Monday, May 20, 2024

Cicconi: The Key Factors That Affects Gifts of Equity to Charity

Rising trend: Donating stock to charity

Lora Cicconi is out with what promises to be a very useful piece in Tax Notes this morning. This article's title is in the headline.  I have not had time to read it yet but it does not appear to talk about donor due diligence. I might still forward it to my bosses at FAMU.  You need a subscription to read it but I know a guy who knows a guy.  Shoot me an email if you want it.  Meanwhile, here is the introduction:

An individual taxpayer’s closely held business is often their most valuable asset, making it an effective instrument to use for charitable planning. If a taxpayer contributes a portion of the equity in their business to a charitable vehicle before a sale of the business, there is an opportunity for the charitable vehicle — rather than the taxpayer — to recognize the gain on the sale, depending on the facts surrounding the transfer and the structure of the sale transaction.  This may lower the overall income tax burden for the taxpayer and the charitable vehicle combined compared with a cash contribution after the sale of a business. This lower tax charge comes with significantly more complexity and risk, however.

For example, the donor’s income tax deduction for the value of the transferred equity may be reduced by market discounts and the tax attributes of the business. Also, because noncash donations to charity are subject to lower adjusted gross income limits, for an extremely philanthropic taxpayer, the income tax benefit of donating equity rather than cash may be offset by the lower deductibility ceiling. Further, substantive income tax doctrines must be considered to ensure that the transfer of equity results in the expected tax consequences, and the income tax rules regarding allocation of gain from passthrough entities must also be taken into account.

Last, the charitable vehicle may recognize unrelated business taxable income from the holding or sale of the transferred equity, and excise taxes might also be applicable. The degree to which these considerations are present when a taxpayer transfers equity to a charitable vehicle depends on the type of charitable vehicle involved and the tax classification of the equity transferred to the vehicle. The focus of this report is on how these variations affect the analysis of the federal income and excise tax issues that arise when taxpayers contribute a portion of their business to a charitable vehicle.  The report begins by distinguishing between the forms of charitable vehicles and equity and then discusses how the identified issues are affected by those factors.

darryll k. jones

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