Yermack on Possible Issues with Charitable Stock Gifts by Executives of Publicly Traded Companies

David Yermack, Professor of Finance at New York University’s Stern School of Business, has written an interesting paper on charitable donations of company stock by Chairmen and CEOs of publicly traded companies.  The title is “Deduction ad absurdum: CEOs Donating Their Own Stock to Their Own Family Foundations.”  Here is the abstract:

“I study large charitable stock gifts by Chairmen and CEOs of public companies. These gifts, which are not subject  to insider trading law, often occur just before sharp declines in their companies’ share prices. This timing is more pronounced when executives donate their own shares to their own family foundations. Evidence related to reporting delays and seasonal patterns suggests that some CEOs backdate stock gifts to increase personal income tax benefits. CEOs’ family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares.”

On the last point, while Professor Yermack does not directly address the federal tax limitations on private foundation investments, it does not appear those limitations would significantly deter the activity he describes.  The excess business holdings limitations of IRC § 4943 would normally require family foundations to eventually reduce their holdings to 20 percent of the company’s voting stock less any voting stock owned by disqualified persons, but for publicly traded companies even a 20 percent voting stock position may be sufficient to continue to exercise significant influence over the company.  The IRC § 4944 rules governing potentially jeopardizing investments would not require sale of the donated stock even given the diversification concern raised by Professor Yermack because the applicable regulations provide that those rules do not apply to an investment that is made by another person and then gratuitously given to a private foundation (Treas. Reg. § 53.4944-1(a)(ii)(a)).

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