Rev. Rul. 85-8

1985-1 C.B. 59, 1985-6 I.R.B. 4.

CHARITABLE CONTRIBUTIONS; DATED PRODUCTS

Published: February 11, 1985

Section 166.-Bad Debts, 26 CFR 1.166-4: Reserve for bad debts

Section 170.-Charitable, Etc., Contributions and Gifts, 26 CFR 1.170A-1: Charitable, etc., contributions and gifts; allowance of deduction.

  Charitable contributions; dated products. When a corporation donates products to a charitable organization shortly before their expiration date, the amount allowable as a charitable contribution deduction is equal to the unrealized appreciation, not to exceed twice the taxpayer's basis in such property. Rev. Rul. 83-29 clarified and superseded.

ISSUE

  What is the amount of the taxpayer's charitable contribution deduction under the circumstances described below?

FACTS

  Corporation X, which is not an § corporation as defined in section 1361(a)(1) of the Internal Revenue Code, is a pharmaceutical manufacturer. X manufactures products that are subject to the requirement that an 'expiration date' be imprinted on the product or its container. The products may not be legally sold after the expiration date.

  Shortly before the expiration date of products that ordinarily were sold by X for 10x dollars, X made a qualified contribution of such products within the meaning of section 170(e)(3)(A) of the Code. On its federal income tax return, X claimed a deduction of 10x dollars for this contribution. At the time of the donation, if X had sold the products in the usual market in which it sold such products, X would have realized only 5x dollars. X could not reasonably have been expected to realize its usual selling price for the products due to the imminence of the expiration date after which the products could not be sold legally. X's basis in the products was 1x dollars.

LAW AND ANALYSIS

  Subject to certain limitations, section 170(a) of the Code allows a deduction for contributions and gifts to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

  Section 1.170A-1(c)(1) of the Income Tax Regulations provides that if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution reduced as provided BY section 170(e)(1) of the Code and section 1.170A-4(a) of section 170(e)(3) and section 1.170A-4A(c).

  If a taxpayer contributes property of a type that is sold in the COURSE of the taxpayer's business, the fair market value of the property is the price that the taxpayer would have received had the contributed property been sold in the usual market in which the taxpayer customarily sells at the time and place of the contribution and, in the case of a contribution of goods in quantity, in the quantity contributed. See section 1.170A-1(c)(2) of the regulations.

  Further, section 1.170A-1(c)(3) of the regulations provides that if a taxpayer makes a charitable contribution of property, such as stock in trade, at a time when the taxpayer could not reasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is the amount for which the quantity of property contributed would have been sold by the donor at the time of the contribution. Thus, property otherwise intrinsically more valuable that is encumbered by some restriction or condition limiting its marketability must be valued in the light of such limitation. See Cooley v. Commissioner, 33 T.C. 223, 225 (1959), affd per curiam, 283 F.2d 945 (2d Cir. 1960); Silverman v. Commissioner, T.C.M. 1968- 216; Deukmejian v. Commissioner, T.C.M. 1981-24.

  Section 170(e)(1)(A) of the Code provides that the amount of any charitable contribution of property otherwise taken into account under section 170 will be reduced by the amount of gain that would not have been long term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution).

  Thus, as a general rule, the deduction for charitable contributions of appreciated inventory property is limited to the taxpayer's basis in the contributed property.

  However, section 170(e)(3)(A) of the Code provides an exception to the general rule for qualified corporate contributions of inventory to be used for the case of the ill, the needy, or infants.

  Section 170(e)(3)(B) of the Code provides that the amount of the charitable contribution deduction for qualified corporate contributions of inventory is equal to the taxpayer's basis in the property plus one-half of the unrealized appreciation, not to exceed twice the taxpayer's basis in such property.

  Section 1.170A-4A(c)(1) of the regulations provides that section 170(e)(3)(B) of the Code requires that the amount of the charitable contribution subject to this section that would be taken into account under section 170(a), without regard to section 170(e), must be reduced before applying the percentage limitations under section 170(b). The amount of the first reduction is equal to one-half of the amount of gain that would not have been long-term capital gain if the property had been sold by the donor-taxpayer at its fair market value on the date of its contribution. If the amount of the charitable contribution that remains after this reduction exceeds twice the basis of the contributed property, then the amount of the charitable contribution is reduced a second time to an amount that is equal to twice the amount of the basis of the property.

  Here, had X sold the property at its fair market value on the date of its contribution, X's amount of gain would have been 4x dollars and such gain would not have been long-term capital gain. See section 1231(b)(1)(A) of the Code. Pursuant to section 1.170A-4A(c)(1) of the regulations, X must reduce the fair market value of its contribution (5x) by one-half of the gain (2x). Since the amount of the charitable contribution that remains after the reduction (3x) exceeds twice the basis of the contributed property (2x), a further reduction is necessary under section 1.170A-4A(c)(1) of 1x dollars.

HOLDING

  Pursuant to the reductions imposed by section 170(e)(3) of the Code, the amount of X's charitable contribution is 2x dollars.

  The price at which a product may be sold depends on all the facts and circumstances at the time of the sale. The purpose of the revenue ruling is to illustrate the method of calculating the amount of the deduction allowable for a charitable contribution of inventory. No inference should be drawn as to the fair market value of any products donated by any corporation shortly before the expiration date of the products. The fair market value of the products donated will depend on the facts and circumstances surrounding those particular products at that particular time.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 83-29 as published in 1983-8 I.R.B. 5, contained facts substantially similar to this proposed revenue ruling, but it did not correctly apply the formula to be used in arriving at the holding. Announcement 83-128, 1983-32 I.R.B. 30, which was published to correct Rev. Rul. 83-29, as published in 1983-8 I.R.B. 5, also did not correctly apply the formula. Rev. Rul. 83-29 as published in 1983-1 C.B. 65 did correctly apply the formula to be used in arriving at the holding.

  Therefore, Rev. Rul. 83-29 as published in 1983-1 C.B. 65 is clarified as superseded.

Rev. Rul. 85-8, 1985-1 C.B. 59, 1985-6 I.R.B. 4.