Ltr. Rul. 9435007

Ltr. Rul. 9435007

Section 170 -- Charitable Deduction
Story posted in Letter Rulings on 22 July 1999
audience: PGDC Network | last updated: 15 June 2011
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Date: June 1, 1994

Refer Reply to: CC:IT&A:3/TR-31-1189-94

LEGEND:

Taxpayer = * * *
Corp A = * * *
Foundation = * * *
x = * * *

Dear * * *

This letter responds to your December 29, 1993 request, supplemented by supporting documents dated April 21, 1994, April 28, 1994, and May 16, 1994.

ISSUE

On behalf of Taxpayer, you requested a ruling that the Corp A stock Taxpayer plans to contribute to the Foundation 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, Taxpayer will contribute to the Foundation x shares of common stock in Corp A (Corp A stock). Taxpayer is a director of Corp A. Taxpayer's children are the trustees of the Foundation, a private foundation under section 509(a) of the Code but not described in section 170(b)(1)(E).

Corp A stock is traded through the National Association of Securities Dealers Automated Quotations (NASDAQ). The Corp A shares held by Taxpayer are restricted based on the manner in which they were acquired. Taxpayer has an adjusted basis in the Corp A stock that is less than its fair market value, and Taxpayer has held the Corp A shares that he will contribute to the Foundation for more than 20 years. The value of the stock Taxpayer intends to donate, including the donations of all members of his family (as defined in section 267(c)(4)), are not expected to exceed 10 percent in value of all the outstanding stock of Corp A. Furthermore, Taxpayer represents that as of the date of the contribution, he can sell, without any Securities and Exchange Commission (SEC) Rule 144 resale restrictions, the same amount of Corp A stock that he intends to contribute to the Foundation.

SEC Rule 144(k) provides that the requirements under Rule 144 shall not apply to restricted securities sold for the account of a person who is not an affiliate of the issuer at the time of the sale and has not been an affiliate during the preceding three months, provided that a period of at least three years has elapsed since the later of the date the securities were acquired from the issuer or from an affiliate of the issuer. For SEC purposes, it is represented that the Foundation is not an affiliate of Corp A, and that the Foundation will be treated as having held the shares for more than three years. Taxpayer represents that Taxpayer and the Foundation will not act in concert in selling stock for their respective accounts. Thus, pursuant to the Rule 144(k) exemption, the Corp A stock will be freely transferable by the Foundation upon receipt.

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

Section 170(e)(5)(B) 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)).

In general, market quotations are considered to be readily available on an established securities market with respect to a security if the security is regularly traded in the national or regional over-the-counter market, for which published quotations are available. See section 1.170A-13(c)(7)(xi)(2) of the Income Tax Regulations. The NASDAQ is an automated system which provides current quotations on over-the-counter securities. See Michael C. Thomsett, Investment and Securities Dictionary 179 (1986)

Section 170(e)(5)(C)(i) 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 the stock) exceeds 10 percent (in value) of all of the outstanding stock of the corporation.

Section 170(e)(5)(C)(ii) provides a special rule that for purposes of section 170(e)(5)(C)(i), an individual shall be treated as making all contributions made by any member of his family (as defined in section 267(c)(4)).

Section 170(b)(1)(C)(iv) 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 1221 defines the term "capital asset" to mean property held by the taxpayer (whether or not connected with his trade or business) but does not 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 acquired in the ordinary course of the taxpayer's trade or business; and (5) certain publications of the United States Government.

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

ANALYSIS

For stock to be "qualified appreciated stock" under section 170(e)(5), it must meet the requirements under both sections 170(e)(5)(B)(i) and 170(e)(5)(B)(ii) of the Code. Section 170(e)(5)(B)(i) requires that the market quotations for the stock be readily available on an established securities market as of the date of the contribution. The Corp A stock is listed on the NASDAQ, an established securities market which publishes current quotations. Moreover, there are no restrictions on the Foundation's ability to sell the Corp A stock pursuant to Rule 144(k) exemption. Thus, the Corp A stock meets the section 170(e)(5)(B)(i) requirement. In addition, Taxpayer represents that the amount of stock contributed, within the meaning of section 170(e)(5)(C), will not exceed 10 percent (in value) of all of the outstanding stock of the corporation.

To meet the section 170(e)(5)(B)(ii) requirement, the Corp A stock must be "capital gain property" within the meaning of section 170(b)(1)(C)(iv), which means that the Corp A stock would have had 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" which is held for more than l year. In the present case, the Corp A stock is a "capital asset" because it does not meet any of the exceptions to the definition of a "capital asset" as set forth in section 1221(1) through (5). Moreover, as of the date of contribution, the Corp A stock would have been held by Taxpayer for more than 1 year with the fair market value exceeding its basis. Thus, if the Corp A stock were sold, it would result in long-term capital gain as described under section 170(e)(5)(B)(ii).

CONCLUSION

Accordingly, we conclude that the Corp A stock that Taxpayer plans to contribute to the Foundation is "qualified appreciated stock" within the meaning of section 170(e)(5)(B) of the Code.

No opinion is expressed concerning the federal income tax consequences of these donations under any other provisions of the Internal Revenue Code. No opinion is expressed concerning the applicability of Securities and Exchange Commission Rule 144(k).

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

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

Sincerely yours,

Acting Assistant Chief Counsel
(Income Tax & Accounting)

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

Enclosure:
copy for section 6110 purposes

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