Wiley Not-for-Profit GAAP 2020 by Richard F. Larkin & Marie DiTommaso

Author:Richard F. Larkin & Marie DiTommaso [Larkin, Richard F. & DiTommaso, Marie]
Language: eng
Format: epub
ISBN: 9781119595939
Publisher: Wiley
Published: 2020-08-04T00:00:00+00:00

Tax Consequences of Gifts of Securities

On investments received by gift subsequent to December 31, 1969, the contributor's tax basis is the basis that the foundation must use when calculating taxable gain. For investments received prior to December 31, 1969, the basis is the higher of fair market value at December 31, 1969, or contributor's tax basis. In most instances, the fair market value is higher. Thus, a private foundation must obtain from the donor, at the time a gift of securities is received, a statement of tax basis. This is very important and great care should be taken to obtain this information promptly upon receipt of the gift. At a later date the donor may be difficult to locate or may have lost the necessary tax records. Since donated securities are recorded for accounting purposes at fair market value at date of receipt, the foundation must keep supplementary memo records of the donor's tax basis.

Here is an illustration of how two gifts of the same marketable security can have different tax consequences to the private foundation. Both gifts made in 1980 involve 100 shares of stock A.

Gift 1—Very low basis:

Mr. Jones acquired his 100 shares of stock A in 1933 when the company was founded. His cost was only 10 cents a share, and therefore his basis for these 100 shares was only $10. Market value on the date of gift was $90 a share, or a total of $9,000. The tax basis to Mr. Jones of $10 carries over to the private foundation. If the foundation later sells the stock for $10,000, it will pay a 2% tax on $9,990 ($10,000 sales proceeds less $10 tax basis), or a tax of $199.80.

Gift 2—Very high basis:

Mr. Smith acquired his 100 shares of stock A in 1970 at a cost of $110 a share or a total of $11,000. The market value on the date of his gift was also $90 a share, or a total of $9,000. If the private foundation later sells this stock for $10,000, it will have neither a taxable gain nor loss. In this instance, the donor's basis of $110 a share carries over to the foundation for purposes of calculating taxable gain, but for purposes of calculating loss, the fair market value at date of gift ($90 a share) becomes the tax basis. Since the sales price ($100) is more than the fair market value at the date of gift ($90), but less than the donor's cost ($110), there is no gain or loss recognized.

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