Issues to Consider When Making and Accepting Gifts of Restricted Stock

Issues to Consider When Making and Accepting Gifts of Restricted Stock

Article posted in Publicly Traded Securities on 19 December 2001| comments
audience: National Publication | last updated: 16 September 2012
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Summary

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 article, 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 and public 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 at j_franklin@stblaw.com and d_shevlin@stblaw.com 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 will simultaneously arrange for the stock to be listed on a national securities exchange, such as The New York Stock Exchange or the NASDAQ. The shares that are registered with the SEC and listed on the relevant exchange are "publicly traded." All other shares are considered restricted stock. Absent any other restrictions, the federal securities laws permit charities that receive donations 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 of shares of a class of its stock; it does not necessarily register all of the outstanding shares of that class. For example, prior to its 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 a public offering of one million shares. The other one million shares of common stock remain restricted stock, even though there 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 substantiating and valuing a donor's gift. Those definitions are discussed later in this article under the heading "Issues for the Donor to Consider -- 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 such stock close to the end of the year. A donor's failure to complete the gift by December 31st will result in the delay of the donor'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 of restricted 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 that the donor has no legal right to recall the gift.3 A donor's gift of physical certificates of restricted stock is complete, and therefore effective for federal income-tax purposes, when a properly endorsed stock certificate is unconditionally delivered to a charity or to the charity's agent.4 For example, a donation of stock in a donor's closely held corporation has been deemed to be 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 In addition, many charities receiving gifts of certificated stock recommend that donors mail an unendorsed stock certificate in one envelope, and an executed stock power in a second envelope. Donors should be aware that in this situation, the gift will not 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 other agent) in making a gift of stock, including restricted stock. In these circumstances, a donor should be aware of the implications of using a broker (or other agent) to effect such a gift. For example, if a donor delivers a properly endorsed stock certificate to a bank or broker acting as the donor's agent, or to the issuing corporation of such stock (or its agent), for transfer of the certificate into a charity's name, the gift is complete only when the stock is actually transferred on the books of the corporation, and not when the donor gives the transfer instructions to the bank, broker, issuing corporation or other agent.7 Thus, when a donor instructs her agent on December 30th to transfer certain stock to a charity, but the issuing corporation 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.8 Stated differently, in such a case, the donor is not entitled to claim a tax deduction in the tax year in which she gave the instructions, but only after the close of the next tax year in which the gift was "completed." In addition, a donor's deposit of stock certificates in a brokerage account with instructions to her agent to transfer the stock to a charity does not constitute an unconditional delivery necessary to make a completed gift, as the broker is acting as the donor's agent.9

Stock 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 of shares of stock in street name also affects the determination of the date of a gift. For example, if stock registered in street name 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 the charity 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 the timing of donor's charitable contribution tax deduction until the transfer has been reflected on the books of the brokerage house, a process that could be lengthy.

Valuing a Gift of Restricted Stock

A donor making a contribution of property, including restricted stock, to an organization exempt from federal income taxation under section 501(c) and classified as a public charity under section 509(a) generally will be entitled to claim a charitable contribution deduction in an amount equal to the fair market value of the restricted stock as of the date the contribution is made, provided the restricted stock has been held by the donor as a capital asset for more than one year.11 Valuation of restricted 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 may be 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 making a 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, for purposes 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. section 1.170A-1(c)(2). This general rule provides that the fair market value of a charitable contribution of property other than money is the price at which the property would change hands between a willing buyer and a willing seller. Treas. reg. section 1.170A-1(c)(3) further provides that if a donor makes a charitable contribution of property at a time when the donor could not reasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is the amount for which the quantity of property contributed would have been sold by the donor at the time of contribution. In contrast, Treas. reg. section 20.2031-2, which is often used to determine the valuation of publicly and non-publicly traded stock and bonds for estate and gift tax purposes, provides that, in the case of stock or bonds for which there is a market on a stock exchange or in an over-the-counter market, the mean between the highest and lowest quoted selling price on the valuation date is the fair market value of the stock or bonds. Treas. reg. section 20.2031-2 further provides that in the case of stock or bonds for which actual sales, bid and asked prices are unavailable, fair market value is to be determined by taking certain factors into consideration, including general factors such as the issuing company's position in its industry and its management, and specific factors such as the company's net worth (in the case of stock) or interest yield and the date of maturity (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 held corporations for estate and gift tax purposes, for guidance in valuing a gift of restricted stock. These factors include (i) the nature of the business of the issuing corporation and the history of the enterprise from its inception; (ii) the book value of the stock and the financial condition of the issuing corporation; (iii) the earning capacity and dividend-paying capacity of the issuing corporation; (iv) sales of the stock and the size of the block of stock to be valued; and (v) the market price of stocks of corporations engaged in the same or a similar line of business, which stocks are actively traded on an exchange or over-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 144 of 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 a contribution 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 applicants represented to the IRS that the stock being contributed, although not registered pursuant to the Securities Act, could be transferred free of resale restrictions, except for the volume restrictions contained in Rule 144(e). These volume restrictions limited 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 entered into an agreement pursuant to which the donor would be prohibited from making any disposition of the contributed stock if such 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 value deduction is appropriate for a contribution of restricted stock to a public charity or a private foundation, if (a) the donor and the charity or foundation, as the case may be, have entered into a contractual arrangement pursuant to which the charity or foundation is effectively not restricted from freely transferring the contributed stock, despite the aggregate volume limitation contained 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 the property (e.g., restricted stock) in "detail reasonably sufficient under the circumstances;" and (iv) a description and good-faith estimate of the value of goods or services provided, if any, by the charity in consideration for the gift of stock received.18 In 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 other basis 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 of restricted stock exceeds $5,000, a donor is required to complete all or a portion of IRS Form 8283, and attach such Form to her federal income tax return for the year of the gift. For purposes of IRS Form 8283, non-publicly traded stock or securities are defined as any stock or securities of a corporation which are not "publicly traded securities."20 Publicly traded securities are 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 they are subject to any restrictions that materially affect the value of the securities to the donor or prevent the securities from being freely traded.22 Although neither the IRS nor the courts have issued any direct legal authority as to whether restricted stock constitutes Non-Publicly traded stock, presumably any such stock that could be considered "qualified appreciated stock" for purposes of the charitable contribution deduction (as discussed above) could also qualify as a publicly traded security, 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 of Non-Publicly traded stock or securities the value of which exceeds $10,000.23 A qualified appraisal must be prepared and signed by a "qualified appraiser" and contain specified information, including (i) a description of the property (e.g., the restricted stock), (ii) the date or expected date of contribution, (iii) the terms of any agreement or understanding that restricts temporarily or permanently a charity's right to use or dispose of the stock, (iv) the appraised fair market value of the stock as of the date of contribution,24 (v) the method of valuation used by the qualified appraiser, (vi) the specific basis for the valuation, and (vii) the qualifications of the qualified appraiser preparing the appraisal.25 In selecting a qualified appraiser, the donor must ensure that such individual either holds herself out to the public as an appraiser or performs appraisals on a regular basis.26 None of the donor, the charity or any party to the transaction in which the donor acquired the property being appraised may serve as the qualified appraiser.27 In addition, except under limited circumstances, a donor may not pay a qualified 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 of the gift.30 The donor must arrange for the appraisal summary to be signed and dated by both the charity and the qualified appraiser.31

If a donor is making a gift of Non-Publicly traded stock or securities and is claiming a charitable contribution deduction in an amount greater than $5,000 but not exceeding $10,000, she does not need to submit a qualified appraisal to the Internal Revenue Service.32 The donor is instead required to attach a partially-completed appraisal summary33 on IRS Form 8283 to her federal income tax return for the year of the gift.34 The donor must arrange for the partially-completed appraisal summary to 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 a company have not been registered with the SEC, then the law significantly restricts the sale and distribution of that stock. The shares may only be sold in a discrete transaction such as a "private placement" or pursuant to another exemption from registration under the Securities Act, including Rule 144 under that Act (discussed below). Serious penalties await a company and 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 shares received by the charity may contain a "legend" printed on the certificate that denotes that the shares are subject to restrictions on resale. Often the legend will make reference to a stockholders agreement, and indicate that the shares are subject to the terms of this agreement. A stockholders agreement, or similar contract, is an agreement among the company and its initial stockholders, and typically applies to any subsequent transferee of the shares. The charity should request to see any 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 contain a representation from the stockholders that the shares are being acquired for "investment purposes" and not with a "view to resale or distribution." Furthermore, a stockholders agreement will typically provide that the stockholder may not transfer the stock without the company's prior consent. Companies may reserve the right to withhold that consent for any reason or they may 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 its stock prior to a public offering, but also the "type" of investor. The company will want to ensure that its stockholders can bear the economic risk of the investment and have enough knowledge and experience in financial affairs to be sufficiently capable 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 evaluate whether it is indeed comfortable making such representations. Furthermore, prior to any resale or transfer by the charity, the stockholders agreement would most likely require the intended buyer to make the same representations.

Restricted Stock Subject 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 who qualifies as a "sophisticated" investor, the charity might not be able to sell to that investor. Consistent with a company's desire to keep tight controls over the number and identity of its stockholders prior to a public offering, the charity may be bound by a "right of first refusal." A right of first refusal obligates a stockholder to notify the company of an intended sale or transfer. 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 the extent the company does not exercise the right of first refusal, the other stockholders then have the option to purchase such shares. Only after the company and the other stockholders exercise their rights is the stockholder free to sell to its intended buyer.

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 the quantity of shares it may sell by a "right of co-sale" or a "tag-along" right. In order to maintain consistent rights among its stockholders, stockholders agreements often provide that other stockholders may participate in the sale to the intended buyer, thus reducing the number of shares the charity may sell to its buyer. Again, after notice of an intended sale and exercise of any refusal rights, the other stockholders may indicate, within a certain time frame, their desire to sell some of their shares as well. Typically, the other stockholders may participate in the sale pro rata based on the relative number of shares of the company they own.

Restricted Stock Subject to "Demand Registration Rights" or "Piggy Back Registration Rights"

As discussed above, simply because a company has decided to conduct a public offering of its shares does not automatically mean that the charity will be able to freely sell its shares. If the charity's shares are not included in the public offering, then the 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 reasonable best efforts to sell the stockholders' shares in a public offering. These rights are typically subject to a number of caveats, and in many cases are triggered only after the company has already conducted its initial public offering. Unlike demand registration rights, piggy-back registration rights do not entitle the holder to initiate a public offering. Rather, piggy-back rights entitle the holder to elect to sell a certain number of shares as part of a public offering, once it has been determined that a public offering will occur. Market conditions and discussions with the company's underwriter might result in only a pro rata share of the charity's shares being included in the offering.

Restricted Stock Subject to a "Lockup" or "Market Standoff"

If a charity still holds restricted stock after a public offering has been conducted, the shares held by the charity may be subject to a "lockup" or "market standoff" agreement, prohibiting the charity from selling any stock for a set period of time after 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 the Securities 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 available with respect to companies that have already conducted a public offering of stock and are filing reports with the SEC and/or the 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 or from an affiliate of the company and the resale of the securities. This does not necessarily mean that the charity must hold the shares for one year before the shares can be sold pursuant to Rule 144. Rather, the Rule has "tacking" provisions. In particular, a charity that has received a gift of shares from an affiliate of the company will be deemed to have acquired the shares on the date the affiliate acquired the shares.35 For example, if the president of XYZ Corp. donates shares to the charity on January 1, 2001 and the president acquired the shares on January 1, 1997, the charity will be able to "tack" onto the president'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 the greater of (A) one percent of the outstanding shares of the company as shown by the most recent report or statement published by the company; (B) the average weekly trading volume of the securities for a period of four weeks. For these purposes, 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 or understanding 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- month period exceeds 500 shares or has an aggregate sales price in excess of $10,000, a Form 144 must be filed with the SEC concurrent with the sale. The form serves as a notification to the SEC to allow the SEC to monitor the operation of the Rule and 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 were acquired from the issuer or from an affiliate of this issuer.36 In the example above, since the donor acquired the stock from the company in 1997 and the charity is permitted to tack onto the donor's holding period, the two year holding period will have 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 Restricted Stock," an appraisal summary on Form 8283 must be signed by the charity. If the charity signs an appraisal summary on Form 8283 and subsequently the charity sells, exchanges, or otherwise dispose[s] of the restricted stock within two years of the date of the charitable contribution, then the charity must complete and file Form 8282 with the IRS and furnish a copy of this form to the donor. The filing of Form 8283 and Form 8282 theoretically allows the IRS to match the charity's reported sales price with the amount deducted by the donor for the contribution of the restricted stock to the charity at a time when the donor's federal income tax return will still be open. Form 8282 must be filed within 125 days after the date of disposition of the 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 the timing of the gift of restricted stock, the valuation of the stock, and the subsequent limitations often placed on a charity seeking to dispose of the stock. These issues, particularly the timing issue, may become more relevant to donors and charities 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 other IRS-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. Ferguson v. Commissioner, 108 T.C. 244 (1997), aff'd 174 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 "Issues for 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 the Charity 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 a charitable contribution deduction equal to the donor's adjusted tax basis in the contributed property. However, section 170(e)(5) provides an exception to this general rule for gifts of "qualified appreciated stock" to a private foundation, as to which a donor is entitled to a charitable contribution deduction in an amount equal to the fair market value of the contributed stock, provided that such stock has been held by the donor as a capital asset for more than one year at the time of contribution.back

  16. Private Letter Ruling 98-25-031 (June 19, 1998); Private Letter Ruling 97-34-034 (May 22, 1997); Private Letter Ruling 94-41-032 (Oct. 14, 1994). A negative result was reached in Private Letter Ruling 92-47-018 (Aug. 24, 1992), where the stock being donated was subject to restriction under Rule 144 that prevented its sale or exchange with a third party prior to a date that was subsequent to the date of contribution. Although a private letter ruling cannot be cited as legal precedent, it may be used 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 of the appraised property nor later than the due date (taking into 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).back

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

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

  28. Treas. reg. section 1.170A-13(c)(6).back

  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 in the stock, and (vi) the appraised fair market value of the stock.back

  30. Id.back

  31. Treas. reg. section 1.170A-13(c)(4).back

  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 following information: (i) identifying information of the donor and the charity, (ii) a description of the property (e.g., the restricted stock), (iii) the manner and date of acquisition of the stock, (iv) the donor's cost or adjusted tax basis in the stock, (v) the date of contribution, and (vi) the amount claimed as a charitable contribution deduction. In addition, if the donor is taking the position that the restricted stock constitutes "publicly traded securities," as discussed above, then she must also include the average trading price of the stock in the appraisal summary. Treas. reg. section 1.170A-13(c)(7)(ix)(B)(2)(iii) defines average trading price 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 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 the proposed sale. For example, if the president of XYZ Corp. is also the president of ABC Charity, then ABC Charity might be deemed to be under common control with XYZ Corp. and therefore an affiliate of XYZ Corp. In that case, the conditions outlined above would continue to apply to ABC Charity's sale of XYZ Corp. stock.back

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