Charitable Gift Yields Taxable Gain, despite Lack of Charitable Deduction
Wagenbrenner, Anne, Journal of Accountancy
In 1980, the Hodgdons donated a piece of unencumbered realty, worth $800,000, to charity. Later in 1980, they donated a second piece of realty, worth $4 million and subject to liens of $2.7 million, to a second charity. The charity took the property subject to the liens.
After applying the percentage-of-income limitations [Internal Revenue Code section 170(b)(1)(C)] for contributions of capital gain property, the Hodgdons were able to deduct only $450,000 of their $2.1 million in total capital gain contributions [$800,000 + ($4 million -- $2.7 million) = $2.1 million] for taxable year 1980.
Section 170 generally allows a carryforward of contributions exceeding the percentage limits. The Hodgdons deducted $21,000 of the carryforward amount in 1981 but were unable to use the rest. The IRS claimed under the bargain sale rules, the Hodgdons had to recognize gain on the contribution of the mortgaged property.
The IRC section 1011(b) bargain sale rule says, "If a deduction is allowable under section 170 . . . by reason of a sale, then the adjusted basis for determining the gain . . . shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property." (Emphasis added.)
If applicable, the rule effectively creates a part-gift, part-sale transaction. Under regulation 1. …