Preliminary Note: On Tuesday, April 9, 2024, the United States Department of Transportation issued a final rule that modernized the Disadvantaged Business Enterprise (DBE) program and the Airport Concessions DBE (ACDBE) program regulations. Review a copy of the final rule. The changes went into effect on May 9, 2024. This blog is one in a series highlighting the changes and updates found in this final rule.
A gift can be a valid way to acquire ownership in a Disadvantaged Business Enterprise (DBE) or an Airport Concession Disadvantaged Business Enterprise (ACDBE), but there are some specific requirements you need to follow to make sure your gift is acceptable under the new U.S. Department of Transportation's (DOT) rules outlined in 49 C.F.R. Part 26. A gift is a transfer of money or property from one person to another without any expectation of repayment or compensation.
This situation most often comes up in a business where one family member wants to pass ownership on to the next generation of family – such as a father passing the business on to his daughter. The new rules add some additional clarity to prior regulations on how to make this an acceptable transfer so that the daughter can qualify for DBE certification.
First, and perhaps one of the most difficult pills to swallow, is that the person who made the gift (in our example, a father) must immediately cease having any involvement or interest in the firm or any other business that contracts with the firm, except as a landlord or a provider of standard support services. Please note that “support services” is not defined in the new regulations. Are support services limited to back-office work (helping with payroll, accounting, etc.) or can it be extended to other tasks? Right now, we do not have any answer. I anticipate see future USDOT appeal decisions explaining what does and does not qualify as support services. The person making the gift cannot keep any remaining shares in the business, because if they did, they would still have an interest in the company.
Second, the person who made the gift cannot “derive undue benefit.” This term is also not defined in the new regulations. This could be interpreted to mean that the person making the gift cannot derive any benefit from the gift, such as a share of profits, a tax deduction, or a reciprocal business deal. The exception would be the payment of rent if the person making the gift remained as landlord (which is permitted). Otherwise, the person making the gift should completely disengage from the company and let the person receiving the gift run it independently.
Third, there must be a writing documenting the gift, such as a receipt, a cancelled check, a transfer confirmation, etc. The writing must identify the transferor, the transferee, the amount or value, and date. This writing can still be made even if the transfer has already taken place.
Gifting is a common way to pass a business on to a new generation. However, it must be done the right way if the company wants to be certified as a DBE or ACDBE. Consulting with knowledgeable counsel prior to making the gift will help to make sure that the transaction is done properly and will pass the DBE review.
