Charitable Stock Donations Come Under Fire

The paper, authored by Cindy Schipiani and Nejat Seyhun of University of Michigan’s Ross School of Business, researched gifts of common stock by large shareholders in all publicly listed U.S. firms from 1986 to 2020. Notably, some of the set included executives, but not exclusively. However, the paper accuses companies and executives of leaking material non-public information to large shareholders, who then use the information to time charitable stock donations to maximize their tax benefits. As evidence, the authors present findings that stock prices rise “abnormally” by about 6% for the year prior to the gift and fall “abnormally” by 4% for the one-year period following the gift. Here, abnormally means outperforming an index of NYSE, AMEX, and NASDAQ firms.

The authors find fault with just about all parties concerned: large shareholders for making charitable donations with tax benefits, companies for providing access and leaking information to those shareholders, and the tax code for being too generous regarding rules for charitable gifts. The narrative of the study aligns closely to increasingly strident calls for the wealthy to “pay their fair share of taxes” amid suspicions that the wealthy are unscrupulous, yet the tax code is set up to benefit them. A recent article from ProPublica publishing the tax returns of some of the wealthiest citizens has brought this issue to the forefront and calls for reform are increasing. 

While negative stories about charitable giving carry increased risk, it is not likely that the deductions will be eliminated. However, it is likely that legislators and regulators will continue to look for methods to discourage insider trading or the manipulation of stock to minimize tax burdens.