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Tuesday September 23, 2014

Case of the Week

Green Supporting Organization For Children?

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 by buying a run-down home in a modest neighborhood, and spent nights and weekends fixing, painting and repairing. After everything was finished he sold it at a profit and hired two assistants. Within two years, George was regularly buying and renovating buildings. He also started to build homes and commercial buildings. Over the years, he continued to build and gradually acquired several valuable commercial buildings.

Early in his career, George met and married Linda. They raised two children, Susan and Clifton.

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 have influence over the operation of a major new charitable program. After speaking with friends, George called their attorney, Sharon Erickson. He started by noting, “I have checked into this program and the options. You know that we have a $2 million commercial building. It is fully leased with fixed payments leases. We could set up a foundation with favorite charity and give the building to the foundation. We can then take a $2 million tax deduction.”

Question:

George continued, “But I have several questions. Can we deduct the full $2 million? How is the foundation board selected? Can our children Susan and Clifton work for the foundation? I have a friend with a foundation, and his children receive large salaries from their foundation. Plus, the foundation pays for an annual family conference. Can we use Green Foundation funds to hold a family conference every year in Hawaii?”

Solution:

Sharon discussed options with favorite charity and then responded, “George, I have spoken with the leaders of favorite charity. We discussed setting up the Green Foundation as a Type I supporting organization. They are open to running this new program through the Green Foundation. You would give the $2 million building and those funds could then be used in the program. With the Type I supporting organization, Favorite Charity will elect three directors and you and Linda will also be directors.”

Sharon then explained the benefits and rules of the Type I supporting organization. She continued, “The good news is that the charitable deduction is usable to 30% of adjusted gross income over this year plus five. You and Linda will save hundreds of thousands in income tax during the next six years. But supporting foundation rules now limit benefits to family. You, Linda and your children are considered disqualified persons. This means that you cannot receive salaries, expense reimbursements and other benefits. If you do, there may be an excess benefit tax. The initial tax is 25% of the excess benefit amount. An additional tax of 200% of the excess benefit may apply if a violation is not corrected. A tax of 10% of the excess benefit (not to exceed $10,000 with respect to any excess benefit transaction) may also be imposed on an organization manager who knowingly participated in an excess benefit transaction.”

As a result, George could not employ his children and could not use Green Foundation funds to pay for an annual family conference in Hawaii. Two months later, George and Linda decided to make the $2 million gift anyway. After thinking through the situation, they realized that the purpose of the gift is to help those in need. They can provide family benefits another way. The Green Foundation received the $2 million building, sold it within six months and now is serving those in need throughout their community.

Published September 19, 2014

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