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Saturday, April 27, 2024
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Case Studies |
Five Extra Years for Southern Brat Deli
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Case:
Peter and Sue Olson were raised in the great North Country. After college, they were married and Peter accepted a position with one of the nation's largest discount stores. He rose through the ranks and finally was promoted to be manager of the New Orleans branch of the store.
Peter and Sue lived in a suburban area of New Orleans and he was quite successful at managing the store. Each weekend, Peter enjoyed his hobby of grilling bratwurst sausages on his barbeque. Peter recognized that brats were a well-known delicacy in the north, but were a relatively new phenomenon to his southern friends. So Peter frequently invited friends and neighbors over for a brat and sweet iced tea gathering.
Peter and Sue were thinking about becoming entrepreneurs, so they started a small business, the "Southern Brat Deli." To their great surprise and mutual joy, their southern customers were delighted with brat and sweet tea. The Southern Brat Deli flourished and Peter soon opened another store-and then another and another and another, until there were ten Southern Brat Delis stretching across Louisiana and Mississippi.
On the advice of his CPA, Peter had incorporated Southern Brat Deli, Inc. as a C Corporation. He was able to operate efficiently and Southern Brat Deli, Inc. grew and flourished under his leadership. Over time, the Southern Brat Deli, Inc. acquired various diverse assets and business interests, in addition to the ten locations of the Southern Brat Deli.
When Peter passed away, his stock in the Southern Brat Deli passed to Sue. About two years ago, she passed away and the Southern Brat Deli C Corporation was transferred to the Olson Private Foundation for the benefit of children in need.
Generally, a private foundation is permitted to hold no more than 20% of a corporation's stock or business interest. Section 4943(c)(2). Under the excess business holding rules of Sec. 4943(c)(6), if a private foundation acquires stock by gift or bequest, it has a five-year grace period to dispose of the stock and comply with the rules. Therefore, the Olson Private Foundation had five years to sell the stock in the Southern Brat Deli. Since this was a company worth millions of dollars and held many diverse assets, they needed to find the right buyer. There were two buyers that were interested and both embarked in the major effort of completing their due diligence before the sale.
Years two, three and four stretched on and still the sale had not been completed. In the middle of year five, the last year they could sell without violating the excess business holdings rules, there was an unfortunate disaster. A major storm with multiple tornadoes swept through Louisiana and Mississippi. Over half of the Southern Brat Deli stores were either flooded or severely damaged by wind. As a result, no buyer was willing to purchase the Southern Brat Deli. The Foundation thought it might take two years to rebuild the stores and reestablish the brat and sweet tea business.
Question:
What action can the Olson Foundation take to avoid penalty taxes?
Solution:
The Olson Foundation is 100% owner of Southern Brat Deli, Inc. and therefore the excess business holdings rules apply under Sec. 4943(a). However, under Sec. 4943(c)(7), the IRS can extend the normal five-year holding period in cases where there was an unusually large gift or bequest of diverse business holdings or complex corporate structures. The extension requires that the Olson Foundation has diligently tried to dispose of the corporation, that there is a new plan to dispose of the assets, that the plan has been submitted to the State Attorney General and that it is reasonable to expect that the plan can be put into effect during the extension time.
The IRS reviewed the request of the Olson Foundation. Since the Foundation had been diligent in its efforts to dispose of the business within the five-year period and disposition was not possible, the IRS determined that it was appropriate to give an extension. Therefore, the IRS provided the Olson Foundation with a five-year extension. During that term of five years, the Foundation will need to complete the sale of Southern Brat Deli, Inc. With full funding, the Olson Foundation will make regular distributions to assist the now much larger population of needy children after the hurricane disaster.
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