Discussion:990 - Loan Recharacterized as Charitable Contribution?
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Discussion Forum Index --> Tax Questions --> 990 - Loan Recharacterized as Charitable Contribution?
| 16 May 2007 | |
| I am preparing the return for a tax-exempt organization (public charity) where the founder (a disqualified person) has loaned money to the organization for start-up purposes and wants to forgive the loan over a period of years, taking a personal charitable contribution each year for the forgiven amount. This multiple year spread is necessary for the 1/3 public support test, since these contributions from a disqualified person do not count as public support.
The issue I fear, but cannot find any information on, is would the IRS recharacterize these loans as contributions under the substance over form doctrine, and thereby cause the payments to be contributions on the date paid? This would of course blow the entity's public support test out of the water and cause the entity to be a private foundation. I wonder if a valid loan agreement would matter, if the founder's ultimate plan is to forgive the entire amount anyway. If this is a risk, I suppose the founder's loan could be replaced with a third-party loan, and then the founder could donate a limited amount each year to pay off the third-party loan, but not enough to cause public support issues? | |
| May 23, 2007 | |
| It sounds like this is not a done deal. When was the loan made? I agree that if the founder puts in a loan, a loan document should be in place as well as a record in the minutes of the board meeting. Please explain how it would be possible for the loan to be replaced with a third-party loan. | |
