News for Professional Advisors

A donor recently approached the Community Foundation about contributing LLC interests in a privately held company to a Donor Advised Fund.

At first glance, the transaction appeared relatively straightforward. The company periodically facilitates charitable transfers and also maintains established share repurchase windows for existing shareholders.

However, during our review of the proposed transfer structure, an important issue surfaced.

Under the standard transfer documents, the company effectively retained an automatic right to repurchase the shares immediately upon transfer to the charitable organization. That raised concern that the IRS could potentially view the transaction as a pre-arranged sale rather than a completed charitable contribution.

If structured incorrectly, the assignment of income doctrine could apply - meaning the donor could still be treated as having sold the shares personally and therefore remain responsible for recognizing the capital gain, even though the shares had been transferred to charity.

That issue could be easy to overlook.

Working collaboratively with the company, donor and advisors, the transfer language was revised to clarify that: The company retained the right, but not the obligation, to repurchase the interests; and The Foundation retained full discretion to accept or decline any purchase offer. 

This revision preserved the intended charitable deduction to allow the donor to avoid recognition of capital gains tax on the contributed units.

Transactions involving closely held business interests and other complex assets can sometimes involve planning nuances where relatively small details in structure or documentation materially affect the outcome.

The Community Foundation offers expertise, with a deep understanding of giving complex assets. 

In this case, asking a few questions helped ensure gifts like this match donor intent and IRS rules.

We are always happy to serve as a resource to advisors and clients as these conversations develop.

This article is for informational purposes only and does not constitute legal or tax advice. Donors should consult their attorney or tax advisor regarding their specific circumstances.