"Do unto others as you would have them do unto you." - Anonymous
"Give and it will be given unto you. A good measure, pressed down,
shaken
together and running over, will be poured into your lap." Luke 6:38
"Petitioner rests its case largely upon the line of authority which establishes
the principle that a taxpayer has the right to conduct
his affairs in such a
manner as to minimize and even avoid taxation if legally permissible."
(Maysteel Products, Inc. v. Commissioner of Internal Revenue Service:
33 T.C. 1021 : Chamberlin v. Commissioner IRS, 207 F.2d 462)
Material that follows is dangerous, but potentially lucrative. Price
Water-
house used many of the transactions we conceived originally to make millions
for clients. Some of the "theoretical" transactions we created were never es-
pecially viable (legal). Some of
those
that were, in times past, are now "dis-
couraged" or condemned by IRS.
SAVIORG does not solicit involvement in; sponsor or even tacitly recommend
performance of transactions that follow. Concepts offered purely for your edifica-
tion and
amusement. Should you be thrown into jail after implimention of one or
more
concept, please do not call us. We shall be forced to disavow any
knowledge
of your public or private identity.
Bon chance
Copyright 1999 SAVIORG. All rights reserved. No part of this book, including
interior design, cover design, and icons, may be reproduced or transmitted in
any form, by any means (electronic, photocopying, recording, or otherwise)
without the prior written permission of the publisher.
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A) DONATION-REDEMPTION-DISPOSITION
Any Stockholder of a closely-held or publically-held corporation can donate
appreciated stock in their corporation to a qualified related or unrelated private
foundation or charity for a full FMV tax-deduction (limited to 50% AGI-carry-
over for five subsequent years). Following the donation, if the donor's corporation,
without evidence of a binding prearrangement with donee, redeems the stock for
cash or tangible assets, the stock will have a "stepped-up" basis equal to FMV
at time of redemption.
However, even if a binding agreement for redemption is not proveable, if the
redeemer uses a promissory note to redeem the stock "soon after" its' donation,
the donor's tax-deductions may be taken only when, and in correspondence with,
the note's cash payments tendered to donee.
Additionally, many "soon after" re-
demptions will not result in a step-up of the stock's basis if a note is used to
redeem.
For these reasons SAVIORG is recommending only the use of cash, tangible
assets (appraised FMV) or credit-line cash draws to redeem stock "soon after"
a bona fide donation by stockholder.
In order for this strategy to work for a publically-held corporation, a resolution
for the plan must pass at the shareholder's meeting prior to the transaction's
consumation.
B) STOCK OPTIONS DONATED, SOLD AND EXERCISED BY CHARITY
Any corporation having publically traded stock, may give discounted ( x% FMV )
non-qualified-stock-options (NQSO) to its related, tax-exempt private foundation.
However, the corporation may not take a tax-deduction for the gift
without becom-
ing liable for an IRS charge of "self-dealing" when the donee exercises.
Note: Only a 509(a) "public charity" can safely be the unrelated non-profit cor-
poration in this and many related transactions. A 501(c) "private foundation"
cannot afford to be involved in a transaction where there exists a significant
probability that IRS will discover the existance of "excess benefits". A Donor
to a public charity is, under normal circumstances, immune from "excess
benefits" liability. ( 26 USC, sec. 4958 (e)2 )
Nevertheless, if the related private foundation sells the NQSO to an unrelated
private foundation (or public charity) that organization can exercise the options
and sell the stock and the following benefits will legally accrue:
1- At exercise/sale the public charity will receive the spread ( FMV of the stock
minus the exercise price ) minus the cost of the NQSO and associated broker's
fees.
2- The related foundation will receive the proceeds from the sale of the NQSO to
the public charity as tax-free income.
3- The corporation will receive a tax-deduction for the entire SPREAD at time of
exercise/sale by the unrelated organization.
4- Under certain circumstances, the corporation will be directly capitalized if the
exercising/selling foundation (or public charity) acquires treasury stock (as newly
issued section 144 stock) instead of the corporation's common stock sold in the
marketplace prior to the broker's disposition.
[ See APPENDIX: V.(A): ]
C) HEDGE STOCK PERFORMANCE WITH NQSO
If a corporation's common stock begins to "drop" radically in price, it may have
difficulty selling treasury shares (or section 144 shares) for a respectable price.
To hedge against a radical drop in stock value, a corporation can donate discounted
NQSO to an unrelated charity that agrees (with a non-legally binding, but definite
"gentleman's agreement") to exercise/sell when the market price of the stock
drops to X% of the FMV at time of donation.
The corporation can provide the exercise cash without fees in exchange for pur-
chase of its treasury stock (or section 144 stock) in lieu of acquiring stock traded
on public markets.
D) RELATED FOUNDATION BUYS 100% VOTING-RIGHTS AND 100%
DIVIDENDS ON 75% MARGIN
A corporation can cause its' related private foundation to purchase common stock
effectively on 75% margin, and, even though at least 50% of the shares are as-
signed (collateralized) to the brokerage which extends the margin, it can still
enjoy voting and dividend rights on 100% of the shares. Dividends can help pay
margin calls as well as expenses, compensation, bonuses, etc. All voting can be
controlled by the corporation's control group without reference to any third party.
(A cash fund to secure margin calls is required by for this transaction.)
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APPENDIX
Table of Contents
Part II