Donating appreciated stock and property

Section 170 measures its property contribution reductions by reference to a hypothetical sale. You determine the property's fair market value when you contribute it. You then determine the gain that would have resulted if you had sold the property at that value. The statute distinguishes gain that would have been long term capital gain from gain that would not.

Your charitable contribution amount otherwise taken into account under section 170 must be reduced by the gain that would not have been long term capital gain. You make that determination without regard to section 1221(b)(3). This is the first component of the statutory reduction.

For specified contributions, you must also reduce the amount by gain that would have been long term capital gain. The required reduction is the sum of the applicable components. The specified contributions include certain tangible personal property, contributions to certain private foundations, specified intellectual property and certain taxidermy property.

If you contribute tangible personal property, the recipient's use matters. The long term capital gain reduction applies when that use is unrelated to the purpose or function supporting the recipient's exemption under section 501. For a governmental recipient, the relevant connection is to a purpose or function described in section 170(c).

A separate rule applies if you contribute tangible personal property that is applicable property under section 170(e)(7)(C), determined without regard to clause (ii). The long term capital gain reduction applies if the recipient sells, exchanges or otherwise disposes of it before the last day of your contribution tax year and has not made the certification required by section 170(e)(7)(D). Both the disposition timing and the absence of that certification are part of this rule.

If you contribute property to or for the use of a private foundation defined in section 509(a), the long term capital gain reduction applies under this provision unless the foundation is described in section 170(b)(1)(F). That exception is part of the private foundation rule.

For this contribution reduction calculation, you generally treat property used in a trade or business, as defined in section 1231(b), as a capital asset. That treatment has specific exceptions. It does not apply to gain subject to section 617(d)(1), 1245(a), 1250(a), 1252(a) or 1254(a).

If you contribute stock in an S corporation, you apply rules similar to section 751 to determine whether gain would have been long term capital gain. The question is how the gain would have been characterized if you had sold the stock. This special determination feeds into the contribution reduction calculation.

If you contribute a perpetual conservation restriction, also called a conservation easement, the value of your charitable contribution is the fair market value of the easement when you contribute it. The valuation described here concerns the donated easement.

You must take comparable easement selling prices into account when there is a substantial record of arm's length sales of easements on other properties that are the same as or very similar to your donated easement. The requirement depends on both a substantial sales record and the similarity of the easements.

If you place property in a charitable remainder trust, its general structure provides specified distributions at least annually to one or more beneficiaries. At least one beneficiary must not be a charity. The distributions continue for life or a term of years, with an irrevocable remainder interest held for or paid to charity.

The two statutory forms use different payment measures. With a charitable remainder annuity trust, your payment provision specifies a sum certain measured against the initial net fair market value of all property placed in the trust. With a charitable remainder unitrust, your payment provision specifies a fixed percentage of the net fair market value of the assets, valued annually.

For either form, the statutory payment range is at least 5 percent and no more than 50 percent of the applicable value. Payments must occur at least annually. If your trust uses a term of years, that term cannot exceed 20 years. Alternatively, payments may continue for the life or lives of the qualifying individuals.

Your trust must provide payments to one or more persons, at least one of whom is not an organization described in section 170(c). If a payment recipient is an individual, that individual must be living when the trust is created.

Your annuity trust's charitable remainder must reach a minimum of one tenth of the starting net fair market valuation of everything you contribute. You determine the remainder interest's value under section 7520.

For your charitable remainder unitrust, the 10 percent requirement applies separately to each property contribution. The remainder interest in that property, valued under section 7520, must equal at least 10 percent of the property's net fair market value on its contribution date.

For either form, your trust cannot pay amounts to or for the use of a person other than an organization described in section 170(c), except for the required beneficiary payments and the qualified gratuitous transfers described in the statute.

After the required beneficiary payments end, your trust's remainder interest must pass to or for the use of an organization described in section 170(c), remain in trust for that use, or, to the extent it consists of qualified employer securities, pass in whole or part to an employee stock ownership plan in a qualified gratuitous transfer. There is also a specified route for qualified employer securities within the remainder. All or part of those securities may pass to an employee stock ownership plan in a qualified gratuitous transfer.

For that securities route, your trust must use the statutory definitions. Qualified employer securities are defined in section 664(g)(4). The employee stock ownership plan is defined in section 4975(e)(7). The transfer must meet the qualified gratuitous transfer definition in section 664(g).

If your charitable remainder trust was created after July 31, 1969, the regulation provides an exemption from taxes imposed by subtitle A of the Code. For a trust tax year beginning before January 1, 2007, the exemption does not apply if the trust has unrelated business taxable income.

For your trust's tax years beginning after December 31, 2006, unrelated business taxable income, determined under section 512 as if part III of subchapter F applied to the trust, triggers an excise tax equal to that income, treated as imposed by chapter 42 except for its subchapter E. If you receive the statutory annuity or unitrust payment as a beneficiary, your distribution is treated first as taxable income other than capital gains, second as capital gain, third as other income, each up to the trust's current and undistributed prior income in that category, and fourth as principal, with undistributed capital gain determined on a cumulative net basis.