ABC broke the news: Mitt Romney has donated millions of dollars worth of stock to the Mormon church. SEC filings disclose that a Bain partner donated $1.9 million of Burger King stock to the Church; in addition, the Church has received stock of other Bain holdings, including Domino’s, DDi, Innophos, and the parent company of AMC Theaters.
But why? Why would Romney give the Church equity stakes in bad fast-food chains, second-rate pizza chains, and other such holdings?[fn1]
Taxes. Sure, there may be other reasons, too, but there’s a significant tax advantage to donating appreciated assets to charities.[fn2]
Remember, certain donors to 501(c)(3) organizations, including churches, can take a deduction for donations they make to that organization. An example of how it works: assume that in 2011 I itemized my deductions, that I earned $100,000[fn3], that my marginal tax rate was 25%, and that I wrote a check to the Church for $10,000. As a result of my charitable contribution, I can deduct the $10,000, which lowers my tax bill by $2,500.
And, it turns out, I get the same deduction if, instead of writing a check for $10,000, I donate, for example, stock worth $10,000. I get a deduction for the fair market value of property donated.
But that stock donation may save me more than $2,500 in taxes. Because we don’t know right now what I paid for the stock. Assume, for example, that I paid $1,000 for the stock I donate. If I wanted to get access to its $10,000 of value, I would have to sell the stock. I would realize a gain of $9,000, which would currently be taxed at a 15% rate, so I would owe $1,350 of taxes. In fact, if I sold the stock for $10,000 cash, and took those bills and gave them to my bishop, I would still owe $1,350 in taxes on my gain.
But the gain is not triggered when I donate the stock to the Church. So now I have a $10,000 deduction that saves me $2,500 in taxes, and I have a potential tax liability of $1,350 that will never materialize. And, because money is fungible, by fulfilling my tithing liability with property, I’ve freed up $10,000 of liquid assets to do with as I please.
And what does the Church do with Burger King stock? It has two options: it can put the stock in its investment portfolio, or it can sell the stock and use the $10,000 it realizes (and doesn’t pay taxes on—remember, the Church, like all 501(c)(3)s, doesn’t pay taxes on its investment income) to do whatever it would have done with the $10,000 in cash that I could have donated. I suspect, in general, that the Church (and, frankly, most charities) takes the second route.
[fn1] It may be that Romney didn’t donate all of those stocks, but his campaign acknowledges that he donated at least some.
[fn2] Note that, from this point on, any motive I suggest for Romney or the Church is pure conjecture: I don’t know Mitt Romney personally. It is within the realm of possibility that he had substantive non-tax reasons for giving the Church a share of Burger King. That said, I kind of doubt it.
[fn3] I should note that the amount of money I earn is something other than $100,000. But, for the sake of mathematical simplicity, every hypothetical person I deal with earns $100,000.