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§ 9.8 S CORPORATION STOCKassets in passive investments, 258 had LIFO inventories at the time of conversion,259 or distributes dividends attributable to its C corporation years.Although the S corporation statutes seemingly permit a private foundation toown S corporation stock, 260 most private foundations are prohibited from owningthis type of stock because of the rules prohibiting excess business holdings. 261 Tothe extent that a private foundation can hold S corporation stock, it is not liablefor the 2 percent excise tax on net investment income, 262 because the S corporationincome is subject to the unrelated business tax. 263 In appropriate circumstances, asupporting organization 264 may be used as a holder of S corporation stock in lieuof a private foundation.Because S corporations were designed for small business, the law contemplatesthe possibility of mistakes as to some of the technical requirements. Congressinstructed the IRS to forgive “invalid elections” and “inadvertent terminations” ofS corporation status when the mistakes were innocent. 265 The IRS has been fairlylenient and forgiving in this regard. 266 To qualify for inadvertent termination relief,the disqualifying transaction should be undone and the parties returned to theiroriginal position. Inadvertent termination treatment might be an appropriateremedy if, for example, S corporation stock was mistakenly contributed to acharity’s pooled income fund, which is not eligible to hold S corporationstock. 267 Otherwise, the general rule is that a corporation that has lost its S corporationstatus is ineligible to reelect that status for at least five years after thatstatus was terminated. 268A corporation can have its S corporation status voluntarily or involuntarilyrevoked. 269 What happens to a charitable organization if this occurs while thecharity owns the corporation’s stock? Presumably, the charity would have toreport as unrelated business income its share of the S corporation’s income untilthe date of revocation. The converse should be the case if a charity owned stockof a C corporation that converted to an S corporation: The charity would beginto recognize unrelated business income as of the date of S corporation status. If acharity is a shareholder at the time of a C-to-S conversion, the C corporationwould not be able to switch to an S corporation unless the charity consented tothe conversion.The much more complicated issue, in an instance of one of these conversions,is treatment of the gain on the sale by the charity of the corporation’sstock. A donor may contribute S corporation stock to a charity, the corporationmay subsequently convert to a C corporation, and the charity may later sell the258 IRC §§ 1375, 1362(d)(3).259 IRC § 1363(d).260 IRC §§ 1361(b)(1)(B) and 1361(c)(7) permit any charitable (IRC § 501(c)(3)) organization to be an eligibleshareholder.261 IRC § 4943. See Private Foundations ch. 7.262 IRC § 4940. See Private Foundations ch. 10.263 IRC § 4940(c)(2).264 IRC § 509(a)(3). See Private Foundations § 15.7.265 IRC § 1362(f).266 See, e.g., Priv. Ltr. Rul. 9728022.267 IRC § 1362(d)(2).268 IRC § 1362(g).269 IRC § 1362(d)(1). 301