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Monday November 12, 2018

Case of the Week

Barbara Banker's LoBank Letter of Agreement

Case:

Barbara Banker started with nothing. Barbara lived in a midsized town and worked in the local hardware store. The store owner noticed her industrious efforts and strong work ethic. When he decided to retire, he suggested that Barbara could take over the hardware store and pay him over a term of 10 years from store profits. Barbara did exactly that. In fact, when the town drugstore owner wanted to retire, Barbara bought the store under a similar plan. Later, Barbara started buying apartment buildings in town. Since she needed financing for these purchases, Barbara became good friends with the town bankers.

Two bankers eventually approached Barbara about starting a new local bank. She agreed to be one of the initial directors and they all invested in the local bank, which they named LoBank. Over the years, the bank's services and value greatly increased. Barbara is a respected businesswoman and she now owns a large, valuable block of LoBank stock.

As a strong supporter of her local community, Barbara gives regularly to her favorite local charity. She would like to make a large gift of bank stock to thelocal charity to be used to build a new youth center. But as a director she knows that LoBank's directors have approved signing a letter of agreement for the sale of all stock to MegaBank, a bank located in a nearby large city. Barbara meets with her CPA to discuss the gift.

Question:

Barbara explains, "My favorite charity would like to name the new youth center after me. I am interested in supporting youth, and this center would be a fine addition for our town. The LoBank stock has gone way up in value, but I have heard that there may be problems with this gift now that there is a letter of agreement. Can I still make this gift? Are there any potential problems?"

Solution:

Barbara's CPA explains that it is possible to make a gift of LoBank stock at this time.

After negotiations, the next step in the C corporation sale process is to sign a letter of intent. The letter of intent is negotiated and deemed acceptable by both buyer and seller. It normally does not require specific action by either party. Rather, the letter of intent is a description of the proposed sale arrangement.

In Gerald A. Rauenhorst, et. aux. v. Commissioner; 119 T.C. No. 9; No. 1982-00 (7 Oct. 2002), the court noted, "[T]he letter of intent was not an offer; it was neither a purchase, tender, or exchange offer as the antidilution provision specifies." The Rauenhorst court stated that the letter of intent and the resolution accepting the letter of intent "[did] not demonstrate that the warrant holders were legally bound, or could be compelled, to sell their stock warrants at the time of the assignments."

Therefore, with a typical letter of intent there is a description of the proposed sale transaction, but neither party is legally bound to complete the agreement. Thus, there is no Rev. Rul. 78-197 binding agreement that precludes transfer of the stock to charity or to a charitable trust. Barbara may complete the gift of LoBank stock, bypass the capital gain and deduct the appraised value. This will be a 30% type appreciated property gift. If she cannot use the full $100,000 amount under the 30% limit for this year, Barbara may carry forward the remaining gift value for up to five years.

Published November 9, 2018
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Milwaukee-Downer Scholarships and Professorships

Some of the many recipients of Milwaukee-Downer scholarships gather for a photo with Carolyn King Stephens M-D'62 and Marlene Crupi-Widen M-D'55 in January 2014 at the annual scholarship luncheon.

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Memorial Scholarship Fund - Milwaukee-Downer
Milwaukee-Downer Class of 1953 Scholarship
Milwaukee-Downer Class of 1955 Scholarship
Milwaukee-Downer Class of 1956 Scholarship
Milwaukee-Downer Class of 1957 Scholarship
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