Tax Planning and Compliance for Tax-Exempt Organizations, Fifth Edition 2014 Cumulative Supplement

CHAPTER 13

Excise Tax Based on Investment Income: IRC § 4940

§ 13.2 Capital Gains

§ 13.2 Capital Gains

p. 320. Add at end of introductory paragraph entitled Capital Losses:

The antithesis of ending a year with a capital loss that cannot be deducted against other investment income or carried forward is ending the year with capital gains when the investment portfolio includes securities in a loss position. In that situation, the issue is whether to sell those securities to offset the gains. Assume a stock portfolio in which the investment strategy recommends continuing to hold the loss security over time to recoup the loss. The question that arises is whether the foundation should sell to offset gains and then buy back the same security. This strategy must be followed with a view to the wash sale rules.

A wash sale is a transaction where you sell the loss security and, within a short time after or before the sale, you reacquire the same security. The loss cannot offset gains, or in other words, the deduction is not allowed for the loss generated if you acquire substantially identical securities within a 61-day period beginning 30 days before the sale and ending 30 days after it. The rules do not, however, pertain to sales resulting in a gain.

To avoid the loss limitation, the foundation can wait 31 days before and after the sale to repurchase the loss securities. The risk to this approach is the potential loss of any gain on the stock that occurs during the 31-day period and the ...