Lawmaker Seeks Guidance on Availability of Charitable Deduction for S Corps Donating Food Under Katrina Act

I am writing to request a clarification on an important issue Congress addressed in the Katrina Emergency Tax Relief Act of 2005, and later extended in Pension Protection Act of 2006, relating to encouraging American businesses and manufacturers to donate food to those in need.

Throughout my career, I have worked to end hunger in America and around the world. I have long championed efforts to provide incentives to businesses to contribute food inventory to the needy. In a historic initiative to help reconstruct and provide needed relief to those hit by the disastrous hurricane season of 2005, the Katrina Emergency Tax Relief Act, among other notable provisions, expanded the charitable deduction for the contribution of food inventory to include businesses other than C Corporations. It has recently come to my attention, however, that S Corporations -- a very common business structure for many of our nation's restaurants -- are hesitant to claim the deduction for donated food because of uncertainty about whether the deduction has an impact on the tax basis of shareholders in the S Corporation structure.

Specifically, Internal Revenue Code Section 170(e)(3)(C)(I) allows a charitable contribution of food to be made without regard to whether the contribution is made by a C Corporation. It is my understanding that both the Katrina Emergency Tax Relief Act of 2005 and the Pension Protection Act of 2006 were silent on the effects of the charitable food donation and its impact upon the S Corporation's shareholder tax basis. In addition, no guidance has been put forward by the Internal Revenue Service to put S Corporation shareholders at ease so that they can take the deduction without triggering the limitations on shareholder deductions in Internal Revenue Code Section 1366(d)(1). Without this specific guidance, concerns have been expressed that the charitable deduction would reduce shareholder basis and would, effectively, increase taxes on the shareholder. This reduction would negate the incentive that was intended and is clearly not what we had in mind when the provision was enacted. The intent was that the full benefit of the deduction be conferred upon those shareholders.

At this time, I ask that Treasury and the Internal Revenue Service work to provide clear guidance regarding food contributions from S Corporations. I believe that this clarification would fulfill the original intent of the legislation by allowing S Corporations to take advantage of this charitable deduction for contributions of food to charities that provide and distribute food and meals to those who need it.

Since the provision expires at the end of this year, it is my hope that Treasury and the Internal Revenue Service will act expeditiously to get clarification and guidance to taxpayers in order to facilitate the continued and enhanced donation of food inventory by S Corporations to those most in need.

If you have questions, please have your staff contact Shellie Bressler of my staff at 202-224-2526.

Thank you, in advance, for your timely attention to this matter.