Because of the economic recovery or, perhaps, in anticipation of it, there seems to be an increase in purchases of closely held companies. Whether the buyers are strategic or financial doesn’t matter: Once the sellers are comfortable that the deal has a high probability of succeeding, they frequently begin to think about charitable donations. 
Often, those closely held companies have made the election to be taxed as Subchapter S corporations. While S corporations may be tax-efficient for everyday operations, they can be an awkward fit for a shareholder with charitable intent. Three major tax factors contribute to that awkwardness: (1) valuation for the donor’s stock to be contributed to a charitable organization, (2) income allocated to the charity between the date of donation and the date of sale of the stock, and (3) taxable gain to the charity on the sale of the stock.


Valuation of donated stock is likely to be less than the donor anticipates. Perhaps he expects that the eventual sale price will be $50 a share. Applying common sense, the donor then expects the stock to be worth $50 a share for charitable deduction purposes. Unfortunately, the valuation principles applicable to donations have to take into account the possibility that the sale doesn’t go through, so it’s unlikely that the charitable donation appraisal would value the stock at $50. Indeed, if it did, there would be some concern that the donation is being made too late to avoid an assignment of income problem.1 If that occurs, the donor is taxed on the gain inherent in the stock, although the donation is still valid. In addition, if the corporation is holding certain types of ordinary income assets (such as cash basis receivables, appreciated inventory items and depreciable assets),2 the donor’s charitable deduction will be further reduced by the difference between the value and the basis of these assets.

Income Allocated

Assuming those difficulties can be overcome, charities are sometimes hesitant to accept gifts of Subchapter S stock. The charities’ share of income of the S corporation will be unrelated business taxable income.3 Charities are, therefore, concerned that if the corporation doesn’t make sufficient distributions to its shareholders, the charity would have to dip into its general funds to pay tax on its pro rata share of the undistributed income. In this situation, perhaps the donor would be willing to sign an indemnity agreement similar to the one mentioned in Hendrix4 last year. Upon insistence by the charity’s counsel, the Hendrix donors agreed that they would pay any income taxes, interest and penalties to the extent that distributions from the corporation were insufficient. The charity may also insist on a put right, so that if the deal collapses, the charity can force the corporation to redeem the stock, so the charity doesn’t have to hold the stock indefinitely.

Taxable Gain

In addition to the income tax that the charity must pay on any ongoing operating income, any gain on the sale or redemption of the stock is also subject to tax.5 Since the charity will have the same basis as the donor,6 there may be a substantial tax due when the stock is sold to a third party or redeemed by the corporation. Donors are often surprised by this tax provision, since a charity can sell most donated assets without incurring taxes. Since charities have been permitted Subchapter S shareholders for over a decade now, many charities have developed gift acceptance policies to deal with Subchapter S stock. For example, donors may be credited with the full value of the donated stock in a capital campaign, or the charity may only credit the net remaining after the payment of any taxes. If this is important to a donor, inquiries should be made before the donation is consummated.
Donations of S corporation stock require significant attention to specific Subchapter S issues. But, if all the details are properly addressed, the tax benefits may be worth the effort.
—This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this publication.


1. Revenue Ruling 78-197.
2. Internal Revenue Code Sections 170(e)(1) and 751.7.
3. IRC Section 512(e).7.
4. Hendrix v. Commissioner, T.C. Memo. 2011-133 (June 15, 2011).7.
5. IRC Section 512(e)(1)(B)(ii).7.
6. IRC Section 1015(a).