Donation of partnership interest

[BHoffman]

My client wants to donate 2% of his 20% interest in a partnership to a public charity.  I'm trying to figure out if it's worth it.

Assumptions:

FMV of 2% = $80,000

Ordinary income from unrealized receivables would be $60,000

So, am I correct that my client's deductible charitable contribution would only be $20,000 AND would require a qualified appraisal?

Thanks and Happy Summer!

 

 

[BHoffman]

I'll try this again with different assumptions and better phrasing

My client is a 20% limited partner in an LLC.  He wants to donate 2% of his member shares to a qualified non-private charity.  I was informed on Friday, and he wants to this on Wednesday. 

The partners are trying to sell the partnership, but no buyer has been identified.  It is listed for sale.  The asking price is $10m.  If my client decides to make the donation, the required qualified appraisal will be performed shortly after the sale and/or before his tax return is due.

Unrealized receivable hot assets are $1m.  There are no liabilities.  There are few fixed assets and not much depreciation recapture.  He has no passive loss carryforwards, etc. so let’s ignore all that and assume the only issue is the unrealized receivables.

My calculations are this:

Estimated FMV of 2% donation = $10m X 20% = $2m X 2% = $40k

Less:  Hot assets = $1m X 20% = $200k X 2% = $4k

Client’s deductible charitable contribution = $40k - $4k = $36k

Is my calculation correct?  I’m asking because I’ve never actually done this before although I have researched it carefully.  I’m hoping for some confirmation if anyone has experience with this unusual transaction.

[Lee B]

I will look this up when I go back to work on Tuesday, but I remember that when you give an ownership interest like this to a charity,

it creates a situation where the charity has to dispose of it unless it is related to to the charity's purpose, because of the UBTI rules,

which my memory tells me affects the deductible basis for your client.?

 

[BHoffman]

Oh, this thing is full of fun. There is also the issue of donating a partial interest, and last I heard the genius tax attorney was going to amend the operating agreement to allow a "non voting" class.  I'm just a hack, but I think to deduct a partial interest, it has to be an undivided share, meaning that the donee has the same rights as the donor.  I sent an email to the geniuses and have asked for an opinion.  The client wants to do this RIGHT NOW because he thinks a buyer will be identified on Thursday, and then it's too late.

I do the bookkeeping for this partnership for a nice fat monthly fee.  That will go away when they sell.  So, I'm not even real motivated to keep the client for just his wife's 1120S and their 1040 if it means a lot of knuckle biting next tax season over this. I'm too old and too ornery and too tired to enjoy slogging into weird and murky water like this.

Thank you so much for taking a look at this.

[easytax]

Cannot add to tax question issues BUT do have an LLC (partnership question - or thought).  Have you seen the operating agreement as many LLC's can have the right to decide if things can be "transferred" etc.?   Be a shame to "figure this out" and find it takes some formalized LLC paperwork too.

[BHoffman]

Good point. The attorneys are working on an amended operating agreement and tell me it will be ready on Tuesday. 

[Richcpaman]

If the entity is going to be sold, and he is only giving away 2%, or $40k max, just have him write the check to the charity after the sale.

Much easier, and cleaner. 

If he was able to "gift" 40k, but get a much larger deduction, I can understand the reason for haste.  But in this case???

The attorneys arranging to make this happen are going to charge more then he is actually going to save in taxes.

Point that out to him.

Rich

[Lion EA]

What's his basis in his membership shares?  When he donates, does he use his cost basis or FMV or the lesser of or...?  Appreciated shares?  Is that why he's trying to give shares now and not cash later?  As well as the lawyers, what is a qualified appraisal going to cost him?  Does he think he's putting all those expenses on the LLC as a whole and won't need his own lawyer, etc.?  Yeah, at my age I might be resigning about now or spinning off the tax returns and just doing the bookkeeping.  I'm staying tuned for the next episode of this soap opera!

[BHoffman]

He is an eternal optimist and believes the partnership will sell at an enormous gain in the next week or so.  He wants his favorite (qualified) charity to share that (tax exempt) gain, and he doesn't mind having a charitable deduction by doing that good deed.

As no good deed goes unpunished, I agree that the cost might outweigh the benefit. However, after running some proformas I found that if he donates the shares, his net cash in hand after the sale will be more than if he donates cash after the sale.  Frankly, that's the real benefit and I don't think the charitable deduction after expenses from a cash flow perspective is going to help much.  

 

[Lion EA]

I hope he's looked into the bylaws of his favorite charity, also.  When my church receives shares, it is required to sell them immediately via an unrelated third party in an arm's length transaction.  It will not follow any restrictions from the donor, such as selling along with the other privately-owned shares.  In fact, it cannot accept any donations with strings attached.

[BHoffman]

Yes, I have been squawking about how the charity is apt to treat the shares, but have received no response. I am supposed to get the amended operating agreement tomorrow so the epic saga will continue....

 

[Gail in Virginia]

[Lion EA]

This is better than all the reruns on TV during this holiday weekend !!

[BHoffman]

You guys need a hobby

[Catherine]

18 hours ago, BHoffman said:

You guys need a hobby

Our hobby is watching online soap operas... 

[Lee B]

I still have several concerns:

1. If a sale is imminent for $ xxx, why would you spend money on an appraisal and if the appraisal value is significantly

    different than the sale price, how do you justify the difference.

2. I still think you may have a problem because this charity more than likely will have turn around

    and sell the PTS interest due to the UBTI rules.

3. I know that there are recapture rules for the donation of tangible personal property,

    when the charity has to sell the personal property in a later year because there is no exempt use.

    Is there any recapture or reduced deductible basis in this scenario ?

 

 

[BHoffman]

35 minutes ago, cbslee said:

1.  A qualified appraisal is required for 8283 donations over $10k.  It can be performed after the sale and before the due date of the client's 1040 as long as the date of the donation is included.

2.  I think the charity has agreed to hold the interest until a sale is completed.  The client tells me they are definitely selling the partnership this year.

3.  There will be unrealized receivables and UBTI involved.  The charity's board of directors, attorneys, accountants, etc. have approved acceptance of the interest knowing this.  I'm going to assume they have covered their bases.  The charity will not receive any tangible personal property, just cash upon the sale of the partnership.

Thank you very much for taking the time to have questions.  I'm sure I will have more as this thing progresses   I appreciate it!

 

 

[BHoffman]

A twist in the plot!  I severely miscalculated the donation amount. The charity will receive 2% of the entire partnership, so it goes like this:

FMV = $10m X .02 = $200,000

Unrealized receivables = $1m X .02 = $20,000

Deductible contribution = $200,000 - $20,000 = $180,000

Makes a difference.  

 

[Richcpaman]

Yes, it does... and affects "all" the partners....

I would still get the qualified written appraisal.

Rich

 

[BHoffman]

Yes, the qualified written appraisal will be done. The client knows it is required. His attorneys know a few qualified appraisers and are getting quote$.

[DANRVAN]

Are you sure he is allowed to make a partial donation of his partnership interest?  I think you will find that restriction deep within the bowels of section 170.  I don't have time to look it up, headed out the door.

 

 

[BHoffman]

Undivided portion is OK and it's spelled out in the amended agreement. 

[BHoffman]

Undivided interest in property info is here

https://www.law.cornell.edu/cfr/text/26/1.170A-7