S stock and charitable contributions.

• Author: Rhine, David S.
• Position: S corporations

Cash contributions to a charity may be quick and easy, but (because they represent after tax income) they are costly; it is better to give pre-tax income. While taxpayers cannot give away their salaries without it being taxed first, they can give away appreciated property without paying long-term capital gains tax. With publicly traded stock, it is relatively simple.

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...