Charitable Donations of Marketable Securities

[sharonbret]

I keep seeing that you can donate appreciated marketable securities and the appreciation is not taxed to the donor.   I see the donation deduction, but am not satisfied that the capital gains are net taxed.  Does anyone have a citation to such a law?

[BobKamman]

What parts of IRS Publication 526, Pages 11-12, do you think are wrong?

[sharonbret]

I do not know that those pages are wrong.  I have no problem deducting the FMV, but show me where in your pages it says you do not have to take into account the income side of things?  Your reference only talks about the deduction side of things.  I want something that says, "Oh, and you do not have  to recognize the income that would have been generated,  as if you had sold the stock."  By not recognizing the income and deducting the contribution at FMV, seems to me that you have  a double benefit, which I can't believe is the way it works.  I just want something that says this is not a problem, and  I can't find it.

[sharonbret]

For example, www.schwab.com says as follows, but I hate to depend on something on the web, I'd just like to know  how they arrive at the position:

Long-term capital-gain property

You can usually deduct the full fair market value of appreciated long-term assets you've held for more than one year, such as stocks, bonds or mutual funds. In addition, if you donate stocks or other investments, you pay no capital gains tax.

Donating investments—especially highly appreciated securities—instead of cash can be a very effective and tax-efficient way to support a charity. Generally, if your assets have appreciated in value, it’s best not to sell securities to generate the cash you need for a donation. Contributing the securities directly to the charity increases the amount of your gift as well as your deduction.

[sharonbret]

Or look at www.bogleheads.org which says below, and they reference the Pub 526 too, but I don't find anything in that publication for that you don't have to recognize  income too.:  

Donating appreciated securities

If you have appreciated stock or mutual funds in your taxable account, you will have to pay capital-gains tax if you sell them. However, by donating appreciated securities directly to a charity you can forgo paying tax as long as you have held the securities for more than one year. (The deduction is limited to 30% of your adjusted gross income for most charities, rather than the usual 50% limit; consult your tax advisor or see IRS Publication 526, Charitable Contributions for details.)

The benefit of this type of donation is equal to the value of the tax deduction. If you donate $10,000 worth of a mutual fund and you paid $5,000 for the shares, you avoid a $5,000 long-term gain, saving $750 at the 15% tax rate. The charity, since it is tax-exempt, can sell the shares itself and pay no tax.

Note that if you have shares with a loss, you should not donate them to charity; instead, you should sell them, claiming the capital loss which will reduce your taxable income, and then donate the sale proceeds to the charity.

[qbteachmt]

What income are you asking about: "I have no problem deducting the FMV, but show me where in your pages it says you do not have to take into account the income side of things?"

The donation at FMV is "Basis + Gain" already. What else is there?

[sjrcpa]

We all know it to be true. It has been this way for many, many years. Maybe it is in the IRC Section 170 Regulations.

[sharonbret]

Again, it is not the deduction amount that is the question.  We agree it is fmv of the marketable security that is deductible, and it is possible that the fmv is less than the original cost., and in that case the security would be sold and the proceeds donated.   I have just never found support for the proposition that the IRS says, "if you donate the marketable security, then you don't have to also recognize the gain."  Usually, the IRS makes you recognize the gain, which then gives you basis, and that is what is written off.  I can think of no other instance where there is this exception, except in this  one instance.  I just want to know what grants this exception.

[BobKamman]

As I asked earlier,

What parts of IRS Publication 526, Pages 11-12, do you think are wrong?

Amount of deduction—General rule. 

When figuring your deduction for a contribution of capital gain property, you generally can use the fair market value of the property.

[abctax55]

It's the whole "point" of donating appreciated stock.  The gain isn't taxed.

Otherwise, why would anyone bother?

[BobKamman]

Actually, there is a list as long as your arm of situations where it's not true.  Taxidermy, for example.  And patents and personal papers.  Professionals know when to spot these exceptions to the general rule.  

Let's say I have a desk that I bought at a yard sale for $25 but had appraised for $500.  I trade it to you for tax return preparation services.  Why do you have to report more than $25 income? Usually, the IRS makes me recognize the gain, which then gives me basis, so that is what I should deduct and you report. I can think of no other instance where there is this exception, except in this one instance. I just want to know what grants this exception. 

[qbteachmt]

If you buy a desk for $25 an it appraises for $500, you don't have taxable reportable gain. You have an increased Worth. Your basis still is $25. If you "trade" it for a service, you and that other person just agreed on the FMV of the two items: non-cash for service of the same value. This is just like the trailer example I used previously on this forum: If you bought a $30,000 trailer for $10,000, you have a $10,000 Asset and not a $30,000 Asset. If it truly was "worth" $30,000 then why didn't you pay $30,000 for it?

@sharonbretStill hasn't identified where is the "missing" value that you seem to determine is Income?

Try thinking through it like this: You have basis and not generating the gain by selling it first, means the gain is still invested in the stock. When you donate the stock, you just donated basis + gain, inclusive. You have Unrealized Gain, so you didn't get the benefit of "touching" the gain first, so you have No Income to report. You gave appreciated stock and you gave both parts of its value: Basis + gain = FMV.

[sharonbret]

I will look into this again.  I suspect that the answer is that there is no "sale or exchange" to trigger the income aspect.  Donations to a charity might not be a "sale or exchange" and therefore no gain is recognized/realized.  I was hoping to find authority on point, like §351, for instance.   It seems that it is something we all know, but can't remember the authority for the position, but I am satisfied the answer is that no gain is recognized/realized. 

Note what Master Tax Guide says on ¶1062A, page 426, "A capital contribution of capital gain property is generally limited to the fair market value of the property on the date of contribution, reduced my the potential long-term gain if: ..the property is contributed to certain private nonoperating foundations other than qualified appreciated stock (publicly traded stock that would produce long-term capital gain if sold);"

..without a citation

Again, it is the deduction side that is easy, its the income side that I am concerned about, but it seems there is no doubt that income is not imputed.  ....sorry, I am easily amused and don't get out much.  I will work on this weekend and will report.

[sharonbret]

I agree.  I will dig further

[itonewbie]

Not sure why you would question something that is not contentious and is so well-established.  Since the whole purpose of §170 is to encourage charitable giving, it should not be surprising that Congress decided to provide certain concession for the donation of appreciated properties.  That does not, however, mean there are no carve-outs under §170.

First, it should be clarified that appreciated stocks are not always deductible at FMV.  §170(e)(1)(A) very clearly stipulates that the deductible contributions of short-term capital gain properties are valued at FMV minus "gain that would not have been long-term capital gain".  Generally speaking, this would be the donor's cost basis.

For ordinary income and long-term capital gain properties, the amount deductible would be governed by §170(e)(1)(B).  Under this subparagraph, appreciated stocks with long-term capital gains are not always fully deductible either.  Where appreciated stocks are donated to nonoperating private foundations, subparagraph (B)(ii) would require the deduction to be adjusted for what would otherwise be long-term capital gain - the only exception is where the stock is a qualified appreciated stock defined under §170(e)(5)(B).  Nevertheless, it should be noted that not all publicly traded securities meet this definition.

It's only after the above are considered would you then refer to §170(f)(11) for valuation.  For purposes of this subsection, publicly traded securities (which is more broadly defined than qualified appreciated stock) are excepted from needing qualified appraisals where such contributions are valued at more than $5k.

[itonewbie]

Also, if you read the construct of §170, particularly the subsections cited above, there would have been no need for reference to capital gain properties or adjustments for what would otherwise be short or long term capital gains if the donor would have to recognize income because the taxpayer would then have full basis and could deduct the entire FMV.

[qbteachmt]

@itonewbie 

So, the Squirrel was wrong, and you can write off something you never wrote on? Ha ha ha...

[itonewbie]

@qbteachmtYes, you can (in this case), with some exceptions.

[sharonbret]

Ok, (See the next paragraph to skip all this)  here is why we don’t recognize income on appreciated property, usually stock.  Rev. Rul 55-138 as modified by Rev Rul 68-69.  It was cited as an example in S. Rep. #91-552, at 80.  The issue was more important in those days because the max tax rate was 70%.  This seems to be the only support on point. Congress could have changed the law, but hasn’t.  So I go back to the theory that there has not been an event for recognition/realization which is usually required in other tax transactions.  Rev Rul 55-138 doesn’t seem to be on point though, Revenue Ruling 55-138, C.B. 1955-1, 223, holds in part that the fair market value of property that is contributed to a charitable organization will be the replacement cost to the donor in his most favorable market.   Rev Rul 68-69 established another rule than replacement cost to value the donation and doesn’t seem to be on point either. 

Still 55-138 was cited in some cases where it was questioned if a donation of agricultural products triggered income.  At first, the rule was cited as: I.T. 3910, supra , holds (1) that the fair market value of agricultural products contributed by a farmer or other producer to an organization described in section 23(o) or section 23(q) of the Internal Revenue Code of 1939 is includible in the gross income of the donor.  Then the ruling cited a bunch of cases contrary to that proposition, and it held than that “In the light of the above cases it follows that no income is realized by a farmer or other producer by reason of his contribution of farm or other products to an organization described in section 23(o) or section (q) of the Internal Revenue Code of 1939.

So that is about as close as I can come to a citation.

BNA portfolio 521-3rd A-113 (2008) and Parker tax pro library.

[itonewbie]

I think what you have cited are irrelevant and outdated.  Those revenue rulings deal with agricultural products, which are ordinary income properties held for sale to customers and not capital assets.

Under the current tax code, deductions for the donation of such properties are governed by §1.170A-4, which requires the FMV to be reduced by the amount of gain that would have been "recognized as gain which is not long-term capital gain if the property had been sold by the donor at its fair market value at the time of its contribution to the charitable organization".

[sharonbret]

You wrote, "Under the current tax code, deductions for the donation of such properties are governed by §1.170A-4, which requires the FMV to be reduced by the amount of gain that would have been "recognized as gain which is not long-term capital gain if the property had been sold by the donor at its fair market value at the time of its contribution to the charitable organization"

That's wonderful and I have no problem with it, if I were talking about the amount of the gift. Again its the income side of things.  Can I get you off the deduction amount and get you to address the income side of things?

Again, I don't dispute the amount of deduction.

I'm referring to recognizing the gain that the donor would recognize if he sold. My citation is the discussion in BNA Portfolio 521-3d A-113 2008 I am sorry to say.  I wish I could afford the new stuff, but the principal is the same.  A-114 2nd full paragraph, column one, "Generally, not gain is recognized on the transfer of appreciated property, to a qualified charity......but they give no citation.  So too, estate and gift BNA portfolio 800-2nd, ....first column, at the bottom of the narrative, .....the income taxation of this gain might be avoided by a charitable transfer, with the present FMV .being ..deductible...  I hate the word, "might." ... but that there seems to be an exception for who the donee is... say a private foundation or a trust, as far as income recognition to the donor, but I did not pursue the matter.  Can you give me a citation to some authority?  I don't like the agriculture case either, but it did cite earlier cases that are not agriculture. maybe BNA should not have cited it, but it is the only thing apparently they could find.

Can you give me a citation, other than one talking about the deduction.

[itonewbie]

From previous responses...

Since the whole purpose of §170 is to encourage charitable giving, it should not be surprising that Congress decided to provide certain concession for the donation of appreciated properties. That does not, however, mean there are no carve-outs under §170. First, it should be clarified that appreciated stocks are not always deductible at FMV. §170(e)(1)(A) very clearly stipulates that the deductible contributions of short-term capital gain properties are valued at FMV minus "gain that would not have been long-term capital gain". Generally speaking, this would be the donor's cost basis. For ordinary income and long-term capital gain properties, the amount deductible would be governed by §170(e)(1)(B). Under this subparagraph, appreciated stocks with long-term capital gains are not always fully deductible either. Where appreciated stocks are donated to nonoperating private foundations, subparagraph (B)(ii) would require the deduction to be adjusted for what would otherwise be long-term capital gain - the only exception is where the stock is a qualified appreciated stock defined under §170(e)(5)(B). Nevertheless, it should be noted that not all publicly traded securities meet this definition. It's only after the above are considered would you then refer to §170(f)(11) for valuation. For purposes of this subsection, publicly traded securities (which is more broadly defined than qualified appreciated stock) are excepted from needing qualified appraisals where such contributions are valued at more than $5k.

Also, if you read the construct of §170, particularly the subsections cited above, there would have been no need for reference to capital gain properties or adjustments for what would otherwise be short or long term capital gains if the donor would have to recognize income because the taxpayer would then have full basis and could deduct the entire FMV.