Giving to charity has tax benefits. But some chief executives may be unfairly trying to increase the tax advantages in gifts to their family foundations.

That's the implication of research by David Yermack, a finance professor at New York University whose seminal research in 1997 helped unearth the option-backdating scandal nearly a decade later.
 
In a new study, Yermack finds that chief executives and chairmen of public companies have an uncanny ability to time large stock gifts to their own family foundations directly prior to big declines in share prices. For example, he found that four out of five stock gifts in the week before an earnings announcement were made right before a decline in the price of the stock.

Such gifts, which are exempt from insider-trading rules, typically come right after a run-up in a company's stock price and right before an abnormal 3 percent drop within the following 20 trading days. In comparison, other types of large charitable stock gifts—while also well-timed—come before a smaller 1 percent average drop in share prices.
 
Yermack's results were based on 155 gifts of more than $1 million made by C.E.O.'s and chairmen to their own family foundations between the middle of 2003, when the Securities and Exchange Commission first began requiring electronic filing for stock transfers, and 2005, the last year reliable data was available. Gifts of this type represented about 25 percent, or $728 million, of all gifts during the period. Yermack's sample included donations by Sandy Weill, Barry Diller, and Stan O'Neal, as well as executives at smaller companies.
 
Of course, the big question is how are these executives able to time their gifts so well?
 
Insider knowledge is one possibility. If executives know the company is about to release some bad news, they may legally gift stock at higher prices and in turn earn a higher tax benefit while still holding on to the voting power of the shares. That's because most family foundations are run by the executives themselves or close family members.
 
Evidence supporting this view is that 15 out of 18 donations made following earnings announcements came after the news was good.
 
Another explanation is that since stock gifts don't have to be reported for long periods after they have been made, executives may be backdating the donations.        
 
This would require collusion on the part of both the foundation and the company. While there is no evidence that this has happened, it is also not difficult to imagine, given what emerged in the investigations into backdating.

A personal tax return claiming a charitable deduction based on backdated gifts "would likely represent tax fraud," says Yermack.

"The government could go after you for a fraudulent pattern of giving, but to date I've not been able to locate any such case ever having been brought," Yermack said at a seminar last week where the paper was presented.
 
Supporting the view of possible backdating, Yermack found that donations that had the longest gap between the reported gift date and the actual filing date were better-timed, potentially giving executives and their tax advisers a longer time period to tie the gift to.

This pattern did not hold true for other types of gifts. Timing was also better if gifts were larger or made in months other than December, the time when most tax-driven charitable giving takes place.
           
Yermack estimates that while most of the 90 chief executives and chairmen in his sample are playing by the rules, about 20 percent may be trying to game the system.
 
Spokesmen for the Internal Revenue Service and the Securities and Exchange Commission declined to comment on Yermack's findings.
 
A more relevant issue for shareholders is that these types of gifts represent valuable information, but because of the relatively lax electronic-filing requirements, by the time the news of a gift is publicly disclosed, any trading opportunity is likely to have passed.
 
"Just because the form is different doesn't mean the substance of what these rules are about should be different. The same kinds of restrictions should apply to gifts as to regular insider trading," said Eleanor Bloxham, president of the corporate governance consultancy Value Alliance.
 
The findings also highlight an interesting juxtaposition of motives on the part of these company executives. In the process of performing an ultimately charitable act, executives can't seem to help but practice a little tax dodging.

And for a chief executive with a multimillion-dollar pay package, the tax benefit would be of marginal value. Yermack estimates that anyone gaming the system would gain only $150,000 in extra tax benefits.

"It does strike me that when you try to regulate every single piece of something," Bloxham said, "somebody will find a way around it."

(See a chart on stock gifts to family foundations here.)

 
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