Charitable Gift Opportunities with Corporate Bonds

Most articles on inter vivos charitable gift planning focus on the advantages of giving appreciated stocks, mutual funds and real estate, but many donors have corporate bonds in their portfolios as well, which may be just as appealing for making tax-wise contributions.

Generally, donors can deduct the full fair market value of any corporate bonds they give to charity and owe no capital gains tax on their paper profit.  The value of listed bonds is the average (mean) of the highest and lowest selling price quoted on the day of the gift (same rule as stock gifts).  If quotes for the high and the low are not available, then the value is the average between the closing value on the day of the gift and the closing value on the day preceding the gift.  If there were no sales on the day prior to the gift, then the value will be a “weighted average” between the close on the day of the gift and the nearest date before the gift date.  If there were no sales on the date of the gift, but sales occurred within a reasonable time period before and after the gift, then an “inverse weighted average” of selling prices before and after the gift must be calculated.

The deduction rules are different if a sale or redemption of the bond would result in ordinary income.  The amount that would have been taxable as ordinary income is not deductible.   Note that some bonds may generate a combination of capital gain and ordinary income upon a sale.  In many cases an accountant will need to be consulted to determine the tax results of sale or other disposition of a particular bond.  Bonds or other securities that have gone down in value should be sold and the proceeds contributed, creating both a charitable and capital loss deduction.  For more information on gift valuation of bonds and other securities, see pages 2-28(b) and 2-62 of the Charitable Giving Tax Service.

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