Tuesday April 16, 2024

Rev. Rul. 82-197
GiftLaw Note: An income tax deduction is permitted for a gift to charity. However, transfer of an option or a promissory note is treated as a future gift. The charitable deduction is available when the option is exercised or the promissory note is paid.

A donor granted a qualified charity the right to purchase property valued at $500,000 for the reduced price of $475,000. The option was valid for two years. If the charity exercised the option within the two years, there would then be a charitable deduction for the excess of the fair market value of the property over the exercise price. In essence, the Service will allow a deduction on the date of the exercise.
Rev. Rul. 82-197, 1982-2 C.B. 72, 1982-47 I.R.B. 6.

Internal Revenue Service Revenue Ruling

TAXABLE YEAR OF CHARITABLE DEDUCTION FOR WRITER OF OPTION ON REAL
PROPERTY

Published: November 22, 1982
26 CFR 1.170A-1: Charitable, etc., contributions and gifts; allowance of deduction.

Taxable year of charitable deduction for writer of option on real property. An individual who grants an option on real property to a charitable organization in allowed a charitable deduction for the year in which the organization exercises the option in the amount of the excess of the fair market value of the property on the date the option was exercised over the exercise price.

ISSUE


Is the writer of an option entitled to a charitable contribution deduction under section 170 of the Internal Revenue Code for the year in which the writer grants the option to a charitable organization or for the year in which the option is exercised?

FACTS


On January 2, 1980, A, an individual, granted to X, an organization described in section 170(c)(2) of the Code, a written option under seal to purchase real property located in state Y and owned by A. Under the option, X had the right to purchase the property at any time during a two-year period for $475,000. The option could be sold or assigned by X. The fair market value of the property on the date the option was granted was $500,000.

On January 1, 1982, X exercised the option by delivering to A $475,000, and A delivered to X a deed transferring the property to X.

Under the law of state Y, a purchase option is defined as a contract by which a person acquires from the owner of property, for consideration, the right or privilege to buy property at a fixed price within a specified period of time, without imposing any obligation on the optionee to do so. While one holding an option to purchase land has valuable property rights, the option does not, before exercise, vest in the optionee any interest, estate, or title in the land.

State Y law further provides that an option supported by consideration may not be withdrawn during the time stipulated, and therefore it is binding upon the parties. An option under seal is considered as being supported by valid and enforceable consideration under state Y law.

LAW AND ANALYSIS


Section 170(a)(1) of the Code allows, subject to certain limitations, a deduction for charitable contributions to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

Rev. Rul. 68-174, 1968-1 C.B. 81, holds that a debenture bond or a promissory note issued and delivered by the obligor to a charitable organization represents a mere promise to pay at a future date and is not a 'payment' for purposes of deducting a contribution under section 170 of the Code.

Rev. Rul. 75-348, 1975-2 C.B. 75, holds that a corporation that pledges to sell shares of its common stock at a specified price to an educational organization is entitled to a charitable contribution deduction only for the taxable year in which the pledge is exercised.

Rev. Rul. 78-181, 1978-1 C.B. 261, states that the writer of an option has created no rights in the writer, but only an obligation to perform in the event the holder exercises the option. Therefore, the option writer does not have a capital asset, and the option does not represent property to the option writer within the meaning of section 62(4) of the Code (relating to deductions for losses from the sale or exchange of property).

Under section 170 of the Code and the Income Tax Regulations thereunder, a charitable contribution may be in the form of money or other property. The transfer to a charitable organization of an option by the option writer is similar to the transfer of a note or pledge by the maker. In the note situation there is a promise to pay money at a future date; in the pledge situation there is a promise to pay money or transfer other property, or to do both, at a future, date; and in the option situation there is a promise to sell property at a future date. Although the promise may be enforceable, a promise to pay money or to sell property in the future is not itself a 'payment' for purposes of deducting a contribution under section 170 of the Code. Thus, the grant of the option to X in this case is not a contribution for which a deduction is allowable under section 170.

HOLDING


A is not entitled to a charitable contribution deduction under section 170 of the Code for 1980. A is entitled to a charitable contribution deduction in the manner and to the extent provided by section 170 for 1982, the year in which X exercised the option. The amount of the contribution is the excess of the fair market value of the property on the date the option was exercised over the exercise price ($475,000).

Rev. Rul. 82-197, 1982-2 C.B. 72, 1982-47 I.R.B. 6.



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