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Agriculture

Why Gifting C-Corp Stock to Non-Participants is a Bad Idea

2024-12-09

Life often presents us with unique challenges and opportunities, and for one family, the question of how to transfer their farm while maintaining harmony and financial stability has emerged. D.O. and their family, with their diverse operations and growing estate, are at a crossroads, seeking the best way to start this transfer process.

Unraveling the Complexities of Farm Estate Planning

Problem: A Family in Good Position with a Growing Estate

D.O. and their spouse find themselves in a favorable situation. They have a substantial family, with three kids and eight grandkids. One son actively farms with them, while the others work outside the farm. Their business is structured through a C corporation that holds various assets, including machinery, grain, livestock, and a bit of land. However, their estate is expanding beyond their immediate needs, leading them to consider gifting $18,000 of corporate stock to each child annually around Christmas. This raises the question of whether this is the right approach to begin the transfer of the farm.

It's a complex situation that requires careful consideration of the pros and cons. On one hand, they want to involve their children and start the process of passing on the family legacy. On the other hand, they need to ensure that their financial well-being is not compromised.

Solution: The Merry and Bah Humbug Aspects of Christmas Gifting

Annual stock gifting through the C corporation presents both advantages and challenges. The merry side includes reducing the taxable estate, making the children feel involved, and allowing for the stewardship of the gift while still maintaining control and income. The corporation can continue to pay salaries and rent personal ground, while the gift simply shifts a portion of equity. Additionally, it may qualify for valuation discounts, benefiting the gift and estate strategies.

However, there are also the bah humbugs to consider. C corp stock is not as straightforward to gift as other entities. Profits remain within the company, and to get money to shareholders, various options such as salaries, dividends, or loans need to be considered. Salaries require material participation and FICA tax, while dividends generate corporate and personal taxes. Loans to shareholders can pose risks to the business and must be repaid with interest.

Gifting Strategies for Non-Participants

In my professional experience, giving C corp shares to non-participants often leads to complications. It's not a recommended approach. If this decision is made, it's crucial to have a well-defined "instruction manual" for the gift. The operating agreement should outline management rules, voting requirements, and funded buy-sell agreements at discounted values.

Alternatively, exploring options like gifting stock to the farm heir and cash to others or gifting land in an LLC can provide more flexibility and avoid potential constraints. Planning the estate distribution strategy first and aligning the gifting strategy with it ensures that annual gifts contribute to the long-term plan rather than causing problems.

By January 1, a significant change was set to occur for farm owners. Those with incorporated farms or those formed as limited liability companies (LLCs) were obligated to report their beneficial ownership to the U.S. Department of Treasury. Failure to do so would result in stiff fines. However, as of last Tuesday, they have been temporarily relieved from this obligation.

Unraveling the Controversy Surrounding the Corporate Transparency Act for Farms

Unpopular Law and Its Challenges

The reporting requirement under the Corporate Transparency Act faced significant opposition from farm groups and the National Federation of Independent Businesses. Multiple lawsuits were filed, with one notable case brought by Texas Top Cop Shop, a business selling tactical gear and apparel. Federal District Court Judge Amos Louis Mazzant III ruled that the CTA and its reporting requirements could not be enforced at present, and reporting companies were not obligated to comply with the January 1, 2025, beneficial ownership reporting deadline. This decision was a major victory for the affected parties. 2: The opposition to this law was not unfounded. Farm owners argued that the reporting process would impose unnecessary burdens on them and divert their attention from core agricultural activities. The potential for increased administrative costs and compliance requirements was a major concern.

Relief and Caution

Although the federal judge's preliminary injunction provided temporary relief, business owners should not be overly optimistic. As Kristine Tidgren, director of the Center for Agricultural Law and Taxation at Iowa State University, pointed out, the preliminary injunction could be lifted at any time. The reporting deadline is approaching, and reporting companies that have not yet filed should remain vigilant and await further guidance from FinCEN. 2: It is crucial for these companies to be prepared. Those that have not filed should be ready to make the necessary reports in the event that the injunction is lifted. Additionally, the court order did not specifically address new companies currently subject to the 90-day deadline for reporting. While the broad injunction should apply to them as well, the lack of a specific "need not comply" statement adds an element of uncertainty.

Exemptions and Deadlines

Not all farms were required to report. Sole proprietorships and general partnerships were already exempt from the reporting requirement. The law primarily targeted farms organized as corporations, LLCs, or other entities on file with a secretary of state. 2: For entities formed this year, reporting to FinCEN was already mandatory. For older entities, the deadline was January 1, 2025. The penalties for non-compliance were severe, with fines of up to $10,000 and two years in federal prison.

The Political Response

Senator Tommy Tuberville (R-AL) and Representative Warren Davidson (R-OH) have taken action by introducing a bill to repeal the CTA. This bill has the support of more than 100 trade groups, including the American Farm Bureau Federation and the National Cattlemen’s Beef Association. 2: The political push to repeal the CTA reflects the significant concerns raised by the farming community. The future of the law remains uncertain, and its impact on the agricultural sector will continue to be closely watched.

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