Charitable Planning with S Corporation Stock—Making It Work

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Since 1998, charities have been able to own S corporation stock (“S stock”). However, the ownership of S stock by an exempt organization may result in either an unexpected tax burden or a liability rather than an asset for the charity. This author’s recent experiences with several clients seeking to include gifts of S stock in their charitable planning well illustrated how challenging this planning objective can be.

The purpose of this column is four-fold: draw attention to the unrelated business taxable income (UBTI) tax pitfall that exists when a charity owns S stock; consider the tax factors for a charity using either a corporation or a trust to hold S stock; (3) use of a Code Sec. 509(a) Type III “supporting organization” (SO) to reduce the UBTI tax; and the possible use of an SO to reduce the excess business holdings tax pitfall that exists when a private foundation owns S stock.

Originally Published in the Journal of Passthrough Entities - July/August 2014.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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