Post-IPO stock

Case study: making a larger gift while increasing tax savings

Sarah was the fifth employee hired at ABC, a start-up tech company. To encourage Sarah to stay with ABC and help the company grow, ABC offered Sarah incentive stock options, which she exercised a couple of years ago. ABC is now a successful and growing company with increasing revenue year-over-year, and executives took the company public several months ago. With the stock experiencing significant appreciation since the IPO, and with the six-month lock-up expiring, Sarah plans to use some of her appreciated stock to provide financial support to her favorite charities this year through her donor-advised fund (DAF) account.

Sarah consulted her company’s corporate counsel—and the staff at her donor-advised fund—to earmark 5,000 shares valued at $100 per share, resulting in a total contribution of $500,000 to her DAF account. Sarah’s cost basis for the shares is $50,000.

Assuming a 20% federal capital gains tax rate based on Sarah’s income level, if Sarah sold the stock, as shown in Option 1, she would realize appreciation of $450,000 and owe an estimated $90,000 in federal capital gains taxes ($450,000 x 20% = $90,000). In this scenario, after paying the federal capital gains taxes, Sarah’s estimated net cash available for charitable giving is $410,000.

Now let’s review Sarah’s benefits with gifting her stock directly to a donor-advised fund or other public charity, as shown in Option 2. In this scenario, Sarah may be able to eliminate capital gains taxes ($90,000) while potentially taking a current year income tax deduction for the fair market value of her stock ($500,000), assuming she itemizes her deductions.

Additional considerations 

In addition to the potential tax benefits described above, the following considerations may apply. 

1. Donate long-term held shares with high appreciation.

In order to realize maximum tax savings from the charitable donation of stock post-IPO, the incentive stock options for the shares must have been held more than one year from exercise date and two years from grant date. In addition, the shares should have appreciated in value. Shares not meeting these criteria do not carry the same tax advantages.

2. Avoid prearranged sales.

You should not enter into any arrangement that would legally compel the donor-advised fund or other public charity to dispose of the stock upon receipt. This kind of “prearranged sale” could reduce or eliminate the tax benefits of making your donation. Upon receipt of the stock, the donor-advised fund or other public charity controls the asset. For most donor-advised funds and other public charities, the general policy is to promptly sell appreciated securities, but a charity may reserve the right to sell at any time.

3. Be mindful of lock-up restrictions.

The decision of whether and how charitable gifts of stock may be made during a lock-up period is determined by the issuer’s counsel. In cases where gifts can be made during a lock-up period, any restrictions that materially affect the value of the shares or prevent the shares from being freely traded may require a qualified appraisal to substantiate the fair market value, and such restrictions may lead to valuation discounts.

You should work closely with the donor-advised fund or other public charity when you transfer stock subject to a lock-up. Your stock donation is irrevocable and you cannot dictate the timing of the sale. DAFgiving360’s ordinary policy is to immediately liquidate stock, but exceptions to this rule may apply. Please consult with your corporate counsel and the donor-advised fund or other public charity when donating stock during an IPO. 

4. Consider whether Rule 144 legend and affiliate restrictions apply.

If your stock is restricted by legend or is “control” stock owned by an affiliate of the issuer (i.e., you are an officer, director, or 10% shareholder), then your company’s general counsel must give you permission to transfer the stock to charity. As a general rule, restricted stock must be sold in accordance with Rule 144 resale restrictions.*

Contributions of long-term held restricted stock to a public charity, including a donor-advised fund, may be deductible at fair market value as of the date of contribution, but valuation discounts may apply if restrictions are not lifted prior to gifting. A qualified appraisal may be required to substantiate the fair market value.

To learn more about gifts of restricted stock, click here.

5. Annual limits apply to charitable deductions.

Overall deductions for donations to donor-advised funds are generally limited to 50% of your adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit for appreciated non-cash assets held more than one year is 30% of AGI. The IRS permits a carryover for five tax years, should your charitable deduction exceed AGI limits in a given tax year. 

Interested in learning more? 

• The Charitable Strategies Group at DAFgiving360 is a team of professionals with specialized knowledge about non-cash asset contributions to charities. Our team stands ready to support you and your advisors, from initial consultation through asset evaluation, receipt, processing, and sale. We strive to provide unbiased guidance and frequent communication at every step of the process to help you and your advisors make informed decisions and stay aware of the time required for your transaction.
• For more information about the advantages of contributing appreciated non-cash assets, you can read an overview article, or call us at 800-746-6216.
• If you would like to learn more about donor-advised fund (DAF) accounts with DAFgiving360, click here.