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§ 9.8 S CORPORATION STOCKshare of an S corporation’s income, as determined for accounting purposes,rather than simply on the corporation’s actual cash distributions. Gain or loss onthe disposition of stock in an S corporation results in unrelated businessincome. 221(b) Gifts from Donor’s PerspectiveA donor must initially determine whether he or she is willing to contribute Scorporation stock to a charitable organization. This donor will consider many ofthe same factors that he or she would for a gift of an ownership interest in anytype of closely held business. Two of these are (1) whether the donor would becomfortable with a charity having the legal rights of a minority shareholder, and(2) whether the stock is subject to a transfer restriction that would prevent thecharity from selling or granting the stock to another party without the shareholder’sapproval.The income tax deduction usually will be less than the appraised value ofthe stock. The tax law mandates that the income tax deduction for a charitablegift of S corporation stock be reduced under rules that are analogous to charitablegifts of partnership interests. 222 It may be possible to avoid a reduced deductionby having the donor terminate the S corporation status shortly beforemaking the gift of the stock. The step transaction doctrine 223 may, however, foilthis approach.Otherwise, the charitable contribution deduction available to the donor iscontingent upon compliance with the gift substantiation rules 224 and, mostlikely, the appraisal requirements. 225 If the charitable donee sells or otherwisedisposes of the stock within two years of its receipt, there is a requirement toprovide reports to the IRS and the donor. 226(c) Gifts from Donee’s PerspectiveBoth tax and nontax issues face a charitable organization that is contemplatingreceiving or that holds stock of an S corporation.Nontax Issues. Charitable organizations readily accept contributions of publiclytraded marketable securities. A charity should, however, treat offers of Scorporation stock in a manner similar to prospective gifts of real estate. Just aseach parcel of real estate is unique, an S corporation is a separate business, thesuccess or failure of which depends primarily on the management skills of thecorporation’s directors and shareholders. Although ownership of S corporationstock does not incur the maintenance responsibilities associated with real estate,a charity can incur additional bookkeeping burdens as the result of owning andselling this type of stock.221 IRC § 512(e)(1)(B)(ii).222 IRC §§ 170(e)(1), 751. This is an addition to the body of law treating certain items as ordinary income, ratherthan capital gain, thereby necessitating a reduction in the charitable deduction. See § 4.4(b).223 See § 4.8.224 See § 21.1(b).225 See § 21.2.226 See § 21.3. 295