Rev. Rul. 2000-43 Confirms IRS Position Denying Accrual-Basis Deduction for S Corporation Charitable Contributions

In Rev. Rul. 2000-43, the IRS confirmed its position that neither an S corporation nor its shareholders is entitled to elect a deduction for charitable contributions on the accrual basis under Sec. 170(a)(2).

The ruling addresses the computation of an S corporation's taxable income when the Code prescribes a special rule applicable only to corporations. In the ruling, the S corporation was a calendar-year accrual-basis corporation whose board of directors authorized certain (otherwise qualifying) charitable contributions. The authorization was made before the end of the calendar year; the contributions were made on March 1 of the following year. The corporation claimed a deduction under Sec. 170(a)(2) (which is available only to corporations), but the Service ruled that an S corporation was not entitled to use that provision.

Sec. 170(a)(2) provides that an accrual-basis corporation may elect to deduct a charitable contribution in the year in which the board of directors authorizes the contribution, if payment of the contribution is made by the fifteenth day of the third month following the close of the tax year.

Sec. 1363(b) provides that an S corporation's taxable income is computed in the same manner as that for an individual, with certain exceptions. Among the exceptions is a requirement that an S corporation may not directly deduct charitable contributions, but must separately state and allocate them to shareholders. Regs. Sec. 1.1366-1(a)(2)(iii) provides that an S corporation must include in separately stated items on Schedule K-1 (Form 1120S) charitable contributions "paid by the corporation within the taxable year of the corporation." Although this regulation governs only the information that must be provided to S shareholders, the rules were intended to provide such shareholders with all of the information that would be relevant to them. Some commentators asked the Service to require S corporations to provide information on charitable contributions eligible for a Sec. 170(a)(2) election. However, when the regulation was issued in final form, the IRS indicated (in the preamble, but not in the regulation itself) that neither an S corporation nor its shareholders was entitled to make an election under Sec. 170(a)(2). Rev. Rul. 2000-43 confirms that conclusion.

It is not clear how far this ruling can be extended. In some cases, the ruling's principles can have favorable consequences for S corporations and their shareholders. Several other Code provisions are applicable only to corporations in some cases, and in other cases only to taxpayers other than corporations. Examples include:

• Sec. 170(c) (charitable contributions by corporations are deductible only if the contribution is to be used within the U.S.);
• Sec. 165(g)(3) (ordinary loss treatment for worthless securities in affiliated corporations, but only if the taxpayer is a domestic corporation);
• Sec. 302(b)(4) (distributions in partial liquidation may be eligible for exchange treatment, but only for noncorporate shareholders); and
• Sec. 1244 (ordinary loss deduction for stock in a small business corporation, but only for individuals).

The Tax Court has held that S shareholders may not avail themselves of the ordinary loss treatment for Sec. 1244 stock that a corporation directly holds; see Rath, 101 TC 196 (1993). The court concluded that the taxpayer did not meet the statutory requirement that the stock be issued to an individual, notwithstanding Sec. 1363(b).

From Kevin Anderson, CPA, J.D., and Michael Lux, CPA, Washington, DC