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Thursday April 24, 2014

Case of the Week

Give Peace A Chance

Case:

Several years ago Mother and Father built a very unique home on 45 acres of beautiful rolling hills and woods. Father passed away three years ago and Mother now solely owns the 45-acre parcel and home.

She enjoys the peaceful country view out her front window. However, the university adjacent to the property is very interested in acquiring the property for eventual future growth. Not surprisingly, Mother is concerned. She does not want a new dormitory filled with college students in her front yard. In fact, she enjoys the peace and protection of her lovely home in the wooded countryside. However, at age 80, she recognizes that eventually some planning will have to be accomplished.

After a thorough understanding of Mother’s needs and desires, a wonderful four part solution was suggested which incorporated an outright sale, a unitrust, a gift annuity and a gift of a remainder interest in a home. (See Case Study “Peace in the Countryside” for a full explanation.) This solution seemed like the perfect fit until Mother’s attorney, Paul Weiss, discovered that Mother had discussed selling the 45 acre family lot to Billy Joe Jackson, an adjacent landowner, for $2.5 million several months ago.

Question:

If the discussions between Mother and Billy Joe are deemed a prearranged sale, Paul stated that Mother’s four-part solution would surely crumble. What are the tax consequences if a prearranged sale is found? What are the rules governing prearranged sales?

Solution:

In general, in order to bypass capital gain, there cannot be a binding obligation to sell when appreciated property is transferred either outright to charity or to a charitable trust. See Ferguson v. Commissioner. Therefore, any contributed property must be transferred to the charity or to the trust with no legally binding obligation in existence. If there were such a legally binding obligation in existence, then the donor would not avoid the capital gain on the sale of the property. For instance, in Revenue Ruling 78-197, the Service treated the proceeds of a company’s redemption of stock as income to the donor if the donee is legally bound or can be compelled by the corporation to surrender the shares for redemption.

In this case, Mother and Billy Joe entered into discussions about the possible sale of the 45 acres for $2.5 million. At first blush, these facts do not sound promising. However, after further investigation, Paul discovered that Mother and Billy Joe did not enter into an oral or written contract for the sale of land. Further, Mother took no actions and made no statements under state law that would legally obligate her to sell the land to Billy Joe. Apparently, Mother was merely “testing the waters” of interested buyers. In fact, so long as there is no signed or oral binding agreement to sell, there may be prospective purchasers "waiting in the wings.”

As a result of Paul’s favorable findings, Mother proceeds safely ahead with her four-part solution. With her newfound liquidity, steady lifetime income and beautiful hillside views, Mother finds peace in the countryside (and her annual six figure income stream) very agreeable.

Published April 18, 2014

Previous Articles

Peace in the Countryside

Southern Brat Unitrust and Sale Bailout

Southern Brat Delicious Lead Trust Bailout

Five Extra Years for Southern Brat Deli

Minor Toxic Waste Problem

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