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Donation of S-Corporation Stock to a Municipality's Qualified Plan


Guest SCUDDESLER
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Guest SCUDDESLER

A local municipality sponsors a defined benefit plan. The municipality has been advised by a partner of an international accounting firm that a third-party, i.e., an entity other than the municipality or any of its employees, may donate $1.5 million of nonvoting, S-corporation stock to the defined contribution plan. The donor is a minority shareholder in the corporation. It is expected that the shares of S-corporation stock will be redeemed within 3 years of the donation. I have two questions:

(1) Is it possible for an entity/individual other than the employer or employee to donate/contribute funds to the defined benefit plan?

(2) If such an entity/individual can make such a contribution, are there any other related issues that I need to consider.

Thank you.[Edited by SCUDDESLER on 08-31-2000 at 11:55 AM]

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1. I'll duck the issue whether the contribution is deductible.

2. IF the IRS treats the donation as a gift to the municipality followed by a contribution to the pension plan, the municipality is probably not an eligible S corp shareholder.

3. The pension plan will be subject to UBTI tax. (Because a trust is a separate legal entity, I don't know if IRC 115 will protect the trust from the UBTI tax. A 115 entity is not an eligible shareholder. The trust would need to claim 115 status for income tax purposes and 401(a) status for S corp pruposes but not 410(a) status for income tax purposes.)

Get an opinion letter and please e-mail me with the name of the accounting firm.

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There is actually a very old revenue ruling, Rev. Rul. 63-46, 1963-1 CB 85, which permits contributions by a party other than the employer or the employees.

You might look at Code § 170©(1) with regard to the deductibility of a contribution to a state or local government as a charitable contribution. And of course, the donor might also argue that the contribution was a business expense, if the intent was to promote the business' name or secure other business advantages.

As for prohibited transaction problems, the federal rules for governmental entities (under § 503) are looser than those for private entities under § 4975. A donation of stock would probably not violate § 503. However, if the stock could be recharacterized as debt, there might well be an issue.

The question of whether UBIT applies to a governmental plan is too complicated to go into here. (You'll have to wait until my book comes out. ;) ) However, suffice it to say that the answer is a resounding, "maybe."

Finally, as always, you need to consult applicable state and local law to determine whether there is any problem with the arrangement.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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