CGNA: Chapter 2 - C Corporations | Quick Take-Aways

CGNA: Chapter 2 - C Corporations | Quick Take-Aways

Article posted in General, Planning on 5 October 2017| comments
audience: National Publication, Bryan K. Clontz, CFP®, CLU, ChFC, CAP, AEP | last updated: 6 October 2017
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Summary

Charitable Gifts of Non Cash Assets continues with a review of closely held C Corporation stock donations.

This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.

Below are quick take-aways on gifts of C corporations. C corporation topics are based on Turney Berry and Jeffrey Thede’s “Giving the Business to Charity: Charitable Planning with Closely Held Businesses,” and Turney Berry’s “Charitable Planning with Closely Held Businesses.” For quick take-aways on C corporation gifts, see C Corporations Quick Take-Aways. For a review based on the articles, see C Corporations Intermediate. For an in-depth examination adapted and excerpted from the articles, see C Corporations Advanced. For further details, see C Corporations Additional Resources.

Compared to gifts of other types of business entities, donations of C corporation stock are relatively simple. Distinguishing features are liability insulation, double taxation, and no unrelated business taxable income issues. Below is an overview of the essential advantages, disadvantages, factors to consider, and questions to ask.

Advantages of donations of C corporation shares include:

  • The C corporation will often buy back the donated stock from the non-profit (the so-called “charitable bailout” or “charitable redemption").
  • Stock can be donated before an employee or outside investor purchase, merger or acquisition, or initial public offering (IPO).
  • The stock can fund outright donations as well as planned giving vehicles like flip charitable remainder unitrusts.
  • Closely held C corporations may donate business assets directly.
  • Redemptions in exchange for promissory notes often include guaranteed interest income.

Disadvantages of donating C corporation shares include:

  • Self-dealing rules are complex, and often come up where private foundations or charitable remainder trusts are part of the transaction.
  • Prearranged redemptions may attract audits—nonprofits cannot be obligated to surrender shares.
  • For gifts during mergers, assignment of income rules may prevent an effective donation.
  • C corporation stock may not be a good funding asset for charitable gift annuities, charitable lead trusts, or charitable remainder annuity trusts unless there is a quick liquidation or there are large consistent dividends.

Wrinkles in the process to consider include:

  • Generally, the more entities and transactions involved, the hazier the overall tax situation.
  • The C corporation can donate appreciated assets without recognizing gain (though this becomes a de facto donation from each shareholder proportionally), but not if the assets comprise “all or substantially all” of the business.
  • If the donation involves stock (or assets) held in charitable lead trusts, the grantor may be able to restructure the trust’s terms, but the nonprofit cannot be paid less than it is owed.
  • Charities are subject to the Shareholders Agreement as well as potential representations and warranties to investors or company acquiring the stock.

Discovery Questions

Donor Questions
  1. What is the donor trying to accomplish with the gift?
  2. What is the value of the stock and how was that determined (e.g., appraisal, 409A valuation, recent transactions)?
  3. What is the total percentage of stock that the donor owns when combined with all related entities (probing if the excess business holding issue will apply)?
  4. Legally, who or what owns the shares?

Advisor Questions

  1. What is the current tax basis per share?
  2. Do the governing documents allow charitable transfers, and if so, what is the process?
  3. What is the likely exit plan for the charity (e.g., will sale be for cash, note, stock or some combination)?
  4. Does the advisor have an estimate of what a qualified appraisal will cost (this expense can vary greatly and can be an impediment to smaller donations)?
  5. If a corporate asset donation is being explored, would the size trigger the “substantially all” liquidation tax?
  6. Are there any self-dealing issues with a donation to a charitable remainder trust, private foundation, or donor-advised fund?

Charity Questions

  1. Is the effort worth the expected benefits (i.e., is the juice worth the squeeze)?
  2. Has the screening and due diligence process identified any potential problems and can the risks be mitigated (primarily this will occur in the Share- holders Agreement or reps and warranties)?
  3. Is there the necessary expertise to accept gifts of private stock in a timely way?
  4. Should indirect gift acceptance be considered, like using external third party foundations or supporting organizations to receive the asset?
  5. Is there a clear liquidation plan to maximize the sales proceeds as soon as possible?

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