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Friday, April 26, 2024
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GiftLaw Pro |
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GiftLaw Note:
B was a broadcasting company and maintained a film library, which consisted of footage from local news stories produced by B's employees. The film library was not held for sale to customers nor included as part of B's inventory. Moreover, because B had expensed the costs associated with the film library, the company's basis in the property was zero. B began contributing footage from its film library, over a period of years, to C, a public charity. C's use of the film library was for a purpose related to C's exempt purpose. Subsequent to each gift, B reported on its tax return a charitable contribution equal to the fair market value of the film footage contributed.
The issue for the Service was whether the contribution of the film library by B should be reduced under Sec. 170(e) of the I.R.C.
Sec. 170(e)(1)(A) provides that the amount of a charitable contribution is reduced by the amount of gain that would not have been long-term capital gain had the property been sold by the donor. Long-term capital gain is generated when a capital asset that has been held for more than a year is sold. The Code defines capital assets as all classes of property unless specifically excluded under Sec. 1221. Sec. 1221(3) excludes from the definition of capital asset a copyright, an artist's composition, a letter of memorandum, or similar property, held by a taxpayer whose personal efforts created the property or for whom the property was prepared or produced. Finally, Sec. 1.1221-1(c)(2) states that "similar property" includes speeches, oral recordings and corporate archives.
The Service found that the film library was property similar to a letter or memorandum that was prepared or produced for the broadcasting company. Specifically, the Service stated that the film library constituted a corporate archive under Sec. 1.1221-1(c)(2), citing case law for support of this conclusion. The Service compared the film footage to a corporate archive because it was a collection of information, a library and an institutional record. Therefore, because the film library was not a capital asset, its sale by B would not have produced a long-term capital gain as desired under Sec. 170. Consequently, B's charitable contribution would be limited to its basis in the film library. Unfortunately, as stated above, B had no basis in the film library; thus, the gift value for tax purposes to C was reduced to zero under Sec. 170(e)(1)(A).
Editor's Note: It is important to note that the "related-use" by C of the film library did not avoid the reduction of B's charitable contribution. Because the property was used for a related purpose, the reduction rules under Sec. 170(e)(1)(B) did not apply. However, as this TAM illustrates, each reduction rule under Sec. 170(e) must be cleared successfully in order to claim a fair market value charitable contribution.
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B was a broadcasting company and maintained a film library, which consisted of footage from local news stories produced by B's employees. The film library was not held for sale to customers nor included as part of B's inventory. Moreover, because the costs associated with the film library were expensed by B, the company's basis in the property was zero. B began contributing footage from its film library, over a period of years, to C, a public charity. C's use of the film library was for a purpose related to C's exempt purpose. Subsequent to each gift, B reported on its tax return a charitable contribution equal to the fair market value of the film footage contributed.
The issue for the Service was whether the contribution of the film library by B should be reduced under Sec. 170(e) of the I.R.C.
Sec. 170(e)(1)(A) provides that the amount of a charitable contribution is reduced by the amount of gain that would not have been long-term capital gain had the property been sold by the donor. Long-term capital gain is generated when a capital asset, which has been held for more than a year, is sold. The Code defines capital assets as all classes of property unless specifically excluded under Sec. 1221. Sec. 1221(3) excludes from the definition of capital asset a copyright, an artist's composition, a letter of memorandum, or similar property, held by a taxpayer whose personal efforts created the property or for whom the property was prepared or produced. Finally, Section 1.1221-1(c)(2) states that "similar property" includes a speech, an oral recording, and a corporate archive.
The Service found that the film library was property similar to a letter or memorandum that was prepared or produced for the broadcasting company. Specifically, the Service stated that the film library constituted a corporate archive under Sec. 1.1221-1(c)(2), citing case law for support of this conclusion. The Service compared the film footage to a corporate archive because it was a collection of information, a library, and an institutional record. Therefore, because the film library was not a capital asset, its sale by B would not have produced a long-term capital gain as desired under Sec. 170. Consequently, B's charitable contribution would be limited to its basis in the film library. Unfortunately, as stated above, B had no basis in the film library; thus, the gift value for tax purposes to C was reduced to zero under Sec. 170(e)(1)(A).
Editor's Note: It is important to note that the "related-use" by C of the film library did not avoid the reduction of B's charitable contribution. Because the property was used for a related purpose, the reduction rules under Sec. 170(e)(1)(B) did not apply. However, as this TAM illustrates, each reduction rule under Sec. 170(e) must be cleared successfully in order to claim a fair market value charitable contribution.
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