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Sunday, April 28, 2024
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Case Studies |
Ducky Don Benefits His Duck Friends
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Case:
Donald Holden Ducksworth, III (Ducky Don to friends) was a lifelong outdoorsman. He loved to hunt and fish. Each fall, Ducky Don and his friends would gather for the opening of duck hunting season.
While still in his 20s, Ducky Don started experimenting with duck decoys. He felt that a better duck decoy would lead to more successful hunts. Ducky Don finally discovered a method for placing a spring and special pivot under the ducks. His duck decoys would all swivel and wobble in the wind. The ducks flying over his head would see a whole flock of duck wobblers and would swoop in to join the group.
Ducky Don started a company to produce the wobbling ducks. While the market is somewhat specialized for duck decoys, Don became well known in his area and thousands of wobbling ducks soon decorated the surrounding fields.
After a long and satisfying career with visions of ducks wobbling in the wind, Ducky Don finally decided to retire. Since he had generously funded his retirement plan throughout his career, Don was able to sell all of the assets of the Wobble Ducks, Inc., and he felt that he didn't really need anything over and above his personal retirement plan.
After the sale, Wobble Ducks, Inc., had cash holdings of $400,000. Ducky Don visited with a development director of his favorite charity "Ducks Everywhere." He indicated that he would like to create a fund to support the care and study of the wild duck population. The Ducks Everywhere gift planner said that it would be perfectly fine to create what is known as a donor advised fund (DAF). Ducks Everywhere would own the fund, but Ducky Don could recommend the projects that would be funded. Ducky Don thought that this was a great idea and thought that he could just give the entire $400,000 to his Ducks Everywhere DAF.
Question:
Can Ducky Don give the entire $400,000 to Ducks Everywhere?
Solution:
Ducky Don owned the Wobble Ducks C Corporation with almost no basis in his stock. If Ducky Don transfers "substantially all" of the assets to charity, then under Reg. 1.337(d)-(4), he will be required to treat the transfer as a sale or liquidation of the corporation. Ducky Don would have almost $400,000 in recognized capital gain in that case.
However, while the IRC does not specifically define "substantially all," most similar phrases in the Code refer to a transfer of 85%. Therefore, Ducky Don decided to transfer 65% of the $400,000 to the Ducks Everywhere DAF. While C corporations are limited to a 10% charitable deduction, this was not a major concern for Ducky Don. He simply was trying to transfer the funds without recognizing the personal capital gain.
Ducky Don had two choices for the remaining, approximately $140,000 in the corporation. He could wait three or four years and then again transfer another 65%. Alternatively, he could distribute the $140,000 over two or three years to himself. He would then have income, but he could give the funds to the Ducks Everywhere DAF and then take a deduction. Over a period of four years, Ducky Don was able to move the entire $400,000 through to the Ducks Everywhere DAF. He now sits on the front porch in his rocker and every fall enjoys the flybys of flocks of wild ducks.
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