forth certain of the rules that a donor should follow to ensure that, in making a year-end gift ofrestricted stock, she receives her charitable contribution deduction in the current, and not subsequent, year.

General Rule

In general, a contribution of stock to a charity is deemed made at the time delivery is effected.2 Delivery of a gift of stock,including restricted stock, is considered complete when the stock has been placed "beyond the control of the donor" so thatthe donor has no legal right to recall the gift.3 A donor's gift of physical certificates of restricted stock is complete, andtherefore effective for federal income-tax purposes, when a properly endorsed stock certificate is unconditionally delivered toa charity or to the charity's agent.4 For example, a donation of stock in a donor's closely held corporation has been deemed tobe complete when the donor physically delivered the stock certificates to a charity.5

The Mailbox Rule

Under the "mailbox rule," if a donor instead mails a properly endorsed stock certificate to a charity or to the charity's agent,

the gift is effective on the date of mailing, provided that the certificate is received in the ordinary course of the mails.6

Inaddition, many charities receiving gifts of certificated stock recommend that donors mail an unendorsed stock certificate inone envelope, and an executed stock power in a second envelope. Donors should be aware that in this situation, the gift willnot be effective for federal income tax purposes until the date that the stock power is placed in the mails.

Using a Broker or Other Agent

In today's financial marketplace, however, the more common practice is for donors to use the services of a broker (or otheragent) in making a gift of stock, including restricted stock. In these circumstances, a donor should be aware of theimplications of using a broker (or other agent) to effect such a gift. For example, if a donor delivers a properly endorsed stockcertificate to a bank or broker acting as the donor's agent, or to the issuing corporation of such stock (or its agent), fortransfer of the certificate into a charity's name, the gift is complete only when the stock is actually transferred on the booksof the corporation, and not when the donor gives the transfer instructions to the bank, broker, issuing corporation or otheragent.7 Thus, when a donor instructs her agent on December 30th to transfer certain stock to a charity, but the issuingcorporation does not enter the transfer into its books until January 13th, the transfer of stock is deemed complete and

effective for federal income-tax purposes as of January 13th, for only then is the stock placed beyond the donor's control.8Stated differently, in such a case, the donor is not entitled to claim a tax deduction in the tax year in which she gave theinstructions, but only after the close of the next tax year in which the gift was "completed." In addition, a donor's deposit ofstock certificates in a brokerage account with instructions to her agent to transfer the stock to a charity does not constitute anunconditional delivery necessary to make a completed gift, as the broker is acting as the donor's agent.9Stock Held in "Street Name"

Moreover, although not necessarily relevant for gifts of restricted stock, publicly traded stock is often held in "street name,"meaning that such shares are registered on the books of central clearinghouses, such as The Depository Trust Company,under the name of the brokerage house in which the donor has an account and not in the donor's name. The holding ofshares of stock in street name also affects the determination of the date of a gift. For example, if stock registered in streetname is transferred from a donor's account at a certain brokerage house to a charity's account at the same brokerage house,the transfer is not effective for federal income-tax purposes until the stock has been transferred into the account of thecharity on the books of the brokerage house, even if the brokerage house allows the charity to sell the stock prior to

recordation of its ownership of the stock on the books of the brokerage house.10 This will have the effect of delaying thetiming of donor's charitable contribution tax deduction until the transfer has been reflected on the books of the brokeragehouse, a process that could be lengthy. Valuing a Gift of Restricted Stock

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A donor making a contribution of property, including restricted stock, to an organization exempt from federal income taxationunder section 501(c) and classified as a public charity under section 509(a) generally will be entitled to claim a charitablecontribution deduction in an amount equal to the fair market value of the restricted stock as of the date the contribution ismade, provided the restricted stock has been held by the donor as a capital asset for more than one year.11 Valuation ofrestricted stock is more complicated than valuation of publicly traded stock, however. Specifically, even if the issuer of the

restricted stock has already conducted a public offering of the class of stock contributed to the public charity, a discount maybe applied to the public trading price of such stock in determining the fair market value of the restricted shares.

The Concept of "Appraised Fair Market Value"

In general, the Internal Revenue Service (the "IRS") has not provided any specific guidance regarding whether a donor makinga contribution of restricted stock to a public charity is entitled to a full fair market value charitable contribution deduction.However, a donor may look to several Code provisions, Treasury Regulations and IRS authorities for guidance. First, forpurposes of IRS Form 8283, Noncash Charitable Contributions ("IRS Form 8283"), and the preparation of a qualified appraisal,12 the IRS has defined the term "appraised fair market value" by reference to the general rule of Treas. reg. section1.170A-1(c)(2). This general rule provides that the fair market value of a charitable contribution of property other than moneyis the price at which the property would change hands between a willing buyer and a willing seller. Treas. reg. section1.170A-1(c)(3) further provides that if a donor makes a charitable contribution of property at a time when the donor could notreasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is theamount for which the quantity of property contributed would have been sold by the donor at the time of contribution. Incontrast, Treas. reg. section 20.2031-2, which is often used to determine the valuation of publicly and non-publicly tradedstock and bonds for estate and gift tax purposes, provides that, in the case of stock or bonds for which there is a market on astock exchange or in an over-the-counter market, the mean between the highest and lowest quoted selling price on thevaluation date is the fair market value of the stock or bonds. Treas. reg. section 20.2031-2 further provides that in the case ofstock or bonds for which actual sales, bid and asked prices are unavailable, fair market value is to be determined by takingcertain factors into consideration, including general factors such as the issuing company's position in its industry and itsmanagement, and specific factors such as the company's net worth (in the case of stock) or interest yield and the date ofmaturity (in the case of bonds).

Revenue Ruling 59-60

Next, a donor may look to Revenue Ruling 59-60,13 which sets forth factors to be used in valuing the stock of closely heldcorporations for estate and gift tax purposes, for guidance in valuing a gift of restricted stock. These factors include (i) thenature of the business of the issuing corporation and the history of the enterprise from its inception; (ii) the book value of thestock and the financial condition of the issuing corporation; (iii) the earning capacity and dividend-paying capacity of theissuing corporation; (iv) sales of the stock and the size of the block of stock to be valued; and (v) the market price of stocks ofcorporations engaged in the same or a similar line of business, which stocks are actively traded on an exchange orover-the-counter.

IRS Private Letter Rulings Regarding "Qualified Appreciated Stock"

The IRS has provided some guidance as to whether a contribution of restricted stock eligible for resale pursuant to Rule 144of the Securities Act of 1933, as amended (the "Securities Act")14 to a private foundation qualifies as a contribution of"qualified appreciated stock."15 Specifically, in three separate private letter rulings,16 the IRS found that a donor making acontribution of restricted stock to a private foundation would be entitled to treat such stock as "qualified appreciated stock"and therefore be allowed to claim a full fair market value deduction for the contribution. In each ruling, the applicantsrepresented to the IRS that the stock being contributed, although not registered pursuant to the Securities Act, could betransferred free of resale restrictions, except for the volume restrictions contained in Rule 144(e). These volume restrictionslimited the aggregate sales of the restricted stock permitted to be made by the donor and private foundation to a specified

number of shares during any three-month period. In light of this restriction, the donor and the private foundation had enteredinto an agreement pursuant to which the donor would be prohibited from making any disposition of the contributed stock ifsuch disposition would impinge the private foundation's ability to sell the contributed stock.17

Given the IRS's position in these rulings, a donor's tax advisor should be able to advise the donor that a full fair market valuededuction is appropriate for a contribution of restricted stock to a public charity or a private foundation, if (a) the donor andthe charity or foundation, as the case may be, have entered into a contractual arrangement pursuant to which the charity orfoundation is effectively not restricted from freely transferring the contributed stock, despite the aggregate volume limitationcontained in Rule 144 of the Securities Act, and (b) no other resale restrictions apply.Substantiating a Gift of Restricted Stock

General Requirements

In general, a donor must substantiate a gift of restricted stock to a charity by obtaining a receipt from the charity containing

the following information: (i) the name of the charity; (ii) the date and location of the contribution; (iii) a description of theproperty (e.g., restricted stock) in "detail reasonably sufficient under the circumstances;" and (iv) a description and good-faithestimate of the value of goods or services provided, if any, by the charity in consideration for the gift of stock received.18 In

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addition, the donor must maintain written records setting forth (i) the manner of acquisition of the contributed stock (i.e.,purchase, gift, bequest, inheritance, etc.), (iii) the approximate date of acquisition of such stock, and (ii) the cost or otherbasis of the stock.19

Gifts of Non-Publicly Traded Stock or Securities Having a Value in Excess of $5,000

Furthermore, the IRS imposes particular substantiation and information-reporting requirements on certain gifts of "non-

publicly traded stock" or "non-publicly traded securities." As explained in further detail below, if the value of a gift ofrestricted stock exceeds $5,000, a donor is required to complete all or a portion of IRS Form 8283, and attach such Form toher federal income tax return for the year of the gift. For purposes of IRS Form 8283, non-publicly traded stock or securitiesare defined as any stock or securities of a corporation which are not "publicly traded securities."20 Publicly traded securitiesare defined as securities for which market quotations are readily available on an established securities market.21

However, stock or securities that otherwise fall within the definition of publicly traded securities will not qualify as such if theyare subject to any restrictions that materially affect the value of the securities to the donor or prevent the securities frombeing freely traded.22 Although neither the IRS nor the courts have issued any direct legal authority as to whether restrictedstock constitutes Non-Publicly traded stock, presumably any such stock that could be considered "qualified appreciatedstock" for purposes of the charitable contribution deduction (as discussed above) could also qualify as a publicly tradedsecurity, given that the charity would effectively not be restricted from freely transferring the stock.

In order to claim a charitable contribution deduction, a donor is required to obtain a "qualified appraisal" for any gift ofNon-Publicly traded stock or securities the value of which exceeds $10,000.23 A qualified appraisal must be prepared andsigned by a "qualified appraiser" and contain specified information, including (i) a description of the property (e.g., therestricted stock), (ii) the date or expected date of contribution, (iii) the terms of any agreement or understanding thatrestricts temporarily or permanently a charity's right to use or dispose of the stock, (iv) the appraised fair market value of thestock as of the date of contribution,24 (v) the method of valuation used by the qualified appraiser, (vi) the specific basis for thevaluation, and (vii) the qualifications of the qualified appraiser preparing the appraisal.25 In selecting a qualified appraiser, thedonor must ensure that such individual either holds herself out to the public as an appraiser or performs appraisals on aregular basis.26 None of the donor, the charity or any party to the transaction in which the donor acquired the property beingappraised may serve as the qualified appraiser.27 In addition, except under limited circumstances, a donor may not pay aqualified appraiser a fee based on a certain percentage of the appraised value of the contributed property.28

A donor must attach a fully-completed appraisal summary29 on IRS Form 8283 to her federal income tax return for the year ofthe gift.30 The donor must arrange for the appraisal summary to be signed and dated by both the charity and the qualifiedappraiser.31

If a donor is making a gift of Non-Publicly traded stock or securities and is claiming a charitable contribution deduction in anamount greater than $5,000 but not exceeding $10,000, she does not need to submit a qualified appraisal to the InternalRevenue Service.32 The donor is instead required to attach a partially-completed appraisal summary33 on IRS Form 8283 toher federal income tax return for the year of the gift.34 The donor must arrange for the partially-completed appraisal summaryto be signed by the charity.

Issues for the Charity to Consider When the Donated Stock Can Be Sold

Perhaps the most important distinction between restricted and publicly traded stock relates to liquidity. If shares of stock of acompany have not been registered with the SEC, then the law significantly restricts the sale and distribution of that stock. Theshares may only be sold in a discrete transaction such as a "private placement" or pursuant to another exemption fromregistration under the Securities Act, including Rule 144 under that Act (discussed below). Serious penalties await a companyand other parties who sell restricted stock in violation of the terms of the Securities Act. As a result, a charity that receives a

gift of restricted stock will typically be bound by substantial restrictions on resale and transferability. In fact, the sharesreceived by the charity may contain a "legend" printed on the certificate that denotes that the shares are subject torestrictions on resale. Often the legend will make reference to a stockholders agreement, and indicate that the shares aresubject to the terms of this agreement. A stockholders agreement, or similar contract, is an agreement among the companyand its initial stockholders, and typically applies to any subsequent transferee of the shares. The charity should request to seeany stockholders agreement and/or any other instrument that governs its rights as a stockholder.

To protect against a wider distribution that might violate the securities laws, the stockholders agreement will typically containa representation from the stockholders that the shares are being acquired for "investment purposes" and not with a "view toresale or distribution." Furthermore, a stockholders agreement will typically provide that the stockholder may not transfer thestock without the company's prior consent. Companies may reserve the right to withhold that consent for any reason or theymay require an opinion of counsel from the stockholder that the sale of the stock will not be in violation of the securities laws.The Persons To Whom Restricted Stock Can Be Sold

In order to comply with the securities laws, a company will be concerned not just with the number of stockholders who own itsstock prior to a public offering, but also the "type" of investor. The company will want to ensure that its stockholders can bearthe economic risk of the investment and have enough knowledge and experience in financial affairs to be sufficiently capable

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of evaluating the risks of an investment. In other words, the company seeks to ensure that the stockholders are"sophisticated" investors. If the charity is being asked to make such representations as a donee, the charity should evaluatewhether it is indeed comfortable making such representations. Furthermore, prior to any resale or transfer by the charity, thestockholders agreement would most likely require the intended buyer to make the same representations. Restricted StockSubject to a "Right of First Refusal"

Even if the charity is permitted to sell its shares under the stockholders agreement and it can identify a purchaser whoqualifies as a "sophisticated" investor, the charity might not be able to sell to that investor. Consistent with a company'sdesire to keep tight controls over the number and identity of its stockholders prior to a public offering, the charity may bebound by a "right of first refusal." A right of first refusal obligates a stockholder to notify the company of an intended sale ortransfer. Within a certain time frame, the company has the option of purchasing the shares the stockholder intends to sell,typically at the same price the stockholder intends to sell to its buyer. Some stockholders agreements also provide that to theextent the company does not exercise the right of first refusal, the other stockholders then have the option to purchase suchshares. Only after the company and the other stockholders exercise their rights is the stockholder free to sell to its intendedbuyer. Restricted Stock Subject to a "Right of Co-Sale" or a "Tag-Along" Right

Even if the company or the other stockholders do not exercise their right of first refusal, the charity may be restricted in thequantity of shares it may sell by a "right of co-sale" or a "tag-along" right. In order to maintain consistent rights among itsstockholders, stockholders agreements often provide that other stockholders may participate in the sale to the intendedbuyer, thus reducing the number of shares the charity may sell to its buyer. Again, after notice of an intended sale andexercise of any refusal rights, the other stockholders may indicate, within a certain time frame, their desire to sell some oftheir shares as well. Typically, the other stockholders may participate in the sale pro rata based on the relative number ofshares of the company they own. Restricted Stock Subject to "Demand Registration Rights" or "Piggy BackRegistration Rights"

As discussed above, simply because a company has decided to conduct a public offering of its shares does not automaticallymean that the charity will be able to freely sell its shares. If the charity's shares are not included in the public offering, thenthe shares are still restricted. For this reason, it is important to know whether the shares donated to the charity are entitled to"demand registration rights" and/or "piggy-back registration rights."

Demand registration rights permit a certain percentage of the stockholders to demand that the company use its reasonablebest efforts to sell the stockholders' shares in a public offering. These rights are typically subject to a number of caveats, andin many cases are triggered only after the company has already conducted its initial public offering. Unlike demandregistration rights, piggy-back registration rights do not entitle the holder to initiate a public offering. Rather, piggy-backrights entitle the holder to elect to sell a certain number of shares as part of a public offering, once it has been determinedthat a public offering will occur. Market conditions and discussions with the company's underwriter might result in only a prorata share of the charity's shares being included in the offering. Restricted Stock Subject to a "Lockup" or "MarketStandoff"

If a charity still holds restricted stock after a public offering has been conducted, the shares held by the charity may besubject to a "lockup" or "market standoff" agreement, prohibiting the charity from selling any stock for a set period of timeafter the public offering, usually no more than 180 days.

Application of Rule 144 of the Securities Act

A charity that holds restricted stock might be able to resell the stock in reliance upon the provisions of Rule 144 of theSecurities Act. Rule 144 is a "safe harbor" provision of the federal securities laws that permits the public resale of restricted

stock if certain conditions are met.

In summary, the conditions are as follows:

(i) There must be adequate public information with respect to the company. Essentially, this means that Rule 144 is availablewith respect to companies that have already conducted a public offering of stock and are filing reports with the SEC and/orthe exchange upon which the company's stock is listed. The Rule contains precise criteria to satisfy this requirement.

(ii) A minimum of one year must elapse between the later of the date of the acquisition of the securities from the company orfrom an affiliate of the company and the resale of the securities. This does not necessarily mean that the charity must holdthe shares for one year before the shares can be sold pursuant to Rule 144. Rather, the Rule has "tacking" provisions. Inparticular, a charity that has received a gift of shares from an affiliate of the company will be deemed to have acquired theshares on the date the affiliate acquired the shares.35 For example, if the president of XYZ Corp. donates shares to the charityon January 1, 2001 and the president acquired the shares on January 1, 1997, the charity will be able to "tack" onto thepresident's holding period. The charity will be deemed to have acquired the shares on January 1, 1997 and will have satisfied

the holding period requirement.

(iii) The amount of securities sold by the charity, together with all sales during the preceding three months, may not exceed

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the greater of (A) one percent of the outstanding shares of the company as shown by the most recent report or statementpublished by the company; (B) the average weekly trading volume of the securities for a period of four weeks. For thesepurposes, the amount of shares sold by the charity and the donor in the same three-month period are aggregated. Therefore,as discussed earlier in this article under the heading "Issues for the Donor to Consider -- Valuing a Gift of Restricted Stock,"the donor and charity must communicate with each other regarding proposed sales or enter into a formalized agreement orunderstanding with respect to sales.

(iv) Sales must be made through a broker or market maker. (v) If the amount of securities to be sold during any three- monthperiod exceeds 500 shares or has an aggregate sales price in excess of $10,000, a Form 144 must be filed with the SECconcurrent with the sale. The form serves as a notification to the SEC to allow the SEC to monitor the operation of the Ruleand as an aid in detecting abuses.

The foregoing requirements will no longer apply if two years have elapsed since the later of the date the securities wereacquired from the issuer or from an affiliate of this issuer.36 In the example above, since the donor acquired the stock fromthe company in 1997 and the charity is permitted to tack onto the donor's holding period, the two year holding period willhave been satisfied and the charity will not have to fulfill the conditions outlined above.

As discussed earlier in this article under the heading "Issues for the Donor to Consider -- Substantiating a Gift of RestrictedStock," an appraisal summary on Form 8283 must be signed by the charity. If the charity signs an appraisal summary on Form8283 and subsequently the charity sells, exchanges, or otherwise dispose[s] of the restricted stock within two years of thedate of the charitable contribution, then the charity must complete and file Form 8282 with the IRS and furnish a copy of thisform to the donor. The filing of Form 8283 and Form 8282 theoretically allows the IRS to match the charity's reported salesprice with the amount deducted by the donor for the contribution of the restricted stock to the charity at a time when thedonor's federal income tax return will still be open. Form 8282 must be filed within 125 days after the date of disposition ofthe restricted stock by the charity.Conclusion

Donors and charities need to consider a number of issues when making and accepting gifts of restricted stock, including thetiming of the gift of restricted stock, the valuation of the stock, and the subsequent limitations often placed on a charityseeking to dispose of the stock. These issues, particularly the timing issue, may become more relevant to donors andcharities alike as the year-end approaches.

FOOTNOTES

END OF FOOTNOTES

2001 Simpson Thacher & Bartlett. All right reserved. Used by permission.

1.

Unless otherwise indicated, all "section" references are to the Internal Revenue Code of 1986, as amended .back

2.

Treas. reg. section 1.170A-1(b).back

3.

W.B. Neville v. Commissioner, T.C. Memo 1967-95.back

4.

Treas. reg. section 1.170A-1(b).back

5.

Carrington v. Commissioner, 476 F.2d 704 (5th Cir. 1973).back

6.

Treas. reg. section 1.170A-1(b). The "mailbox rule" applies when the donor uses the U.S. postal system and any otherIRS-approved "private delivery service," such as Federal Express or United Parcel Service. See Notice 2001-62, 2001-40 I.R.B.(Sep. 17, 2001).back

7.

Id.back

8.

Londen v. Commissioner, 45 T.C. 106 (1965)back

9.

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Ferguson v. Commissioner, 108 T.C. 244 (1997), aff'd174 F.3d 997 (9th Cir. 1999).back

10.

Morrison v. Commissioner, T.C. Memo 1987-112.back

11.

Section 170(e)(1).back

12.

A more detailed discussion of IRS Form 8283 and qualified appraisals appears later in this article under the heading "Issuesfor the Donor to Consider -- Substantiating a Gift of Restricted Stock."back

13.

1959-1 C.B. 237.back

14.

A more detailed discussion of Rule 144 of the Securities Act appears later in this article under the heading "Issues for theCharity to Consider -- Application of Rule 144 of the Securities Act."back

15.

In general, under section 170(e)(1), a donor making a contribution of property, including restricted stock, to a 501(c)(3)organization that has been classified as a private foundation under section 509(a) generally will be limited to receiving acharitable contribution deduction equal to the donor's adjusted tax basis in the contributed property. However, section170(e)(5) provides an exception to this general rule for gifts of "qualified appreciated stock" to a private foundation, as towhich a donor is entitled to a charitable contribution deduction in an amount equal to the fair market value of the contributedstock, provided that such stock has been held by the donor as a capital asset for more than one year at the time ofcontribution.back

16.

Private Letter Ruling 98-25-031 (June 19, 1998); Private Letter Ruling 97-34-034 (May 22, 1997); Private Letter Ruling94-41-032 (Oct. 14, 1994). A negative result was reached in Private Letter Ruling 92-47-018 (Aug. 24, 1992), where the stockbeing donated was subject to restriction under Rule 144 that prevented its sale or exchange with a third party prior to a datethat was subsequent to the date of contribution. Although a private letter ruling cannot be cited as legal precedent, it may beused as guidance as to the position the IRS may take with respect to a particular issue.back

17.

Id.back

18.

Treas. reg. section 1.170A-13(b)(1).back

19.

Treas. reg. section 1.170A-13(b)(3).back

20.

Treas. reg. section 1.170A-13(c)(7)(ix) and (x).back

21.

Treas. reg. section 1.170A-13(c)(7)(xi)(A).back

22.

Treas. reg. section 1.170A-13(c)(7)(xi)(C).back

23.

Treas. reg. section 1.170A-13(c)(2).back

24.

A description of appraised fair market value appears earlier in this article under the heading "Issues for the Donor to Consider-- Valuing a Gift of Restricted Stock."back

25.

Treas. reg. section 1.170A-13(c)(3). The appraisal must be made not earlier than 60 days prior to the date of contribution ofthe appraised property nor later than the due date (taking into account any extensions) of the tax return on which thecharitable contribution deduction is first claimed. Treas. reg. section 1.170A-13(c)(3)(i)(A).back

26.

Treas. reg. section 1.170A-13(c)(5)(i).back

27.

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Treas. reg. section 1.170A-13(c)(5)(iv).back

28.


29.

Pursuant to Treas. reg. section 1.170A-13(c)(4)(ii), the appraisal summary must include, among other things, (i) identifying

information of the donor, the charity, and the qualified appraiser, (ii) a description of the property (e.g., the restricted stock),(iii) the date of contribution, (iv) the manner and date of acquisition of the stock, (v) the donor's cost or adjusted tax basis inthe stock, and (vi) the appraised fair market value of the stock.back

30.

Id.back

31.


32.

Treas. reg. section 1.170A-13(c)(2)(ii).back

33.

Pursuant to Treas. reg. section 1.170A-13(c)(4)(iv), this partially-completed appraisal summary must include the followinginformation: (i) identifying information of the donor and the charity, (ii) a description of the property (e.g., the restrictedstock), (iii) the manner and date of acquisition of the stock, (iv) the donor's cost or adjusted tax basis in the stock, (v) the dateof contribution, and (vi) the amount claimed as a charitable contribution deduction. In addition, if the donor is taking theposition that the restricted stock constitutes "publicly traded securities," as discussed above, then she must also include theaverage trading price of the stock in the appraisal summary. Treas. reg. section 1.170A-13(c)(7)(ix)(B)(2)(iii) defines averagetrading price as the "mean price of all transactions (weighted by volume), other than original issue or redemptiontransactions, conducted through a United States office of a broker or dealer who maintains a market in the issue of thesecurity during a defined 'computational period.'"back

34.

Treas. reg. section 1.170A-13(c)(2)(ii).back

35.

The Rule defines as an "affiliate" of a company as any person that directly, or indirectly through one or more intermediaries,controls, is controlled by, or is under common control with the company.back

36.

This provision does not apply if the charity itself is an affiliate of the company or has been in the three months preceding theproposed sale. For example, if the president of XYZ Corp. is also the president of ABC Charity, then ABC Charity might bedeemed to be under common control with XYZ Corp. and therefore an affiliate of XYZ Corp. In that case, the conditionsoutlined above would continue to apply to ABC Charity's sale of XYZ Corp. stock.back

W.B. Neville v. Commissioner, T.C. Memo 1967-95.x1e[delim]x1efn4;;;bfn4;;;Treas. reg. section1.170A-1(b).x1e[delim]x1efn5;;;bfn5;;;Carrington v. Commissioner, 476 F.2d 704 (5th Cir.1973).x1e[delim]x1efn6;;;bfn6;;;Treas. reg. section 1.170A-1(b). The "mailbox rule" applies when the donor uses the U.S.postal system and any other IRS-approved "private delivery service," such as Federal Express or United Parcel Service. SeeNotice 2001-62, 2001-40 I.R.B. (Sep. 17, 2001).x1e[delim]x1efn7;;;bfn7;;;Id.x1e[delim]x1efn8;;;bfn8;;;Londen v.Commissioner, 45 T.C. 106 (1965)x1e[delim]x1efn9;;;bfn9;;;Ferguson v. Commissioner, 108 T.C. 244 (1997), aff'd 174 F.3d997 (9th Cir. 1999).x1e[delim]x1efn10;;;bfn10;;;Morrison v. Commissioner, T.C. Memo1987-112.x1e[delim]x1efn11;;;bfn11;;;Section 170(e)(1).x1e[delim]x1efn12;;;bfn12;;;A more detailed discussion of IRS Form

8283 and qualified appraisals appears later in this article under the heading "Issues for the Donor to Consider --Substantiating a Gift of Restricted Stock."x1e[delim]x1efn13;;;bfn13;;;1959-1 C.B. 237.x1e[delim]x1efn14;;;bfn14;;;A moredetailed discussion of Rule 144 of the Securities Act appears later in this article under the heading "Issues for the Charity toConsider -- Application of Rule 144 of the Securities Act."x1e[delim]x1efn15;;;bfn15;;;In general, under section 170(e)(1), adonor making a contribution of property, including restricted stock, to a 501(c)(3) organization that has been classified as aprivate foundation under section 509(a) generally will be limited to receiving a charitable contribution deduction equal to thedonor's adjusted tax basis in the contributed property. However, section 170(e)(5) provides an exception to this general rulefor gifts of "qualified appreciated stock" to a private foundation, as to which a donor is entitled to a charitable contributiondeduction in an amount equal to the fair market value of the contributed stock, provided that such stock has been held by thedonor as a capital asset for more than one year at the time of contribution.x1e[delim]x1efn16;;;bfn16;;;Private Letter Ruling98-25-031 (June 19, 1998); Private Letter Ruling 97-34-034 (May 22, 1997); Private Letter Ruling 94-41-032 (Oct. 14, 1994). Anegative result was reached in Private Letter Ruling 92-47-018 (Aug. 24, 1992), where the stock being donated was subject torestriction under Rule 144 that prevented its sale or exchange with a third party prior to a date that was subsequent to thedate of contribution. Although a private letter ruling cannot be cited as legal precedent, it may be used as guidance as to theposition the IRS may take with respect to a particular issue.x1e[delim]x1efn17;;;bfn17;;;Id.x1e[delim]x1efn18;;;bfn18;;;Treas.

reg. section 1.170A-13(b)(1).x1e[delim]x1efn19;;;bfn19;;;Treas. reg. section1.170A-13(b)(3).x1e[delim]x1efn20;;;bfn20;;;Treas. reg. section 1.170A-13(c)(7)(ix) and(x).x1e[delim]x1efn21;;;bfn21;;;Treas. reg. section 1.170A-13(c)(7)(xi)(A).x1e[delim]x1efn22;;;bfn22;;;Treas. reg. section

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1.170A-13(c)(7)(xi)(C).x1e[delim]x1efn23;;;bfn23;;;Treas. reg. section 1.170A-13(c)(2).x1e[delim]x1efn24;;;bfn24;;;Adescription of appraised fair market value appears earlier in this article under the heading "Issues for the Donor to Consider --Valuing a Gift of Restricted Stock."x1e[delim]x1efn25;;;bfn25;;;Treas. reg. section 1.170A-13(c)(3). The appraisal must bemade not earlier than 60 days prior to the date of contribution of the appraised property nor later than the due date (takinginto account any extensions) of the tax return on which the charitable contribution deduction is first claimed. Treas. reg.section 1.170A-13(c)(3)(i)(A).x1e[delim]x1efn26;;;bfn26;;;Treas. reg. section1.170A-13(c)(5)(i).x1e[delim]x1efn27;;;bfn27;;;Treas. reg. section 1.170A-13(c)(5)(iv).x1e[delim]x1efn28;;;bfn28;;;Treas. reg.

section 1.170A-13(c)(6).x1e[delim]x1efn29;;;bfn29;;;Pursuant to Treas. reg. section 1.170A-13(c)(4)(ii), the appraisalsummary must include, among other things, (i) identifying information of the donor, the charity, and the qualified appraiser,(ii) a description of the property (e.g., the restricted stock), (iii) the date of contribution, (iv) the manner and date ofacquisition of the stock, (v) the donor's cost or adjusted tax basis in the stock, and (vi) the appraised fair market value of thestock.x1e[delim]x1efn30;;;bfn30;;;Id.x1e[delim]x1efn31;;;bfn31;;;Treas. reg. section1.170A-13(c)(4).x1e[delim]x1efn32;;;bfn32;;;Treas. reg. section 1.170A-13(c)(2)(ii).x1e[delim]x1efn33;;;bfn33;;;Pursuant toTreas. reg. section 1.170A-13(c)(4)(iv), this partially-completed appraisal summary must include the following information: (i)identifying information of the donor and the charity, (ii) a description of the property (e.g., the restricted stock), (iii) themanner and date of acquisition of the stock, (iv) the donor's cost or adjusted tax basis in the stock, (v) the date ofcontribution, and (vi) the amount claimed as a charitable contribution deduction. In addition, if the donor is taking the positionthat the restricted stock constitutes "publicly traded securities," as discussed above, then she must also include the averagetrading price of the stock in the appraisal summary. Treas. reg. section 1.170A-13(c)(7)(ix)(B)(2)(iii) defines average tradingprice as the "mean price of all transactions (weighted by volume), other than original issue or redemption transactions,conducted through a United States office of a broker or dealer who maintains a market in the issue of the security during adefined 'computational period.'"x1e[delim]x1efn34;;;bfn34;;;Treas. reg. section1.170A-13(c)(2)(ii).x1e[delim]x1efn35;;;bfn35;;;The Rule defines as an "affiliate" of a company as any person that directly, orindirectly through one or more intermediaries, controls, is controlled by, or is under common control with thecompany.x1e[delim]x1efn36;;;bfn36;;;This provision does not apply if the charity itself is an affiliate of the company or hasbeen in the three months preceding the proposed sale. For example, if the president of XYZ Corp. is also the president of ABCCharity, then ABC Charity might be deemed to be under common control with XYZ Corp. and therefore an affiliate of XYZCorp. In that case, the conditions outlined above would continue to apply to ABC Charity's sale of XYZ Corp. stock.-->

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Documents

PGDC 12-01 Gifts of Restricted Stock