|Summary||A taxpayer can generate a tax deduction against ordinary income equal to 4 times the cash outlay with the transaction described herein.
On a million dollars of income, a taxpayer therefore saves up to $250,000 in tax as this proforma for a California taxpayer shows:
This transaction is based on longstanding rules related to charitable giving and long-term holding rules. It is not a “listed transaction” under current IRS pronouncements.
This level of benefit is available as the cash outlay goes to purchase existing food and fertilizer supplement minerals (primarily magnesium, with other trace minerals and referred to generally herein as “Magnesium”) from a major supplier in business for over 50 years, under exclusive, discounted terms and the product being donated to a charity at full appraised value. (The ability to book a deduction at the appraised value versus the actual outlay is due to the taxpayer’s ability to tack on the long term holding period of the existing LLC members). In addition, a charitable deduction over basis does not limit the deduction in this instance. 2
Due to the exclusive, discounted terms that the taxpayer will receive by participating in the bulk acquisition of the minerals, the taxpayer is able to obtain a leveraged deduction that substantially mitigates his current year tax burden while providing a substantial benefit to a qualified, third party charity.
|Process||The taxpayers contribute cash to an LLC in exchange for membership interests. This LLC subsequently acquires all the membership interests of Magnesium LLC, a pre-existing LLC which has a long term holding period of the magnesium.|
|Timing||Purchase deadline: November 2021. There is a limited amount of available Magnesium. Indications of Interest are accepted as of June 1 with order fulfilled on a first come first serve basis.|
|Deduction Limits and Minimum Outlay||100% charitable tax deduction against ordinary income up to 30% of Adjusted Gross Income. The amount of the deduction is based on the appraised value appraised by an independent licensed appraiser.
Five year carry forward on excess contributions made in the current year.
There is a minimum cash outlay of $50,000 ($200,000 deduction).
|Legal Summary||Charitable deductions are generally available at the lower of the actual cost or the fair market value of the item being donated. However, on donations with a long-term holding period, the amount deductible is the fair market value of the item. In this case, the taxpayer has a long-term holding period by virtue of basic ‘tacking’ rules that apply when the taxpayers’ LLC acquires the Magnesium LLC as described above. Because the Magnesium LLC’s members have a long-term holding period in the Magnesium and the taxpayers’ LLC acquires all the interests in the Magnesium LLC, this holding period ‘tacks’ onto all members and the fair market value of the Magnesium is the amount claimed if donated to charity.|
|Tax Opinion||A tax opinion is available from an experienced tax attorney, if desired, for each individual participant for an average fee of $5000 per opinion.3|
|Charitable Purpose||The charity is an existing charity with tax exempt status under Section 501(c )(3) of the Tax Code. It intends to utilize the donations to further its charitable purposes by increasing its endowment to do so. Sales may be made of the raw product or via further product refinements in accordance of commercialization efforts as described below.|
|Commercialization Efforts||The LLC has signed a business development agreement with a firm to help commercialize the Magnesium. The business development firm has experience in marketing and product development and its principals have been featured in the Inc. 500 list of fastest growing companies. This agreement will continue to apply to any Magnesium donated to the charity. For any Magnesium distributed to an LLC member, the member has the option to retain their services, if desired.
Following a summary of the commercial applications of Magnesium.
Magnesium is one-third less dense than aluminum. It improves the mechanical, fabrication and welding characteristics of aluminum when used as an alloying agent. These alloys are useful in airplane and car construction.
Magnesium is used in products that benefit from being lightweight, such as car seats, luggage, laptops, cameras and power tools. It is also added to molten iron and steel to remove sulfur.
As magnesium ignites easily in air and burns with a bright light, it’s used in flares, fireworks and sparklers.
Magnesium sulfate is sometimes used as a mordant for dyes. Magnesium hydroxide is added to plastics to make them fire retardant. Magnesium oxide is used to make heat-resistant bricks for fireplaces and furnaces. It is also added to cattle feed and fertilizers. Magnesium hydroxide (milk of magnesia), sulfate (Epsom salts), chloride and citrate are all used in medicine.
Magnesium is a mineral that is important for normal bone structure in the body. People get magnesium from their diet, but sometimes magnesium supplements are needed if magnesium levels are too low. Dietary intake of magnesium may be low, particularly among women. Magnesium deficiency is also not uncommon among African Americans and the elderly. Low magnesium levels in the body have been linked to diseases such as osteoporosis, high blood pressure, clogged arteries, hereditary heart disease, diabetes, and stroke.
An easy way to remember foods that are good magnesium sources is to think fiber. Foods that are high in fiber are generally high in magnesium. Dietary sources of magnesium include legumes, whole grains, vegetables (especially broccoli, squash, and green leafy vegetables), seeds, and nuts (especially almonds). Other sources include dairy products, meats, chocolate, and coffee. Water with a high mineral content, or “hard” water, is also a source of magnesium.
Magnesium is most commonly used for constipation, as an antacid for heartburn, for low magnesium levels, for pregnancy complications called pre-eclampsia and eclampsia, and for a certain type of irregular heartbeat (torsades de pointes).
Magnesium is required for the proper growth and maintenance of bones. Magnesium is also required for the proper function of nerves, muscles, and many other parts of the body. In the stomach, magnesium helps neutralize stomach acid and moves stools through the intestine.
See https://en.wikipedia.org/wiki/Magnesium for additional introductory information.
|Not a Security||Taxpayer’s membership in the LLC is for the purpose of acquiring the Magnesium as part of a bulk purchase on discounted, exclusive terms, not available on smaller standalone purchases. As indicated above, the LLC documents allow members to vote for individual distributions of the Magnesium to the member or for a donation to the charity. The LLC interests do not therefore represent a security as the participation does not represent a passive ownership with the intent to make profits. Rather it is a holding entity that provides the vehicle whereby the member can directly acquire the Magnesium.|
|The Sellers’ Motives||The current owners of the Magnesium are a second and third generation group that has the extraction / mining rights on one of the largest Magnesium production areas in the world. The exclusive, below market terms of sale are available to us via our pre-existing relationship with them and their interest in a short term (1 to 3 years) cash infusion which provides additional working capital, without reducing their future processing capacity or diluting their company ownership while also potentially kickstarting additional commercialization efforts of their product as described above.|
Step by step Process
1. Joining the LLC. An individual joins the LLC with cash contributions by wiring to our closing attorney 25% of the amount of the magnesium they wish to acquire in exchange for membership interests evidenced by an executed LLC membership agreement.
2. Acquisition of the Magnesium. With the cash contributions, the LLC acquires all the interests of a pre-existing LLC which has a long term holding of magnesium.
3. Year End Vote. Individual LLC members vote at year end to i. receive delivery of the amount of magnesium purchased in bulk (i.e. 4x their outlay) or ii. to have it donated to charity.
4. K1 Reporting and Unwind. LLC makes distributions or contributions per the member’s vote. A K1 is distributed to individuals. (In the event of a charitable contribution, the LLC files a Form 8283, including appraisal, with the IRS. These distributions/contributions of magnesium trigger an automatic withdrawal from the LLC, per the terms of the Operating Agreement (as the purpose of joining the LLC has been accomplished, i.e. acquire the magnesium at bulk, discounted terms).
The individual now has the bulk magnesium purchased or a charitable contribution, based on their year end vote along with K1 documentation of the LLC’s activity.
- Full deductibility is limited to 30% of AGI for non-cash contributions. Tax savings based on income is illustrated at per million for simplicity.
- Revenue Ruling 96-11 addresses the basis issue for a charitable contribution of property from a partnership. The Revenue Ruling relates that charitable contributions are allowed at FMV and that value is passed through to the partners to include on the partner’s return, and not included in computing the partnership income. It further concludes that since the resulting permanent decrease in the partnership’s basis is an expenditure of the partnership not deductible in computing the partnership’s taxable income, it is not properly chargeable to capital accounts. Revenue Ruling 96-11 was clarified in the 2017 Tax Act, but the change did not alter the Revenue Ruling as it relates to this transaction.
- A brief summary of the major points of the opinion, issued on a ‘more likely than not basis, includes the following:
- i) Deduction is at Fair Market Value with a One Year Holding Period. An asset held for more than one year is considered a long-term capital asset. The gift of a long-term capital asset qualifies for a charitable tax deduction at fair market value. The deduction for a gift of a long-term capital asset is limited to 30% of a donor’s adjusted gross income (AGI). See IRC 170(b)(1)(B)(i). Any remaining deduction may be carried forward for an additional five years.
- ii) Holding Period of Asset Tacks onto Partnership. The holding period of the assets contributed by the partner ‘tacks onto’ the partnership; thereby the holding period continues within the partnership. See IRC 723 provides that a partnership’s basis in contributed property is generally the contributing partner’s adjusted tax basis in the property. Moreover, the acquisition of a partnership of another partnership preserves the holding period of the acquired partnership. See also the Tax Adviser, March 31, 2014.
iii) A Qualified Charity. The charity receiving the charitable contribution is a qualified IRC 501(c)(3); therefore, contributions to it are eligible for a charitable tax deduction.