The classic tale of the Trojan Horse (or, for the truly cultured, the Trojan Rabbit) serves as a warning about accepting gifts that may not be what they seem. In this ancient tale, the Greeks were in the tenth year of their siege of Troy during the Trojan War when they built a large hollow wooden horse (the symbol of Troy) and hid a number of their best warriors inside. They rolled it to the city gates, then made a show of sailing away, abandoning their siege. The Trojans moved the horse into the city and began celebrating their apparent victory. As the celebration continued into the night, the Greek warriors emerged from the horse, threw open the gates, and let in the waiting Greek army, who were finally able to claim victory over Troy.
If a business owner approaches a charitable organization with a plan to donate a business interest, they will likely be welcomed. After all, upon completion of the gift process (including a subsequent sale of the interest), the organization will likely have a substantial infusion of cash to further the charity’s important work, and the donor will potentially have significant tax benefits. But WATCH OUT! The lessons of the Trojan Horse may apply to such a gift.
“I fear the Greeks, even those bearing gifts.”
There’s no reason to fear a generous donor or a complex gift. However, development officers need to be aware that hidden issues can create a Trojan Horse situation that negatively impacts or even halts a gift of a business interest. Proceed with caution—all aspects of the gift should be carefully reviewed and considered.
Are there restrictions on a gift of stock?
Many businesses have restrictions that limit or prohibit the transfer of ownership—restrictions imposed through the entity documents, a shareholder or member agreement, a buy-sell agreement, a loan agreement, or some other creditor agreement. If such restrictions exist, the donor’s legal counsel and the development team should review the relevant document(s) and determine the best way to proceed.
Is the business operating in a highly regulated industry?
A business in the environmental, financial, or insurance industries, for example, may have federal or state issues that impact the donation. The development team should enlist an attorney knowledgeable about the specific industry to review any relevant regulations and define their impact (if any) on the gift.
Is there real property associated with the business interest?
Real property can be a significant business asset. For example, if Sandra’s Famous Laundry holds legal title to the properties on which her 15 locations operate, this will be a valuable part of the charitable gift. However, there may be any number of issues with the real property, including:
• Environmental issues. The development team must determine if there are any environmental issues to consider. For example, if Sandra’s Famous Laundry includes dry-cleaning services, there may be an environmental impact from the chemicals used.
• Title issues. The development team should also make sure that any real estate owned by the business is truly owned by the business. Multiple owners, liens, or disputes about the title are all issues that will impact the charitable gift and must therefore be resolved before moving forward.
Will the gift result in unrelated business taxable income (UBTI)?
If the activities of the donated business are not substantially related to the organization’s charitable purpose, once the gift is completed, any income generated by the business will likely be taxable to the charity. This can be a big problem. The development team must understand any associated tax obligation and be certain that acceptance of the business interest will not cause a loss of tax-exempt status.
What will the organization do with the business interest once the gift is completed?
It is very common for the donor of a business interest to have a potential buyer in mind—someone interested in purchasing the business interest from the charity. This scenario benefits all parties if it is handled correctly. To avoid issues with the donation, including the assessment of capital gains tax, there may not be any pre-arranged sale or pre-existing purchase obligation in place before the donation. If such an obligation exists, the donation may be subject to the assignment of income doctrine, which provides that income is taxed at the source to whoever earned it and may not be assigned to another party. The donor and the development team need to work closely with attorneys to ensure the gift is structured correctly.
Is the gift a Trojan Horse or a fantastic opportunity?
A gift of a business interest may represent a truly compelling opportunity for your organization—one that greatly impacts your mission. For such a gift to be successful, though, your team must be careful and thorough, knowing where to look for hidden issues and how to resolve them.
Want to read more about handling a gift of a business interest? Use our Contact Us form to request a complimentary copy of Techniques. The current issue of this newsletter designed for allied professionals provides a more in-depth look at the benefits and potential pitfalls of this type of gift.
