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Getting Started: Gift Strategy Using Closely Held Stock

At first, the idea of donating some of your closely held stock may sound a bit strange. After all, how could we, or any other charitable organization, benefit from such a gift?

Let's assume you're unable to make a substantial cash contribution out of your own pocket, but there is cash in the corporation from retained earnings. These have been taxed on the corporate level and, if distributed as dividends, would be taxed again on the individual level.

You cannot or will not sell the closely held stock to the public, but you decide to give some shares to The Foundation. We may then present the stock to your corporation for redemption. This redemption can be accomplished by using retained earnings for the purchase, letting us receive much-needed funds.

Are there any problems with this plan? The Internal Revenue Service has ruled that you cannot legally bind a charitable organization to go through with the redemption at the time it receives the shares. There can be no prearranged contract or agreement for the corporation to buy the stock. But the IRS accepts a tax court holding that a charitable organization may independently offer the donated stock for redemption.

A Typical Example
Phil owns virtually all of the stock in a company he founded. Its current valuation is $2 million. Phil's cost basis is zero because his original investment has long since been written off for tax purposes.

The corporation has $200,000 in retained earnings, and Phil is concerned that the IRS may question the retention of this amount and decide to impose a second tax on it. Moreover, he has wanted to make a major contribution to us. So, Phil gives us $200,000 worth of his stock, and both he and Sisters Hospital Foundation accomplish their goals.

He receives an income tax deduction of $200,000. (Note: When you claim a charitable contribution deduction for a donation of closely held stock valued at more than $10,000, its deductibility depends upon you obtaining and attaching to your tax return a qualified appraisal of the stock.)
He avoids federal taxes on capital gains plus the additional state taxes.
His corporation solves its potential accumulated earnings problem, including a potential federal penalty tax.
He retains full control of his company.
The charitable organization receives $200,000.

gifts of closely held stock

Impact on Ownership Percentage
Your gift of closely held stock will reduce your percentage interest in the corporation if you own less than 100 percent. If you own all of the stock, however, a gift of a portion followed by a redemption will leave you still owning 100 percent of the outstanding stock.

If you own less than 100 percent and the balance is held by family members whom you wish to benefit, the gift and redemption can be a tax-efficient method of increasing their percentage interests in the corporation.

Please call Julie Snyder at 716-862-1992, or e-mail us at jsnyder@chsbuffalo.org, for more information.

The information in this Web site is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to estate and income tax include federal taxes only. Individual state taxes and/or state law may impact your results.