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Charitable contribution of S property.

The IRS has confirmed again that the transfer of S property to a charitable organization is not a constructive distribution of the property to the S shareholders. IRS Letter Ruling 9340043 considered a charitable contribution by an S corporation to a charitable remainder unit trust (CRUT) formed by the corporation's sole stockholder. The letter ruling held that the S corporation's contribution of a limited partnership interest, held by the S corporation for three years, was not a constructive dividend to the stockholder.

The IRS had previously concluded in Letter Ruling 8552053 that transfers by an S corporation of land, subject to a scenic conservation easement retained by the S corporation, to charitable organizations and to private individuals were not constructive dividends to the S shareholders. For Federal gift tax purposes, the transaction was treated as an indirect gift by the seven shareholders to the private individuals. The contribution deduction passed through by the S corporation to the shareholders for the gift to the charitable organizations was measured by the property's fair market value (FMV), as burdened by the scenic easement. No mention was made of any stock basis limitation, or reduction of the shareholder's stock basis for the passthrough of the charitable contribution deduction.

Letter Ruling 9340043 specifies that the S corporation's sole shareholder must reduce his basis by the property's FMV (and charitable contribution deduction), i.e., the FMV of the remainder interest in the CRUT. The ruling does not explain whether the contribution deduction passthrough is limited to the sole stockholder's basis in his stock, or whether any excess charitable contribution deduction passthrough is "suspended" under Sec. 1366(d).

In a partnership setting, the Service concluded in Letter Ruling 8405084 that the basis limitation provision of Sec. 704(d) did not limit the passthrough deduction for the charitable contribution element in a bargain sale of land by the partnership to a charity, allocated to six of the partners. The sale proceeds were allocated to the other two partners. The basis proration provision of Sec. 1011 (b) was not mentioned.

The IRS expressed a similar view in Letter Ruling 8753015 as to the gift by a limited partnership of a scenic or preservation easement on commercial property located in a city's historic district. Each partner could deduct his contributive share of the charitable contribution deduction and would not be subject to the Sec. 465 at-risk limitation or the Sec. 469 passive loss limitation. No mention was made of the Sec. 704(d) basis limitation.

Sec. 705(a)(2)(B) refers to the decrease by a partner in the basis of his partnership interest by nondeductible partnership expenditures. However, Regs. Sec. 1.704-1(d)(2), and the examples thereunder, do not refer to charitable contributions in listing the deductions that affect the basis of a partnership interest.

From John J. Murphy, Jr., CPA, Charlotte, N.C.
COPYRIGHT 1994 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Murphy, John J., Jr.
Publication:The Tax Adviser
Date:Jan 1, 1994
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