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Abstract: 

The sale of a business creates an opportunity for a philanthropic owner to fund a family foundation. In a straightforward transaction, the owner can sell the business entity or business assets, recognize taxable income on the sale, and claim a deduction for the gift of the proceeds to the foundation. Gifts of cash to a private non-operating foundation are deductible in the current year to the extent of 30% of the donor’s contribution base. Because of the percentage limitations on the charitable contribution deduction, however, the owner’s deduction might not fully offset his income. Accordingly, after taxes, the amount available to contribute to the foundation likely will be less than the total proceeds from the sale of the business. The value to the foundation can be increased if, rather than distributing after-tax proceeds to the foundation, the owner contributes an interest in the business to the foundation with the expectation that the foundation will sell to a third party. In such case, the foundation’s proceeds will be subject to investment income tax under IRC §4940, but the 2% rate (1% in certain circumstances) is far less onerous than the capital gain rate imposed on the owner. This article explores the strategy of contributing an interest in the business rather than after-tax proceeds for purposes of maximizing the value to the foundation. As the author points out, with references to federal circuit, Tax Court and IRS rulings, when structuring a transaction in this way, philanthropists and their advisors must be alert to a number of significant consequences and risks.

Keywords: Palmer v. Comm’r; Rev. Rul. 78-197; Hudspeth v. United States; Rauenhorst v. Comm’r; Blake v. Comm’r

Affiliations:  1: Strasburger & Price, LLP.