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yazaddaruvala

Anyone know the legality of using loan acquisition as a strategy for donation and tax exemption?

- `A` loans $100,000 from `B`.

- `A` cannot pay the loan, and therefore `B` sells to loan to `C` for $10,000.

- `C` then donates money to a charity set up by `C`.

- The charity then offers to pay off `A`s loan, and the money comes back to `C`.

At this point, `C` "donates" (i.e. cycles the money) enough to make their taxes $0 per year. `A` has their mortgage slowly but surely forgiven. Win-Win, but the IRS losses.

While morally grey, what might the legality be?

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IIRC under current tax code this results in $100k of taxable income for the original debtor. For C, well, getting paid from the charity counts as taxable income, so things net out. Donate $100k, receive $100k in debt repayments, net change to AGI is $0.

The best scheme I can come up with is this:

Make the note performing again by giving the creditor a small amount of money. Claim that it is now worth significantly more than $10k due to being a performing loan. Donate the loan to a controlled charity, pocket the tax deduction for the "fair market value" of it, and then stop paying to make it be "performing" and have the charity take the losses on it. The IRS will still fault it, probably, but it lets you actually get ahead on your taxes.

NB: this system can be a price support for rare artwork getting sold in distress. If you think you can claim to the IRS that a piece of art is worth $100M later, and you pay a 30% marginal tax rate, then the post-donation after-tax price is essentially $30M less.

> the money comes back to `C`

Does receiving a payment on a loan not count as income? After brief searching, and the usual IANAL disclaimer, it would seem you'd still be liable for interest on the loan as income (so some small percent of your 'donations' cancel out?). Further, you can only claim so much charitable donations per-year (but it can roll over for 5 years).

It's an interesting strategy if it works. I'd love to hear someone more educated on the topic weigh in.

"The charity then offers to pay off `A`s loan, and the money comes back to `C`."

That isn't a charity. It violates the Federal laws about tax exempt organizations.

This sounds a lot like cum-cum and cum-ex dealings. It might not be illegal per-se. But the moment too many people do it, governments will churn in and send some to jail.

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