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Thursday, May 2, 2024
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Case Studies |
Zero Tax Greenco Bailout, Part 2
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Case:
Bill and Clara Green consider themselves very fortunate. Bill was born in Estonia. When he was an infant, his parents immigrated to America. He attended high school and State College on the East Coast. After he received an engineering degree, Bill worked for two different companies on the East Coast. He met Clara, married and they have two children, Susan and Harry.
Bill worked for companies that produced different types of industrial control systems. One day, he started working on a control system that would measure various kinds of smokestack emissions. Since the Environmental Protection Agency was now starting to regulate smokestack emissions, Bill thought it would be a great opportunity.
Bill quit his job, took their life savings and started in his garage. He soon hired another engineer, a secretary and set up a C Corporation named Greenco, Inc. to produce instruments to measure smokestack emissions. Over the years, Greenco has flourished and grown and now has 30 employees with customers throughout the nation.
When asked whether Greenco is a good business, Bill responds, "It's a great business. The power companies buy our probes to measure the emissions in their smokestacks. Then the EPA changes the rules! So our customers need to buy updated probes."
Bill is now 70 and Clara is 68. He would like to sell and has an offer from MegaCorp. The offer is a "stock for stock" exchange. Bill and Clara would transfer their stock in Greenco and receive shares of MegaCorp. Bill would like to retain part of the MegaCorp stock and make a major gift to the Green private foundation.
Question:
Should Bill and Clara exchange Greenco stock for MegaCorp stock? Can they fund the gift to their private foundation and enjoy major income tax savings?
Solution:
Bill and Clara are in the fortunate position of transferring their Greenco C corporation stock to a public C corporation for shares of MegaCorp. This stock for stock transfer defers recognition of gain in Greenco. After the transfer, Bill and Clara hold shares of MegaCorp, with the basis in their prior stock transferred to the new stock. Since they had only $1,000 of basis in the entire block of stock, their new basis is about two cents per share of MegaCorp.
If Bill and Clara had given Greenco stock to the Green private foundation, they would have been able to deduct only the two cents of basis per share. However, for gifts of public stock to a private foundation (with a limit of 10% of the public company), there is a fair market value deduction. Bill and Clara give $1,000,000 of MegaCorp shares to the Green private foundation.
This gift is deductible at fair market value of $1,000,000, but is limited to 20% of adjusted gross income each year. Fortunately, there also is a five year carry-forward for this gift. Bill and Clara will be able to write off this gift over the next five years. They are very pleased that they will be able to increase their gifts now from the private foundation and still enjoy the substantial income tax savings from their gift.
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