January 14, 1999 | Read Time: 1 minute
For-profit corporations that convert to tax-exempt status or that transfer assets to a tax-exempt entity could wind up owing tax to the I.R.S.
Under final regulations that implement changes contained in the Tax Reform Act of 1986, a taxable corporation that transfers “all or substantially all” of its assets to a tax-exempt entity generally must treat the transaction as if it had sold the assets at fair market value.
In such cases, the corporation could wind up owing capital-gains taxes, the same taxes it would have to pay if it sold the assets.
If the assets are used by the tax-exempt entity in a business that is unrelated to its tax-exempt purpose, the corporation can defer any tax liability until the assets are sold or their use changes.
The rules do not apply to corporations that give part of their assets to charity. Nor do they apply to shareholders who give corporate stock to a charity.
However, if shareholders give all of a corporation’s stock to a charity and the charity then liquidates the corporation, the corporation must pay tax on any gain as if it had sold the assets.
Randall Snowling, a non-profit tax expert at the accounting firm of Deloitte & Touche, says the new regulations may discourage donations of stock in corporations that own only “passive” assets such as real estate because the corporation, upon liquidation, would be forced to pay tax as if it had sold the assets.
The regulations take effect on January 28. They were published in the December 29, 1998, issue of the Federal Register, Pages 71,591-96.
