August 17, 2010
Authored by: Kim Civins
Last week, I posted about the income tax deductibility limitations for gifts of cash to a public charity versus a private foundation. Today: the same analysis but for long-term, capital assets that have a fair market value at the date of the donation higher than the donor’s cost basis in the property.
In general, the AGI* deductibility limitation for gifts of long-term holdings of appreciated assets made to public charities (or “50% charities”) is reduced to 30% unless the donor elects to step down the deductible contribution base of the long-term capital gain property from fair market value to cost basis. Therefore, in general, gifts of long-term appreciated marketable securities to a public charity can be deducted at their fair market value on the date of the gift, subject to the 30% AGI deduction limitation, and any overage may be carried over for up to five additional tax years, but if the donor elects to limit the deduction to the donor’s basis in the property as opposed to fair market value, the donor may increase the deductibility limitation to 50% of AGI.
If long-term capital-gain property is contributed to a foundation (a “30% charity”), deductions are limited to the property’s cost basis, and not fair market value if it exceeds basis.
An exception to this reduction rule applies to contributions of “qualified appreciated stock”. “Qualified appreciated stock” is defined as any stock of a corporation (1) for which market quotations were readily available on an established securities market as of the date the stock is contributed and (2) that was capital-gain property (i.e., a capital asset, the sale of which on the date of contribution would have resulted in the realization of long-term capital gain). The stock of any corporation is considered to be “qualified appreciated stock” only to the extent that the cumulative amount of such stock contributed by the taxpayer (and certain taxpayer related parties) to all private foundations that are not 50% charities does not exceed 10% of the value of all outstanding stock of the corporation. Shares of open-end mutual fund stock which the mutual fund must redeem at net asset value upon an investor’s demand are “qualified appreciated stock” where the net asset value of the shares is quoted on a daily basis in a newspaper of general circulation throughout the U.S.
The AGI deductibility limitation for gifts of long-term holdings of appreciated securities made to 30% charities like a private foundation is reduced to the lesser of (i) 20% of the taxpayer’s AGI for the taxable year or (ii) the excess of 30% of the taxpayer’s AGI for the taxable year over the amount of contributions of capital gain property to 50% charities. Charitable contributions of long-term capital gain property subject to this reduced limitation are taken into account after all other charitable contributions.
Therefore, in general, gifts of long-term appreciated marketable securities to a foundation can be deducted at their fair market value on the date of the gift, subject to the 20% AGI deduction limitation, and any overage may be carried over for up to five additional tax years, provided such securities are “qualified appreciated stock”. To the extent such assets do not meet this definition, such gifts may be deducted at the amount of their cost basis, subject to the same AGI deduction limitations and carry-forwards.
*Technically, “AGI” or “adjusted gross income” is not used for calculation of deduction limitations and an individual taxpayer’s “contribution base” is the more technically correct term. The term “contribution base” means AGI of the taxpayer computed without regard to any net operating loss carry-back to the taxable year. Even though for income tax deductibility purposes, most calculations rely on the “contribution base”, for ease of reference we refer to this amount as AGI, even though this might not result in exactly the same calculation.