To Gift or To Loan?

We’ve been researching how gifts and loans from non-certifiable owners can impact some state-based certifications of legitimately owned DBEs (Disadvantaged Business Enterprises). Yes, harping on legitimacy is part of our shtick. We have absolutely no interest in seeing these certification programs abused or defrauded.

Anyway, you would think that a gift is perfectly acceptable, since the US Department of Transportation (DOT) Disadvantaged Business Enterprise (DBE) application actually offers gift as a selection for how someone acquired his/her ownership position. And, it seems reasonable that a loan to acquire ownership could be forgiven for whatever reason the person who drafted the loan felt appropriate. Logic aside, it appears that intent or the interpretation of loan forgiveness can be a sticky wicket in the world of certification.

Because it’s government, there are layers of laws, acts and rules that apply to anything done in the name of the United States.  The DOT DBE rules get changed through the Supplemental Notice of Proposed Rulemaking (SNPRM) process.  And when it comes to gifts, what we found published in June of 2013 reads: “For this reason, the SNPRM erected a presumption that assets acquired by gift in this situation would not count. The applicant could overcome this presumption only by showing, through clear and convincing evidence–a high standard of proof–that the transfer was not for the purpose of gaining DBE certification and that the disadvantaged owner really controls the company. This provides effective safeguards against fraud, without going to the unfair extreme of creating a conclusive presumption that all gifts are illegitimate. Also, for purposes of ownership, all assets are created equal. If the money that one invests in a company is really one’s own, it does not matter whether it comes from the sweat of one’s brow, a bank loan, a gift or inheritance, or hitting the lottery. As long as there are sufficient safeguards in place to protect against fronts–and we believe the rule provides them–the origin of the assets is unimportant. We are adopting the proposed provisions without change.”

All of our owners were gifted some stock at one point or another.  Ultimately, the reason had much more to do with taxes than certification.  Family-owned companies pay all sorts of taxes, including inheritance taxes on our private stock.  Did it make sense for my dad to gift his daughters and grandchildren with some of his stock when he turned 70?  Of course, it did!  But he was no longer actively involved in the business founded by a daughter who was always the majority owner. It is important that the diverse owner(s) of a business be able to demonstrate his/her ability to govern and control the business regardless of gifts from non-diverse owners; especially in situations involving family and/or spouses.

And, if there are loans involved extra care must be taken. There should be official loan documents detailing the value of the loan and terms for repayment. If there is a possibility of loan forgiveness, it should be noted and explained in the loan agreement. There are many things one could list as potential for retiring a loan, such as: sales increase of x percent; reduction of overhead expenses by x percent; landing a particular client or contract; or any other legitimate reason that can demonstrate a real, substantial and valid rationale for retiring the loan.

No matter what certification a SDMWVLGBTQBE (Small Disadvantaged or Disabled, Minority, Women, Veteran, Lesbian, Gay, Bisexual, Trans-gendered or Queer Business Enterprise) owner might be interested in pursuing, they have all been designed to prevent fraud. If not well documented, gifts or loan forgiveness may be interpreted by a certifier’s analyst as being superficial and a front for a non-diverse business to take advantage of a certification to which it is not entitled.

If you have loans or gifted ownership, before submitting your application:

  • Review and potentially revise your loan documents to address the possibility of loan forgiveness
  • Draft a letter of explanation around any gifted ownership, if possible have it written and signed by the gifter witnessed by a notary

Being able to provide legitimate documentation addressing these concerns may help prevent future misinterpretations about why ownership was a gift or a loan forgiven.