By Kenneth H. Bridges, CPA, PFS June 2023
Charitable gifts of cash can provide a nice tax benefit. Charitable gifts of appreciated assets can provide an even greater tax benefit, as you can potentially get a deduction for the value of the property and have the appreciation forever escape tax.
This works great with publicly-traded stock, as the process is fairly clean, the value is readily available, and no appraisal is required under tax rules. Real estate can also work well, although an appraisal is required, and there can be disputes with the IRS as to value. But what about stock or LLC units in a privately-held company just prior to its sale? Yes, that can work as well, but it is a bit more tricky.
First, S-corp stock generally does not work well, because income from an S-corp (including gain from sale of its stock) is considered unrelated business taxable income (UBTI) for the charitable organization. C-corp stock and LLC/partnership units can work, but you must complete the gift to charity prior to the sale transaction getting to the point that it is a virtual certainty that it will close; and you must get a qualified appraisal and have your Form 8283 signed by both the appraiser and the charitable organization.
In a recent case (Hoensheid), the Tax Court provided a thorough review of the rules applicable to a pre-sale charitable gift of appreciated stock in a privately-held company; and provided a road map of how not to do it.
Having entered into a letter of intent for the sale of the company he owned with his two brothers, Mr. Hoensheid wanted to make a significant gift of a portion of his share of the proceeds to a donor advised fund (Fidelity Charitable Gift Fund). Mr. Hoensheid recognized that there were significant income tax benefits to instead making a gift of some of his shares prior to the sale, but, according to an email he sent, did not want to do so until he was “99% sure” the sale transaction was going to happen. While he made the transfer of shares to Fidelity Charitable prior to closing, he did not do so until after several things had occurred which made it quite clear to the Tax Court that there was virtually no chance of the transaction not closing. Specifically, the Boards of both the selling company and the buyer had approved the transaction, they had swept all of the cash out of the company, and they had paid significant change of control bonuses out to employees. Under these circumstances, the Tax Court ruled that Mr. Hoensheid was taxable on the gain from sale of the gifted shares.
Although, in the case of shares sold shortly after their receipt by a charitable organization, it might seem that the value is obvious, tax law requires that in the case of a charitable gift in excess of $5,000 of something other than cash or publicly-traded stock, you must get a “qualified appraisal” (which can be done anytime from 60 days prior to the gift until the due date of the related income tax return). Typically, the appraiser will arrive at a value that is a little less than the ultimate sales price, because of the necessity to take into account the possibility that the transaction might not have closed. In the Hoensheid case, Mr. Hoensheid had the appraisal done by the investment banker which represented his company in the sale transaction (because he was willing to do it for no additional fee). While the investment banker may have been the most knowledgeable person as to the value of the company, the Tax Court found that he did not meet the definition of “qualified appraiser” and the report he issued did not meet the requirements for a “qualified appraisal”. Accordingly, Mr. Hoensheid received no deduction for the charitable contribution.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.