Tax
Donating Private Company Stock: The Appraisal Rule That Cost One Founder $3.3 Million
Donating private company stock can beat giving cash. The qualified appraisal, the 60-day window, and the 2026 rules that decide whether the deduction holds.
By 409.AI Team - 2026-09-09
# Donating Private Company Stock: The Appraisal Rule That Cost One Founder $3.3 Million
In July 2015, a shareholder in a closely held manufacturing business gave more than $3 million of stock to a donor-advised fund. Two days later, the company sold for roughly $80 million. The donor claimed a $3.3 million charitable deduction and reported no capital gain on the donated shares.
The Tax Court took both away. In *Estate of Hoensheid v. Commissioner*, T.C. Memo. 2023-34, the court held the gain had already accrued to the donor by the time the shares changed hands, so the sale proceeds were taxable. Then, separately, it denied the charitable deduction entirely, because the valuation behind it wasn't a qualified appraisal and the person who prepared it wasn't a qualified appraiser. Tax on the gain, nothing for the gift.
That case is the clearest warning available to founders thinking about giving away private stock, and the rules it turns on got stricter in 2026. Here's what actually has to happen for a stock gift to work.
Why founders give shares instead of cash
The appeal is straightforward arithmetic. When you donate appreciated stock you've held more than a year to a public charity, [IRS Publication 526](https://www.irs.gov/publications/p526) lets you deduct the fair market value of the shares, and you never recognize the built-in gain.
Say you bought 200,000 shares of founder common at $0.02 back at incorporation, and a recent appraisal puts common at $8.00. You want to give away 50,000 shares.
Sell first, then donate the cash: you realize $399,000 of long-term gain. At 20% plus the 3.8% net investment income tax, that's about $95,000 to the IRS, leaving roughly $305,000 for the charity and a $305,000 deduction.
Donate the shares directly: the charity receives $400,000 of stock, sells it as a tax-exempt entity, and you deduct $400,000. Nobody pays the $95,000.
The gap is real, which is why this shows up in every pre-liquidity planning conversation. The gap also explains why the IRS scrutinizes these gifts closely.
Trap one: giving too late
The deduction assumes you gave away *stock*. If you gave away what was effectively a claim on sale proceeds, the assignment of income doctrine puts the gain back on your return.
For the narrow case of a gift followed by a corporate redemption, Rev. Rul. 78-197 gives a workable line: the IRS treats the proceeds as the donor's income only if the charity was legally bound, or could be compelled, to surrender the shares. Outside that fact pattern, courts look at how ripe the sale was when you signed the gift over.
In Hoensheid, the donor wanted to wait as long as possible to be sure the deal would close, and waited too long. By the gift date there were no unresolved contingencies, the remaining steps were ministerial, working capital had already been stripped out and distributed, and there was no realistic risk of the sale falling through. The court looked at the substance rather than the paperwork and found the gain fixed before the gift.
The practical lesson isn't a date on a calendar. It's that certainty cuts against you. A gift made while diligence is open, financing is unsigned, and the outcome could still change looks like a gift of stock. A gift made after everything is settled looks like a gift of money you already earned. Founders who wait for the deal to feel safe are choosing the worse side of that line.
Trap two: the appraisal nobody thought they needed
The second holding in Hoensheid is the one that surprises people, because it has nothing to do with whether the $3.3 million number was right.
For noncash gifts over $5,000, section 170(f)(11) requires a qualified appraisal and a completed Form 8283. Private stock gets slightly gentler treatment at the bottom end: under [Treas. Reg. 1.170A-13(c)(2)(ii)(B)](https://www.law.cornell.edu/cfr/text/26/1.170A-13), a gift of nonpublicly traded stock worth more than $5,000 but not more than $10,000 needs only a partially completed appraisal summary, not a full appraisal. Above $10,000, you need the real thing. Above $500,000, the appraisal itself gets attached to the return.
The [Form 8283 instructions](https://www.irs.gov/instructions/i8283) set out the mechanics, and each one is a place gifts fail:
Timing. The appraisal "must be signed and dated by a qualified appraiser not earlier than 60 days before the date you contribute the property," and you must receive it before the due date, including extensions, of the return claiming the deduction. A valuation done in March doesn't substantiate a gift made in December.
Signatures. The appraiser completes and signs Part IV of Section B. The charity signs the donee acknowledgment in Part V. A Form 8283 missing either signature is an incomplete return position, not a technicality.
The appraiser. The IRS wants someone who either holds a recognized appraisal designation or has the coursework plus two or more years of experience valuing that type of property, who regularly prepares appraisals for pay, and who declares their qualifications inside the appraisal itself.
Hoensheid's donor used the financial adviser working on the sale, partly to save money. The court found that the adviser held no certification, didn't hold himself out as an appraiser, and prepared appraisals once or twice a year mostly to win other business. The valuation also carried the wrong contribution date, omitted the statement that it was prepared for income tax purposes, left out the appraiser's qualifications, and didn't explain its method. The taxpayers argued substantial compliance. The court refused, because the failures went to substance rather than form.
This is the same distinction that governs whether an independent valuation earns [409A safe harbor treatment or just looks like one](https://409.ai/articles/409a-safe-harbor-price-vs-qualified-appraiser). Who signs, what the report contains, and when it was prepared decide whether the IRS treats it as an appraisal at all.
Your 409A is not a qualified appraisal
Founders reach for the 409A because it's sitting in the data room and it already values common stock. It doesn't do this job.
A 409A exists to set an option strike price under section 409A. A charitable appraisal exists to substantiate a deduction under section 170, and the regulations demand specific contents, including a statement that the report was prepared for income tax purposes, a description of the method, and the appraiser's declaration. The dates rarely line up either, since 409As are refreshed on their own cycle and the 60-day window is tight.
The valuation analysis underneath will look familiar. Both reports wrestle with the same private-company problems, including the [discount for lack of marketability](https://409.ai/articles/discount-lack-marketability-dlom-409a-valuation) that separates a share of illiquid common from a share of anything you can sell on Monday. And the fair market value standard here is the same one that makes [a 409A different from a general FMV assessment](https://409.ai/articles/409a-valuation-vs-fair-market-value). But the report has to be commissioned for the gift, dated for the gift, and written to the section 170 requirements. It's the same engine 409.ai builds for [gift and estate tax valuations](https://409.ai/articles/gifting-startup-equity-2026-estate-tax-exemption), pointed at a different filing.
What changed in 2026
The One Big Beautiful Bill Act reshaped the deduction side starting this tax year, and it cuts against large gifts by high earners. According to the [Tax Foundation](https://taxfoundation.org/blog/charitable-deduction-big-beautiful-bill/), itemizers now face a floor: charitable contributions below 0.5% of adjusted gross income aren't deductible at all. And for taxpayers in the top bracket, the value of itemized deductions is capped at 35 cents per dollar rather than 37.
Run the $400,000 stock gift through it with $2 million of AGI. The 0.5% floor wipes out the first $10,000, leaving $390,000 deductible. At 35 cents on the dollar, that's $136,500 of tax benefit, against the $148,000 the full $400,000 would have been worth at a 37% rate. The 30% of AGI ceiling on gifts of appreciated capital gain property still applies, though at $2 million of AGI a $400,000 gift clears it comfortably, and anything over the ceiling carries forward for five years.
None of that erases the case for giving shares rather than cash. The avoided capital gains tax is still the larger number. But the deduction is worth measurably less than it was in 2025, and the same law that tightened it also [expanded the QSBS exclusion](https://409.ai/articles/qsbs-one-big-beautiful-bill-act-section-1202-changes), which matters here: section 1202 is a shareholder-level benefit, and a tax-exempt charity has no gain to exclude. Shares that would have been worth a great deal to you under 1202 hand none of that advantage to the donee.
Three things that go wrong with startup shares specifically
Short holding periods. The full fair market value deduction is for long-term capital gain property. Donate stock you've held a year or less and Publication 526 limits your deduction to basis. Someone who exercises options in March and donates the shares in December gets a deduction close to their strike price, not the appraised value.
ISO shares. A gift is a disposition. Section 424(c)(1) defines the term to include "a sale, exchange, gift, or a transfer of legal title," with narrow exceptions for bequests, certain reorganization exchanges, and pledges. Donating ISO shares before you've cleared two years from grant and one year from exercise is a disqualifying disposition, which pulls the [favorable ISO treatment](https://409.ai/articles/iso-vs-nso-how-stock-options-are-taxed) off the table on shares you no longer own.
Transfer restrictions. Most private stock carries a right of first refusal, board approval requirements, and often a flat prohibition on transfers to outside parties. The charity has to be able to accept and eventually sell the shares, which is the same set of consents that governs any [secondary sale of startup stock](https://409.ai/articles/secondary-sale-startup-shares-qsbs-tax-treatment). Getting the gift approved is a separate project from getting it valued.
The order of operations
If you're planning to give shares before a liquidity event, the sequence is what protects you. Commission the appraisal from someone who meets the qualified appraiser standard and who will state their credentials in the report. Complete the gift while the outcome is genuinely uncertain, not after the deal has hardened into a formality. Have the appraiser sign within the 60-day window, get the charity's signature on Form 8283 before you file, and keep the report.
Hoensheid's donor got the economics right and the paperwork wrong, and the paperwork is what the court ruled on. A gift of private stock is one of the few places where a valuation report isn't supporting evidence for the deduction. It is the deduction.