IRS Revenue Ruling
2000-43

Code Secs. 170, 1366

<<FULL TEXT>>

(Also section 1366.)

Charitable contributions; S corporations; section 170(a)(2). This
ruling provides that an accrual-basis S corporation may not elect under
section 170(a)(2) to treat a charitable contribution as paid in the year
authorized by the S corporation's board of directors if the contribution
is paid by the S corporation after the close of the tax year.


REV. RUL. 2000-43

ISSUE

May an accrual-basis subchapter S corporation elect under section
170(a)(2) of the Internal Revenue Code to treat a charitable contribution
as paid in the year authorized by the S corporation's Board of Directors
if the contribution is paid by the S corporation after the close of the
taxable year and before the 15th day of the third month following the
close of the taxable year?


FACTS

Taxpayer is the sole shareholder of an accrual-basis subchapter S
corporation. The S corporation reports on a calendar year period. On
December 31, 1999, the S corporation's Board of Directors authorized a
charitable contribution to Charity, a qualified donee under section
170(c)(2) and an organization described under section 501(c)(3). The S
corporation paid the charitable contribution to Charity on March 1, 2000.


LAW AND ANALYSIS

Section 170(a)(1) allows as a deduction any charitable contribution (as
defined in section 170(c)) the payment of which is made within the taxable
year. Under section 170(b)(1), the percentage limitation on charitable
contributions for an individual is 50 percent, 30 percent, or 20 percent
of the taxpayer's contribution base (generally adjusted gross income) for
the taxable year, depending generally on the type of property contributed
and the type of qualified donee. Under section 170(b)(2), the percentage
limitation on charitable contributions by a corporation is 10 percent of
the taxpayer's taxable income with certain adjustments.

Under section 170(a)(2), a corporation reporting its taxable income on
the accrual basis may elect to deduct a charitable contribution in the
year in which the board of directors authorizes the contribution, if the
payment is made by the 15th day of the third month following the close of
the taxable year. The election may be made only at the time of the filing
of the return for the taxable year and is made by reporting the
contribution on the return. See section 1, 170A-11(b)(2) of the Income Tax
Regulations.

The legislative history to section 170(a)(2) provides that the
exception for accrual basis corporations was desirable because
corporations intending to make the maximum charitable contribution
allowable as a deduction had experienced difficulty in determining before
the end of the taxable year what constituted 5 percent of their net income
(the section 170(b) gross income limitation for corporations at the time
of enactment). S. Rep. No. 831, 81st Cong., 1st Sess. at 1949-2 C.B. 289,
290-1.

Section 1363(b) states that the taxable income of an S corporation is
computed in the same manner as in the case of an individual with certain
exceptions, among which is an exception that the deductions referred to in
section 703(a)(2) are not allowed to the corporation. Section 703(a)(2)(C)
specifically refers to the deduction for charitable contributions provided
in section 170.

Section 1366(a)(1)(A) provides that in determining the tax of a
shareholder, each shareholder takes into account the shareholder's pro
rata share of the corporation's items of income (including tax-exempt
income), loss, deduction or credit, the separate treatment of which could
affect any shareholder's tax liability. Section 1366(a)(1) provides
further that the items referred to in section 1366(a)(1)(A) include
amounts described in section 702(a)(4). Section 702(a)(4) refers to
charitable contributions (as defined in section 170(c)).

Section 1.1366-1(a)(2)(iii) provides that the separately stated items
of a subchapter S corporation include charitable contributions, grouped by
the percentage limitations of section 170(b), paid by the corporation
within the taxable year of the corporation.

The legislative history of section 1366 states that the corporate
limitation on charitable contributions will no longer apply. Instead,
charitable contributions by S corporations will pass through to the
shareholders and be subject to the individual limitations on
deductibility. See H.R. Rep. No. 826, 97th Cong., 2d Sess. 14 (1982); S.
Rep. No. 640, 97th Cong., 2d Sess. 16 (1982).

Under section 1363(b), a subchapter S corporation computes its taxable
income in the same manner as an individual. The election in section
170(a)(2) is not available to an individual. An individual taxpayer may
deduct a charitable contribution only in the year in which payment is
actually made to the charitable organization. Furthermore, the rationale
behind section 170(a)(2), a corporation's difficulty in determining its
charitable contribution limit under section 170(b)(2), does not apply to
subchapter S corporations because a subchapter S corporation is not
subject to the same section 170(b)(2) limit.

Accordingly, under the facts described above, the S corporation must
report the charitable contribution on its tax return for the year in which
it actually paid the charitable contribution, the taxable year ending
December 31, 2000.


HOLDING

An accrual-basis subchapter S corporation may not elect under section
170(a)(2) to treat a charitable contribution as paid in the year
authorized by the S corporation's Board of Directors if the contribution
is paid by the S corporation after the close of the taxable year.


DRAFTING INFORMATION

The principal author of this revenue ruling is Martin Schaffer of the
Office of Associate Chief Counsel (Passthroughs and Special Industries).
For further information regarding this revenue ruling contact Martin
Schaffer at (202) 622-3080 (not a toll-free call).

<<END RULING>>

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