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SPECIAL GIFT SITUATIONStransaction. 250 This means that the characteristics of different forms of income passthrough to the shareholder. For example, an individual obtains the benefit of lowerlong-term capital gains rates from the corporation’s capital gains. Similarly, theindividual’s ability to deduct the corporation’s charitable contributions may berestricted based on the individual’s own charitable gifts.The law is not clear as to whether these principles carry over to a charitythat owns S corporation stock. This complication arises out of the fact that thepertinent provision of the S corporation unrelated business income statute 251only refers to the rules by which a shareholder’s tax liability is determined. 252The question is whether the omission of any reference to the character passthroughrule 253 means that the character of the income does not pass through.Guidance from the IRS on this point is critical, in that charitable trusts will paya different amount of unrelated business income tax depending on whether theS corporation’s long-term capital gain retains its character or is instead treatedas ordinary income.The closest comparable law is that pertaining to partnerships, and it is of littlehelp. The instructions to the exempt organization unrelated business incometax return suggest that all partnership unrelated business income is condensedto a single line reflecting net partnership income. This may not have posedmuch of a problem in the past, when charities only paid the unrelated businessincome tax on the portion of the partnership’s income that came from an unrelatedbusiness activity. A partnership’s investment income is exempt from unrelatedbusiness income taxation. 254 The consequences can be different for incomefrom an S corporation because its investment income is subject to the unrelatedbusiness income tax.Most S corporations are required to use the calendar year, to coincide withthe tax years of their shareholders, 255 who usually are individuals. A charitableorganization may, however, have a different fiscal year. Until there is IRS guidance,probably the safest strategy is to conform to the rules that tax-exempt organizationsuse for reporting income from a partnership that has a different fiscalyear: They include in income the amount shown on the partnership’s schedulethat is dated within their own fiscal year. 256Because a C corporation with fewer than 75 shareholders can easily convertto an S corporation by making an election, a series of special rules preventconverted C corporations from completely escaping some of the taxes that otherwisewould have applied to them. Problems can therefore arise if an S corporationthat was once a C corporation sells property that it owned at the time ofthe switch within 10 years of the conversion, 257 invests large portions of its250 IRC § 1366(a), (b).251 IRC § 512(e)(1)(B)(i).252 IRC § 1366(a).253 IRC § 1366(b).254 IRC § 512(c); Reg. § 1.512(c)-1.255 IRC § 1378.256 IRC § 512(c)(2); Reg. § 1.512(c)-1.257 IRC § 1374. 300