S shareholder charitable contribution planning opportunities.

• Author: Dance, Glenn E.
• Position: S corporations

One of the changes made by recent S corporation legislation relates to the ability of charitable organizations to become S shareholders. As a result of this change in the law, S shareholders will be able to make contributions of S stock to certain charities, beginning in 1998, without terminating the company's S status. Although this was a fairly exciting change, there are several practical problems that may limit its appeal in the real world. An alternative idea for charitably inclined S shareholders may be to make charitable contributions of shareholder loans, rather than S stock. In many instances, structuring a charitable contribution in the form of a shareholder loan may provide a more tax-efficient result for both the S shareholder and the charity.

One of the practical problems with making contributions of stock to a charity is the potential for generating unrelated business taxable income (UBTI) for the charity. The charity's distributive share of S earnings would generally represent UBTI, unless the S corporation engaged in certain exempt activities. Many charitable organizations are prohibited from earning any UBTI under their organizational charter, or would otherwise be disinclined to assume the administrative burdens of filing Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)), and making tax payments on earnings from their investments. As a result, there is somewhat of a disincentive for charitable organizations to accept contributions of S stock. In addition, the contributing shareholder is not permitted to treat S stock as a capital asset in determining the treatment of its charitable contribution to the extent of the S corporation's "hot assets."

To avoid these issues, it may be more attractive instead to donate an S shareholder loan, because neither the hot assets rule nor the UBTI issue would come into play. From a valuation standpoint, the charitable contribution of an S shareholder...