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Wednesday, May 1, 2024
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Case Studies |
A Runner's C Corporation, Part 2
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Case:
In part one, Rob Hansen, 65, decided to retire and sell his company, The Shoe Factory, Inc. Specifically, the Shoe Factory was going to fund a Charitable Remainder Unitrust (CRUT) with 60% of its main asset - a building and land valued at $10,000,000. Afterwards, the Shoe Factory, which still owns a 40% interest, and the CRUT would sell the property to a new buyer. At that point, the CRUT would receive $6,000,000 (60% x $10,000,000) minus any selling costs. The company would accordingly receive $4,000,000 minus its share of selling costs. Because the 40% portion was sold outside of the CRT, it is a fully taxable transaction to The Shoe Factory. To help offset some of the resulting tax burden, The Shoe Factory is entitled to a corporate income tax charitable deduction of $1,480,000 for creating the CRUT, which is subject to the 10% of taxable income limitation. Any excess charitable deduction will be carried forward for five years.
Rob is pleased with the plan, but still has a problem. Namely, his company will have over $3,000,000 in cash after the sale and payment of income taxes. Rob does not want to declare a dividend because of the double taxation that would occur.
Question:
Rob asks if there is any way he can benefit from his cash-rich company without paying another big hit of taxes?
Solution:
Rob has another excellent charitable option with respect to the remaining cash in his company. First, Rob can transfer a portion of his stock in The Shoe Factory to a CRUT for his benefit. Once the trust is funded, the company could repurchase the shares from the CRUT. This repurchase would provide Rob's CRUT with liquidity and would transfer out cash held inside the company without any tax recognition. The repurchase plan would not be an act of self-dealing if done in accordance with Sec. 4941(d)(2)(f).
Rob is impressed with this option and decides to go forward with the repurchase plan. Having run his "baby" for this many years, Rob is not completely ready to dissolve The Shoe Factory. Therefore, Rob creates a CRUT and funds it with a portion of his shares. As a result of this comprehensive charitable plan, The Shoe Factory has a twenty-year term CRUT, and Rob has a one-life CRUT. In total, both trusts avoided a substantial amount of tax and will provide a generous amount of income over the years. Clearly, this plan met and exceeded Rob's initial hopes and goals. Rob, thus, will retire a very happy man and donor.
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