Donation of partnership interest to charity

[BHoffman]

My client is a 20% limited partner in an LLC. He wants to donate 2% of his member shares to a qualified non-private charity. I was informed on Friday, and he wants to do this on Wednesday.

The partners are trying to sell the partnership, but no buyer has been identified. It is listed for sale. The asking price is $10m. If my client decides to make the donation, the required qualified appraisal will be performed shortly after the sale and/or before his 2017 tax return is due.

Unrealized receivable hot assets are $1m. There are no liabilities. There are few fixed assets and not much depreciation recapture. He has no passive loss carryforwards, etc. so let’s ignore all that and assume the only issue is the unrealized receivables.

My calculations are this:

Estimated FMV of 2% donation = $10m X 20% = $2m X 2% = $40k
Less: Hot assets = $1m X 20% = $200k X 2% = $4k

Client’s deductible charitable contribution = $40k - $4k = $36k

Is my calculation correct? I’m asking because I’ve never actually done this before although I have researched it carefully. I’m hoping for some confirmation if anyone has experience with this unusual transaction.

[BHoffman]

Partial interest disallowance

BTW, attorneys are supposed to dealing with the problem of donating a partial interest that would disallow the deduction. I'm supposed to get those details on Tuesday.

Having a pretty lousy Memorial Day....

[Roland Slugg]

That's good tax planning on your client's part.

Your calculations appear to be correct. My only question is regarding the 2% amount. Is your client donating 2% of the entire partnership's value, which would be 10% of his own 20% interest? Or is he planning to donate 2% of his 20% interest. Based on your calculations, he is planning to donate 10% of his p'ship interest. (Oops! $10,000,000 x 20% x 2% is indeed $40,000. My bad.)

To get a charitable contribution deduction for the full FMV (less the ordinary income portion) there are a few requirements: (1) He must have owned his p'ship interest for more than one year, (2) there can be no restrictions on the donee's gift, and (3) the donee must be a qualified organization ... generally a 501(c)(3) or one of the others that qualifies. Don't forget to watch the limitation, too. The limitation for contributions of appreciated property to 50% charities is 30%, and the limitation for contributions of appreciated property to 30% charities is 20%. (Code §170(b)(1)(C) and (D))

If the company is sold within a reasonably short time after the gift is made, the appraiser's determination of FMV should, presumably, be fairly accurate. If the time frame is long, however, two questions/issues can arise: (1) the accuracy of the FMV used for determining the charitable contribution, and (2) a "minority interest" valuation adjustment. To avoid these issues it would be best to make the contribution shortly before the company is sold, if that flexibility exits.

Finally, it is obvious that you used "round numbers" in your post, to make explaining everything easier, but when you make the actual calculations later, you will need to include depreciation recapture when figuring the "unrealized receivables." Depreciation recapture is Sec. 751 property.

[BHoffman]

Thanks! The client wants to donate 2% of his 20%. Sorry if my math is wrong but you got the gist. I'm good with the Section 751 stuff.

They are hoping to identify a buyer and get an agreement on Thursday, which is why this is such a rush.

There is a fly in the ointment. I think the attorney mentioned that the shares received by the donee will be "non voting". From my research, I'm under the impression that, for donating a partial interest, the donee must have the same voting rights as the donor in order for the contribution to be deductible as an "undivided share". I've asked for an opinion from the attorney that addresses this potential problem. What do you think?

[Roland Slugg]

Your math was correct in the OP ... mea culpa added to my first reply above.

Is your client's interest non-voting? If voting, why would the interest donated to the charity be non-voting? Is it in the p'ship agreement that transferred interests become non-voting? If not, is the lawyer trying to change things? Lawyers will often screw up a good deal with their own ideas. Your client should have a copy of the p'ship agreement, and he should look for the provision the lawyer mentioned.

I suspect that if the donated interest is not the same as what the donor currently owns, that may present a serious problem regarding his desired contribution deduction ... not absolutely sure, though.

[BHoffman]

The attorney answered my email and it looks like they are on it. There won't be a difference in the voting rights after all. Thanks for your help! The operating agreement is being amended to accommodate the transaction.