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§ 9.8 S CORPORATION STOCKunrelated business income tax return, Form 990-T, need not be filed). Quarterlyestimates of the tax 230 need not be filed (on Form 990-W) if the total tax liabilityfor the year is less than $500. 231 The charity can assess this situation by askingquestions of the donor and by examining the Schedule K-1 information returnsthat the S corporation issued to the donor in recent years. Otherwise, the taxreturn must be filed and taxes paid, and quarterly estimates of the tax will haveto be paid to avoid penalties. 232If the gift of S corporation stock is accepted, the charity should learn thedonor’s adjusted basis in the stock, because that will be used in determining theamount of taxable gain the charity will have on the sale of the stock. 233 A lowbasis could cause normally tax-exempt cash distributions (see below) to be taxableand could prevent the charity from deducting the business operating losses.Various administrative requirements, such as gift substantiation and an independentappraisal, are noted above.Generally, the income of an S corporation is allocated to each shareholder inproportion to the number of shares owned by that shareholder. 234 If a shareholderacquires or disposes of S corporation stock during a year, the shareholderis taxed on a portion of the year’s income based on the number of days that theshareholder owned the stock during that year. 235Unrelated business taxable income in this context consists of the charity’sshare of the accounting income shown on the shareholder’s Schedule K-1, whichthe corporation attaches to its annual tax return (Form 1120S). The accountingincome is rarely the same as the cash distributions that the charity receives fromthe S corporation. It is common for an S corporation to retain part of its profits toreinvest in growing the business. With rare exceptions, the cash distributionsthat the charity receives from the S corporation will be nontaxable, because thetax is levied on the accounting-based income instead. 236To the extent that the unrelated business income tax cannot be avoided, 237 acharity’s primary tax concern should be that there is sufficient cash available topay the tax as it comes due, usually in quarterly estimated tax payments.Although most S corporations distribute sufficient cash to their shareholders toenable them to pay the income tax attributable to that income, a charity shouldaddress this issue before accepting a gift of S corporation stock. A charity shouldavoid accepting stock of an S corporation that is like a burned-out partnership230 IRC § 6655(a)–(d), (g)(3).231 IRC § 6655(f).232 Reg. § 1.511-3(a).233 The donor’s basis will carry over to the charity. IRC § 1223(2). The charity will adjust this basis amount overtime to reflect its share of the corporation’s income and distributions. IRC § 1367.If the charity purchased the stock, rather than received it as a gift, and the corporation was previously a Ccorporation, any “dividends” attributable to the corporation’s years as a C corporation reduce the basis in thestock. IRC § 512(e)(2).234 IRC § 1366(b).235 IRC § 1377(a)(1).236 IRC § 1368.237 For example, a charity may own interests in several S corporations and partnerships, some of which generateprofits and others of which generate losses; if the losses exceed the profits, there is no unrelated taxableincome. 297