TAXPAYER MAY CARRYOVER EXCESS CONTRIBUTION OF QUALIFIED APPRECIATED STOCK

Reference:

Section 170 -- Charitable Deduction

Full Text:

Date: October 6, 1994

Refer Reply to: CC:DOM:3T&A:I/TR-31-2315-94

LEGEND
Taxpayer = * * *
F = * * *

Dear * * *

This is in response to your letter ruling request, submitted on behalf of Taxpayer, dated August 25, 1994.

ISSUE

If, in 1994, Taxpayer contributes "qualified appreciated stock" as defined in section 170(e)(5) of the Code and the amount of such contribution exceeds Taxpayer's percentage limitation under section 170(b)(1)(D)(i), may Taxpayer continue to value the 1994 excess contribution carryover as "qualified appreciated stock" (fair market value at time of contribution) without regard to the section 170(e)(1)(B)(ii) valuation limitation of such contribution if made after 1994?

FACTS

In 1994, Taxpayer intends to transfer stock to F, a private foundation which is described in section 509(a) but not described in section 170(b)(1)(E). The amount of Taxpayer's transfer is substantially in excess of the amount Taxpayer will be permitted to deduct in 1994 under the percentage limitations imposed by section 170(b)(1)(D)(i).

F has been recognized by the Internal Revenue Service as an exempt organization under section 501(c)(3). It is represented that gifts to F are "qualified appreciated stock" under section 170(e)(5).

LAW

Section 170(e)(1)(B)(ii) of the Code provides, as a general rule, that donors making charitable contributions of capital gain property 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), are not permitted a charitable contribution deduction for the amount of the contributed property that would have been long- term capital gain if the property contributed had been sold by the taxpayer at its fair market value.

Section 170(e)(5) of the Code, enacted in 1984, creates an exception to the general rule for "qualified appreciated stock". Under section 170(e)(5), donors may be allowed to deduct the fair market value for gifts of "qualified appreciated stock" to a private foundation as defined in section 509(a), other than a private foundation as described in sect ion 170(b)(1)(E).

Section 170(e)(5)(D) provides that the exception for gifts of "qualified appreciated stock" shall not apply to contributions made after December 31, 1994.

Section 170(b)(1)(D)(ii) provides, in part, that to the extent the donor's contributions of capital gain property to private non- operating foundations exceed the percentage limitation under section 170(b)(1)(D)(i), the excess shall be treated as a charitable contribution of capital gain property in each of the five succeeding taxable years in order of time.

Section 170 (b)(1)(D)(ii), the carryover provision for contributions to private non-operating foundations, was enacted at the same time as section 170(e)(5), the provision for contributions of "qualified appreciated stock". Moreover, absence of both allowances under previous law was referred repeatedly in the legislative history, and both provisions were included as part of the private foundation provisions of H.R. 4170. See H.R. Rep. No. 432, Pt. 2, 98th Cong., 2d Sess. 1463, (1984); S. Rep. No. 169, Vol. 1, 98th Cong., 2d Sess. 586-587 (1984); H. R. Rep. No. 861, 98th Cong., 2d Sess. 1082 (1984); Joint Committee on Taxation Staff, General Explanation of H.R. 4170, 98th Cong., 2d Sess. 666-669 (1984).

In an analogous carryover issue, the Service has ruled that the tax character of the contributed property under the alternative minimum tax is determined at the time of the contribution. See Rev. Rul. 90-111, 1990-2 C.B. 30 (excess contribution carryovers for non- capital gain property from 1991 are treated as non-capital gain property for 1992 and subsequent years under alternative minimum tax, though the special rule resulting in non-capital gain characterization applies only to contributions made in 1991).

ANALYSIS

Under section 170(e)(5)(D), section 170(e)(5) treatment will apply to the contribution of "qualified appreciated stock" if the contribution is made on or before December 31, 1994. Thus, so long as the contribution of "qualified appreciated stock" is made to F before the end of 1994, Taxpayer will be allowed to value the contribution without regard to section 170(e)(1)(B)(ii).

Legislative history supports the same treatment for the carryover as for the initial contribution of "qualified appreciated stock". Moreover, a previous Service position underscores that, in determining the tax character for carryovers, the focus is on the tax character of the property when the contribution is made. Thus, so long as Taxpayer's contribution qualifies for "qualified appreciated stock" treatment at the time that it is made, the excess carryover will be given the same treatment.

CONCLUSION

Therefore, the value of 1994 excess contributions of "qualified appreciated stock" carried over to succeeding years will continue to be based upon the fair market value of the stock at the time of the contribution, and will not be limited to Taxpayer's basis as a result of the expiration of the "qualified appreciated stock" rule on December 31, 1994.

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

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

Sincerely,

Assistant Chief Counsel
(Income Tax & Accounting)

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

Enclosure
copy for section 6110(j)(3) purposes