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Donation via Company Sale to Employees

  • 1.  Donation via Company Sale to Employees

    Posted 06-04-2020 09:28 AM
    Hello All - We have an inquiry that we would like to get advice on from you all.
    We have a donor who is selling his company to the employees (an ESOP - Employee Stock Ownership Plan).  The donor would like to contribute a portion of the subordinated promissory note to our University.  If we agree to accept it, we would hold a portion of the note for five years, receiving interest each year (at a fixed interest rate) and ultimately receiving payment on the face value of the note at the end of the five year term.
    Our questions are:  Would the University consider this a "gift" because the note is an asset or a "pledge" because the company *could* default on the note?  If we record this as an asset held by others (gift), then clearly we could not count the interest payments as contributions, they would be earned income.  But, if we record the note as a "pledge" I wonder if each interest payment would then be considered a gift as well as the ultimate amount we receive.
    Also how do you see this committment being valued?
    Lastly, I would love to hear others suggestions regarding other things our Gift Acceptance Committee should consider before agreeing to acceptance.

    Thank you all for any guidance you are able to provide.


    ------------------------------
    Christina Atkins
    Director of Records
    Wake Forest University
    atkinscr@wfu.edu
    ------------------------------


  • 2.  RE: Donation via Company Sale to Employees

    Posted 06-04-2020 10:15 AM
    A promissory note is essentially a pledge.  While I would need to review the entire contract, my initial thought is to treat this as a pledge and the realized income as pledge payments.  Ultimately, though, how you handle the transaction(s) must follow the direction of your CFO.

    John

    John H. Taylor
    Principal
    John H. Taylor Consulting, LLC
    2604 Sevier St.
    Durham, NC   27705
    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987






  • 3.  RE: Donation via Company Sale to Employees

    Posted 26 days ago
    We have received our first ever promissory note which entails a lady who executed a contract with our now deceased donor to pay rent and live on his property. We have the signed and executed promissory note in hand. Our Planned Giving Officer wanted our Business Office to have the bank buy out the note so that we recognize the full value as a cash gift and the lady would then pay the bank like a mortgage. The lady did not want to do that and our Business Office backed down. Then the debate became how the gift would be processed and monies received. We were going to recognize the full value as a deferred gift and then write off the full balance and checks would come into the Business Office, however an endowment is involved. Therefore, we would always be out of balance with the Business Office on the fund, and we are not comfortable that the Business Office will ensure the monthly payments always come in (only $231 monthly for the next 10 years!). Therefore, we are now back to booking it as a pledge and the payments coming through our office. PGO is still insisting that it can be fully booked and just let the Business Office deal with the payments and back end. Thoughts?? As often happens, I am in the middle.

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    Rita S. Williams
    Director of Advancement Services
    High Point University, High Point NC
    rwillia0@highpoint.edu
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  • 4.  RE: Donation via Company Sale to Employees

    Posted 26 days ago
    Rita, there's a ton going on here.  And without seeing the actual documents/contracts I am not sure we can offer any guidance.  But this much I can tell you.  If the donor is eligible, today, to claim a tax deduction for this transfer/transaction, then your PGO is correct.  I suspect that to be the case.  On the other hand, without seeing more, what you describe might not involve a gift at all - unless it is some form of a retained life estate.  In that case, again, your PGO is correct.

    John

    John H. Taylor
    Principal
    John H. Taylor Consulting, LLC
    2604 Sevier St.
    Durham, NC   27705
    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987







  • 5.  RE: Donation via Company Sale to Employees

    Posted 06-04-2020 12:01 PM
    In general, if a donor writes a promissory note to you, that's a pledge.

    If a donor donates a promissory note that they hold as a creditor (ie debt someone else owes to them), this is a gift of an asset. You will need to get it appraised, and that's the value you can record as a gift. The actual revenue you receive is earned income, just like rent from a property or dividends from a stock. The 'gift' is the right to receive future revenue streams, and that's worth something today.

    In practice, this means that your gift value is going to be different from the loan principal+interest payments value, but that's on your business office to reconcile.

    Valuing a promissory note from a privately-held business is hard, and valuing a subordinate promissory note is harder. You will need to get an appraisal that basically evaluates the loan as a risky annuity.

    These kinds of gifts are very valuable to taxpayers b/c the asset is hard to sell, but if you donate it you get the FMV, ignoring the cost-basis.


    Thank you,
    Isaac Shalev
    CRM Expert
    Sage70, Inc.
    (917) 859-0151
    isaac@sage70.com

    Schedule a 30-minute consultation now:






  • 6.  RE: Donation via Company Sale to Employees

    Posted 7 days ago
    Thank you for your responses John and Isaac. The donor who gifted us the promissory note is deceased so the promissory note was willed to us. The "renters" are now paying us monthly. After discussing with the Business Office, we are booking the gift value of the note as a pledge, and the interest as a deferred pledge. There is an amortization schedule and we will split the gift each month (for 10! years) because the interest portion cannot be fully realized currently. The full amount, principal plus interest will go into an endowed fund per donor's wishes. Now our questions are, 1) should the pledges go on the deceased donor's record, 2) if so, should the renters receive soft credit, and 3) are we required to acknowledge the renters (with or without tax verbiage?) after we receive payments? As a side note, we would acknowledge with an annual letter, not monthly. We are just not sure if we are required to or not.

    Yes John, there's a ton going on here for sure! Thank you for your input!!

    ------------------------------
    Rita S. Williams
    Director of Advancement Services
    High Point University, High Point NC
    rwillia0@highpoint.edu
    ------------------------------



  • 7.  RE: Donation via Company Sale to Employees

    Posted 7 days ago
    Your Business Office is likely to show the full value of the note as an asset.  Personally, I would never record a pledge for this - nor the MANDATORY payments as gifts.  Per the IRS a gift is only a gift if it is voluntarily given.

    I would work with the Business Office and determine the asset value they have assigned to the note.  I would record that as a deferred gift and count the full amount of that in your totals.  The Advancement Office should not be involved in handling mandatory rent payments.

    John

    John H. Taylor
    Principal
    John H. Taylor Consulting, LLC
    2604 Sevier St.
    Durham, NC   27705
    919.816.5903 (cell/text)

    Serving the Advancement Community Since 1987







  • 8.  RE: Donation via Company Sale to Employees

    Posted 7 days ago
    Again John, thank you so much for your thoughts and suggestions. I really appreciate your time. This may be that easy if there were not an endowment fund involved. It's our role to ensure those monies get into the endowment fund per the donor's wishes. It's our role to ensure we are in balance and in synch with the Business Office reporting for the endowment funds, as we are responsible for sending endowment reports to the deceased donor's family and validate that the book value of the fund is accurate. We cannot ensure the fund balance is accurate if we are not recording the transactions and have nothing to validate against. A deferred pledge is (financially) unrelated or disconnected from the endowment fund. Make sense? I understand what you are suggesting, and if the monies were going to an unrestricted fund it would make sense to do what you suggested. As much as I don't want to process monthly transactions for that many years, I do not see an alternative option.

    ------------------------------
    Rita S. Williams
    Director of Advancement Services
    High Point University, High Point NC
    rwillia0@highpoint.edu
    ------------------------------