S to C Corporation Conversion
A third strategy for working around the rules that require charities to pay tax on S corporation income or sale proceeds and that prevent CRTs from owning S corporation stock is conversion of the S corporation to a C corporation. If this conversion is possible, then the C corporation stock may be transferred to a CRT or charity without the UBI consequences and other concerns presented by transfers of S corporation stock to charities and CRTs. An S corporation's accountant and legal counsel are in the best position to determine whether or not conversion to a C corporation is possible or advisable in any particular circumstance.
Example 4.14.6A
Chester Carslie is the sole shareholder of Cookie Casa, an S corporation. Chester is ready to sell Cookie Casa and wants to give all of his Cookie Casa stock to a CRT or charity so that he can bypass the capital gain and benefit charity. Chester learns that he cannot give the Cookie Casa stock to a CRT and that if he gives the stock to a charity, the sale proceeds will be taxable UBI to the charity. After talking with Cookie Casa's accountant and legal counsel, Chester learns that a conversion of Cookie Casa from an S corporation to a C corporation is feasible and will not produce unfavorable tax consequences. Cookie Casa therefore converts to a C corporation and then Chester gives the Cookie Casa C corporation stock to Favorite University, his alma mater. Chester is able to deduct the full fair market value of the stock.
If an S corporation converts to a C corporation, a shareholder can contribute his or her resulting C corporation stock to a charity or CRT and receive a fair market value deduction for the value of the charitable gift.
While conversion from an S corporation to a C corporation may facilitate stock gifts to CRTs, a C corporation faces obstacles that an S corporation may not. Specifically, the income of C corporation is taxed twice - once at the corporate level and once at the shareholder level. For more information on this double taxation, see GiftLaw Pro 4.2.1.
As is the case with an S corporation, a C corporation can also make direct charitable gifts by contributing its assets outright to charity or to a term of years CRT. Unlike an S corporation where the resulting deduction flows through to shareholders, the C corporation uses the deduction itself. C corporations, however, are only permitted to use charitable deductions up to 10% of their taxable income. For additional discussion of this limitation, see GiftLaw Pro 4.2.1.
