We’re into fall already, and before we know it the end of the year will be upon us. This upcoming period of time is a busy one for stock administration professionals. In the mix of activity that tends to spike in the month of December is that of charitable giving and gifts. In today’s blog I’ll cover some reminders about ensuring proper tax reporting and securities law compliance for stock related donations.
My inspiration for this blog actually came from a Fortune magazine article about John Mackey, co-CEO and co-founder of Whole Foods. Only a single sentence in the entire article mentioned stock options. In talking about Mackey’s $1 per year salary, the article also mentioned that “The company donates stock options Mackey would have received to one of its foundations.” As I started thinking about how that transaction would be handled on the company side, I realized that it’s been a while since we talked about gifts and donations.
This is honestly a topic that could command a lot of written coverage. The intricacies of gifting stock can be complex from several angles. In the interest of space, I’ll focus on a few areas that touch stock administration.
Timing of Donation to Charity: For tax purposes, the IRS considers the charitable donation to be complete on the date it is received by the charity – not the date it was requested, not the date the company approved the transfer. This is something to be mindful of the closer the request is made to December 31st. If the donor personally delivers a stock certificate with all necessary endorsements to the charitable recipient, the gift is complete for federal income tax purposes on the day of delivery. If the shares are being transferred electronically to the charity, then the transfer is complete when the shares are received into the charity’s account. It’s not enough to have made a transfer request to a broker. This timing can be important to companies who are tracking dispositions of ESPP shares and ISOs. For dispositions due to charitable donations occurring near December 31st, it’s best to verify the date the shares were actually received by the charity in order to apply the disposition to the proper tax year.
Donations of shares acquired through an ESPP or Incentive Stock Option (ISO) exercise: There are some tricky nuances around taxation on the participant side that hopefully will have been discussed with their tax advisor. What stock administrators need to know is that in tracking dispositions of ESPP and ISO shares, a disposition is a disposition – even a charitable one. That means for purposes of tracking qualified vs. disqualified dispositions, the same rules apply to charitable donations of the shares. See the above section on “Timing of Donation to Charity” to ensure tax reporting in the proper year.
Rule 144 Considerations: Rule 144 is concerned with the sale of control securities, not their gratuitous transfer, so the subsequent sale of the stock by a charity, not the actual gift of the shares to the charity, would be subject to the restrictions of Rule 144, if it is applicable. The charity must follow Rule 144 if it has a control relationship with the issuing company. Those wanting more detail on Rule 144 and gift requirements can read the March-April 2013 issue of The Corporate Counsel.
In summary, if an affiliate gifts stock to a non-affiliate that was originally acquired by the affiliate in the open market (i.e., not restricted in the affiliate's hands), since the securities were not subject to a holding period requirement in the affiliate donor's hand, SEC staff has stated that the donee need not comply with the Rule 144(d) holding period requirement for its sales of the securities. Moreover, the Staff notes that if the donee is not an affiliate and has not been an affiliate during the preceding three months, then the donee is free to resell the securities under Rule 144(b)(1) "subject only to the current public information requirement in Rule 144(c)(1), as applicable."
“The one-year cut off for the application of the current public information requirement to donees does run from the donor’s original acquisition. Good news—but don’t forget that the six-month “tail,” adopted in 2007 (which requires donors to aggregate with their donees’ sales) runs from the date of the gift.” The “tail” mentioned in the article applies to the donor, who must aggregate his/her sales of stock with those of the donee for purposes of complying with the Rule 144 volume limitation. This requirement applies for six months after the gift (12 months where the issuer is not a reporting company or is not current in its Exchange Act reporting).
If you are not a subscriber to The Corporate Counsel (or have not yet renewed) you can gain immediate access online to sample gift compliance letters by taking advantage of the no-risk trial. (Almost all of our member companies and law firms are long-term subscribers to The Corporate Counsel.)
Tips to Aid Insiders in Trading During COVID-19
I recently wrote about the heightened level of interest and scrutiny regulators are placing on stock trades in light of COVID-19. Dramatic changes in the economic and business circumstan...Read More
Market Volatility and Your ESPP
Last week I blogged about how a stock price decline could impact your burn rate (and, consequ...Read More
The Case for ESPPs and Upping Participation
In a recent NASPP Equity Expert podcast episode “ESPP Innovation: Helping Employees Participate...Read More
Administration and Governance Challenges Meet Tech Innovation
When a company is growing at lightning’s pace, such growth can bring a need to streamline or expand processes to ensure errors and hiccups are minimized. Sometimes the momentum of expansion c...Read More
Final Rules for 401(k) Hardship Withdrawals and ESPP Contributions
The IRS has issued Read More