Charitable deductions and flowthrough entity basis limitations.

• Author: Farber, Paul
• Position: Brief Article

A partner's charitable deduction is not limited by the basis in his partnership interest, but an S shareholder's charitable deduction is limited by the basis in his stock. Normally a partner may deduct his distributive share of partnership deductions and losses only to the extent of his basis in his partnership interest. An anomaly exists with respect to charitable contributions. Regs. Sec. 1.704-1(d)(2) specifies five items from Sec. 702(2) that are subject to the loss limitation rule, but Sec. 702(a)(4), which covers charitable contributions, is not one of them. Letter Ruling 8405084 confirmed that charitable contributions were not subject to the loss limitation rule.

For donations of appreciated capital gain property in which the contribution amount deductible by the partners is its fair market value (FMV), Rev. Rul. 96-11 states that the reduction in basis (but not below zero) is measured by the partnership's basis in the contributed property. Rev. Rul. 96-11 did not address the holding of Letter Ruling 8405084 described above.

It should be noted that this anomaly does not apply to contributions that are business motivated and, therefore, are deductible as business expenses rather than as contributions. If a business-motivated contribution is of appreciated capital gain...