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Tuesday June 2, 2020

Case of the Week

Barbara Banker's LoBank Letter of Agreement

Case:

Barbara Banker started with nothing. She 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 Barbara take over the hardware store and pay him from store profits over a term of 10 years. Barbara did exactly that. When the town drugstore owner wanted to retire, Barbara bought the store under a similar plan. Later, Barbara started buying apartment buildings in town. Because she needed financing for these purchases, Barbara became good friends with the town bankers.

Two bankers 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 (with the name LoBank). Years later, the bank's services and value have greatly increased. Barbara is a respected businesswoman, and now has a large block of stock in LoBank.

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

Question:

Barbara explained, "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 problems?"

Solution:

Barbara's CPA explained 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 actions 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 gift. If she cannot use the full deduction amount under the 30% limit for this year, Barbara may carry forward the remaining gift value for up to five additional years.

Published March 6, 2020
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Previous Articles

Barbara Banker's Youth Center

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scriptsknown

Kelli Kotowski

Executive Director of Gift Planning
University Advancement

McGuffey Hall
1 Ohio University
Athens, OH 45701

Kotowskk@ohio.edu
740.597.1819 office
740.707.3100 cell
800.592.3863 toll free
740.593.1432 fax

Caty Allgood

Director of Gift Planning
University Advancement

McGuffey Hall
1 Ohio University
Athens, OH 45701

allgood@ohio.edu
740.593.9968 office
440.258.6564 cell
800.592.3863 toll free
740.593.1432 fax