Donation of property – a look at the new requirements under disadvantaged business legislation

Introductory Note: On Tuesday, April 9, 2024, the U.S. Department of Transportation issued a final rule that modernized the Disadvantaged Business Enterprise (DBE) and Airport Concessions DBE (ACDBE) program regulations. Review a copy of the final rule. The changes became effective on May 9, 2024. This blog is one in a series highlighting the changes and updates included in this final rule.

A gift can be a valid means of acquiring ownership of a Disadvantaged Business Enterprise (DBE) or an Airport Concessioned Disadvantaged Business Enterprise (ACDBE), but there are some specific requirements that must be followed to ensure the gift will be accepted under the new US law Department of Transportation (DOT) rules set forth in 49 CFR Part 26. A gift is the transfer of money or property from one person to another without expectation of return or compensation.

This situation most often occurs in the case of a company in which one of the family members wants to pass on ownership to the next generation of the family – for example, a father hands over the company to his daughter. The new rules add additional clarity to previous rules on how to make such a transfer acceptable in order for a daughter to qualify for DBE certification.

The first and perhaps one of the hardest pills to swallow is that the person who made the gift (in our example, the father) must immediately cease any connection or interest in the company or any other activity that enters into a contract with the company, except as a landlord or standard support service providers. Please note that the new regulations do not define the concept of “support service”. Are support services limited to back-office work (payroll assistance, accounting, etc.) or can they be extended to other tasks? We have no answer at this time. I anticipate that future USDOT appeal decisions will clarify what qualifies and what does not qualify as support services. The person making the donation cannot keep the remaining shares in the company because if they did, they would still have shares in the company.

Secondly, the person who made the gift cannot “take an undue advantage from it.” This term is also not defined in the new regulations. This can be interpreted to mean that the person giving the gift cannot derive any benefit from it, such as a share of profits, a tax break or a mutual business transaction. An exception would be the payment of rent if the person making the gift remained the landlord (which is allowed). Otherwise, the person giving the gift should completely separate themselves from the business and let the person receiving the gift run it themselves.

Third, there must be a record documenting the gift, such as a receipt, canceled check, wire transfer confirmation, etc. The letter must identify the transferor, transferee, amount or value, and date. This entry can be made even if the transfer has already taken place.

Gifts are a common way to pass on a business to a new generation. However, if a company wants to become DBE or ACDBE certified, it must be done the right way. Consulting a knowledgeable advisor before making a gift will help ensure that the transaction has been carried out correctly and will pass the DBE inspection.