Charitable Deduction Strategy

A client wants to donate to set up a Donor Advised Charitable Fund.
Client has appreciated stock he would like to retain.
What if he donated that low basis stock to the the charitable fund instead of cash.
Then a day later use the cash he was going to donate to buy the same stock thereby giving a new higher basis in the same stock.
I am not smart enough to know if the wash sale rules, or any other rules, affect this - my guess is that this is all legit.

A Wash sale is selling stock for a loss and repurchasing the stock again. Not applicable in your situation.

This is all legit but may want to make sure your client understands the following :
1) Donating long term capital gain for short term capital gain ( OK if planning to hold new stock for over 1 year )
2) Make sure there's a tax benefit from the gifting ; itemize deductions should exceed standard deduction before the gifting occurs . With higher standard deduction and SALT limitations many more taxpayers will not be able to itemize this year

This is all legit but may want to make sure your client understands the following :
1) Donating long term capital gain for short term capital gain ( OK if planning to hold new stock for over 1 year )
2) Make sure there's a tax benefit from the gifting ; itemize deductions should exceed standard deduction before the gifting occurs . With higher standard deduction and SALT limitations many more taxpayers will not be able to itemize this year

Actually, the idea was to donate a relatively large amount of appreciated stock to a donor advised fund so most of that will still benefit from an itemized deduction given the $10,000 in SALT will satisfy most of the std deduction for this single person.
(SALT limit is same for single vs married filing jointly as I remember.) Replacement stock most likely will be held long term. Also advised client re the advantages of the QCD for IRA distributions.

Actually, the idea was to donate a relatively large amount of appreciated stock to a donor advised fund so most of that will still benefit from an itemized deduction given the $10,000 in SALT will satisfy most of the std deduction for this single person.

Yep, that's a legit strategy. I used to consider DAFs as an idea for charitably-minded people who have one-off major gains, such as selling their business or winning the lottery, to combine a few years' giving into one without having to immediately choose the recipients. But with the new itemized deduction limits and increased standard deduction, DAFs are probably going to be useful for more people. Also, the new §199A deduction is phased out on taxable income, not AGI, so careful tax planning for business owners at/near the phaseout might be incredibly tax efficient (even if donating cash instead of appreciated shares).

DAFs also allow a person to give anonymously to an organization which prevents a bunch of mailings and the selling of addresses. DAFs tend to have relatively high fees for non-distributed assets, but not outrageously high, and the fees are generally going to be much less than the tax benefit received.

A client wants to donate to set up a Donor Advised Charitable Fund.

Why does he want to donate to a donor advised fund? If all he wants is to avoid capital gains on his low-basis stock, he can give it to any charity. At any time he can buy some other stock or the same stock in whatever amount he wants and have basis at current FMV; it doesn't have to be in conjunction with the gift.

Frankly wrote :

" Why does he want to donate to a donor advised fund"

Maybe taxpayers income is spiking this year and wants a deduction, while at the same time doesn't want to make immediate grants . Possibly taxpayers goal is to make grants in following year(s) to multiple charities.

Maybe taxpayers income is spiking this year and wants a deduction, while at the same time doesn't want to make immediate grants .

Exactly. The taxpayer wants a tax break for being charitable, without actually being charitable. Funds are piling up in DAFs, fees are being charged, and the charities aren't benefiting. It's another tax scam for the rich, since obviously most taxpayers who aren't rich will never be using it.

Your client wants to set up his own DAF from scratch? or use an available one (one of my clients uses Fidelity's fund). It was pretty easy, and my client and I both got all the documentation needed on all the parts. I'm sure there are others.

Exactly. The taxpayer wants a tax break for being charitable, without actually being charitable. Funds are piling up in DAFs, fees are being charged, and the charities aren't benefiting. It's another tax scam for the rich, since obviously most taxpayers who aren't rich will never be using it.

Money doesn't go into DAFs to just sit around forever.

I'm personally thinking of doing a DAF, and I'm not anything near what you would consider "rich". It's only due to the tax law change that I even needed to consider one. Paying 0.6% p.a. in DAF fees to one of the lower-fee providers (Fidelity, Vanguard, etc) is a small price to pay when the alternative is to cut my charitable giving by twenty-odd percent.

Maybe taxpayers income is spiking this year and wants a deduction, while at the same time doesn't want to make immediate grants .

Exactly. The taxpayer wants a tax break for being charitable, without actually being charitable. Funds are piling up in DAFs, fees are being charged, and the charities aren't benefiting. It's another tax scam for the rich, since obviously most taxpayers who aren't rich will never be using it.

It this charitable because that money is going to go to charity sooner or later. The donor can never get it back. Perhaps there should be a minimum, just like a MRD from a retirement account. But that is for Congress to decide.

Also - remember that a Qualified Charitable Distribution from an IRA cannot go to a donor advised fund. While I have a donor advised fund established pior to 2018 at this point I prefer to make major charitable contribution via the QCD. The Donor advised fund is growing and will be a source of charitable giving in the future. What is left when I am gone is up to the successor advisers, my children. At some point in time Schwab ends up with the power to distribute.

I just keep my money, pay the taxes, and let the biggest charity in the world hand it out how they please...

What is the reasoning for not having the same income limitation on the amount deductible in any one year as the income limitation applicable to donations to private foundations?

What is the reasoning for not having the same income limitation on the amount deductible in any one year as the income limitation applicable to donations to private foundations?

You are asking that Congress be reasonable?
However, I think the concern regarding Private Foundations is that they are more likely to engage in questionable activities. From what I read both the Clintons and the Trumps have possibly engaged in such.

Guys - I have a question about the transaction in the OP:

- donate appreciates stock and take deduction based on FMV of asset; buy it back for cash the next day; claim FMV basis in the asset.

The conclusion above is something along the lines, “my guess is that this works” “yup it works” etc.

My guess would be that it does not work for at least three reasons. So I just want to see how people are addressing circular cash flow, step transaction and business purpose (which has now been codified for a number of years). I have not done avdeep dive in this context but it would seem to me that any single one of these doctrines causes the transaction to fail to attain its intended result.

What authority do you guys have for thinking that it works? Honestly curious about it because if there is authority for it, it’s legally sanctioned double-dip.

So, the Gates Foundation is a scam for the rich?

Jake – makes sense. Thanks. Donor has a lot more control over Private Foundation shenanigans.

Diplodok – sounds like reasonable tax and economic planning to me.

sounds like reasonable tax and economic planning to me.

Based on what authority?

(...because if you have none, then the step transaction doctrine makes the charitable contribution of the stock disappear, and you're just left with stock that has it's historic basis and simply a charitable contribution of cash to the donor advised fund).

So I just want to see how people are addressing circular cash flow, step transaction and business purpose (which has now been codified for a number of years). I have not done avdeep dive in this context but it would seem to me that any single one of these doctrines causes the transaction to fail to attain its intended result.

What authority do you guys have for thinking that it works? Honestly curious about it because if there is authority for it, it’s legally sanctioned double-dip.

Under Sec 170 a donor is entitled to a deduction if there has been a contribution of something of value to a charity, which is satisfied here. There is no requirement to avoid acquiring new shares. The deduction amount is the fair market value, including the gain portion, except in some specific cases that don't apply here.

Contrast that to the wash-sale rule where one must relinquish ownership for the wash period - avoid purchasing replacement shares of that stock or any substantially identical security - to claim the tax benefit.

It's quite common to give away appreciated shares of a stock that you continue to acquire; in fact, acquiring more is a reason to give some away for those with concentrated positions (e.g. equity comp). None of the doctrines you're referencing seems at all relevant. And where's the "double-dip"?