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 that 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. 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 all three invested in the bank, which they named LoBank. Over the years, the bank’s services and value greatly increased. Barbara is a respected executive and owns a large block of LoBank stock.

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 the sale of all stock to MegaBank from a nearby big city. Barbara met with her counsel to discuss the gift.

Question:

Barbara explained, “My favorite charity has a naming opportunity for the new youth center and has asked if I would consider making the lead gift. I am interested in supporting youth, and this center would be a fine addition for our town. The LoBank stock has significantly increased 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 counsel 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. Because Barbara does not have a binding agreement to sell prior to making a charitable gift, she may make the gift, bypass the capital gain and deduct the appraised value. Her charitable deduction limit will be 30% of her adjusted gross income because this is an appreciated asset 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.