Full Text:

July 29, 1981

Refer Reply to: T:I:I:3:2
A = ***
X = ***

Dear ***

This is in reply to your request for ruling, dated March 2, 1981, and submitted on behalf of your clients, A and X.

X is a non-profit retirement center exempt from federal income taxes under section 501(c)(3) of the Internal Revenue Code, and is also a charitable organization described in sections 170(b)(1)(A) and 170(c)(2). X was created under a total community concept to provide a living environment to meet the special needs of the elderly. In addition, X provides its residents with civic, cultural, religious and recreational activities. Many of the activities and service for the residents are located in X's community center.

A has a collection of approximately 100 porcelain art objects, which he began acquiring for his personal pleasure about 1960. A has owned all the objects for more than one year. Over the years A has sold only one piece, to avoid a duplication in the collection, and he has no plans for any future sales. In December 1980, A donated four pieces of his collection to X (the only donation of the porcelains A has ever made), and A intends to make further inter-vivos donations to X at periodic intervals. A has provided in his will that upon his death the remaining pieces in the collection shall go to X.

X is currently having a architect design a showcase especially for the display of the porcelains on the wall of the resident's dining hall in the community center. X intends to keep the porcelains permanently for the exclusive benefit of its residents.

A is not a resident of X, nor has he any plans to become a resident of X. X has not given any consideration to A in exchange for the donation.

You have requested that the Internal Revenue Service make the following rulings on behalf of A:

(1) A's future contributions of his porcelain art objects to X will qualify as charitable contributions under the provisions of section 170(c) of the Code.

(2) The amount of A's charitable contribution will not be reduced under section 170(e)(1)(B)(i) of the Code because the use of the porcelains by X will be related to the purpose or function constituting the basis for its exemption under section 501.

(3) The amount of A's charitable contribution deduction will be equal to the value of the objects on the date of contribution subject to the limitations of section 170(b)(1)(C) of the Code applicable to "certain capital gain property".

Section 170(a) of the Code allows as a deduction any charitable contribution payment of which is made within the taxable year. Section 170(c) defines a charitable contribution to include a contribution or gift to or for the use of an organization described in section 170(c)(2).

Although the term "contribution" is not defined either in the Code or in the Income Tax Regulations, it is well established judicially that in order to be deductible under section 170 of the Code, a contribution must qualify as a gift in the common law sense of being a voluntary transfer of property without consideration. Singer v. United States, 449 F. 2d 413 (Ct. Cl. 1971); and Rev. Rul. 76-185, 1976 - 1 C.B. 60.

Section 1.170A - 1(c)(1) of the 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(b)(1)(A) of the Code provides, in part, that in the case of an individual, the deduction provided for a contribution to charitable organizations described therein shall be allowed to the extent that the aggregate of such contributions does not exceed 50 percent of the taxpayer's contribution base for the taxable year.

Section 170(b)(1)(C) of the Code imposes a special limitation on the deduction of contributions of certain capital gain property. Gifts of such property may not exceed 30 percent of the taxpayer's contribution base for the year. For purposes of section 170(b)(1)(C) contributions of capital gain property to which this paragraph applies are taken into account after all other charitable contributions.

Section 1.170A - 8(d)(3) of the regulations, in part, defines property that is subject to the 30 percent limitation. If there is a charitable contribution of a capital asset that, if it were sold by the donor at its fair market value at the time of its contribution, would have resulted in the recognition of long-term capital gain, and if the amount of such contribution is not required to be reduced under section 170(c)(1)(B) of the Code, then such capital asset shall be treated as "30 percent capital gain property" for purposes of section 170.

Section 170(b)(1)(E) of the Code defines the term "contribution base" to mean adjusted gross income computed without regard to any net operating loss carryback to the taxable year under section 172 of the Code.

Section 170(e)(1)(B)(i) of the Code provides, in relevant part, that in the case of a charitable contribution of tangible personal property, if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501, the amount of the charitable contribution otherwise taken into account under section 170 shall be reduced by 40 percent of the amount of gain that would 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).

Section 1.170A - 4(b)(3)(i) of the regulations provides, in part, as follows:

The term "unrelated use" means a use which is unrelated to the purpose or function constituting the basis of the charitable organization's exemption under section 501. . . . If furnishings contributed to a charitable organization are used by it in its offices and buildings in the course of carrying out its functions, the use of the property is not an unrelated use.

While ordinarily decorative objects might not be related to a charity's exempt purpose, the porcelain art objects involved in this case are functionally related to X's principal activity of creating a living environment for X's residents because the display of the procelains directly enhances that environment. Thus, the porcelains are related to the purpose or function constituting the basis for X's exemption under section 501(c) of the Code, and section 170(e)(1)(B) does not apply to reduce the amount of charitable contribution otherwise taken into account.

Because section 170(e)(1)(B) of the Code does not apply to the donation, and because the porcelains are long-term capital gain property, the 30 percent limitation of 170(b)(1)(C) does apply to a donation of the porcelains.

Accordingly, based on the facts submitted, we hold as follows:

(1) A's future contributions of his porcelain art objects to X will qualify as charitable contributions under the provisions of section 170(c) of the Code.

(2) The amount of A's charitable contribution will not be reduced under section 170(e)(1)(B)(i) of the Code because the use of the porcelains by X will be related to the purpose or function constituting the basis for its exemption under section 501.

(3) The amount of A's charitable contribution deduction will be equal to the value of the objects on the date of contribution subject to the limitations of section 170(b)(1)(C) of the Code.

Rev. Rul. 79-256, 1979 - 2 C.B. 105, can be distinguished from the case at hand because here A accumulated and enjoyed the porcelains over a considerable period of time prior to the donations.

Except as specifically ruled upon above, no opinion is expressed as to the federal income tax consequences of the transaction described above under any other provision of the Internal Revenue code.

A should attach a copy of this ruling to his tax return for the taxable year in which the transaction covered by this ruling is consummated. We are enclosing a copy for that purpose.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Internal Revenue Code provides that it may not be used or cited as precedent.

Sincerely yours,

Anthony Manzanares, Jr.
Chief, Individual Income Tax Branch