Contributions of S Corporation Debased Debt to Charity: Opportunities, Problems, and Policy Questions Abound with Double Dipping

S corporation losses may be utilized even though they exceed the shareholder's stock basis if the shareholder has made loans directly to the corporation. The basis of debt is reduced in the same way that stock basis is reduced by the flow-through of losses. The contribution of such reduced or zero basis debt obligations to a charity will result in a charitable contribution deduction equal to the fair market value of the debt if the debt is a capital asset held for more than a year. The contribution of zero basis debt may result in the double deduction of basis; first to absorb pass through losses and secondly as a charitable contribution deduction. This strategy may prove advantageous in special circumstances but there are numerous timing and other issues that the tax advisor must recognize or risk unexpected tax consequences and professional embarrassment. Congressional intent and tax policy issues encouraging charitable contributions are examined in the context of S corporation debt.