CLOSELY HELD STOCK
At first, the idea of donating some of your closely held stock may sound a bit strange. After all, how could the Foundation, or any other charitable institution, benefit from such a gift? And why in the world would you want to give up stock in your own company?

Believe it or not, both parties can reap major benefits from such a contribution. Obviously, we're looking for financial support. And presumably you could benefit from a substantial tax deduction.
But like other owners of closely held stock, you want to maintain control of your company. Perhaps you founded the business or acquired it from your family, and you don't want to give it up. The stock probably has appreciated in value. Maybe your company doesn't pay any dividends.

Eat Your Cake and Have It, Too
Let's assume you're unable to make a substantial cash contribution out of your own pocket, but there is cash in the corporation from retained earnings. These have been taxed on the corporate level and, if distributed as dividends, would be taxed again on the individual level.

You cannot -- or will not -- sell the closely held stock to the public, but you decide to give some shares to the Foundation. We then present the stock to your corporation for redemption. This redemption can be accomplished by using retained earnings for the purchase, letting the Foundation receive much-needed funds.

Are there any problems with this plan? The Internal Revenue Service has ruled that you cannot legally bind a charitable organization to go through with the redemption at the time it receives the shares. There can be no prearranged contract or agreement for the corporation to buy the stock. But the IRS accepts a tax court holding that a charitable organization may independently offer the donated stock for redemption.

As a practical matter, there is little likelihood that the Foundation will fail to do this. It's anxious to realize cash, and a redemption is an easier and quicker way than trying to find another buyer. And the Foundation wants to maintain the donor's good will, hoping for future contributions.

A Typical Example
Circumstances can vary a lot. But the following example illustrates how a gift of closely held stock can work to the advantage of both donor and donee.

Phil owns virtually all of the stock in a company he founded. Its current valuation is $2 million. Phil's cost basis is zero because his original investment has long since been written off for tax purposes. The corporation has $200,000 in retained earnings, and Phil is concerned that the IRS may question the retention of this amount and decide to impose a second tax on it. Moreover, he has wanted to make a major contribution to the Foundation. So, he gives $200,000 worth of his stock. Subsequently, the Foundation offers the stock to the company for redemption, and the company agrees to buy it for $200,000, using retained earnings.

Both Phil and the Foundation accomplish their goals.

- He receives an income tax deduction of $200,000, enabling him to save some money in federal and state income taxes.
- He avoids federal taxes on capital gains plus the additional state taxes.
- His corporation solves its potential accumulated earnings problem, including a potential federal penalty tax.
- He retains full control of his company.
- The charitable organization receives $200,000 in cash to carry out its important mission.

The bottom line is a win-win result for both parties.

When you claim a charitable contribution deduction for a donation of closely held stock valued at more than $10,000, its deductibility depends upon you obtaining and attaching to your tax return a qualified appraisal of the stock.

A charitable gift of stock of a closely held corporation may present a difficult valuation problem since typically the infrequent transactions in the stock are insufficient to establish fair market value. However, the IRS has outlined some fundamental factors that should be carefully analyzed in an appraisal:

- The nature of the business and its history since inception.
- The economic outlook in general, and the condition and outlook of the specific industry.
- The book value of the stock and the financial condition of the business.
- The earning and dividend-paying capacity of the business.
- Whether or not the enterprise has good will or other intangible value.
- Sales of the stock and the size of the block of stock to be valued.
- The market price of stocks of corporations engaged in the same or a similar line of business, provided such stocks are actively traded in a free and open market.

Your gift of closely held stock will reduce your percentage interest in the corporation if you own less than 100 percent. However, if you own all of the stock, a gift of a portion followed by a redemption will leave you still owning 100 percent of the outstanding stock. If you own less than 100 percent and the balance is held by family members whom you wish to benefit, the gift and redemption can be a tax-efficient method of increasing their percentage interests in the corporation.

A donation of your closely held stock can be a fine way for you to make a sizable charitable contribution while realizing valuable tax benefits.