Thursday March 28, 2024

4.2.4 Assets to Charity or CRT

Assets to Charity or CRT

Assets to Charity:  As an owner approaches retirement, significant liquid assets may remain in a C corporation.

Assets to Charitable Remainder Trusts:  If there are liquid assets, but children or other family members are planning to continue operating the business, a charitable remainder trust may work well for the founders' retirement plan.

Personal Holding Company:  If 60% or more of a corporation's adjusted gross income derives from passive income, the company may be deemed a personal holding company (PHC).

Reg. 1-337(d)-4 Gain Recognition:  When a corporation is liquidated, tax is potentially payable at the corporate level.

Assets to Charity


As an owner approaches retirement, significant liquid assets may remain in a C corporation. For example, the owner may have been in the construction or sales business and have accumulated significant liquid assets in the C corporation. However, when he or she retires, there is no longer active income, but the cash and liquid assets remain.

If the owner is philanthropic, one option is to gift to charity a major portion of the assets. While there is a 10% deduction limit for the corporation, the owner may determine that it is appropriate to give a substantial portion outright to charity. This may also be of interest for donors who have a donor advised fund (DAF) or supporting organization (SO). The gifts may then be transferred into an entity that is influenced by family members and used for future charitable gifts.

Assets to Charitable Remainder Trusts


If there are liquid assets, but children or other family members are planning to continue operating the business, a charitable remainder trust may work well for the owner's retirement plan. The liquid assets or securities may be transferred to a charitable remainder unitrust, with the corporation as the grantor and the income recipient. Since a corporation does not have a specific life span, a term of years unitrust (20 or fewer) will be the selected option. The appreciated land or stock transferred to the unitrust may then be sold, with a bypass of capital gain at the higher corporate rates. In addition, the charitable deduction may be usable up to 10% of taxable income, with a carry forward for up to five additional years.

Since the corporation will have taxable income upon receipt of the distribution from the trust, it would be desirable if a consulting contract with the founders can be justified and maintained. The corporation receives the trust income and distributes it to the founders. The corporation thus would have both income and an offsetting deduction. Presumably, the founder in retirement is now in a lower tax bracket and will not pay tax at a high rate.

This plan provides for a secure retirement source for income payments. It is necessary for the company to continue as an active operating entity for the trust's full term of years for this plan to be successful.

Personal Holding Company


If 60% or more of a corporation's adjusted gross income derives from dividends, interest, royalties and other types of passive income, the company may be deemed a personal holding company (PHC). Sec. 542(a)(1). PHC income is generally taxable at the top personal income tax rate for that year. Thus, if a CRT retirement plan is contemplated, it is essential that the majority of income for the corporation be produced through active business operations.

Gifts by PHCs are also subject to special charitable deduction rules. A PHC may take a charitable deduction at the lesser of: (i) 20% of the PHC's adjusted gross income in the year of the gift; or (ii) 30% of the personal holding company's adjusted gross income in the year of the gift divided by the amount of the capital gain gifted. Sec. 545(b)(2). In addition, PHCs are not allowed to carry forward any deduction disallowed in the year of the gift. Sec. 545(b)(2).

Reg. 1-337(d)-4 Gain Recognition


When a corporation is liquidated, tax is potentially payable at the corporate level. If it were permissible for a corporation to distribute all of its assets to charity or to a charitable trust, this tax could be avoided. In order to limit this type of transaction, Reg. 1.337(d)-4 requires recognition of gain at the corporate level if "substantially all" of the assets are given to charity or to a charitable remainder trust.

The phrase "substantially all" is not defined in Sec. 337(b)(2) or in Reg. 1.337(d)-4. However, there are several other places in the Code in which the phrase "substantially all" is interpreted to mean 85%. Reg. 1.514(b)-1(b)(1)(ii). Reg. 53.4942(b)-1(c). Reg. 53.4946-1(b)(2). Reg. 1.401(k)-1(d)(1)(ii). While these regulations cover a variety of tax issues, it is significant that they uniformly interpret the phrase "substantially all" to mean 85%.

Since the exception under Sec. 337 refers to "an 80%" subsidiary, some counsel have also expressed the belief that "substantially all" could be interpreted to be 80%.

Regardless, it is apparent that a transfer of perhaps 65% of assets to charity or to a charitable trust would be permissible under Sec. 337(b)(2). Cautious counsel would be prudent in remaining at or below that level with transfers to charity.

Example 4.2.4A Unitrust Retirement Plan

Sam and Mary Wilson started a small manufacturing business many years ago. Sam is now 70 and Mary is 65. While they also have a pension plan that Sam recently rolled over into an IRA, they would like additional income from the business. In addition, Sam and Mary would like their children to take over the business.

The business is valued at approximately $3 million. Sam and Mary have been making gifts of stock and the children currently own approximately one-third of the business, with the remaining two-thirds owned by Sam and Mary.

Sam and Mary create a family limited partnership (FLP) and transfer the balance of their stock to the FLP. They plan to use their estate exemptions and annual exclusions to transfer the balance of the FLP units to family members.

Sam plans to retire, but expects to be employed by the company in a consulting role. Since the company had purchased land for a plant many years earlier, the company does have an available asset. Due to changes in business circumstances, the land will no longer be required for a new plant. The property was originally purchased for $100,000 and has increased in value to $500,000.

The corporation transfers the $500,000 parcel of land into a 6% unitrust for a term of 20 years. When the trustee sells the property, the corporation bypasses gain on $400,000 and saves taxes at the corporate rate. The income tax deduction of over $150,000 will save taxes for the next five years.

Each year, the unitrust will distribute income of $30,000 to the company. With growth of the trust principal, this income could increase to approximately $45,000 over the 20 years. Under his consulting contract, Sam will receive approximately $35,000 per year for the 20 years. This payment will be a very good supplement to his IRA distributions.

The company will have both income from the trust and a compensation deduction for the payment to Sam. His children are particularly pleased that the company will not be required to make payments out of company income to Sam for his supplemental retirement plan.

Case Studies on Assets to Charity or CRT

Ducky Don Benefits His Duck Friends:   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.

Private Letter Rulings

PLR 200644013 Built-in Gain for C Corp to S Corp Conversion:   Company reported taxable income as a C corporation until Date 1. Company elected to be taxed as an S Corporation beginning on Date 2. Company deals in residential and commercial real estate.

PLR 200909029 No Gain or Distribution Triggered by Corporation's Leased Property Contribution to Foundation:   Trustees of Foundation, a 501(c)(3) organization, are executors of Estate. Estate is the only shareholder of Corporation, which is a company in the business of owning and leasing real property.


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