Paul L. Caron

Saturday, April 30, 2011

NY Times: Gift of Non-Voting Bose Stock to MIT Raises Tax Questions

New York Times, Gift to MIT from Bose Founder Raises Tax Questions, by Stephanie Strom:

The founder of the Bose Corporation, a privately held company that makes high-end audio products, has donated the majority of the company to the Massachusetts Institute of Technology, the university said Friday. But Amar G. Bose ... placed some unusual restrictions on the Bose shares he donated to the university. While the shares give the university majority ownership, they are nonvoting and thus confer no control over the company and its operations. Nor can MIT sell the shares. It will receive dividends from Bose. ...

[S]ome tax experts said the gift and the lack of detail about it raised questions. “We don’t know much about the terms of this gift, but it seems like it clearly falls into a gray area that has been of concern to Congress,” said Dean Zerbe, national managing director of the tax consulting firm Alliantgroup. ... Roger Colinvaux, an associate law professor at Catholic University and previously a staff member of the Congressional Joint Committee on Taxation, also said the gift raised questions for him. “If the shares truly can’t be sold so that there is some restriction on the university’s ability to transfer stock, then it would suggest it is a contribution of partial interest only, which would not be deductible as a charitable contribution,” said Mr. Colinvaux, who recently published an article in The Florida Tax Review that argues that the laws governing charity are outdated and inadequate. But Erik Dryburgh, a nonprofit lawyer, said he did not see a problem with the gift. “On its face, I don’t see the abuse or potential abuses that were present in some of the more abusive gift transactions we saw in the past,” Mr. Dryburgh said.

Mr. Zerbe and Mr. Colinvaux, though, said the gift brought to mind various tax shelters involving charities that came under scrutiny during the time they worked in Congress. [MIT] denied that Dr. Bose’s gift was similar to those tax strategies. ... Most of the tax shelters cited by Mr. Zerbe and Mr. Colinvaux involved an elaborate strategy where privately held companies gave nonvoting shares to a charity and then, after a period of time, bought them back. The transactions attracted the attention of regulators puzzled by why donors would give nonprofit groups nonvoting shares, whose value — and thus potential for tax deduction — is limited by their nonvoting nature.

In 2003, the Senate Permanent Subcommittee on Investigations looked into such transactions and found that in some cases, they were an elaborate way of using a charity’s tax-exempt status to erase tax liabilities for the other shareholders of the company involved.

A charity involved in such a tax strategy would receive income from the company in proportion to the size of its holdings of nonvoting stock. But while that income was taxable, it was not distributed to the charity and stayed at the company to be reinvested. The charity did not owe taxes on the income, anyway, because it was tax-exempt. Later, the charity would sell the nonvoting shares back to the company at fair market value, and the company would distribute the income, tax-free, that had been associated with those shares among its other shareholders.

In other, similar cases, charities that received nonvoting stakes in privately held companies through gifts of stock used large losses they had incurred on unrelated businesses to offset taxes for other shareholders. Mr. Dryburgh wrote a paper on that type of tax shelter. In 2004, the IRS listed as “restricted” such transactions and denied deductions associated with them.

(Hat Tip: Bob Kamman.) BNA reported yesterday that the IRS is increasing audit scrutiny of unrelated business income loss deductions by colleges and universities.

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