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SPECIAL GIFT SITUATIONSstock. At present, there is no guidance as to whether all, some, or none of thegain is taxable as unrelated business income.(d) ConclusionThe ability of charities to own S corporation stock opens the door to charities’participation in the most common form of small business. Charities and donorsshould first focus on the fundamental economics of a potential gift of S corporationstock before wrestling with the unrelated business income issues. Certainly,if the transaction would not benefit the charity, the gift should not be accepted.The interaction of the unrelated business income rules and the laws of S corporations,the latter now involving charities because of the new S corporationgift rules, poses many unique and unanswered legal issues that await guidancefrom the IRS. 270§ 9.9 SECTION 306 STOCKThe federal tax law recognizes a special type of stock known as section 306 stock(the term is derived from the section of the Internal Revenue Code that providesthe tax rules for this type of security). Section 306 stock essentially isstock distributed to a shareholder in circumstances that make the value of thestock distributed not includible in the recipient’s gross income. 271 The proceedsfrom the sale of section 306 stock are treated as ordinary income rather than ascapital gain. 272In one case, an individual acquired section 306 stock as a dividend on commonstock, and this receipt was not recognized as income. 273 He contributed thestock to a public charitable organization and claimed a contribution deductionfor the full fair market value of the stock, while simultaneously not diminishinghis control over the corporation. The IRS litigated the claimed deduction; thecourt involved held that this donor must reduce what would otherwise be thecharitable contribution deduction (based on the fair market value of the stock)by the amount of ordinary income that would have been realized upon a sale ofthe stock. 274In a similar case, two individuals made charitable contributions of section306 stock to a school and a college, and claimed charitable contribution deductionsbased on the fair market value of the stock. Once again, the IRS litigatedthe matter; in defense, the donors asserted an exception to the general rule concerningsection 306 stock, which is that a disposition of section 306 stock willreceive capital gains treatment “[i]f it is established to the satisfaction of the Secretary[IRS] that the distribution, and the disposition or redemption, was not inpursuance of a plan having as one of its principal purposes the avoidance ofFederal income tax.” 275270 In general, see Hoyt, Charitable Gifts of S Corporation Stock: How to Solve the Practical and Legal Problems,2 J. Planned Giving (no. 1) 5 (Jan. 1998).271 IRC § 306(c)(1)(A).272 IRC § 306(a).273 IRC § 305(a).274 Bialo v. Commissioner, 88 T.C. 1132 (1987). The deduction reduction rule involved is discussed in § 4.4.275 IRC § 306(b)(4)(A). 302