Thursday, March 28, 2024
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GiftLaw Note: When a charity acquires Sub S stock from a donor it is not treated like C Corporation stock. With Sub S stock the charity must pay tax on the gain at sale. This is because Sub S stock is deemed to be unrelated business taxable income to the charity while C Corporation stock is not. Also, a CRT is not a permissible owner of Sub S stock.

One way charities and donors have tried to avoid such restrictions is through use of the option strategy. The option strategy involves the grant of an option to purchase S Corporation stock from an S Corporation shareholder to a charity or CRT. The option exercise price is heavily discounted and well below the fair market value of the S Corporation stock. The charity or CRT then sells the option to a public charity for the difference between the fair market value of the S Corporation stock and the option exercise price. When the purchaser exercises the option, the donor claims a deduction for the difference between the option exercise price and the fair market value paid by the purchaser to the charity or CRT. In PLR 8922014, the IRS initially approved the transaction, but later withdrew in the PLR below. Thus, this is not a valid option today.

PRIVATE RULING 9417005

DATE: June 1, 1993


This letter is written in connection with a prior private letter ruling, dated July 2, 1992 (PLR 9240017). This letter ruling involved the transfer to a charitable remainder trust of an option to purchase real property.

The Internal Revenue Service is now reconsidering the issues raised by this letter ruling. Accordingly, effective as of the date of this letter, we are withdrawing the letter ruling previously issued (PLR 9240017). No inference should be made from this withdrawal as to the proper tax treatment of the transfer to a charitable remainder trust of an option to purchase property.

Sincerely yours,

Frances Schafer
Senior Technician Reviewer
Branch 3
Office of the Associate
Chief Counsel
(Passthroughs and Special Industries)




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