Magazine article The CPA Journal

Tax Court Values Four-Day-Old Bread for Charitable Contribution Purposes

Magazine article The CPA Journal

Tax Court Values Four-Day-Old Bread for Charitable Contribution Purposes

Article excerpt

By Peter Barton, MBA, CPA, JD, professor of accounting and Clayton Sager, PhD, associate professor of accounting University of Wisconsin-Whitewater

In Lucky Stores v. Commissioner, a case of first impression, the Tax Court ruled that four-day-old bread could be valued at full retail price in determining the charitable contribution deduction for donated inventory. Enacted in 1976, Sec. 170(e)(3) allows C corporations to deduct basis plus one-half of the appreciation for donations for the care of the ill, needy, or infants. (Only basis can be deducted for discarded inventory.) Qualifying inventory includes food, clothing, medicine, medical and recreational equipment, books, etc. Lucky Stores affects all donations made under the broad provisions of this statute.

Deductions for contributions of ordinary income property are limited to basis by Sec. 170(e)(1)(A). However, Sec. 170(e)(3) allows C corporations to deduct basis plus one-half of the appreciation if the donation of inventory is for the care of the ill, needy, or infants. The deduction cannot exceed twice the basis. The appreciation is the fair market value (selling price) minus the basis. (Other entities can deduct only basis for these donations.) Regs. Sec. 1.170A4A(b)(2)(ii) broadly defines "ill," "needy," and "infants."

Regs. Sec. 1.170A1(c)(2) defines "fair market value" (FMV) as the selling price of the property "in the usual market in which [the donor] customarily sells ... in the quantity contributed." If the donor could not reasonably expect to receive the usual selling price, Regs. Sec. 1.170A-1(c)(3) requires that the gift be valued at "the amount for which the quantity of property contributed would have been sold by the donor at the time of the contribution."

Lucky Stores makes and sells bread. During the years at issue, it oversupplied its stores by about six percent to prevent the possibility of empty shelves and routinely donated the excess bread to food banks. In 1985, it donated four-day-old bread with a basis of $ 1,753,485 and FMV of $3,081,204. In 1986, the basis and FMV were $3,471,236 and $6,072,353, respectively. On its tax returns, Lucky Stores deducted basis plus 50% of the appreciation for these donations.

Lucky Stores delivered bread to their supermarkets on day 1. …

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