Stocks as charitable contributions

I make sizable charitable contributions on an annual basis. Rather than paying cash, I have begun to transfer shares of stock that have significantly appreciated in value to my church.

Charles Blair, DDS
John McGill, MBA, CPA, JD

I make sizable charitable contributions on an annual basis. Rather than paying cash, I have begun to transfer shares of stock that have significantly appreciated in value to my church. Recently, I read that one of the stocks I own is the subject of a takeover bid that is expected to be finalized shortly. I talked to my CPA about giving shares of stock in this company, but he warned me that there may be a problem, even if the transfer takes place before the merger is finalized. I don't see any problem in doing this. Is my CPA correct?

Yes.

In a recent similar case, Ferguson vs. Commissioner, 99-1 U.S.T.C. Paragraph 50,412 (9th Cir. 1999), an individual who donated corporate stock to a charitable organization immediately before the corporation merged under a cash tender offer was taxed individually on the stock gain under the anticipatory assignment of income doctrine. Since more than 50 percent of the stock had been tendered for the merger at the time the shares were donated, the court held that the merger was a "done deal" and, thus, the individual had not transferred the shares of stock, but, rather, the right to receive cash from the corporation. Ac cordingly, in your situation, you need to make sure that the stock shares are gifted as soon as possible - and before enough shares have been tendered - to guarantee that the deal will go through.

I am in the process of selling my dental practice, and I plan to close on June 30 of next year. Our contract does not address how vacation and sick pay are to be handled. Do I have to pay any of this, and, if so, will this be deductible?

As a general rule, buyers and sellers should prorate the cost of the accrued vacation and sick pay for staff members as of the date of closing. In your situation, you would be responsible for half of next year's liability for vacation and sick pay. You should pay this amount - less any sick and vacation pay actually used during the first six months of next year - to the employees at closing. Any sick leave or vacation paid by you will be a deductible expense for your practice.

Recently, another doctor told me he had been advised to set up a Subchapter S corporation and, thereafter, transfer his practice into the corporation and begin taking all of his practice profit out in the form of a dividend, with no salary. By doing so, he claimed that he could avoid all payroll taxes on his practice profits for a tremendous savings. Is this correct?

No.

The IRS recently won a number of cases involving this particular issue. Under current tax law, the IRS has the right to recharacterize amounts paid out as dividends to salary where no salary has been paid; so, accordingly, the strategy you refer to will not work.

In order to decrease my practice's taxable income for the current year, I am interested in prepaying some rent that will be due early next year for the use of my professionl office building. Can I deduct the rent this year, even if it relates to the use of the office building during the first few months of next year?

Yes.

As a general rule, a cash-method taxpayer, such as your corporation, can deduct expenses as soon as they are paid. However, if the benefit provided extends more than 12 months into the subsequent tax period, the prepayment is not immediately deductible. In your situation, the prepayment relates only to the first few months of next year. Consequently, the amount paid should be fully deductible in the current tax year.

The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.

Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($177 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.

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