“What’s the value of my contribution?” When the question arises, my instant response is, “Why, it’s the fair market value, of course.” If pressed, I’ll cite the IRS definition of fair market value (FMV):
“The price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
If the contribution happens to be publicly traded stock, the definition of FMV is even easier to explain:
“If there is an active public market for the contributed stocks or bonds on a stock exchange, in an over-the-counter market, or elsewhere, the FMV of each share or bond is the average price between the highest and lowest quoted selling prices on the valuation date.”
As straightforward as the rules are, there are situations where it becomes tempting to use the net proceeds from the sale of the stock instead of FMV.
Consider a contribution of stock in exchange for a charitable gift annuity. The annuity contract must specify a dollar value to be paid to the annuitant. Most often, that dollar value is determined by applying the American Council on Gift Annuities (ACGA) suggested rates to the value contributed. What is more, the charity is accepting a liability to pay the annuitant(s) a certain amount for life based upon the value it received.
So, it makes sense to base a charitable gift annuity on the net proceeds, right? After all, if the value of the stock went down between the date of gift and the date of liquidation, then the charity is protected from having to pay the higher annuity amount.
As reasonable as that approach may seem – especially during times when the stock market is gyrating wildly – it is wrong.
The right answer is to base the annuity amount, as well as the charitable deduction and payment calculations, on the full fair market value. For a gift of publicly traded stock, that’s the average between the high and low market prices on the date of the gift. For anything else, it’s still the fair market value, and if that’s greater than $5,000, your donor will need a qualified appraisal.
No doubt, the value of the proceeds from the sale is a critically important element of the gift transaction, but not relevant when it comes to the charitable deduction.