S stock and charitable contributions.
Example: Taxpayer T wishes to give $10,000 to XYZ charity. She has publicly traded stock held more than one year with a basis of $5,000 and a fair market value (FMV) of $11,250. T can sell the stock, pay capital gains tax of $1,250 (20% of the $6,250 gain) and give the remaining $10,000 to charity. However, it may be better for T to give the charity $10,000 worth of the same stock. The charity can sell the stock and realize the $10,000. As an exempt organization, it will not have to pay any capital gains tax and T can still keep $1,250 worth of stock.
This (better) alternative has long been available to holders of C stock, but until the passage of the Small Business Job Protection Act of 1996 (SBJPA), an S corporation could not be owned by a charity. If a charity owned S stock, the S election terminated. The SBJPA expanded eligibility of ownership of S stock to include Sec. 501(c)(3) organizations for tax years beginning after 1997.
An S shareholder can now contribute S stock to a public charity without endangering the S election. A deduction is available for the FMV of the stock contributed, provided it has been held for more than one year.
For many shareholders, the entire value of the stock will not be long-term capital gain property. Under Sec. 170(e)(1)(A) and Regs. Sec. 1. 170A-4(a), a lifetime contribution of S stock to charity has to be reduced by the ordinary income the taxpayer would have had to recognize had the stock been sold rather than contributed. This will result in a reduction of the charitable contribution. To compute this reduction, the shareholder needs to examine the S corporation's holdings. To the extent it has unrealized receivables or appreciated inventory, the pro rata portion of the value of the S stock will be ordinary income property.
However, the taxpayer's benefits will be the charity's burden. The Sec. 511 unrelated business income tax (UBIT) was intended to put charities on even footing with for-profit businesses. But, for S corporations, it goes further. Sec. 512(e) subjects all S income reportable by a charity to UBIT. This includes dividends and interest earned by an S corporation (which would not otherwise be subject to UBIT) and gains on dispositions of S stock. The charity will have to take this tax into account when accepting a gift of S stock.
While the opportunities for expanded S corporation ownership are substantial, charitable remainder trusts still may not own S stock. Any gift to charity of non-publicly traded stock valued in excess of $10,000 will require a qualified appraisal for the donor to deduct the charitable contribution. Gifts to private foundations present other problems. The excess business holdings tax must be taken into consideration and contributions may be limited to basis.
FROM DAVID S. RHINE, MBA, CPA, NEW YORK, NY
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|Title Annotation:||S corporations|
|Author:||Rhine, David S.|
|Publication:||The Tax Adviser|
|Date:||May 1, 1999|
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