California Senate Bill 1760

SB 1760 will address the following two issues:

Charitable Gifts as Preference Items for State Alternative Minimum Tax (AMT) Purposes

In 1993, the federal government changed the tax code so that donors who make charitable gifts of appreciated long-term capital gain property would no longer include the appreciation element of their gifts as income in calculating whether they were subject to the federal Alternative Minimum Tax (AMT). The change was made because charities found that donors were hesitant to make gifts of such property given the possibility the gifts could subject them to the AMT, even though this would not have occurred in many cases.

California never amended its state tax code to conform to the federal tax law on this issue. As a result, donors who make charitable gifts of appreciated long-term capital gain property are subject to different tax rules under federal and state law. The disparity makes it difficult for donors to understand the tax consequences of making a gift. In addition, it puts charities in a difficult position. If they bring the issue to the donors' attention, the donors are likely to be confused and could become less inclined to make the gift. Alternatively, if charities do not inform donors of the tax law disparity, the relatively few donors who would be affected may feel deceived upon discovering they owe state AMT because of their charitable gift.

Example: A donor makes a gift of highly appreciated xyz company stock to her favorite charitable organization. The donor purchased the stock six years ago when the price was $5 per share. The stock's value on the date of her gift is $15 per share. She transferred 1,000 shares to the charity. She is afforded a charitable deduction for federal and state income tax purposes on the fair market value of her gift or $15,000.

For state purposes only, her gift is an Alternative Minimum Tax preference item. The difference between the total cost basis (1,000 shares x $5 = $5,000) and the total fair market value (1,000 shares x $15 = $15,000) or $10,000 is included in her state AMT calculation.

Depending on the donor's complete income tax situation, she may be liable for alternative minimum tax. As a result, it is difficult -- if not impossible -- to project the tax benefit of making a charitable gift. Faced with this dilemma, some potential donors may opt not to make charitable gifts, or incur costly accounting and legal fees to calculate the benefit.

Solution: Bill number SB 1760 would conform California tax law to federal tax law and remove the possibility of a charitable gift of appreciated property giving rise to taxes by not subjecting gifts to California AMT.

Gifts of Publicly Traded Stock to Private Foundations

In October 1998, the federal government made permanent Internal Revenue Code Section 170(e)(5) which permits a charitable income tax deduction for the full fair market value for gifts of publicly-traded stock to a private (nonoperating) foundation (these type of organizations are often called a number of other names such as family foundation, charitable foundation, etc.). State law does not recognize IRC Section 170(e)(5) and therefore donors are able to deduct only the stock's cost basis for state charitable income tax purposes for gifts to private (nonoperating) foundations.

Example: A donor creates a charitable foundation in the form of a private nonoperating foundation as a way of making gifts to local charitable organizations that he and his family have long supported. He makes an initial gift of 50,000 shares of publicly traded stock to his family's private charitable foundation. He purchased the stock for $3 a share three years ago. The stock is worth $10 per share on the date of his gift to the foundation for a total gift value of $500,000.

For state income tax purposes, his charitable income tax deduction would be based on the cost basis of the stock or $3 a share. His charitable income tax deduction would be limited to $150,000. For federal income tax purposes, the fair market value of the gift would be fully deductible. In other words, the value of the stock on date of gift, or $500,000, would be fully deductible.

The difference between federal and state tax law creates confusion among charitably minded individuals and is a disincentive for giving.

Solution: Bill Number SB 1760 would conform the state tax law and federal tax law. The result will be less confusion among charitably minded individuals and an incentive for people to make charitable gifts by affording donors a full fair market value deduction for gifts of publicly traded stock to a private nonoperating foundation.

General Information about SB 1760

The State Legislative Counsel maintains a website that allows individuals to view the markup of SB 1760 in either HTML or PDF format and review its history.

To Track the Bill's Progress

The same State Legislative Counsel website provides an automatic mechanism for individuals to track state bill information. To stay informed about the SB 1760 you can subscribe on the above referenced page.

For Additional Information Regarding SB 1760

For more information regarding SB 1760, you may contact Jeff Shields, Volunteer Chair, Legislative Committee, Northern California Planned Giving Council at sb1760@hotmail.com.