Tax Implications Stall Partnership Stock Gifts
January 1, 2001 Bridget Rosenberg
William P. Carey, founder of the W.P. Carey Foundation and trustee for Johns Hopkins University, has donated millions to support the work of nonprofits, especially those that do work for education and the arts.
But Carey, who has sought to donate shares in his company rather than money, believes the Unrelated Business Income Tax discourages nonprofits from receiving gifts of shares in companies that are set up as partnerships.
"The reason I would give them appreciated stock instead of giving them cash is because it is like giving them more," said Carey, founder and chairman of W.P. Carey & Co. LLC, in New York City. "If I had to sell my stock and pay capital gains tax on it, it might cost me 20 percent. By giving them the stock instead of selling the same stock and giving them the proceeds, I am actually giving them 120 percent," he said.
While it might seem that shares in a publicly traded limited liability partnership (LLP) or membership interest in any other form of partnership such, as a Limited Liability Company (LLC), would be a highly beneficial donation, many nonprofits are leery of accepting such a gift. "UBIT makes a giver hesitant to give because it creates hesitation in people who would love to have this money coming in," said Gus Carey, managing director of W.P. Carey & Co. LLC and chairman of the Investment Program Association.
Some organizations have a policy of avoiding any UBIT, explained Harvey Berger, director of not-for-profit tax services for accounting and management firm Grant Thornton.
"I don’t happen to believe that’s a realistic position if you can make money from something, even if you are going to have to pay tax on it," said Berger. "You’re still coming out ahead by about 60 percent."
However, there are other factors besides UBIT that an organization should think about when considering a gift of shares or membership interest from a partnership, experts said.
"If an exempt organization receives interest in a partnership, it is considered part of that agglomeration and it is technically considered to be engaging in whatever business the partnership is engaging in," explained Mary Lyman, tax counsel for the Coalition of Publicly Traded Partnerships in Washington, D.C. Nonprofits are understandably cautious about being perceived as a partner in a company that they cannot control, she said.
Berger pointed out three issues that may be even more important than possible UBIT:
• "If the LLC were to do things that a charity can’t do, like engaging in political activity or lobbying, that also would get attributed to the organization."
• "There is no requirement that an LLC actually distribute its income. A lot of times LLCs don’t distribute all of their income," said Berger. The charity would have to pay UBIT on that income even if they didn’t receive all of those dollars.
• "There’s also no market for it, presumably. If you have a share in an LLC, there’s nothing you can do with it; you’re stuck with it," said Berger. While this is not the case for a publicly traded LLC, it is a drawback of owning membership interest in most partnerships.
"None of these problems are overwhelming," said Berger. However when nonprofits combine the potential issues that could result from accepting such a gift, they may opt to decline.
The most important thing to consider when making this decision is the relationship between the organization and the potential donor. "The number one question that I would ask is Who is this person? Do they mean anything to you? What do you know about them, because you’re getting into bed with this person," Berger said.
If the gift were significant enough to give the nonprofit enough interest in the company to have some control over the business’s actions, the organization may be facing an even greater risk.
"If the nonprofit is considered a partner with a for-profit, then its 501(c)(3) status may be jeopardized. Where the nonprofit’s primary role is no longer mainly charitable, then its capacity to receive deductible gifts will be threatened. Clearly, that is a danger," said Walter Sczudlo, general counsel for the Association of Fundraising Professionals (AFP) in Alexandria, Va.
In addition to affecting fundraising, UBIT influences investment planning for nonprofits. William Carey is also critical of UBIT because it prevents organizations and pension funds that are also subject to the tax from investing in publicly traded LLCs. "It’s not just from a gift standpoint, but also from an investment standpoint. There’s no reason why a tax-exempt pension fund should be disadvantaged over taxable investors. We can see no social benefit to it whatsoever," he said.
"Pension funds are a pretty big part of the market, and that is a pretty big part of the market that they are shut out of," said Lyman.
"UBIT provisions are established to permit a certain level of activity that may be coincident to and/or complementary of the nonprofit’s activities to occur," said Sczudlo. However, the Careys believe that rather than giving nonprofits an opportunity, the structure of the UBIT laws limits their ability to make strong investments.
The Careys say that the UBIT laws should be revisited to give organizations and pension funds more investment opportunities. "They’re not going into business; they’re just making investments," said William Carey. As a result, the Careys are planning to initiate a campaign to lobby for changes in the UBIT laws.
"We would want to have a provision that causes charities, pension funds, and nonprofit institutions not to have UBIT triggered by the existence of nonrecourse debt," said William Carey.
Time will tell whether the nonprofit sector supports his efforts. Without being familiar with any of the details of Carey’s plan, Sczudlo said, "AFP supports the broadening of existing incentives for charitable giving and the removal to barriers to gifts for legitimate purposes, but the tax regulators are going to draw the line at some point."
The Careys realize this and do not intend to try to lobby away the UBIT regulations entirely.
"We don’t want to damage any purposes of the act that might have legitimate social purpose," said William Carey. "I don’t want to try to change the intent of the law. I just want make some changes to do things within the spirit of the law."
Bridget Rosenberg is a reporter for the Denver News Bureau.