Friday April 19, 2024

Rev. Rul. 79-256
GiftLaw Note: Even though a donor is not engaged in a trade or business, property contributed can be deemed to be ordinary income property by the way the donor transacts with such property and thus the donor can receive a reduced charitable deduction. Rev. Rul 79-256 discusses two donors. The first donor, as a hobby, grows ornamental plants and contributes a large number of the plants to various charities each year. The second donor purchased a substantial part of a limited edition lithograph collection and after one year contributed the art to charity.

In the first situation, the IRS held that the donor's activities of continuous production and disposition of the plants were equivalent to those of a commercial plant grower. In the second situation, the IRS held that the donor's bulk acquisition and subsequent disposal of a substantial part of the total limited edition are substantially equivalent to those of a commercial art dealer. Because of both donors' actions, the gifts are deemed to be gifts of ordinary income property that must be reduced under Sec. 170(e). Thus, both donor charitable deductions would be limited to cost basis.
July, 1979

Charitable contributions; ornamental plants and lithograph prints; long-term capital assets. A taxpayer who raises ornamental plants, as a hobby, and each year donates a large number to various charities and a taxpayer, not an art dealer, who purchased a substantial part of the total limited edition of a particular lithograph print and donated the prints to various art museums are engaged in activities substantially equivalent to those of commercial dealers, and the amount of each contribution is subject to the reduction provisions of section 170(e) of the Code.

ISSUE


In the situations described below, does section 170(e) of the Internal Revenue Code apply and thus require that the amount of the taxpayers' charitable contributions be reduced by any gain that would not have been long-term capital gain if the donated property had been sold by the taxpayer at its fair market value?

FACTS


Situation 1 . For a number of years the taxpayer was engaged in the activity of raising ornamental plants, as a hobby. In 1978, as in prior years, the taxpayer donated a large number of plants to various charities, after having held the donated plants for the long-term holding period for a capital asset under section 1222(3) of the Code. The cost of the plants contributed in 1978 was 25x dollars, and they had a total fair market value of 200x dollars when they were contributed. Approximately the same ratio of cost to fair market value existed in the prior years.

Situation 2 . The taxpayer is not a dealer in objects of art. In 1977, the taxpayer purchased a substantial part of the total limited edition of a particular lithograph print by an established artist for a total price of 25x dollars. In 1978, after having held the prints for more than a year, the taxpayer donated the prints to various art museums. The total fair market value of the prints was 100x dollars when they were contributed.

LAW AND ANALYSIS


Section 170(a) of the Code allows as a deduction any charitable contribution 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.

Section 170(e)(1)(A) of the Code provides that the amount of any charitable contribution of property shall be reduced by the amount of gain that would not have been long-term capital gain if the property had been sold by the taxpayer at its fair market value.

Section 1.170A-4(a)(1) of the regulations provides that section 170(e) (1)(A) requires that the amount of a charitable contribution of "ordinary income property" be reduced by the amount of gain that would not have been recognized as long-term capital gain if the property had been sold by the donor at fair market value at the time such property was contributed.

Section 1.170A-(4)(b)(1) of the regulations provides that the term "ordinary income property" means property on which any of the gain would not have been long-term capital gain if the property had been sold by the donor at its fair market value at the time of its contribution. The term "ordinary income property" includes, for example, property held by a donor primarily for sale to customers in the ordinary course of the donor's trade or business.

Thus, under section 170(e)(1)(A) of the Code and the corresponding regulations, the determination whether property contributed to charity is ordinary income property requires that the donor be placed in the position of a seller of such property. Even though a donor is not engaged in a trade or business, the frequency and continuity of the contributions may be such as to be substantially equivalent to the activities of a dealer selling property in the ordinary course of a trade or business. Under such circumstances, the items contributed would be treated as ordinary income property.

In both Situation 1 and Situation 2, the contributions were not made after a period of accumulation and enjoyment by the taxpayers of the property contributed. On the contrary, the contributed property was produced (Situation 1 ) or purchased (Situation 2 ) in bulk and distributed to various donees. In Situation 1 , the taxpayer's continuous production and disposition of plants are the equivalent of the activities of a commercial nursery business. In Situation 2 , the taxpayer's bulk acquisition and subsequent disposal of a substantial part of the total limited edition of prints are substantially equivalent to the activities of a commercial art dealer.Therefore, under the presumed sale requirement of section 170(e)(1)(A) of the Code, the items contributed in both situations will be treated as ordinary income property.

HOLDING


In both Situation 1 and Situation 2 , the amount of each taxpayer's contribution must be reduced, under section 170(e) of the Code, by the excess of the fair market value of the contributed property as of the dates of contribution over each taxpayer's cost. Therefore, the amount of each taxpayer's contribution is limited, for purposes of section 170 of the Code, to its cost to the donor. However, the treatment provided under section 170(e) does not imply that a taxpayer is engaged in a trade or business for the purposes of any other section of the Code. Furthermore, the holding of this revenue ruling is equally applicable to taxpayers who, under comparable circumstances, produce or acquire types of property other than those involved in the two situations.



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