Charitable contribution of S property.

• Author: Murphy, John J., Jr.

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...