STOCK CONTRIBUTED TO FOUNDATION IS QUALIFIED APPRECIATED STOCK

Reference:

Section 170 -- Charitable Deduction
UIL Number(s) 0170.11-05

Full Text:

Date: December 31, 1992

Refer Rely to: CC:IT&A:03 TR-31-1615-92
TR-31-2354-92

LEGEND:
Taxpayers = * * *
Corp A = * * *
Corp B = * * *
Foundation = * * * x = * * *

Dear * * *

This is in response to your letter ruling request dated August 25, 1992, supplemented by letters dated October 16, 1992, October 30, 1992, November 25, 1992, December 23, 1992, and December 30, 1992. On behalf of Taxpayers, you requested a ruling that the stock Taxpayers plan to contribute to Foundation, an exempt organization under section 501(c)(3), is "qualified appreciated stock" within the meaning of section 170(e)(5)(B) of the Internal Revenue Code.

FACTS

On or before December 31, 1994, Taxpayers will contribute to Foundation x shares of common stock in Corp A (Corp A stock), which is stock held by Taxpayers for investment. Corp A stock is listed on the New York Stock Exchange. Taxpayers acquired the Corp A stock in a merger they represent qualified as a tax-free reorganization under section 368(a)(2)(E) of the Code, which occurred in 1992. As part of the merger, Taxpayers exchanged all of their Corp B stock, which Taxpayers had owned since 1962, for Corp A stock. Taxpayers represent that their adjusted basis in the Corp A stock is less than its fair market value.

Taxpayers state that they have not contributed any other Corp A stock to Foundation or made a gift of Corp A stock to any other donee. The value of the Corp A stock Taxpayers plan to contribute to Foundation will not exceed 10 percent (in value, as of the date of contribution) of all the outstanding stock of Corp A.

In an Agreement and Plan of Merger with Corp A, Taxpayers stated that they would act in accordance with the rules governing the transfer of stock by affiliates under the Securities Act of 1933 (the Act), as amended. Taxpayers also stated that they would not sell or dispose of shares in Corp A stock except (i) pursuant to an effective registration statement under the Act, or (ii) as permitted by, and in accordance with, Rule 145 or another applicable exemption under the Act.

Under an exemption in Rule 145(e) of the Act (the outstanding shares limitation), Taxpayers may sell, during any 90-day period, one percent of the outstanding shares of Corp A stock as shown by the most recent report of Corp A. The outstanding shares limitation applies to both Taxpayers and their donees on an aggregate basis. For Taxpayers to qualify for the Rule 145(e) exemption, Corp A must comply with Securities and Exchange Commission (SEC) reporting requirements, which are not greater then those imposed by the SEC on any company listed on the New York Stock Exchange. Taxpayers may sell Corp A stock pursuant to a registration statement without being subject to the outstanding shares limitation if the sale does not involve a public offering.

Taxpayers intend to contribute less than .3 percent (as of the date of the contribution) of the outstanding shares of Corp A stock to Foundation. The number of shares comprising the gift to the Foundation will, therefore, be substantially less than the maximum number of shares that may be sold under the Rule 145(e) exemption in any 90-day period.

Taxpayers have given Foundation a statement that (1) they will not dispose of any shares of the Corp A stock to the extent the disposition would limit Foundation's ability to dispose of the stock, and (2) they will require that any disposition of Corp A stock by their estates, trusts, beneficiaries, and other successors in interest be limited to dispositions that would not limit Foundation's ability to dispose of the stock.

LAW

Section 170(e)(1)(B)(ii) of the Code provides that in the case of charitable contributions to or for the use of a private foundation (as defined in section 509(a)), other than a private foundation described in section 170(b)(1)(E), the amount of the charitable contribution of property otherwise taken into account under section 170 is reduced by the amount of gain that would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of the contribution).

Section 170(e)(5)(A) states that section 170(e)(1)(B)(ii) does not apply to any contribution of "qualified appreciated stock".

Section 170(e)(5)(B) of the Code defines "qualified appreciated stock," except as provided in section 170(e)(5)(C), to mean any stock of a corporation (i) for which (as of the date of the contribution) market quotations are readily available on an established securities market, and (ii) which is capital gain property (as defined in section 170(b)(1)(C)(iv)).

Section 170(e)(5)(C)(i) of the Code provides that, in the case of any donor, the term "qualified appreciated stock" shall not include any stock of a corporation contributed by the donor in a contribution to which section 170(e)(1)(B)(ii) applies (determined without regard to section 170(e)(5)) to the extent that the amount of the stock so contributed (when increased by the aggregate amount of all prior contributions by the donor of that stock) exceeds 10 percent (in value) of all of the outstanding stock of the corporation. For purposes of section 170(e)(5)(C), an individual shall be treated as making all contributions made by any member of his family (as defined in section 267(c)(4)).

Under section 170(e)(5)(D) of the Code, section 170(e)(5) will not apply to contributions made after December 31, 1994.

Section 176(b)(1)(C)(iv) of the Code defines the term "capital gain property" to mean, with respect to any contribution, any capital asset the sale of which at its fair market value at the time of the contribution would have resulted in gain which would have been long- term capital gain.

Section 1222(3) of the Code defines "long-term capital gain" to mean gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent the gain is taken into account in computing gross income.

Section 1221 of the Code defines the term "capital asset" to mean property held by the taxpayer (whether or not connected with his trade or business) but does include (1) stock in trade; (2) certain property used in a trade or business; (3) certain property that is the product of the taxpayer's personal efforts; (4) accounts or notes receivable; and (5) certain publications of the United States Government.

Section 1223(1) of the Code provides that, in determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under the Code, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged.

Under section 354(a) of the Code, in general, no gain or loss is recognized if stock in a corporation a party to a reorganization is, in pursuance of the plan of reorganization, exchanged solely for stock in the corporation or in another corporation a party to the reorganization.

Section 358(a)(1) of the Code provides as a general rule that, in the case of an exchange to which section 354 applies, the basis of property permitted to be received under section 354 without the recognition of gain or loss shall be the same as that of the property exchanged decreased by the fair market value of any other property (except money) received by the taxpayer, the amount of any money received by the taxpayer, and the amount of loss to the taxpayer which was recognized on the exchange, and increased by the amount which was treated as a dividend and the amount of gain to the taxpayer which was recognized on the exchange (not including any portion of the gain that was treated as a dividend).

ANALYSIS

For stock to be "qualified appreciated stock," it must meet the requirements of section 170(e)(5)(B)(i) and (ii) of the Code. Section 170(e)(5)(B)(i) requires that market quotations for the stock be readily available on an established securities market as of the date of the contribution. Corp A stock is currently listed on the New York Stock Exchange and, under the facts of this case, there are no SEC restrictions on Foundation's ability to sell the Corp A stock. Accordingly, the Corp A stock meets the requirements of section 170(e)(5)(B)(i).

To meet the requirements of section 170(e)(5)(B)(ii) of the Code, the Corp A stock must be capital gain property within the meaning of 170(b)(1)(C)(iv), which means that the Corp A stock would have to result in long-term capital gain if sold at its fair market value. Under section 1222(3), long-term capital gain results from the sale of a capital asset held for more than 1 year. We conclude, in the present case, that the Corp A stock is a capital asset, because it does not meet any of the exceptions to the definition of capital asset set forth in section 1221(1) through (5). Since it has been represented that the fair market value of the Corp A stock is more than its adjusted basis, we also find that if the Corp A stock were sold, it would result in a gain.

In regard to the one-year holding requirement, Taxpayers represent that they acquired the Corp A stock in 1992, in a reorganization qualifying under section 368(a)(2)(E) of the Code. They received the Corp A stock in exchange for stock acquired in 1962. Under section 1223(1), the period Taxpayers held the Corp A stock will include the period Taxpayers held the stock exchanged, if the stock's basis is determined in part by the stock exchanged. Under section 358(a)(1), the basis of the Corp A stock is determined in part by the basis of the stock exchanged if section 354 applies to the exchange. Therefore, based upon Taxpayers' representations, we conclude that the Corp A stock is long-term capital gain property within the meaning of section 170(b)(1)(C)(iv), and Taxpayers' proposed contribution of Corp A stock meets the requirements of section 170(e)(5)(B)(ii).

CONCLUSION

Since section 170(e)(5)(B)(i) and (ii) of the Code is met, and Taxpayers will not have contributed more than 10 percent (within the meaning of section 170(e)(5)(C)) of the Corp A stock to the Foundation, we rule that the Corp A stock that Taxpayers plan to contribute to Foundation on or before December 31, 1994 is "qualified appreciated stock" within the meaning of section 170(e)(5)(B).

No opinion is expressed concerning the federal income tax consequences of the proposed contribution under any other provisions of the Code.

A copy of this ruling should be attached to Taxpayers federal income tax returns for the tax years affected.

This ruling is directed only to the taxpayers who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely yours,

Assistant Chief Counsel
(Income Tax & Accounting)

By: Karin G. Gross
Senior Technician Reviewer,
Branch 3