As an attorney, CPA, or financial advisor, you already know that your clients are typically better off from a tax perspective when they donate appreciated stock held for more than one year instead of writing a check. That’s because the client’s charitable deduction is calculated based on the stock’s fair market value, and the charity, unlike your client, can sell the stock without triggering capital gains tax. Many of your clients may already regularly give appreciated stock to their Donor Advised Fund at the Community Foundation of Anne Arundel County (CFAAC) to support the grants and funds they care about.
So what happens when one of these clients starts asking questions about what’s on their tax return? For instance:
"Wait a minute. I distinctly remember that my stock was worth $81.95 per share when the market closed on the day I transferred 100 shares to the Community Foundation to add to my Donor Advised Fund. But my tax return is showing a deduction amount less than $8,195. Is that a mistake?"
It's a great question, and of course you know the answer! When a client contributes publicly traded securities to a fund at a community foundation, such as CFAAC, or directly to another public charity, the charitable deduction amount is based on the fair market value of the asset at the time of the gift under Internal Revenue Code Section 170 and Treasury Regulation § 1.170A-1(c). For publicly traded securities, though, "fair market value" is not ordinarily the closing price. Instead, the IRS valuation rule generally uses the average between the highest and lowest quoted selling prices on the date of the contribution, a methodology outlined in Treasury Regulation § 20.2031-2(b)(1).
Here's a simple example.
Suppose a client transfers shares to a Donor Advised Fund at CFAAC on August 20. On that date:
- High price: $82.40
- Low price: $79.60
- Closing price: $81.95
Many clients understandably assume their deduction will be based on the $81.95 closing price. Under the applicable valuation rules, however, the value generally used is the average of the high and low prices:
($82.40 + $79.60) ÷ 2 = $81.00 per share
The difference may be small in many cases, but for larger gifts, or during periods of market volatility, it can become meaningful.
Again, you know this, but many clients do not. That’s why it’s worth reminding a client about this rule whenever they’re making gifts of appreciated stock. It’s also worth remembering that determining the valuation date itself may involve additional analysis. The relevant date is generally the date the gift is considered complete for federal tax purposes, which may differ depending on how the securities are transferred and when control passes to the charitable organization. Because of these nuances, it's wise to coordinate closely with CFAAC’s gift planning team whenever timing is critical, such as at year end.
Fortunately, the Community Foundation of Anne Arundel County works with gifts of appreciated securities year-round and can help facilitate smooth transfers into any of our funds, whether a client is adding to an existing Donor Advised Fund or establishing a new one. Especially as the fall planning season approaches, clients often focus on maximizing charitable deductions while avoiding capital gains tax on appreciated investments. Being prepared to explain why the deduction is based on the average of the day's high and low, not simply the closing price, can be a helpful component of client conversations.
Whether you need help thinking through fund options, a needs assessment for a client's giving goals, or training for your team on how gifts of stock move through the process, CFAAC's gift planning team is ready to help. Contact Thomas Perkins, Director of Gift Planning, at thomas@cfaac.org, or reach the CFAAC office at 410.280.1102.
Please reach out to CFAAC anytime, and especially when a client is getting ready to transfer stock. We will keep an eye out for it and make sure the processing goes smoothly. Thank you for the opportunity to work with you to serve your clients.