Can I Deduct My Charitable Donation on Last Year’s Return Since I Gave Instructions to My Broker?
Q:
“I wanted to make a charitable donation of stock in December 2012. I sent in the paperwork to my broker in mid-December. My statement shows the stock wasn’t transferred out of my account until the first week of January. Can I deduct the donation on my 2012 return since I gave the instructions to my broker in 2012? Or do I have to wait until my 2013 return to deduct it?
A:
The short answer is that your donation is effective when the charity receives the shares, not when you give the instruction to your broker to transfer the shares. The way you have described it, you can’t deduct the donation on your 2012 return. Your donation is a 2013 deduction.
Now for the details. I’m assuming the stock you donated was publicly-traded, was not part of an imminent merger or acquisition, and was held in “street name”1 since that is the most common situation. If those assumptions are not correct2 then other rules apply that won’t be covered here.
Generally the rule is that the donation occurs when you have relinquished control over the shares. For shares held in street name there are two scenarios to consider: 1) When your charity has an account at your brokerage firm; and 2) When your charity does not have an account at your brokerage firm.
When the Charity has an Account at Your Brokerage Firm
If the charity has an account at your brokerage firm the rule is very simple. The donation occurs on the day your broker makes the entry on its books moving the shares from your account to the charity’s account.3 You will see the date of the donation on your account statement.
The donation can happen very quickly because no shares are actually transferred. The shares continue to be registered in the “street name” of your broker.
For example the asset management firm at which I am a partner, Jacobs Equity, has clients that have submitted donation paperwork as late as December 30. In every case the donation was effective before the end of the year. The broker made its book entry and the donation was complete. No transfer, no waiting.
To be fair, it certainly helps that there exists a longstanding relationship between Jacobs Equity and the brokerage firm. Practically speaking a retail investor may not be successful pushing through a last-minute donation. But from the tax law’s perspective there is no problem with it.
When the Charity Does Not have an Account at Your Brokerage Firm
If your charity does not have an account at your broker then your broker must transfer the shares to the charity’s broker or agent, generally via the Depository Trust Company (“DTC”). This process takes time and there is not much you can do to speed it up.
My understanding is the IRS considers the DTC to be an agent of the donor for purposes of establishing the donation date. If that’s the case, the donation would not be effective until the shares arrive on the other end and are credited to the charity’s account. The donation would not be effective when the shares leave your account even if your statement shows the departure date for the shares.
On the other hand I have never heard of the IRS challenging the donation date of a “plain vanilla” stock donation as it appears on the taxpayer’s brokerage statement.
In any event, since the DTC transfer process takes time it is dangerous to wait until the end of the year to make the donation.
Giving Instructions to Your Broker Does Not Establish the Donation Date
In neither scenario is the donation considered effective on the day you give the instruction to your broker.4
Can You Do It Faster?
Suppose it is mid-December (or later!) and you really need to make your donation effective before the end of the year. Your charity of choice does not have an account at your broker. What do you do? You call up your charity and encourage it to set up an account with your brokerage firm so the donation can occur quickly. As long as your charity is willing to go to the trouble of setting up a brokerage account, and assuming it’s willing to act quickly (perhaps proportionally related to the size of your donation!) then there is no reason why you can’t make the donation effective several days sooner than if you were to transfer the shares through the DTC.
Final Thoughts
The foregoing discussion is limited to how the IRS will treat your donation. It doesn’t address any legal rights you may have against your broker. First I would recommend you discuss the situation with your broker. See if they are able to do anything to help (e.g. have them review the situation to determine if perchance the donation occurred earlier than shown on your statement, or if there is a legal and ethical way to alter the timing of the donation on their records). If there is enough money at stake and you believe your broker has done something wrong, you can discuss the situation with an attorney to see what options you might have.
Additional Reading
Charitable Giving for Procrastinators by Laura H. Peebles of Deloitte & Touche. Note that the article is a few years old (from 2004) but is still relevant and provides great background of the leading cases.
Timing of Charitable Contributions is an October 2012 article at the New York Community Trust website.
Charitable Gifts of Publicly Traded Securities is also at the New York Community Trust website. March 2012.
Footnotes
- Your shares were most likely held in “street name” if you were donating shares that you purchased in a brokerage account at a place like Fidelity, Schwab, or Scottrade. ↩
- For example, if the shares were restricted, if you donated a physical stock certificate, if the shares were subject to a pending merger or tender offer, etc. ↩
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See Income Tax Regulations section 1.170A-1(b) which states “the gift is completed on the date the stock is transferred on the books of the corporation.” Although the sentence appears in the context of a stock certificate rather than stock held in street name, it demonstrates the principle that is followed for both. In Morrison v. Commissioner, 53 T.C.M. 251 (1987) the court explicitly applied the provision to donated stock that had been held in street name:
↩For purposes of section 170, a gift of stock is complete when delivery of the properly endorsed stock certificate is effective. The regulations state that “[i]f the donor delivers the [endorsed] stock certificate to his bank or broker as the donor’s agent * * * for transfer into the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation.” Sec. 1.170A-1(b), Income Tax Regs. While the regulations contemplate the delivery of a stock certificate properly endorsed by the donor, the petitioners’ arrangement is closely analogous.
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From Morrison:
The date on which a donor directs his agent to transfer stock to a charity is not determinative of when a gift is complete. Rather, delivery of a gift of stock is complete when the stock is actually transferred, for only then is the stock placed beyond the donor’s control. ↩
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