With more than half of all Americans now owning stock, it is not surprising that many of them are donating shares of stock to their church. As a result, it is important for church leaders and donors to be familiar with the tax rules that apply to stock donations. Unfamiliarity with these rules can result in additional taxes. This is the second article in a two-article series reviewing what donors and church leaders need to know. The first article appeared in the August 2001 edition of this newsletter, and addressed the following topics:
1. Why should donors consider donating stock to their church?
2. What about gifts of privately held stock?
3. What limitations apply to gifts of stock?
4. What about stock that has declined in value?
5. What about selling the stock and donating the proceeds?
This article will address four additional issues associated with gifts of stock.
As we have seen, donors who contribute publicly traded stock to a church or charity can claim a charitable contribution deduction in the amount of the fair market value of the donated shares, subject to the limitations discussed previously. The fair market value of donated stock is determined by (1) determining the “mean price” of the donated shares by adding the high and low quoted prices of the stock on the day of the gift, and dividing by two; and then (2) multiplying the mean price times the number of donated shares.
Key point. The date of a gift of stock is addressed in the income tax regulations as follows: “Ordinarily, a contribution is made at the time delivery is effected. The unconditional delivery or mailing of a check which subsequently clears in due course will constitute an effective contribution on the date of delivery or mailing. If a taxpayer unconditionally delivers or mails a properly endorsed stock certificate to a charitable donee or the donee’s agent, the gift is completed on the date of delivery or, if such certificate is received in the ordinary course of the mails, on the date of mailing. If the donor delivers the stock certificate to his bank or broker as the donor’s agent, or to the issuing corporation or its agent, for transfer into the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation.” Treas. Reg. 1.170A 1(b).
Caution. Donors often make gifts of stock at the end of the year by calling their stock broker and asking that the shares be transferred. Donors who expect a year-end charitable contribution deduction should make their desire clear when communicating with their broker. In some cases, brokers do not transfer donated shares until the beginning of the new year, resulting in the loss of any deduction for the previous year.
Donors can contribute shares of stock in a number of ways, including the following:
- By electronic transfer (if available).
- By physical transfer (personally or through the mail). For security purposes, donors usually transfer unsigned stock certificates, and separately execute a “stock power” form with a signature guaranteed by the donor’s bank or broker. The stock power form should be sent on the same day as the stock certificate, but in a separate envelope. If donated stock is held in the names of more than one person, all owners must sign the stock power form. If using the mail, donors should send all documents by registered mail.
- By a stock broker.
Caution. Donors who contribute stock to their church through a broker should be sure that the broker understands that they are donating the stock, not selling it. If the broker sells stock held by the donor for more than one year and transfers the proceeds to the donor’s church, rather than giving the shares directly to the church, the donor will have to pay capital gains tax on any gain in the value of the stock.
Donors generally determine the fair market value of donated mutual fund shares by multiplying the “net asset value” on the date of the gift times the number of donated shares.
Gifts of stock are subject to special substantiation rules. Note the following:
- A church is not an appraiser, and should never provide donors with a “value” for donated stock. Instead, provide a receipt that acknowledges the date of gift, the donor’s name, the number of shares given, and the name of the company.
- A donor who gives publicly traded stock valued at more than $5,000 is not required to obtain a qualified appraisal or complete a qualified appraisal summary (Section B of Form 8283).
- A donor who gives publicly traded stock valued at more than $500 must complete Section A, Part 1, of Form 8283. This requirement applies even if the stock is valued at more than $5,000 (in which case the stock is exempt from the qualified appraisal requirement).
- A donor who gives “nonpublicly traded stock” valued at $10,000 or less is not required to obtain a qualified appraisal and complete a qualified appraisal summary (Form 8283). However, donors who give nonpublicly traded stock valued at more than $10,000 must obtain a qualified appraisal of the stock no earlier than 60 days prior to the date of the gift, and they must also complete a qualified appraisal summary (IRS Form 8283) that summarizes the qualified appraisal and is enclosed with the tax return on which the deduction is claimed. Failure to comply with these requirements can lead to a loss of any charitable contribution deduction.
Example. A donor contributed “nonpublicly traded stock” worth more than $10,000 to a church, but obtained no qualified appraisal and attached no qualified appraisal summary to the tax return on which the charitable contribution deduction was claimed. The Tax Court ruled that the donor was not entitled to a charitable contribution deduction even though there was no dispute as to the value of the donated stock. Hewitt v. Commissioner, 109 T.C.12 (1997).
Tip. Do not assume that donors are familiar with the substantiation rules that apply to gifts of stock. Church treasurers should obtain several copies of Form 8283 each January to give to persons who donate stock to the church during the year. You can order multiple copies of Form 8283 by calling the IRS forms hotline at 1-800-TAX-FORM.
This content originally appeared in Church Treasurer Alert, September 2001.