Publicly traded shares donated to a private foundation qualify as "qualified appreciated stock"

Plain-English summary

Normally, when someone donates appreciated stock to a private (non-operating)
foundation, section 170(e)(1)(B)(ii) trims the charitable deduction down to the
donor's cost basis instead of full market value. There is an exception:
"qualified appreciated stock" (QAS) under section 170(e)(5) lets the donor
deduct the full market value, but only for publicly traded stock and only up to
10% of a company's outstanding shares (counting a donor's prior gifts and
family members' gifts). Two taxpayers who contributed shares of a listed
company (through a chain of trusts and LLCs) to their private foundation asked
the IRS to confirm those shares are QAS. The taxpayers are corporate insiders,
so their sales are subject to insider-trading policies, Rule 10b5-1 written
trading plans, and Rule 144 volume limits, and the shares are "restricted
securities." The IRS ruled that none of those securities-law restrictions
materially affect the shares' value or prevent them from being freely traded,
so the shares qualify as qualified appreciated stock under section 170(e)(5)(B),
provided the other section 170 requirements are met. The IRS pointedly declined
to rule on whether the transfer is even a valid charitable contribution, on
valuation, on the assignment-of-income doctrine, or on the private foundation
excise-tax rules (excess business holdings, self-dealing, and the like). This
matters to wealthy donors of appreciated public stock because QAS status can be
the difference between a full fair-market-value deduction and a much smaller
basis-only deduction.

Ruling snapshot

• Question: Do publicly traded shares indirectly contributed to a private foundation, subject to insider-trading and Rule 144 restrictions, constitute "qualified appreciated stock" under section 170(e)(5)(B)?
• Outcome: approved (shares qualify as QAS, subject to other section 170 requirements)
• Key authorities: IRC § 170(e)(1)(B)(ii), (e)(5); Treas. Reg. § 1.170A-13(c)(7)(xi); Todd v. Commissioner, 118 T.C. 334 (2002)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201848005 Third Party Communication: None
Release Date: 11/30/2018 Date of Communication: Not Applicable
Index Number: 170.00-00, 170.11-05
Person To Contact:
------------------------------------------------------ ----------------------, ID No. ----------------
------------------------------------ Telephone Number:
---------------------------- ----------------------
-------------------------------- Refer Reply To:
CC:ITA:B01
PLR-107092-18
TIN: ------------------ Date:
------------------ August 31, 2018

Legend

Taxpayer A = ------------------------

Taxpayer B = -------------------------

Contributed = ---------------------------------------------------------------------------
Shares

Stock 1 = -------------------------------

Stock 2 = -------------------------------

Corporation 1 = ---------------------

Corporation 2 = --------------------------------------

Private = -----------------------------------------
Foundation

LLC 1 = --------------------------

LLC 2 = -------------------------------------------

Trust 1 = -------------------------------------------------------

Trust 2 = --------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
---------------------------------------------

Date 1 = ----------------------
PLR-107092-18 2

Year 1 = -------

Contribution = --------------------------
Date

Approved Plan = --------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
------------------------------------------------------------

Exchange = --------------------------------------

Dear ----------------------------------------:

   This responds to your letter dated March 2, 2018, and supplemental letter dated

April 30, 2018, requesting a ruling under § 170 of the Internal Revenue Code (the
Code). Taxpayer A and Taxpayer B (collectively “Taxpayers”) request a ruling that the
Contributed Shares of Stock 1 of Corporation 1 indirectly contributed by Taxpayers to
Private Foundation constitute “qualified appreciated stock” (QAS) within the meaning of
§ 170(e)(5)(B) of the Internal Revenue Code.

                                               FACTS

   Taxpayer A is the sole settlor and trustee of Trust 1. Trust 1 is wholly revocable

by Taxpayer A. Trust 1 is the sole member of LLC 1, which is a disregarded entity for
federal income tax purposes. Taxpayers are managers of LLC 1. LLC 2 is a wholly-
owned subsidiary of LLC 1. Corporation 2 is an organization described in § 501(c)(4).
LLC 2 has the power to designate the members of Corporation 2’s board of directors.
Taxpayer A is also the sole settlor and trustee of Trust 2.

  On the Contribution Date, LLC 1 contributed the Contributed Shares of Stock 1 of

Corporation 1 to Private Foundation. Private Foundation is a private foundation within
the meaning of § 509(a) but is not considered a private foundation described in
§ 170(b)(1)(F). Taxpayer A is the sole trustee of Private Foundation.

   Stock 1 of Corporation 1 is listed and regularly traded on Exchange, a national

securities exchange registered with the Securities Exchange Commission (SEC) under
section 6 of the Securities Act of 1934 (the Exchange Act). Additionally, Taxpayers
state that the Contributed Shares could at all times on or after the Contribution Date be
sold on Exchange at Exchange prices pursuant to an exemption from the registration
requirement set forth in section 4(a)(1) of the Securities Act of 1933 (the Securities Act)
and the safe harbor set forth in SEC Rule 144.
PLR-107092-18 3

   Taxpayers, and entities over which they exercise control, are subject to

Corporation 1 insider trading policies that require Taxpayers and such entities to
conduct purchases and sales of Corporation 1 securities pursuant to SEC Rule 10b5-1
written trading plans.

    In the instrument effectuating the contribution of the Contributed Shares, LLC 1

agreed not to take, and to cause any person with which it would be required to
aggregate sales under SEC Rule 144 not to take, any action that would restrict the
ability of Private Foundation to sell the Contributed Shares as a result of the volume
restrictions contained in SEC Rule 144(e).

   Neither the exemption to the registration requirement, nor an SEC Rule 10b5-1

written trading plan, nor the SEC Rule 144(e) volume restrictions subject the
Contributed Shares to a restriction that materially affects the value of the Contributed
Shares to the donor or prevents the Contributed Shares from being freely traded.

1. Taxpayers’ beneficial ownership of Stock 1 and Stock 2 of Corporation 1 has
   not materially changed during the period beginning on Date 1 and ending on
   the date of this ruling request.
2. The Contributed Shares were at all times held as a capital asset, as defined in
   § 1221(a), in the hands of LLC 1.
3. On the Contribution Date, the adjusted basis of the Contributed Shares was
   lower than the fair market value of the Contributed Shares.
4. On the Contribution Date, LLC 1 held the Contributed Shares for more than one
   year.
5. None of Taxpayers, Trust 1, Trust 2, LLC 1, LLC 2, Corporation 2, or Private
   Foundation are or have ever been an “issuer” of Corporation 1 securities within
   the meaning of the Securities Act.
6. None of Taxpayers, Trust 1, Trust 2, LLC 1, LLC 2, Corporation 2, or Private
   Foundation are or have ever been a “dealer” within the meaning of the
   Securities Act.
7. The Contributed Shares are “restricted securities” within the meaning of SEC
   Rule 144(a)(3).
8. Each of Taxpayers, Trust 1, Trust 2, LLC 1, LLC 2, Corporation 2, and Private
   Foundation are “affiliates” of Corporation 1 within the meaning of SEC Rule
   144(a)(1).
9. None of the Contributed Shares are or will be subject to an effective registration
   statement within the meaning of section 5 of the Securities Act.

10. On the Contribution Date, each of Taxpayers, Trust 1, and LLC 1 could satisfy
    all requirements under SEC Rule 144 to sell on Exchange at Exchange prices a
    number of shares of Stock 1 of Corporation 1 equal to the number of
    Contributed Shares.
    PLR-107092-18 4

11. On the Contribution Date, Private Foundation could satisfy all requirements
    under SEC Rule 144 to sell on Exchange at Exchange prices a number of
    shares of Stock 1 of Corporation 1 equal to the number of Contributed Shares.

12. Private Foundation expects to be able to satisfy all requirements under SEC
    Rule 144 to sell on Exchange at Exchange prices Stock 1 of Corporation 1 at
    the times and in the amounts contemplated by Private Foundation’s Approved
    Plan.
13. Following LLC 1’s contribution of the Contributed Shares to Private Foundation,
    Taxpayers, Trust 1, Trust 2, LLC 1, and LLC 2 will not have gifted in aggregate
    more than ten percent by value of Corporation 1 stock to Private Foundation,
    taking into account prior gifts of Corporation 1 stock by such persons to any
    private nonoperating foundation.
14. Other than as described in this ruling request, there are no legal restrictions on
    the ability of Taxpayers, Trust 1, LLC 1, or Private Foundation to sell or
    otherwise dispose of the Contributed Shares.
15. On the Contribution Date, Taxpayers did not possess any material nonpublic
    information with respect to Corporation 1.
16. LLC 1’s contribution of the Contributed Shares to Private Foundation on the
    Contribution Date, during Taxpayers’ Year 1 taxable year, constituted a
    “charitable contribution” within the meaning of § 170(c).
17. At all times, Taxpayer A, as trustee of Private Foundation, will engage in
    reasonable best efforts to ensure that the amount of Corporation 1 stock held
    by Private Foundation does not exceed, when aggregated with all other private
    foundations described in § 4946(a)(1)(H), two percent of the voting stock and
    two percent of the value of the outstanding shares of all classes of Corporation
    1 stock.
18. Any sales of the Contributed Shares pursuant to Private Foundation’s Approved
    Plan will occur via open market transactions on Exchange, and, to the best of
    Taxpayers’ knowledge, will not be sold to any person related to Taxpayers or
    any entity controlled by or related to Taxpayers within the meaning of § 267.
19. Taxpayers will value the Contributed Shares for purposes of the value of their
    deduction under § 170 at the Contributed Shares’ market value on the
    Contribution Date by calculating the average price between the highest and
    lowest quoted selling price on Exchange on the Contribution Date.

                             LAW AND ANALYSIS
    

Internal Revenue Code and Income Tax Regulations

   Section 170(a) allows a deduction for any charitable contribution (as defined in §

170(c)) payment of which is made within the taxable year. A charitable contribution
shall be allowable as a deduction only if verified under regulations prescribed by the
Secretary.
PLR-107092-18 5

   Section 1.170A-1(c)(1) of the Income Tax Regulations provides if a charitable

contribution is made in property other than money, the amount of the contribution is the
fair market value of the property at the time of the contribution reduced as provided in
§ 170(e)(1) and § 1.170A-4(a).

   Section 170(e)(1)(B)(ii) provides that the amount of any charitable contribution of

property to or for the use of a private foundation as defined in § 509(a), other than a
private foundation described in § 170(b)(1)(F), otherwise taken into account under this
section shall be reduced by the amount of gain which 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 such contribution).

   Section 170(e)(5)(A) provides that § 170(e)(1)(B)(ii) shall not apply to any

contribution of QAS. Section 170(e)(5)(B) defines QAS as 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
§ 170(b)(1)(C)(iv).

   Section 170(b)(1)(C)(iv) provides that for purposes of this paragraph, the term

“capital gain property” means, 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) provides that “long-term capital gain” means gain from the sale

or exchange of a capital asset held for more than one year, if and to the extent such
gain is taken into account in computing gross income.

   Section 170(e)(5)(C)(i) provides that in the case of any donor, the term QAS shall

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

    Section 170(e)(5) was added to the Code by the Tax Reform Act of 1984, Pub. L.

98-369. Congress believed “that deductibility at full fair market value for gifts of
appreciated stock to private nonoperating foundations should be permitted in certain
situations in which the potential for abuse, including overvaluations, is minimized.” H.
Rep. No. 432, Part 2, 98th Cong., 2d Sess. 1464 (1984); Joint Committee on Taxation
Staff, General Explanation of Revenue Provisions of the Deficit Reduction Act of 1984,
98th Cong. 667 (1984).
PLR-107092-18 6

    While § 170(e)(5) does not specify under what circumstances “market quotations

are readily available on an established securities market,” the Tax Court has concluded
that this requirement is satisfied if the requirements under § 1.170A-13(c)(7)(xi)(A) are
satisfied. See Todd v. Commissioner, 118 T.C. 334, 346 (2002).

   Section 1.170A-13(c)(7)(xi)(A) provides that publicly traded securities means

securities (within the meaning of § 165(g)(2)) for which, as of the date of the
contribution, market quotations are readily available on an established securities
market. Market quotations are 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 public quotations are available. Section 1.170A-
13(c)(7)(xi)(A)(2).

  Section 1.170A-13(c)(7)(xi)(C)(1) provides, in part, that securities described in

§ 170A-13(c)(7)(xi)(A) shall not be considered publicly traded securities if the securities
are subject to any restrictions that materially affect the value of the securities to the
donor or prevent the securities from being freely traded.

Securities Act and SEC Rules

   Section 5 of the Securities Act provides, in part, that unless a registration

statement is in effect as to a security, it shall be unlawful for any person, directly or
indirectly, to sell such security to the public. 15 U.S.C. § 77e(a). Section 4(a)(1),
however, provides that section 5 shall not apply to transactions by any person other
than an issuer, underwriter, or dealer. 15 U.S.C. § 77d(a). SEC Rule 144 sets forth a
safe harbor that, if satisfied, deems certain persons not to be “underwriters” of
securities. 17 C.F.R. § 230.144(b).

   SEC Rule 10b5-1 defines when a purchase or sale constitutes trading “on the

basis of” material nonpublic information in insider trading cases brought under Section
10(b) of the Exchange Act and Rule 10b-5 thereunder. 17 C.F.R. § 240.10b5-1.
Additionally, SEC Rule 10b5-1(c) provides a number of affirmative defenses that, if
demonstrated by a person making the purchase or sale of a security, would establish
that such purchase or sale was not “on the basis of” material nonpublic information
when the person made the purchase or sale. 17 C.F.R. § 240.10b5-1(c). Specifically,
SEC Rule 10b5-1(c)(i)(A)(3) provides, in part, that subject to paragraph (c)(1)(ii) of this
section, a person’s purchase or sale is not “on the basis of” material nonpublic
information if the person making the purchase or sale demonstrates that before
becoming aware of the information, the person had adopted a written plan for trading
securities. 17 C.F.R. § 240.10b5-1(c)(1)(i)(A)(3).

  SEC Rule 10b5-1(c)(1)(ii) provides, in part, that paragraph (c)(1)(i) is applicable

only when the plan to purchase or sell securities was given or entered into in good faith
PLR-107092-18 7

and not as part of a plan or scheme to evade the prohibitions of this section. 17 C.F.R.
§ 240.10b5-1(c)(1)(ii).

   SEC Rule 144(e) provides a limitation on the amount of securities sold. SEC

Rule 144(e) provides that the amount of securities sold for the account of an affiliate of
the issuer in reliance upon this section is generally determined as follows:

           (1) If any securities are sold for the account of an affiliate of the issuer,
   regardless of whether those securities are restricted, the amount of securities
   sold, together with all sales of securities of the same class sold for the account of
   such person within the preceding three months, shall not exceed the greatest of:

        (i) One percent of the shares or other units of the class outstanding as
   shown by the most recent report or statement published by the issuer, or

          (ii) The average weekly reported volume of trading in such securities on all
   national securities exchanges and/or reported through the automated quotation
   system of a registered securities association during the four calendar weeks
   preceding the filing of notice required by paragraph (h), or if no such notice is
   required the date of receipt of the order to execute the transaction by the broker
   or the date of execution of the transaction directly with a market maker, or

         (iii) The average weekly volume of trading in such securities reported
   pursuant to an effective transaction reporting plan or an effective national market
   system plan as those terms are defined in § 242.600 of this chapter during the
   four-week period specified in paragraph (e)(1)(ii) of this section. 17 C.F.R. §
   230.144(e).

Analysis

   Under § 170(e)(5)(B), the Contributed Shares are stock for which, as of the

Contribution Date, market quotations are readily available on an established securities
market.

   Taxpayers represent that LLC held the Contributed Shares at all times as a

capital asset, and that LLC 1 held the Contributed shares for more than one year.
Taxpayers also represent that, as of the Contribution Date, the fair market value of the
Contributed Shares exceeded their adjusted basis.

  Taxpayers represent that, following LLC 1’s contribution of the Contributed

Shares to Private Foundation on the Contribution Date, Taxpayers, Trust 1, Trust 2,
LLC 1, and LLC 2 will not have contributed in aggregate more than ten percent by value
of Corporation 1 stock to Private Foundation when aggregated with prior gifts of
Corporation 1 stock by such persons to any private nonoperating foundation.
PLR-107092-18 8

   Taxpayers represent that the Contributed Shares could at any time be sold in

their entirety on Exchange at Exchange prices pursuant to the exemption to the
registration requirement set forth in section 4(a)(1) of the Securities Act and the safe
harbor set forth in SEC Rule 144.

   Based on Taxpayers’ representations, the fact that Taxpayers, and entities over

which they exercise control, are subject to insider trading policies that require
Taxpayers and such entities to conduct purchases and sales of Corporation 1 securities
pursuant to an SEC Rule10b5-1 written trading plan does not subject the Contributed
Shares to any restriction that materially affects the value of the Contributed Shares to
Taxpayers as the donors or prevents the Contributed Shares from being freely traded.

  Based on Taxpayers’ representations, the SEC Rule 144(e) volume limitations do

not subject the Contributed Shares to any restriction that materially affects the value of
the Contributed Shares to Taxpayers as the donors or prevents the Contributed Shares
from being freely traded.

                                     RULING

Based on the information submitted and representations made by Taxpayers, we

rule as follows:

Provided the requirements of § 170 are otherwise satisfied, the Contributed Shares
of Stock 1 of Corporation 1 indirectly contributed by Taxpayers to Private Foundation
constitute “qualified appreciated stock” within the meaning of § 170(e)(5)(B) of the
Code.

                                    CAVEATS

   The rulings contained in this letter are based on facts and representations

submitted by Taxpayers and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the materials submitted in
support of the request for rulings. Verification of the information, representations, and
other data may be required as part of the examination process.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

   No opinion is expressed or implied regarding whether the contribution of the

Contributed Shares constitutes a “charitable contribution” within the meaning of
§ 170(c).
PLR-107092-18 9

   No opinion is expressed or implied regarding the tax consequences of any

potential future transaction involving Corporation 1 securities.

   No opinion is expressed or implied regarding the assignment of income doctrine.

 No opinion is expressed or implied regarding excess business holdings within the

meaning of § 4943(c).

 No opinion is expressed or implied regarding private inurement within the

meaning of § 501(c)(3).

  No opinion is expressed or implied regarding any issues under Chapter 42 of the

Code, affecting private foundations.

PROCEDURAL STATEMENTS

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

   A copy of this letter must be attached to any income tax return to which it is

relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

                                                      Sincerely,



                                                      Norma C. Rotunno
                                                      Branch Chief, Branch 1
                                                      (Income Tax & Accounting)