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Publicly Traded Stock Exception for Gifts to Private Foundations Made Permanent

Congress passed, and President Clinton signed into law, legislation extending a host of business tax breaks, including a provision to make permanent the special rule contained in Sec. 170(e)(5) on the deductibility of contributions of qualified appreciated stock to private foundations.

The general rule of Sec. 170(e)(1)(B) is that taxpayers can deduct only their basis when they donate long-term capital gain property to a private foundation. However, Sec. 170(e)(5) permitted both individual and corporate taxpayers to obtain a fair market value (FMV) deduction for contributions of appreciated publicly traded stock to a private foundation as long as the contribution was made by June 30, 1998. The Tax and Trade Relief Extension Act permanently extended this special rule; it is effective retroactively for contributions of qualified appreciated stock to private foundations made after June 30, 1998. One limitation on this technique under Sec. 170(e)(5)(C) is that total donations made by the donor (and members of the donor's family) to private foundations of stock in a particular corporation may not exceed 10% of that corporation's outstanding stock.

Corporations can donate treasury stock to a private foundation and obtain an FMV deduction without relying on Sec. 170(e)(5). This approach may continue to be useful for non-publicly traded corporations. The rule in Sec. 170(e)(1)(B)(ii) limiting deductions to basis actually provides that, when a charitable contribution is made to a private foundation (other than a so-called conduit foundation described in Sec. 170(b)(1)(E)), the deduction is reduced by "the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value...." In the case of a sale or exchange by a corporation of its own stock (including treasury stock), Sec. 1032 provides that no gain or loss is recognized. Therefore, the cutback rule of Sec. 170(e)(1)(B) does not apply to donations by a corporation of its own stock to a private foundation; see Rev. Rul. 75-348.

Gifts by individuals of closely held stock or other non-publicly traded business interests (which never qualified for the now-resurrected exception under Sec. 170(e)(5)) may be made to so-called conduit foundations (described in Sec. 170(b)(1)(E)(ii)) with excess distribution carryovers to obtain FMV deductions. For a foundation to be treated as a conduit foundation eligible to be treated as a public charity (with resulting 30% of adjusted gross income (AGI) and FMV deductibility), all contributions received during the year must be distributed within the two and one-half month period following the close of the tax year or applied against excess distribution carryovers. If anything less than all contributions received is distributed, the foundation is not a conduit. If excess distribution carryovers are to be used, an election must be made under Regs. Sec. 53.4942(a)-3(c)(2)(iv).

A limited exception applies to this conduit rule. Solely for purposes of determining the FMV deductibility of property, the foundation only has to distribute an amount equal to property contributions (not all contributions) received during the year. The contributor would continue to be subject to the 20%-of-AGI limitation.

From Robert B. Coplan, Washington, DC

©1999 AICPA