Gifting of stocks to a charity
Donor can deduct value of gift, while also avoid paying capital gains tax on shares
Q: I hold some oddlot (24.87) shares of NCR Corp. (the result of its spinoff many years ago from AT&T) in book-entry form. I recently received a modified Dutch auction buyback offering from NCR. I have in the past donated odd-lot shares of stock to various charities, enabling me to make contributions to them while avoiding capital gains taxes (not to mention the thought of trying to figure out my basis in the NCR stock makes my head spin.) Is there some way I can proffer my shares for purchase with the proceeds going directly to a charity, avoiding a capital gains event and allowing me to take a charitable deduction for 2015?
A. This question is a timely one as it allows me to discuss an underused planning strategy right before year-end. As you say, a gift of a capital asset to a charity allows the donor to deduct the fair market value (FMV) of the gift.
As a tax-exempt organization, the charity can then sell the stock and avoid paying any capital gains tax. The overall benefit to the donor is magnified because he can deduct the value of the gift and also avoid paying the capital gains tax.
As a simple illustration, assume that I want to donate $2,000 to a charity. I have $2,000 available, as well as stock that has a FMV of $2,000 and a tax cost of $500 to me.
My tax rate on ordinary income is 28 percent and on long-term capital gains it is 20 percent. I also itemize deductions.
A gift of $2,000 would save me $560 in tax, based on my 28 percent regular tax rate. A gift of the stock would also save me $560, but it would also allow me to avoid paying a $300 capital gain tax if I were to sell the stock myself.
The stock gift saves me a total of $860 in tax — $560 directly and $300 in an avoided tax. This is more apparent if I assume that I will sell the stock to get the funds to make the charitable gift. The sale would net me $1,700 after tax and I would need to use $300 from other sources to make the full gift.
The stock gift allows me to keep the $300 while still providing the charity with the full $2,000, as they can sell the stock without paying tax.
The ability to shift the stock gains to the charity is based on “fruit and tree” concepts, which is derived from an old tax doctrine that the fruit is taxed to the owner of the tree; if the tree is given, the fruit goes with it.
The famous jurist Learned Hand developed this metaphor of a tree and the fruit from that tree. The tree is the source of the income; the fruit is that income. He who controls the tree controls the production of the fruit and should then be the party taxed on the fruit.
Your past transfers gave the control of the “tree” to the charity so that the transfer did shift the capital gain to the charity, but only because they were given control of the stock.
Your current situation is a bit stickier. I think that, if you were to first proffer the shares in your name and then make the gift, you would be taxed on gains with a charitable deduction for the proceeds. So you would lose the benefit of shifting the capital gain to the charity.
The reason I say this is that, if the stock is subject to an agreement to sell before it is transferred, then the charity is simply given the right to the proceeds of a sale that has already been negotiated. No real control of the source of the income has been transferred.
Tax people sometimes distinguish such a transfer by continuing Judge Hand’s metaphor to say that the fruit has already ripened in the hands of the donor.
There are many cases on this issue precisely because it is often difficult to determine when the fruit has ripened to the point where it cannot be shifted to another. But I think your facts go too far.