Presentation on theme: "PUBLIC CHARITIES/PRIVATE FOUNDATIONS AND BUSINESS TRANSACTIONS – A GOOD MIX OR NOT? Case Study Examples By Michael V. Bourland Michelle Coleman- Johnson."— Presentation transcript:
PUBLIC CHARITIES/PRIVATE FOUNDATIONS AND BUSINESS TRANSACTIONS – A GOOD MIX OR NOT? Case Study Examples By Michael V. Bourland Michelle Coleman- Johnson Bourland, Wall & Wenzel, A Professional Corporation Attorneys and Counselors City Center Tower II 301 Commerce Street, Suite 1500 Fort Worth, Texas TH ANNUAL NONPROFIT ORGANIZATIONS INSTITUTE UNIVERSITY OF TEXAS SCHOOL OF LAW January 15, 16 & 17, 2003 The Four Seasons Hotel 98 San Jacinto Boulevard Austin, Texas
BIOGRAPHICAL INFORMATION MICHAEL V. BOURLAND EDUCATION B.A., Baylor University J.D., Baylor University LL.M. in Taxation, University of Miami, Florida PROFESSIONAL ACTIVITIES Founding Shareholder - Bourland, Wall &Wenzel, P.C. Board Certified (Estate Planning and Probate Law) – Texas Board of Legal Specialization Fellow, American College of Trust and Estate Counsel Former Member, Real Estate, Probate and Trust Law Council (State Bar of Texas Real Estate, Probate and Trust Law Section) ACADEMIC APPOINTMENT AND HONORS Guest Lecturer in Estate Planning at Baylor University School of Law Baylor University School of Business The Center for American and International Law University of Texas School of Law MICHELLE COLEMAN-JOHNSON EDUCATION B.B.A., Magna Cum Laude, Stephen F. Austin State University J.D., Baylor University (Estate Planning and Probate Concentration) PROFESSIONAL ACTIVITIES, ACADEMIC APPOINTMENT AND HONORS Associate Attorney - Bourland, Wall & Wenzel, P.C. Certified Public Accountant Guest Lecturer at Baylor University School of Law (Nonprofit Organizations) State Bar of Texas Advanced Estate Planning and Probate Course 2002 (Nonprofit Organizations) Tarrant County Bar, Tax and Estate Planning Section (Elder Law) Tarrant County Young Lawyers Association (Estate Planning, Nonprofit Organizations)
CASE STUDY EXAMPLES
CASE STUDY EXAMPLE NO. 1 CHARITABLE GIFT ANNUITY/ NOTE TRANSACTION BETWEEN PUBLIC CHARITY AND JAMES FOUNDER
Public Charity (PC) will form a Supporting Organization (SO) to be a Supporting Organization of PC. SO is controlled by a three person Board of Directors appointed by PC, the sole member of SO. There will be created a Founder Donor Advised Fund of SO to receive charitable gifts James Founder makes to SO. Supporting Organization Public Charity Sole Member CASE STUDY EXAMPLE NO. 1 INTRODUCTION
CASE STUDY EXAMPLE NO. 1 STEP ONE: JAMES TRANSFERS APPRECIATED PUBLICLY TRADED STOCK TO SO FOR CHARITABLE GIFT ANNUITY FROM SO James Founder Charitable Gift Annuity Publicly Traded Stock SO Sole Member PC 1. James will transfer appreciated publicly-traded stock to Founder Donor Advised Fund of SO in exchange for a Charitable Gift Annuity. The Charitable Gift Annuity will have a present value of approximately 90% of the value of the stock (or less if he desires a greater charitable gift and income tax charitable deduction) and James will realize an income tax charitable deduction equal to at least 10% of the value of the stock. The stock will be valued on the date of transfer. 2. Annual Charitable Gift Annuity payments will be made for the joint and survivor lifetimes of James and his wife, Sally. The joint-life expectancy of James and Sally is approximately 22 years.
CASE STUDY EXAMPLE NO. 1 STEP TWO: SO CONTRIBUTES THE STOCK TO AN INVESTMENT LIMITED PARTNERSHIP AND CORPORATION THAT IT OWNS Stock PARTNERSHIP 99.99% Limited Partner Corporation 0.01% General Partner PC Sole Member SO 100% Shareholder 1.SO will create Investment Limited Partnership (Partnership) and Corporation to own the publicly-traded stock James transferred to SO. SO will own 100% of the Corporation. The Corporation will own a 0.01% general partner interest in Partnership. SO will own a 99.99% limited partner interest in Partnership. 2.SO will transfer the stock it receives from James to Partnership and the Corporation in exchange for Partnership interests and Corporation shares. 3.SO will contribute the stock to Partnership and Corporation in order to simplify STEP THREE that follows and to allow certain income tax protective benefits of Partnership for Founder Family, L.P., described in STEP THREE. Stock
CASE STUDY EXAMPLE NO. 1 STEP THREE: SO SELLS ITS INTEREST IN THE INVESTMENT LIMITED PARTNERSHIP TO FOUNDER FAMILY, L.P. FOR A NOTE AND SELLS ITS STOCK IN CORPORATION TO FOUNDER, LLC FOR CASH 1.SO will sell its limited partnership interest in the Investment Limited Partnership (Partnership) to Founder Family, L.P. for a Note. Founder Family, L.P. is an asset-holding entity of the Founder family. Further, SO will sell its stock of Partnerships corporate general partner to Founder, LLC for cash. 2.The Note will make a payment to SO each year for the term of the Note. The term of the note is the lesser of (i) the joint and survivor lives of James and Sally or (ii) 21 years (i.e., one year less than James and Sallys joint life expectancy). 3.After SOs sale of its Investment Limited Partnership interest to Founder Family, L.P. and the stock of Partnerships corporate general partner to Founder, LLC, the Investment Limited Partnership can sell its stock and diversify without erosion of its initial capital base from income taxation (there will be no capital gains taxation on the publicly traded stocks sale by Partnership). PARTNERSHIP Corporation 0.01% GP Interest PC Sole Member SO Founder Family, L.P. LP Note 99.99% LP Interest L.P. Interest in PARTNERSHIP James & Sally LP Childrens Trusts or Children Individually Founder, LLC GP Interest Corporation Stock 100% Ownership
CASE STUDY EXAMPLE NO. 2 PUBLIC CHARITY FAMILY FOUNDATION NON DISQUALIFIED PERSON GIFT/ BARGAIN SALE LEASE TRANSACTIONS
Building Cash/Deduction (3) CASE STUDY EXAMPLE NO. 2 (6) & (7) Cash/Deduction (5) (7) (2) Deduction Lease Payments Use of Building/Land Land Personal Property Building Deduction (1) Publicly Traded Stock Founder Family Foundation J & S F (4) Deduction NDP Lease Payments Land Promissory Note Public Charity - Founder Donor Advise Fund
CASE STUDY EXAMPLE NO. 2 1)James and Sally Founder gift a certain amount of low basis publicly traded stock to Founder Family Foundation (FFF) as part of their annual income tax charitable gift plan. 2)James and Sally make two separate gifts to the Founder Donor Advise Fund at Public Charity. The first is a certain amount of low basis publicly traded stock and the second is a certain amount of high basis publicly traded stock. Steps (1) and (2) provide James and Sally with the maximum annual income tax charitable deduction for the gift year.
CASE STUDY EXAMPLE NO. 2 3)A person who is not a Disqualified Person (NDP) sells Building NDP owns to FFF in a bargain sale transaction for 50% of its fair market value. NDP receives cash from FFF and an income tax charitable deduction.
CASE STUDY EXAMPLE NO. 2 4)NDP donates Land that NDP owns surrounding Building to Public Charity as a gift for the Founder Donor Advise Fund. NDP receives an additional income tax charitable deduction for the gift. NDPs combined cash and tax savings from its income tax charitable deduction from the bargain sale of Building to FFF and gift of Land to Public Charity approximates the economics NDP desires from the sale/gift transactions.
CASE STUDY EXAMPLE NO. 2 5)NDP further desires to recover the income tax basis in certain personal property located in Building, as well as receive some additional cash from the value of the personal property. NDP achieves this in a bargain sale of the personal property to FFF at 50% of its fair market value. NDP receives cash from FFF and an additional income tax charitable deduction augmenting the economics of the other gift and sale transactions.
CASE STUDY EXAMPLE NO. 2 6)After the bargain sales by NDP to FFF, FFF leases Building to Public Charity for its fair market rental value for use by Public Charity in a specific program of Public Charity that James and Sally support. 7)After the gift by NDP to Public Charity, Public Charity sells Land to FFF for a Promissory Note for its fair market value. FFF leases Land to Public Charity for its fair market rental value for use by Public Charity in a specific program of Public Charity that James and Sally support. While the leases and sale are not directly tied together, the gifts of Step 2 and Promissory Note of Step 7 will be structured so Public Charity will have the resources to make lease payments to FFF.