Index Nos.: 0170.02-00

November 26, 1979
Legend
X = ***
Chief, Appeals Office: ***
Taxpayer's Name: ***
Taxpayer's Address: ***
Taxpayer's Identification No.: ***
Year Involved: 1975
Date of Conference: No conference held

ISSUE:

Whether the 5 percent limitation of section 170(b)(2) of the Internal Revenue Code for corporate charitable contribution deductions applies to the deduction for cost of goods sold in a situation in which the property contributed was purchased in the same taxable year.

FACTS:

In 1975 X, a corporation, contributed securities from its trading account to charitable organizations. The securities had been purchased by X earlier in that same taxable year. X has always maintained inventories of its traded securities. X did not remove the cost of the contributed securities from its cost of securities sold.

The examining agent contends that unless the cost of securities sold is reduced for 1975 by the cost of the contributed securities, X will be able to avoid the 5 percent limitation of section 170(b)(2) of the Code because the deduction for cost of goods (securities) sold will exceed 5 percent of taxable income.

APPLICABLE LAW AND RATIONALE:

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.

Section 170(c)(2) of the Code provides, in part, that the term "charitable contribution" means a contribution or gift to or for the use of a corporation, trust, community chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.

Section 1.170A -- 1(c)(1) of the Income Tax Regulations provides, in part, that the amount of a contribution made in property other than money is the fair market value of the property at the time of the contribution. Section 1.170A -- 1(c)(2) of the regulations provides, in part, that fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge or relevant facts.

Section 170(e)(1)(A) of the Code provides that if a taxpayer contributes property that would have resulted in gain that would not have been long-term capital gain if the property had been sold at its fair market value at the time of the contribution, the value of the contribution must be reduced by the amount of such gain.

Section 170(b)(2) of the Code provides, in part, that in the case of a corporation, the total deductions under section 170(a) for any taxable year shall not exceed 5 percent of the taxpayer's taxable income.

Section 1.170A -- 1(c)(4) of the regulations provides, in part, that any costs and expenses pertaining to the contributed property that are incurred in the year of contribution and would, under the method of accounting used, be properly reflected in the cost of goods sold for such year are to be treated as part of the cost of goods sold for such year. Any such costs and expenses that are treated as part of the cost of goods sold for the year of contribution are not to be treated under any section of the Code as resulting in any basis for the contributed property.

Thus; in the case under examination the contributed securities have no basis for purposes of determining the amount of gain by which the contribution must be reduced under section 170(e)(1)(A) of the Code. See Example (2) of section 1.170A -- 1(c)(4) of the regulations.

We think the regulations are clear in their application to the facts in the case presented. The cost of the contributed securities was incurred in the year of contribution and was properly reflected in the cost of goods sold. Because section 1.170A -- 1(c)(4) of the regulations prevents the contributed securities from receiving any basis for which a charitable contribution deduction could be taken, it is not necessary to apply the 5 percent ceiling of section 170(b)(2) of the Code.

CONCLUSION:

The 5 percent limitation of section 170(b)(2) of the Code does not apply to the deduction for cost of goods sold in a situation in which the property contributed was purchased in the same taxable year.