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SPECIAL GIFT SITUATIONSThe crucial issue is whether the stock looks like an attractive investment inrelation to the potential burdens that owning the stock could impose. Questionsto be asked include how soon the stock can be sold and converted into productivemarketable investments, and, if the stock is to be held for a period of time, ifit can produce net cash flow (after payment of the unrelated business incometax) for use for charitable purposes. The tax consequences will generally be secondaryto the basic economics of the transaction.As a general rule, charities prefer to sell interests in closely held businessesthat have been contributed to them, as these assets do not usually conform tocharities’ overall investment philosophy. Stock in an S corporation is not anexception to this basic policy; the charitable donee is almost certain to want tosell it (imposition of the unrelated business income tax will likely make the charityeven more eager to sell the asset).Donors may, however, expect the charity to hold the S stock for a significantperiod of time. Moreover, there is a restricted market for selling this type ofstock; it is frequently confined to the corporation itself, existing shareholders, orpurchasers who have been preapproved by the existing shareholders. Inasmuchas a charitable organization is almost certain to be a minority shareholder, itmust rely on the controlling shareholders for fair treatment. For example, thecharity should satisfy itself that the control group will not engage in practicesthat may prove damaging (or even embarrassing) to the charity.Consequently, a charity is well advised not to accept a gift of S corporationstock unless it is reasonably satisfied that there will not be any resulting materialfinancial difficulties. A charity should also investigate the possibility of problemsunder state law concerning ownership of S corporation stock. If the stock isto be sold several years after the contribution, the charity should be assured (bymeans including procurement of a timely appraisal) that it is receiving a fairprice for the stock.Another nontax issue is the credit to be given a donor of S corporation stockin the context of a major campaign. The choice is between the full fair marketvalue of the stock or that value reduced by the amount of the unrelated businessincome tax burden. Likewise, if the stock is donated in exchange for a charitablegift annuity, 227 the choice is essentially already made: as only the after-taxamount will be left to pay the annuity, the annuity should be based on theamount of the after-tax proceeds. 228Tax Issues. The greatest potential tax burden that owning and selling S corporationstock presents to a charity is payment of the tax on unrelated businessincome.If the income from the corporation is minimal, there presumably is not a taxproblem. The first $1,000 of unrelated business income is not taxable 229 (and the227 See Chapter 14.228 In the unrelated debt-financed income setting, the law requires only that the value of a charitable gift annuitybe less than 90 percent of the value of the contributed property. IRC § 514(c)(5); see § 14.6. A charity is thereforefree to issue a charitable gift annuity based on an amount that is lower than the fair market value of thedonated property.229 IRC § 512(b)(12). 296