Thursday April 18, 2024

4.12.4 Gifts of Stock to a Private Foundation

Gifts of Stock to a Private Foundation

Private Foundations:  Private foundations are growing rapidly in number.

Charitable Deduction Rules:  There are two basic rules for charitable gifts to private foundations.

Qualified Appreciated Stock:  If the gift of stock is not from a family business, but is from a larger corporation that is publicly traded, then the gift deduction may be based on fair market value.

Private Foundations

Private foundations are growing rapidly in number. The principal attraction of the private foundation is control by the donor and his or her family. However, a private foundation also is subject to numerous restrictions.

First, private foundations are prohibited from engaging in self-dealing. Self-dealing is any transaction between the foundation and a disqualified person, including a sale, lease, loan or other transaction. Sec. 4941(d)(1). A donor is a disqualified person as are his or her lineal ancestors or descendants and their spouses. Sec. 4946(d).

Second, a private foundation must distribute annually a minimum percent of its income, generally 5%. Reg. 53.4942(a)-1(a).

Third, a private foundation may not have excess business holdings. This prohibition limits the time during which it may hold an excess level of stock in a business enterprise. Sec. 4943; Reg. 53.4943-2(a).

Fourth, a private foundation may not make investments that could jeopardize its charitable purpose. Sec. 4944; Reg. 53.4944-1(a).

Finally, a private foundation may not make expenditures to lobby or influence legislation. Sec. 4945; Reg. 53.4945-1(a).

These limitations are designed to insure that the private foundation does indeed serve a charitable purpose. In addition, there are other limitations on charitable deductions.

Charitable Deduction Rules

There are two basic rules for charitable gifts to private foundations. Rather than the 60% AGI limit for cash and 30% AGI limit for appreciated property that is applicable to public charities, the private foundations have much more restrictive limits.

Gifts of cash are deductible to 30% of adjusted gross income. Gifts of appreciated property are deductible to 20% of adjusted gross income. Sec. 170(b)(1)(B).

Therefore, capital gain gifts are limited to 20% of the contribution base. In addition, if there are added cash or appreciated gifts to public charities, the 30% limit for cash or 20% limit for appreciated property may be reduced further, so that the total deductions do not exceed 50% of AGI. The 20% deduction limit applies even if there is a reduced level of deduction for a specific gift. Sec. 170(b)(1)(D).

If privately-held stock or appreciated real estate is given to a private foundation, then there is an additional reduction. The gift of closely held stock to a private foundation results in a deduction only for the cost basis. Sec. 170(e)(1)(B)(ii). With a family business, there is very little basis in the stock and the deduction may be very minimal.

Qualified Appreciated Stock

If the gift of stock is not from a family business, but is from a larger corporation that is publicly traded, then the gift deduction may be based on fair market value. Sec. 170(e)(5). The "qualified appreciated stock" must be tradable on an established securities market and must be long-term capital gain. In addition, the cumulative gifts of qualified appreciated stock by one donor to a private foundation may not exceed 10% of the value of all outstanding stock in the company. Sec. 170(e)(5)(C).

Case Studies on Gifts of Stock to a Private Foundation

Zero Tax Greenco Bailout, Part 2: Bill and Clara Green consider themselves very fortunate. Bill was born in Estonia. When he was an infant, his parents immigrated to America. He attended high school and State College on the East Coast. After he received an engineering degree, Bill worked for two different companies on the East Coast. He met Clara, married and they have two children, Susan and Harry.