IRS Applies Special Tax-Benefit Rule to Publicly Traded Stock

IRS Applies Special Tax-Benefit Rule to Publicly Traded Stock

In a recent private letter ruling (PLR 201848005, released Nov. 30, 2018), donors planned to contribute corporate stock regularly traded on a national securities exchange to their private foundation (PF). They represented to the Internal Revenue Service that: the stock was exempt from Securities and Exchange Commission Rule 144 and other SEC rules that would affect marketability; and they wouldn’t take any action that would be subject to insider-trading rules.

General Rules

Before we get to the IRS’ decision on the PLR, let’s review some general rules for gifts to PFs (other than private operating foundations [POFs]).

Income tax benefits for gifts to PFs are generally less favorable than those for gifts to public charities. Long-term appreciated securities, real estate and tangible personal property are deductible at cost basis only under Internal Revenue Code Section 170(e)(1)(B)(ii). Gifts of long-term appreciated securities, real estate and related-use tangible personal property to public charities are deductible at fair market value (FMV).

Special rule for pass-through foundations. A deduction for full FMV is allowed when the PF (within two and a half months following the year of receipt) gives an amount equal to all gifts described in the preceding paragraph to churches, schools, hospitals, public charities or POFs. IRC Section 170(b)(1)(D); Section 170(e)(1)(B)(ii); Treasury Regulations Section 1.170A-9(h)(2)(iv). Note. Unless tangible personal property is for a “related use, the deduction is limited to cost basis.”

Special rule for certain gifts of publicly traded securities (qualified appreciated stock). A full FMV deduction is allowed for gifts of long-term qualifying publicly traded stock. What’s qualified appreciated stock? Listed securities, of course. The IRS’ definition also includes mutual fund shares if quotations are published daily in readily available newspapers. Treas. Regs. Section 1.170A-13(c)(7)(xi)(A)(3). It also includes securities traded on a national or regional over-the-counter market. Treas. Regs. Section 1.170A-13(c)(7)(xi)(A)(2); PLR 9623018 (March 5, 1996). Gifts of stock subject to SEC Rule 144 restrictions, including volume and resale limitations, may not qualify for FMV deductibility. PLR 9746050 (Aug. 15, 1997). The contributed stock can’t be more than 10 percent of the corporation’s outstanding stock taking into account the current gift and earlier gifts by the donor and family members.

Carryovers for gifts qualifying for FMV deductibility. Excess gifts to PFs may be carried over until exhausted under the applicable deductibility ceiling for up to five years. IRC Section 170(b)(1)(B).

Ordinary income property gifts. As with public charities, gifts of ordinary-income and short-term property to PFs yield a deduction for cost basis or FMV, whichever is lower. Section 170(e)(1)(A).

Ceilings on deductibility for gifts to PFs. Cash and ordinary-income property are deductible up to 30 percent of adjusted gross income (AGI).

Gifts of long-term appreciated property to PFs—including those deductible at FMV under the marketable-securities rule. Deductible up to 20 percent of AGI. Section 170(b)(1)(D).

Carryover. A five-year carryover is allowed for all excess gifts to PFs. Section 170(b)(1)(B). Note. PLR 8824039 (March 21, 1988) (involving a charitable lead trust) suggested that the IRS doesn’t allow a five-year carryover when an excess gift is “for the use of” a PF.

Back to the PLR

Here’s the IRS’ analysis:

  • Under Section 170(e)(5)(B), the contributed shares are stock for which, as of the contribution date, market quotations are readily available on an established securities market.

  • The donors represented that the contributed shares at all times were held for more than one year. They also represented that, as of the contribution date, the FMV of the contributed shares exceeded the adjusted basis.
  • The donors won’t have contributed in aggregate more than 10 percent by value of the corporation stock to the PF when aggregated with prior gifts of the corporation to any private nonoperating foundation.

Based on the information submitted and representations made by the donors, the IRS ruled that, provided the requirements of Section 170 are otherwise satisfied, the shares of stock contributed to PF constitute “qualified appreciated stock” within the meaning of Section 170(e)(B).

IRS’ Caveats

  • The PLR is based on the facts and representations submitted by the donors and accompanied by a penalty of perjury statement executed by an appropriate party. It hasn’t verified any of the materials submitted in support of the request for rulings. Verification of the information, representations and other data may be required as part of the examination process.
  • Except as expressly provided herein, the IRS neither expresses nor implies an opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter:

  1. whether the contributed shares constitute a “charitable contribution” within the meaning of Section 170(c).

  2. the assignment of income doctrine. (The stock was held by the donors’ revocable trusts.)
  3. the excess business holdings within the meaning of IRC Section 4943(c).

  4. private inurement within the meaning of IRC Section 501(c)(3).

  5. any issues under Chapter 42 of the Code, affecting PFs.


© Conrad Teitell 2019. This is not intended as legal, tax, financial or other advice. So check with your advisor on how the rules apply to you.


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