Gifts of Closely Held Stock

Gifts of closely held corporate stock may be attractive charitable gift vehicles for both the donor and the donee organization under the right circumstances. Carefully planned, such stock may also be used to fund a charitable remainder or lead trust. However, closely held stock is more difficult and expensive to value than publicly traded stock and an independent appraisal is typically necessary to substantiate the deduction. In addition, closely held stock is commonly subject to a buy-sell agreement among all shareholders. Therefore, it is imperative to review such agreements to ensure that the donor has the power to gift such stock to a charity. Further, state law may restrict ownership in professional corporations to natural persons licensed in a particular profession.

Donors generally receive charitable income and transfer tax deductions for the fair market value of the stock contributed. Unrealized appreciation in the stock is not taxed. The donor, therefore, is receiving a double benefit by making a gift of appreciated stock; full fair market deduction and non-recognition of gain. The income tax deduction in any one year will normally be limited to thirty-percent of the donor's adjusted gross income with a five-year carryover for gifts to a public charity and twenty-percent of AGI for gifts to private foundations. Gifts to private foundations must be carefully reviewed to comply with the self-dealing and excess business holdings limitations applicable to private foundations. Gifts of closely held stock to a public charity may be subject to excess benefit transaction requirements if the donor or a related party is a "disqualified person" with respect to the donee organization.

Then shareholders are planning to sell a corporation, or redeem a portion of its stock, a gift of appreciated corporate stock may be particularly appropriate prior to consummating the sale or redemption. Properly planned and executed, the donor gets a contribution deduction for the appreciated fair market value of the stock, and is not required to recognize taxable gain equal to the appreciation inherent in the gifted shares. Upon consummation of the sale or redemption of the stock, the charity is a selling shareholder and may receive cash or marketable securities in exchange for the gifted shares. Careful legal and tax planning are required to avoid having the sale of the gifted shares attributed back to the donor and taxed as if she had first sold or redeemed the shares and then gifted cash.

From the standpoint of the charity a gift of regular "C" corporation stock is not necessarily problematic, even if closely held. Corporate income remains taxed at the corporate level and distributions to a "non-controlling" charitable shareholder are generally non-taxable dividend income. Otherwise tax-free interest, annuity, royalty, and rental income of a C corporation controlled by a charity may become taxable to the controlling charity, however. In addition, taxable income may arise at the corporate level if a controlled corporation is liquidated by a controlling charitable entity shareholder. Charitable beneficiaries of closely held stock must ensure that it is in the best interest of the charity to accept the gift, and not become party to a transaction having no underlying economic value, but which produces a tax deduction for the donor.

Generally, subject to the same benefits and limitations described above, gifts of S corporation stock are more problematic. Although certain charitable organizations are permitted S corporation shareholders, charitable remainder trusts and non-grantor charitable lead trusts are not. Further, since S corporations "pass through" their income to shareholders, S corporation income is generally taxed to the charitable shareholder as unrelated business taxable income.

©2008 Ronnie C. McClure, PhD, CPA