A Loophole in CEO Gift Giving?

Are executives gaming their gift-giving for maximum tax benefits? A study has found a correlation between the timing of gifts to family foundations shortly before the stock price drops sharply. The research, conducted by Dr. David L. Yermack, a professor of finance at the Stern School of Business at New York University, the pattern suggests that some gifts of stock may have been backdated in much the same way that some companies have backdated stock options, according to The New York Times.

“On average, the gifts have been extraordinarily well-timed to maximize the associated personal income tax benefits,” Dr. Yermack told the NYT, “and it seems to me fairly likely that some of these people making them may be monkeying around with paper trails.”

The study looked at 151 gifts of at least $1 million worth of stock to foundations controlled by the donor, each of whom were either corporate chairmen or chief executives. Dr. Yermack would not name any of the 90 executives who made the gifts. He emphasized there was nothing illegal about such gifts because the rules that prohibited corporate insiders from selling stock during periods when they were privy to information unavailable to other investors did not apply to charitable contributions.

“There’s a huge loophole for giving away stock without any of the restrictions that normally apply to selling stock,” Dr. Yermack said, “and that allows donors an opportunity to profit, at least on a tax basis. They can donate a stock the day before a negative earnings announcement, for example, and get a much bigger deduction than they would have the next day.”