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SPECIAL GIFT SITUATIONSThe IRS took the position that the donors did not transfer the scenic easementfor an exclusive conservation easement purpose. This assertion was in addition tothe one that the donors lacked the necessary donative intent. The donors arguedthat they granted the scenic easement for the “purpose of protecting the area . . .from further development so as to preserve the beauty and environmental systemsof that area.” 212 The IRS, however, countered that the donors had granted theeasement with the “expectation of preserving property values and achievingdesired zoning restrictions for the property.” 213 The court wrote that it was unableat the time to determine whether the benefits accruing to the donors (other thanthe tax savings generated by the charitable deduction) “were merely incidental toa greater public conservation benefit derived from the scenic easement conveyance”and noted that the facts required “further ventilation.” 214 The courtobserved that donors bear the burden “of proving at trial that . . . [they] transferredthe easement to the [c]onservancy with the requisite donative intent andexclusive conservation purpose.” 215§ 9.8 S CORPORATION STOCK 216S corporations are small business corporations that, for federal income tax purposes,are treated as partnerships. 217 Prior to 1998, charitable organizations wereprohibited from owning stock issued by these corporations. 218 If a charitybecame a shareholder of one of these entities, the corporation immediately lostits S corporation status and became subject to many of the disadvantageous provisionsof the income tax laws generally applicable to corporations.(a) Background and IntroductionCharities now have access to gifts of stock of closely held businesses that werepreviously inaccessible to them. Many of these business owners have the opportunityto make charitable gifts of this type of stock.The major tax problem in this regard for charitable organizations is that thistype of interest is regarded as ownership in an unrelated business. 219 Items ofincome, loss, or deduction of an S corporation flow through to charitable organizationshareholders as unrelated business income. 220 A charity is taxed on its212 Id.213 Id.214 Id.215 Id. This opinion was affirmed on appeal in McLennan v. United States, 994 F.2d 839 (Fed. Cir. 1993). Thematter of donative intent in the general charitable giving context is explored in § 3.1.In Osborne v. Commissioner, 87 T.C. 575 (1986), a charitable deduction was allowed for the installationand transfer of drainage facilities and easements to a city. The IRS challenged the deduction, alleging that thefacilities enhanced the value of the donors’ property. The court allowed the deduction only to the extent thetransfer “gratuitously benefited” the city. Id. at 583. The court allowed the deduction, using a value about twicethat asserted by the government.216 This section is based in part on materials prepared by Christopher R. Hoyt, Esq., Professor of Law, Universityof Missouri-Kansas City, with Professor Hoyt’s permission.217 IRC §§ 1361–1379.218 Former IRC § 1361(c)(7).219 IRC § 512(e)(1)(A). See § 3.5.220 IRC § 512(e)(1)(B)(i). 294