Charitable Family Partnerships Reduce Tax Liability For Some
July 13, 1999
The Internal Revenue Service is trying to figure out whether a complicated tax strategy known as the "charitable family limited partnership" -- or "char-flip" for short -- is legitimate. The strategy has suddenly become popular among wealthy individuals who want to sell highly appreciated assets -- such as real estate or businesses -- but don't want to be hit with huge capital gains taxes.
- Rather than selling the business, an individual gives the bulk of the company to a charity, but retains management control.
- The donor then takes an immediate income-tax deduction for the fair market value of the gift, while the charity arranges the sale of the asset -- which implies no tax bill since the seller is a charity.
- While the charity collects the proceeds of the sale, the individual donor as general partner can direct income from these proceeds to himself or others over a period of years.
- The charity could actually sell the business back to the next generation of the family, thereby avoiding estate taxes.
The technique was first promoted in 1997 by a Dallas tax- consulting firm called Fortress Financial Group -- which has moved to protect the concept legally.
Last month, the IRS established an internal taskforce to look into the strategy. It is expected to take a position on the legitimacy of the procedure late this summer.
Although the agency is still trying to put a dollar figure on char-flip transactions, promoters estimate that at least $3 billion worth of such transactions have been completed in just the past two years.
Source: Monica Langley, "Hot New Tax Strategy Yields Fast Deductions and Long-Term Gains," Wall Street Journal, July 13, 1999.
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