Partnership interests (including interests in limited liability entities treated as a partnership) represent a potentially valuable gift to charities and private foundations, but with greater potential complications than gifts of stock. CPAs can alert principals to the following issues.
Determine whether the organization has the resources to perform
due diligence, effect the transfer and either liquidate or carry
the asset.
As
part of this determination, assess the risks associated with
ownership and marketability of the interest relative to the expected
benefit and whether the time frame for the transfer will meet the
donor’s expectations.
Assess possible exposure to unrelated business income tax
(UBIT).
A
partner otherwise exempt from income tax under IRC § 501(a) may be
subject to additional tax reporting and potential liability for UBIT
under section 511 to the extent income is attributable to certain
sources including ordinary income from a trade or business activity
of the partnership and income from other sources to the extent
produced from debt-financed property.
If gross income from unrelated business activities exceeds
$1,000 for a year, the organization must file IRS Form 990-T.
This
is essentially a Form 1120, U.S. Corporation Income Tax
Return, and net income from unrelated business activities is
taxed at the regular C corporation rates. There should be no threat
to the charity’s tax-exempt status as long as unrelated business
activities remain minor in relation to exempt charitable activities.
Verify whether the charity will assume any liability as a result
of the transfer.
Legal
counsel may need to help identify actual or contingent liabilities
for which the transferee charity may become subject. Also determine
whether any transfer or appraisal fees will apply and who will be
responsible for them. In addition, scrutinize the partnership’s
activities for undisclosed liability, such as environmental
liability for an entity with real property holdings.
Keep in mind that a sale, including a bargain sale, between a
private foundation and a disqualified person is a prohibited act
of self-dealing
subject
to unwinding and excise taxes on parties to the transaction. A
disqualified person may include a participating “foundation manager”
as defined in section 4946(a).
For a gift, the charity must assign a fair market carrying value
for financial reporting purposes.
Documentation
of such value should be prepared contemporaneously and retained for
the financial statement audit or review.
Maintain records of the charity’s separate tax basis in the
partnership interest.
Any
suspended passive losses of a donor not recognized as the result of
a gift are tacked on to the donee’s carryover gift basis from the
donor (section 469(j)(6)). This will affect the amount of taxable
gain or loss recognized by the charity on subsequent disposition
where UBIT is applicable (Treas. Reg. § 1.170A-4(c)(4)).
Documentation supporting carryover basis should be acquired from
the donor at the time of transfer.
Added
costs from such additional tax reporting and accounting needs should
be considered as part of the cost/benefit analysis of accepting ownership.
As with any noncash contribution, the charity should provide
written confirmation to the donor
that
includes the donor’s name and address, date and description of the
property, and a statement that no goods or services were provided in
exchange for the contribution (if this is the case). But the charity
should not indicate a value. In addition, the charity should be
prepared to complete Part IV of IRS Form 8283, Donee
Acknowledgment, upon request by the donor and keep a copy.
—By Dennis Walsh, CPA, (nonprofitcpa365@gmail.com) a Jamestown, N.C.-based consultant to religious workers and exempt organizations, focusing on financial management, legal compliance and organizational development.
