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Thursday, May 2, 2024
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Case Studies |
A Bargain Sale Over Time
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Case:
Arthur Bell is a long-time supporter of the local university where he attended more than 25 years ago. He has attributed his success as an entrepreneur to the excellent education he received from the university and has shown his appreciation as one of the school's most consistent and generous philanthropists. He has made it a point to give at least $50,000 to the annual fund each of the past 10 years and has been active in raising funds for the university. He is currently serving as the campaign chair for an extremely successful multi-million dollar campaign to raise funds for a new performing arts center. The campaign began about one and one-half years ago and 90% of the goal has already been attained. Because of Mr. Bell's entrepreneurial expertise and his drive and compassion for the university, the projected five-year campaign is now expected to be completed in about two years.
During the campaign, Mr. Bell has become aware of a need that has existed now for many years. A number of years ago the university was given a charitable bequest of $1,000,000, which was specifically designated to purchase or build an office building to alleviate overcrowding in the university's administrative offices. This money has been invested in the university's board-designated endowment fund per FASB guidelines and has grown to $1,500,000. The need for the building has become greater and greater as the years have gone by and the time has definitely come to take some action. However, the university has very little land to spare and the projected cost of such a project is expected to be around $2.5 million.
Mr. Bell owns an office building on the east side of the campus that would be an ideal fit to fill the university's need for additional office space and conversion costs would be minimal. The building is currently 100% leased by a major corporation that will soon be moving its offices to a neighboring city. The lease will expire by year end and the move is expected to take place shortly thereafter. The building was recently appraised for $2.5 million.
Question:
In a recent meeting with the university's Senior Development Officer, Jackie Armstrong, Mr. Bell explained that he may be willing to give his office building to the university. However, he would like to expand his business interests into a neighboring state and his financial advisors have projected a need of $1.5 million to complete the expansion. Jackie stated that she had the perfect solution - a bargain sale on the office building. The building will be purchased from Mr. Bell with the $1.5 million the university has in the bank designated for that purpose. Based upon the bargain sale rules, he will receive a tax deduction of $1,000,000, the difference between the fair market value of the building and the purchase price. Also, he will be required to report capital gains of about $800,000 based upon his cost basis in the building of $1.2 million. Mr. Bell likes the idea, but he has one question: "I won't be able to write off a gift of this size on my income tax return over the required six-year period so is there a way to 'spread out' the gift over time?"
Solution:
Jackie ponders this question for a few moments and states that one solution for this problem would be for Mr. Bell to deed an undivided 50% interest in the building to the university at the end of this year. Then the other 50% interest would be deeded one, two, or three years down the line dependent upon his tax situation. The university would pay him $750,000 for each 50% interest in the building. In this way, he would receive a tax deduction of $500,000 each time he transferred a 50% interest and would report one-half of the gain as well. Jackie explained that he would need an updated appraisal to take the deduction in future years, so the numbers could change slightly.
In order for the university to move into the building, Mr. Bell stated that he would be more than happy to allow the university to use "his" 50% rent free until he transferred the other half. Also, being the consummate thinker, Mr. Bell stated that he would write an addendum to his living trust that would bequeath his remaining 50% to the university should he pass away prior to making the transfer. This would make him feel comfortable that "all bases are covered."
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