Bulk charitable donations may face basis and valuation limits

Plain-English summary

Chief Counsel advised on a taxpayer claiming a charitable deduction for donating a large number of items. A donor's bulk acquisition and disposition can be substantially equivalent to dealer activity, making the items ordinary income property and generally limiting the deduction to the lower of basis or fair market value under IRC § 170(e)(1). Even when dealer treatment does not apply, fair market value may reflect a blockage or bulk-sale discount because placing a large quantity on the market can depress prices. The advice reviews rulings and cases involving prints, books, sheet music, gems, and Bibles to illustrate these fact-dependent limits.

Ruling snapshot

• Question: How should dealer treatment and bulk-sale effects limit a charitable deduction for a large number of donated items?
• Outcome: Advice given
• Key authorities: IRC § 170(e)(1); Treas. Reg. §§ 1.170A-1(c) and 1.170A-4(a); Rev. Rul. 79-256; Rev. Rul. 79-419; Rev. Rul. 80-233

Full text (IRS public release)

ID: CCA_2014100808151812
UILC: 170.11-00, 170.02-00

Number: 201443019
Release Date: 10/24/2014
From:
Sent: Wednesday, October 08, 2014 8:15:18 AM
To:
Cc:
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Subject: Charitable Donation of a large number of items

You have presented us with a scenario in which the taxpayer claims a charitable
contribution deduction for a gift of large number of items.

Donor Treated as a Dealer

Under section 170(e)(1), the amount of any charitable contribution of property is
reduced by the amount of gain that would not be long-term capital gain if the property
were sold at its fair market value. In other words, if the contribution were a sale that
would have resulted in ordinary income (such as the sale of property held by the donor
primarily for sale to customers in the ordinary course of his trade or business), then the
amount of the deductible charitable contribution would be generally limited to the
LESSER of the donor’s basis, or fair market value. See Treas. Reg. sec. 1.170A-4(a).

In Rev. Rul. 79-256, 1979-2 C.B. 105, Situation 2, the taxpayer, who was not an art
dealer, purchased a substantial part of the total limited edition of a lithographic print for
a total price of $25x. After holding the prints for more than one year, she donated the
prints to art museums. The fair market value at the time of contribution was $100x. The
Service concludes that the taxpayer’s “bulk acquisition and subsequent disposal of the
prints” are substantially equivalent to the activities of a commercial art dealer, and
therefore the prints are treated as ordinary income property. Further, the contribution
was not made after a period of accumulation and enjoyment by the donor. Thus, the
Service concludes, the amount of the taxpayer’s charitable contribution must be
reduced by the hypothetical ordinary income gain, and the contribution is limited to the
taxpayer’s cost. See also G.C.M. 37611 (July 25, 1978).

In Rev. Rul. 79-419, 1979-2 C.B. 107, the taxpayer, who was not a dealer in books,
purchased 100 books through a promoter at a volume discount, stored them for just
over 12 months, and then donated them to various charities. The Service concludes
that the taxpayer’s activity in this case is “tantamount to the activity of a dealer selling
books”, and the books are treated as ordinary income property. Thus, if the fair market
value is more than the taxpayer’s basis in the books, the amount of the charitable
contribution deduction must be reduced by the theoretical ordinary income gain on the

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property. Furthermore, if the fair market value is equal to or less than the taxpayer’s
basis, the amount of the charitable deduction is limited to that lesser amount.

In Pasqualini v. Commissioner, 103 T.C. 1 (1994), the Tax Court declined to apply these
two revenue rulings, noting that application of the factors in determining whether the
taxpayers’ activities are substantially equivalent to the activities of a dealer are
“inherently factual”.

Fair Market Value - May Take into Account Bulk Sales

Generally, under section 1.170A-1(c)(1) of the regulations, the amount of a charitable
contribution of property is the fair market value of the property at the time of the
contribution, reduced as provided in section 170(e)(1) of the Code. Section 1.170A-
1(c)(2) defines fair market value as 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 reasonable knowledge of relevant facts.

In Skripak v. Commissioner, 84 T.C. 285 (1985), the taxpayers purchased
approximately 150,000 books at a substantial discount, held them for the long-term
capital gain holding period, then donated them to various libraries. The Court noted that
the regulations under section 170 do not specify whether a wholesale or retail market is
to be used, but found that the “sheer number of [donated] books . . . would require a
substantial discount from the [list price]. The simultaneous marketing of all those books
would substantially depress the market”. Also, the Court found that a willing,
knowledgeable buyer would demand and receive a substantial discount for the
purchase of any of the excess inventory, particularly in the quantities donated to the
various libraries. The Court concluded that the taxpayers’ purchase of the books was
an arm’s-length transaction, and the fair market value of the books was no more than
20% of the catalog list price.

In Rimmer v. Commissioner, T.C. Memo. 1995-215, the taxpayer, who was not a dealer
in sheet music, purchased approximately 85,000 pieces of Yiddish and Hebrew sheet
music for $10,000 and subsequently contributed nearly all of the sheet music to a
section 170(c) organization. The taxpayer obtained an appraisal for his donation,
valuing it at $220,120. The Court found that the existing market for this sheet music
was small, and concluded that “the addition of 85,000 pieces of sheet music on the
public market either would depress the market for each title or, perhaps more likely,
would result in many copies being unsalable for a considerable period of time.” Thus,
the Court concluded that a discount in the nature of a discount to reflect blockage was
appropriate. Compare Rev. Rul. 80-69, 1980-1 C.B. 55, stating that the best evidence
of fair market value depends on actual transactions, and the price at which a promoter
sold gems to a taxpayer who subsequently donated the gems may be the best evidence
of the maximum fair market value of the gems.

In Rev. Rul. 80-233, 1980-2 C.B. 69, the taxpayer purchased 500 copies of the Bible for
$100x from a promoter who advised that $100x was a considerable discount from retail

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price. The promoter stored the Bibles for the taxpayer for 13 months, and at the
taxpayer’s direction, mailed the Bibles to a charity selected by the taxpayer. At the time
the taxpayer contributed the Bibles to the charity, wholesale dealers were selling similar
lots of Bibles to members of the general public at $100x. The Service holds that to
determine fair market value, reference is made to the most active and comparable
marketplace at the time of the donor’s contribution. Thus, the fair market value of the
Bibles is $100x, the price at which the Bibles were sold to the taxpayer and were still
being sold to others.