This comprehensive article analyzes the rules that apply to, and the tax planning strategies for, a charitable gift of S corporation stock. It describes the interaction of the laws governing S corporations and tax-exempt organizations and describes the best ways to solve the challenges posed by each set of laws. The article also addresses additional challenges that can occur when specific types of tax-exempt organizations own S corporation stock, notably private foundations, donor advised funds, supporting organizations and ESOPs.
From the perspective of both the donor and the charity, three “bad things" happen when S corporation stock is contributed to a charity: (1) the donor's income tax deduction is usually less than the stock’s appraised value; (2) the charity must pay the unrelated business income tax (UBIT) on its share of S corporation income; and (3) the charity must pay UBIT on its gain when it sells the stock. This is much harsher tax treatment than if the charity had received and sold an ownership interest in an identical closely-held business that had been organized as a C corporation, a limited liability company or a partnership. Professor Hoyt suggests specific legal reforms to make the tax treatment more consistent.
The article also identifies the best ways to structure a charitable gift under the existing laws, such as a donation to an intermediary charitable trust. In most cases, though, both the donor and the charity will be better off if the S corporation makes a charitable contribution of some of its assets compared to having a shareholder contribute S corporation stock.
ACTEC Law Journal
Christopher R. Hoyt,
Charitable Gifts by S Corporations and Their Shareholders: Two Worlds of Law Collide,
ACTEC Law Journal
Available at: https://irlaw.umkc.edu/faculty_works/441