Article on Charitable Gifts by S Corporations
When the owner of a closely-held business is contemplating a major charitable gift, there are two potential donors. The owner could contribute an ownership interest in the business (e.g., stock), or the owner could arrange for the business to contribute some of its assets. Although the value that the charity may receive from each potential donor might be the same, our tax laws have very different outcomes depending on whether the donor is the business owner or the business itself. Furthermore, the tax outcomes vary dramatically depending on whether the business is a partnership, a limited liability company (“LLC”), a corporation taxed under Subchapter C (a “C corporation”), or a corporation taxed under Subchapter S (an “S corporation”).
Although an S corporation is taxed similarly to a partnership, there are many differences that make a charitable gift of S corporation stock, or a gift of property from the S corporation itself, more challenging than a comparable gift from a partner or from a partnership. This article examines the opportunities and hazards when S corporations make charitable gifts. It demonstrates that a gift from an S corporation generally produces better after-tax results to both the donor and the charity compared to a shareholder’s donation of S corporation stock. The article also focuses on the legal challenges that can apply to certain charitable gifts by S corporations that do not apply to comparable gifts from partnerships, including donations of property subject to the Section 1374 built-in gains tax and constructive dividend distributions. A companion article will examine the legal challenges and solutions when a shareholder makes a charitable contribution of S corporation stock. That article will appear in the Spring 2011 issue of ACTECT Law Journal: “Charitable Gifts of S Corporation Stock: Two Worlds of Law Collide.”