Corporate Governance

From the Pages of The Pomerantz Monitor: Backdating Charitable Donations

By Carolyn Moskowitz

As reported in the current issue of The Pomerantz Monitor, the scandal of options backdating at hundreds of companies across the country is approaching its second anniversary. But just as this story starts to show signs of winding down, another backdating scheme may be about to raise its ugly head.

There is a long tradition of the wealthy donating corporate stock to charity. The IRS allows individuals to take charitable deductions equal to the market price of any stock on the date it is donated to charity. Unlike open market sales, gifts of stock have very lenient disclosure requirements. Depressingly, a new academic study by David Yermack, a finance professor at NYU, who previously studied options backdating, shows that donations of their companies? stock by corporate CEOs and chairmen to their own charitable foundations tend to be dated just before the market price of the donated stock plunges. As the Church Lady used to say, "how convenient."

The study looked at 151 gifts of stock valued at $1 million or more made from the middle of 2003 through the end of 2005, and found that sixty percent of the time, the donated stock subsequently performed worse than the market as a whole. The study also reportedly found that many of the gifts tended to be made following positive earnings announcements but before negative announcements.

It may not be illegal to donate stock when its value is high; but it is probably illegal to lie to the IRS about the date you made the donation, in order to inflate your tax deduction. And in our ledger book, it?s unethical for business leaders to use aggressive tax evasion strategies when making charitable donations to their own foundations.   

Full post as published by PomTalk on April 01, 2008 (boomark / email).