Gift Planning Tips

An Option with Options

A business wishing to benefit charity can grant an option to purchase the company’s shares at a favorable price.  The company is entitled to a charitable deduction for the difference between the fair market value of the shares and the option price [Rev. Rul. 75-348] in the year the option is exercised or transferred to an unrelated charity [Letter Ruling 8826008].  Charity can also be given an option to purchase a particular asset of the company.
Employee stock options may not be the best asset for lifetime giving, since they are not transferrable during the employee’s life [Code §422(b)(5)].  Nonstatutory stock options may be transferrable, but at best the charitable deduction produces a wash, with the donor recognizing income upon exercise.  On the other hand, options are an excellent asset for testamentary transfers.  Like bequests of retirement plan assets, U.S. savings bonds and other items of IRD, testamentary gifts of stock options produce both estate and income tax savings.

A stock option gift made to a private foundation rather than directly to a charity must be handled differently.  In general, the exercise of a stock option by a private foundation would be a sale or exchange with a “disqualified person.”  To avoid a tax on self-dealing, the private foundation must sell the option to an unrelated §501(c)(3) organization at the fair market value (the exercise price less a discount).  The unrelated §501(c)(3) organization then is free to exercise the option.  The corporation is entitled to a charitable deduction in the year the option is exercised, for the excess of the fair market value of the stock over the exercise price [Letter Ruling 8849018].


Charitable Gifts as Retirement Accounts for Employees

A client with long-time household help may wish to remember them in an estate plan, or in some cases, even establish a retirement fund.  Bequests can be included in a will or living trust to leave a specified amount that may be tied to the salary the employee was paid and the number of years employed.  It’s also possible to leave assets in an estate that will fund a charitable remainder trust or charitable gift annuity, particularly if the client’s estate will be subject to estate tax.  The value of charity’s interest is deductible for estate tax purposes, and the trust or gift annuity can be arranged to pay monthly for the individual’s life, similar to a pension plan.  If established during the client’s life, the gift annuity should be funded with cash, to avoid the immediate recognition of capital gains [Reg. §1.1011-2(a)(4)(ii)].  Depending on the age of the intended annuitant, it may be necessary to defer payments if the charity limits the age at which annuity payments can begin.


Special Rules for Gifts of Intellectual Property

The deduction for charitable gifts of patents, certain copyrights or other intellectual property is generally limited to the lesser of the donor’s tax basis or the fair market value [Code §170(e)(1)(B)].  Although the initial deduction is limited, donors are entitled to additional deductions for up to 12 subsequent years for a portion of the qualified donee income received by the charity allocable to the property [Code §170(m)].  The applicable percentage of the income deductible is:

Taxable year of donor ending on or after date of contribution

Applicable percentage

1st

100%

2nd

100

3rd

  90

4th

  80

5th

  70

6th

  60

7th

  50

8th

  40

9th

  30

10th

  20

11th

  10

12th

  10

The donor must inform the charity at the time of the donation that he or she intends to treat the contribution as a qualified intellectual property contribution.  A donee organization receiving such notification must prepare a return for each taxable year showing the amount of any qualified donee income [Code §6050L(c)] and provide a copy to the donor (Notice 2005-41).


Generosity on the Gridiron

With the college football season underway, fans should know that there may be a charitable deduction available for the right to purchase tickets with “special seating.”  In the case of payments made to colleges and universities in exchange for the right to purchase tickets to athletic events, Code §170(l) allows a deduction for 80% of the payment made, although no deduction is available for the cost of the tickets themselves.  If the total cost for the right to purchase tickets is $312.50 or more, the portion representing the charitable contribution will be $250 or more, requiring a contemporaneous written acknowledgment.  Twenty percent of the amount paid for the right to purchase tickets for seating at college or university athletic events is treated as a good faith estimate of the fair market value of this right [Reg. §1.170A-13(f)(14)].  The deduction also applies to the purchase of skybox seats.

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