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Sunday, May 5, 2024
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Case Studies |
Green SO Bailout, Part II
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Case:
George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and was determined to become a successful business owner. After high school he obtained permission to come to America to go to college. George applied to several colleges and was accepted as a work-study student at a state college. He lived in the dorm and worked nights in the cafeteria. On weekends, he moonlighted as a waiter at a five-star restaurant.
George was both resourceful and determined to succeed. He started working for a manufacturing company on the east coast, but soon was drawn west. Starting on a shoestring, he worked day and night to build probes to measure emissions from smokestacks. His business flourished and soon George was expanding and growing. On the advice of his CPA, George incorporated as GreenProbe, Inc as a “C” corporation.
Early in his career, George met and married Linda. They raised two children Susan and Clifton. After college, both Susan and Clifton joined GreenProbe, Inc. Susan rose to become President and Clifton was VP of sales.
Linda is a strong supporter of a local charity. George is now on the board and would like to help with a major gift. But he also thought that it would be good to help Susan and Clifton to acquire stock in GreenProbe.
Question:
George contacted his CPA Sharon and inquired, “Sharon, you know that we would like to help local charity, but we also want to start moving stock to Susan and Clifton. In addition, we have already funded the Green Foundation as a supporting organization for local charity. So how do we help local charity and move stock over to Susan and Clifton?”
Solution:
Sharon responded, “George, we have already set up the Green Foundation as a Type I supporting organization. The next step will be for you and Linda to start making gifts of shares of GreenProbe stock to Susan and Clifton. You can begin by using your annual gift exclusions. And you and Linda also have a lifetime gift exemption. With those gifts of GreenProbe stock, Susan and Clifton will build their ownership.
Next, you can make a gift each year of shares of GreenProbe stock to the Green Foundation. There cannot be a prearrangement for GreenProbe, Inc. to repurchase the shares, but within about four weeks GreenProbe can redeem the shares from the Green Foundation. Because the Green Foundation is a public charity, the Joint Committee on Taxation (JCT) explanation of the Pension Protection Act of 2006 indicates that a family member or entity may purchase a Type I Supporting Organization asset at fair market value.
Under the supporting organization rules, there cannot be a loan from the Green Foundation to a family company, so GreenProbe will need to redeem for cash. Fortunately, GreenProbe has substantial amounts of cash. In fact, by redeeming the stock it reduces the risk that GreenProbe could be liable for an accumulated earnings tax.
After reviewing the cash position of GreenProbe each year, you and Linda may make a gift of stock to the Green Foundation, and about one month later the stock will be redeemed. At the same time, annual gifts of stock from you and Linda to Susan and Clifton will increase their shares in GreenProbe, Inc. The good news is that there is a triple benefit with this plan. With each gift, you and Linda receive an income tax deduction. As the shares are redeemed, GreenProbe solves its accumulated earnings problem. Finally, the redeemed shares plus gifts of stock to Susan and Clifton increase their ownership and reduce your ownership of GreenProbe, Inc. All in all, it is a fine plan!”
George and Linda were pleased with the plan. They decided to take the tax savings from the first gift of stock and enjoy a delightful cruise in the Mediterranean. Bon voyage!
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