When a business owner begins contemplating the sale of a closely held company, charitable planning often enters the conversation. The idea is compelling: contribute shares before the sale, avoid capital gains on the donated portion, and use the proceeds to fund long-term philanthropy through a donor-advised fund or private foundation. It’s a strategy that has been used for decades, and when executed correctly, it can be one of the most tax-efficient ways to support charitable causes.
But as recent cases have shown, especially the Tax Court’s 2023 decision inEstate of Hoensheid v. Commissioner, the timing of the gift is not merely a detail — it is the entire ballgame. A gift made too late in the transaction process can unravel the intended tax benefits and leave the donor with both a tax bill and a compliance headache. Advisors who work with business owners need to understand the nuances of this timing, because the IRS is increasingly scrutinizing pre-sale gifts of closely held stock, and the consequences of missteps can be significant.
Why Timing Matters So Much
The tax advantage of donating appreciated stock before a sale rests on a simple principle: the charity must be the true owner of the stock at a time when the outcome of the sale is still uncertain. If the donor has already effectively locked in the sale — even if the final documents haven’t been signed — the IRS may argue that the donor has made an “anticipatory assignment of income.” In plain terms, the IRS will say: You already earned the right to the sale proceeds, so you can’t avoid tax by transferring the stock at the last minute.
This is exactly what happened in Hoensheid. The donor contributed shares to a charity just two days before closing. Although the formal purchase agreement had not yet been signed at the time of the gift, the court found that the sale was “practically certain.” Negotiations were complete, the price was set, the buyer was committed, and the closing date was scheduled. The charity, in the court’s view, bore no real risk of ownership. It was simply a conduit for the sale proceeds.
The result was harsh but predictable: the donor was taxed on the full capital gain associated with the donated shares, as if he had sold them himself.
The Window in Which a Gift “Works”
For a pre-sale gift of closely held stock to achieve its intended tax benefits, the transfer must occur early enough that the charity or donor-advised fund sponsor becomes a genuine shareholder — not merely a placeholder waiting for a sale that is already inevitable.
This means the gift should be completed before:
- the parties have agreed to all material terms of the sale,
- the board or shareholders have approved the transaction,
- due diligence is substantially complete,
- the closing date is set, or
- the parties behave as though the deal is a foregone conclusion.
In other words, the charity must receive the stock at a moment when the deal could still fall apart or materially change. That uncertainty is what allows the charity to be treated as the true seller of the stock for tax purposes.
The Risks of Getting It Wrong
When the timing is off, the consequences can be significant. The donor may lose the capital gains benefit entirely, resulting in a tax bill on the appreciation in the donated shares. The IRS may also challenge the charitable deduction, especially if the appraisal or substantiation is incomplete or flawed. In Hoensheid, the donor faced both problems: the court disallowed the capital gains benefit and also questioned the adequacy of the appraisal.
Beyond the tax consequences, there are reputational risks for advisors and sponsoring organizations. A failed structure can undermine donor trust and raise concerns for boards and compliance committees. For donors who are making their first major charitable gift, a misstep can sour their philanthropic experience for years.
The Benefits When the Timing is Right
When executed properly, a pre-sale gift of closely held stock can be extraordinarily powerful. The donor avoids capital gains tax on the appreciation in the donated shares, often resulting in a larger charitable gift than would be possible if the donor sold the stock first and donated the after-tax proceeds. The donor also receives a charitable deduction, subject to the usual AGI limits and property rules.
For donors who use a donor-advised fund, the strategy provides additional flexibility. The donor can make a single large contribution of stock, allow the DAF sponsor to sell the shares, and then recommend grants to multiple charities over time. For donors who prefer a private foundation, the gift can support long-term family philanthropy, though the foundation rules require careful navigation.
A Practical Roadmap for Advisors and Donors
Although every transaction is unique, the process of making a pre-sale gift of closely held stock generally follows a predictable arc. The most successful outcomes occur when advisors and donors begin planning early — ideally before negotiations with potential buyers become serious.
The first step is to clarify the donor’s philanthropic goals and determine whether a donor-advised fund, private foundation, or public charity is the right vehicle. At the same time, advisors should review corporate documents to identify any restrictions on transferring shares to a charity. Many closely held companies require board or shareholder approval for such transfers, and these approvals can take time.
Once the donor decides to proceed, the next step is to obtain a qualified appraisal. The IRS requires a formal appraisal for gifts of non-publicly traded stock, and the appraisal must meet specific standards. Engaging an experienced appraiser early helps avoid delays later.
The actual transfer of the stock must be completed before the sale becomes “practically certain.” This is the critical moment. Advisors should document the status of negotiations at the time of the gift, including any open terms, unresolved contingencies, or remaining due diligence. The charity or DAF sponsor must receive the stock unconditionally and must have full discretion to decide whether to participate in the sale.
After the gift is complete, the charity or DAF sponsor should act as a genuine shareholder. It should receive information in its own right, sign documents independently, and make its own decision to sell the stock. The donor may not direct or control the charity’s actions, though the charity may choose to align its decisions with the donor’s preferences.
Finally, after the sale closes, both the donor and the charity must maintain thorough documentation. The donor must file Form 8283 with the appraisal attached, and the charity must provide a contemporaneous acknowledgment of the gift. A clear timeline of the transaction is often the best defense against an IRS challenge.
The Role of Donor-Advised Funds and Foundations
Donor-advised funds have become the preferred vehicle for many pre-sale gifts of closely held stock. Because DAF sponsors are public charities, donors often receive a more favorable deduction than they would for a gift to a private foundation. DAF sponsors also have established procedures for accepting and liquidating illiquid assets, which can simplify the process.
Private foundations can also receive closely held stock, but the rules are more complex. Foundations must navigate the excess business holdings rules, which limit how much of a business a foundation can own and for how long. They must also avoid self-dealing, which can occur if the foundation transacts with disqualified persons. For donors who want maximum flexibility and fewer regulatory constraints, a DAF is often the better choice.
A Final Word for Advisors
The lesson of Hoensheid is not that pre-sale gifts of closely held stock are risky or unwise. On the contrary, they remain one of the most effective charitable planning strategies available to business owners. The lesson is that timing and documentation matter — and that advisors must guide donors through the process with care.
When advisors help donors plan early, document thoroughly, and execute the gift before the sale becomes inevitable, the strategy works beautifully. The donor avoids capital gains, the charity receives a larger gift, and the transaction supports long-term philanthropic goals. But when the gift is made too late, the IRS has shown that it is willing to challenge the structure, and courts have shown that they are willing to agree.
For advisors who work with business owners, the message is clear: bring charitable planning into the conversation early, long before the ink on the purchase agreement is dry. The difference between a successful strategy and a failed one often comes down to a matter of days.
