Friday April 26, 2024

2.2.2 Gift/Sale of Stock

Current Charitable Gifts

Gift of Stock:  The gift/sale of stock is logistically quite easy to accomplish. Shares of stock are divisible.

Tax Benefits:  If a taxpayer were to sell appreciated stock, the difference between the fair market value and the cost basis would be gain.

Zero Tax Sale:   A donor may be interested in a zero tax sale. In most circumstances, the gift of approximately one-third of the shares will result in a zero tax sale.

Gift of Stock


The gift/sale of stock is logistically quite easy to accomplish. Shares of stock are divisible. Most shares of public stock are now held in street accounts. The desired number of shares may be transferred directly through a financial services firm to the qualified charity.

For publicly held shares that have appreciated, there will be a bypass of gain and an income tax deduction. The deduction is the mean between the high and low sales on the date of the gift. Reg. 20.2031-2(b)(1). For public securities held for over one year, the deduction will be a 30% type at fair market value. If the securities are short-term, the deduction will be limited to cost basis. Sec. 170(e)(1).

Privately held shares of stock may also be transferred to charity. If the privately held stock is valued at greater than $10,000, a qualified appraisal is required. Reg. 1.170A-13(c). In addition, with gifts of privately held stock, the donor should recognize that there may be a discount for minority interest or lack of marketability. The appraiser should both value the stock and determine the discount, if any.

Tax Benefits


If a taxpayer were to sell appreciated stock, the difference between the fair market value and the cost basis would be gain. If the gain is long-term, it would be taxable at 15%. However, the gift/sale can reduce taxes in most cases by 50% to 70%. The combination of the bypass on gain on the shares gifted to charity plus the charitable income tax deduction will dramatically reduce the tax payable.

The charitable deduction will normally be an appreciated property-type deduction usable to 30% of adjusted gross income. The deduction will save tax at the top ordinary rate. However, the capital gain will be taxed at the much lower capital gains rate. A gift of one-fifth of the shares will typically reduce the tax by 60%.

Zero Tax Sale


A donor may be interested in a zero tax sale. In most circumstances, the gift of approximately one-third of the shares will result in a zero tax sale. With a gift of one-third, the capital gains tax may be reduced by one-third, and the charitable deduction on that gifted portion that saves tax at the top ordinary rate will frequently offset the entire tax payable on the gain portion. This is because the capital gains tax rate is much lower than the ordinary income tax rate. If the tax savings from the charitable deduction equal the tax payable on the capital gain, there will be a zero tax sale.

Note that the zeroing of taxes may not always occur in one year. While all gain will be recognized the first year, the 30% of AGI limitation on the charitable gift deduction may require the deduction be spread over two to six years. However, while the taxpayer may be required to pay tax the first year, the tax savings from the carry forward reported in future years could lead to a net zero tax results over several years.

Example 2.2.2A

Beth Larson purchased stock in a retail company seven years ago for $20,000. During the past seven years, the company has experienced very good growth and the stock is now valued at $100,000.

Beth would like to diversify and plans to sell the stock. However, she would like to reduce the tax on the sale by at least 60%. She transfers 200 of her 1,000 shares to her favorite charity. The value of the property transferred is $20,000. She then sells the remaining $80,000 worth of stock, with a basis of 20% of value, and reports a long-term capital gain of $64,000.

Fortunately, the $20,000 deduction saves tax at her marginal rate. The cash she receives minus the tax due results in a balance of about 70,000. She nets more than if she had sold the stock and written a check for the fall tax due.

Case Studies on Gift/Sale of Stock

In-Kind Distributions to Donors, Part 1 of 2:   Jim Thompson, a retired engineer, and his spouse Logan Thompson, a retired nurse, are currently considering funding a term-of-years charitable remainder unitrust with Americans for the Arts charity. Americans for the Arts is raising money for the construction of a new building which would house a state-of-the-art theatre and museum. The Thompsons, while retired, are active investors and have amassed quite a fortune over the past few years. In particular, they have investments in numerous established technology companies that have quadrupled in value over the past two years. They would like to use $800,000 of stocks with a cost basis of $100,000 to fund a five-year CRUT with a 15% payout. However, they believe these companies are great investments with acceptable risk and prefer that the trustee of the CRUT not sell these stocks. Furthermore, the Thompsons would like their CRUT payouts to be the actual stock - an in-kind distribution - as opposed to cash payouts. Thinking creatively, the Thompsons then wonder if such a distribution would avoid capital gain since technically the stock has never been sold.

Stock Unitrust Payouts to Donors:   Jim Thompson, a retired engineer, and his wife Janet Thompson, a retired nurse, are considering funding a term-of-years charitable remainder unitrust (CRUT) to benefit their favorite charity. Their favorite charity is raising money for the construction of a new building which would house a state-of-the-art theatre and museum. The Thompsons are active investors and have amassed quite a portfolio over the past few years. In particular, they have an investment in a medical services company that has quadrupled in value. They would like to use $800,000 of stock with a cost basis of $200,000 to fund a five-year CRUT with a 15% quarterly payout. However, they believe this company is a great investment with acceptable risk and prefer that the trustee of the CRUT not sell this stock. Furthermore, the Thompsons would like their CRUT payouts to be the actual stock – an in-kind distribution – as opposed to cash payouts. Thinking creatively, the Thompsons then wonder if such a distribution would avoid capital gain taxation since technically the stock has never been sold.

Can the Thompsons accomplish their goal of a tax-free 'in-kind' distribution of their technology stock? What are the tax consequences to the CRUT and to the Thompsons with this transaction?

Related Topics on Gift/Sale of Stock

2.1.1  Bargain Sale to Charity:    A bargain sale occurs when an individual transfers an asset to charity and receives less than the fair market value in return. The fair market value less the value returned is a charitable gift. The donor will benefit from the bypass of gain and receive a charitable deduction on the gift portion, but must recognize taxable gain on the value returned to him or her.

2.2.1  Gift/Sale of Land:    For donors who own appreciated property, a combination gift and sale can maximize tax savings. A portion of the land is transferred by deed to a charity. Normally, the charity and the donor then jointly sell their respective portions of the property. The donor bypasses gain on the gift portion and uses the charitable income tax savings from the gift portion to offset, in part or in whole, the tax payable on the real property not donated.

      Quiz-Basic



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