held by the donor primarily for sale to customers in the ordinary course of a trade or business (inventory)19
A capital asset held for a period of time that is less than the period required to cause the property to become long-term capital gain property (short-term capital gain property)
A work of art created by the donor
A manuscript created by the donor
Letters and memoranda prepared by or for the donor
Stock acquired in a nontaxable transaction that, if sold, would generate ordinary income20
Stock in a collapsible corporation that, if sold, would generate ordinary income21
Stock in certain foreign corporations that, if sold, would generate ordinary income22
Property used in a trade or business,23 treated as a capital asset, if gain would have been recognized, upon sale of the property by the donor at its fair market value at the time of the contribution, as ordinary income by reason of the application of recapture rules24
The term ordinary income property does not include an income interest in respect of which a federal income tax charitable contribution deduction is allowed.25
It is the position of the IRS that, when individuals purchase items with the intent of retaining them for the requisite capital gain holding period26 and thereafter donating them to a charitable organization for the purpose of generating a charitable contribution deduction (in an amount greater than the acquisition price), the individuals are engaged in a charitable donation venture.27 The consequence of this view is that the properties held for contribution purposes are items of inventory of the venture and thus are forms of ordinary income property.28 This position, however, is being rejected in the courts.29
(b) Deduction Reduction Rules
Often, as noted, the rule for the deduction arising from a gift of property to a charitable organization is that the amount of the deduction is equal to the amount of the fair market value of the property at the time of the gift.30 In the case of a charitable gift of ordinary income property, however, the amount of the charitable contribution for the gift of the property must be reduced by the amount of gain that would have been recognized as gain, which is not long-term capital gain, if the property had been sold by the donor at its fair market value, determined at the time of the contribution to the charitable organization.31 The amount of gain that is taken into account in making this reduction is sometimes termed the ordinary income element.
Consequently, this deduction reduction rule basically means that a donor's deduction for a contribution of an item of ordinary income property to a charitable organization is confined to the donor's basis in the property. The amount that is deductible is the fair market value of the property, reduced by the amount that is equal to the ordinary income element.32 In one case, a company that contributed its film library to a charitable organization was advised by the IRS that its charitable contribution deduction was zero, in that the library was akin to letters and memoranda and, thus, was not a capital asset. Because the costs associated with establishing the library were expensed as incurred, the basis in the property was zero. The value of the property contributed had to be reduced by its full amount.33
This rule applies:
Irrespective of whether the donor is an individual or a corporation
Irrespective of the tax classification of the charitable organization that is the donee (for example, public or private charity)34
Irrespective of whether the charitable contribution is made to or for the use of a charitable organization35
To a gift of ordinary income property prior to application of the appropriate percentage limitation(s)36
(c) Special Rules of Inapplicability
This deduction reduction rule does not apply to reduce the amount of the charitable contribution when, by reason of the transfer of the contributed property, ordinary income or capital gain is recognized by the donor in the same tax year in which the contribution is made.37 Thus, if recognition of the income or gain occurs in the same tax year in which the contribution is made, this rule is inapplicable when income or gain is recognized upon:
The transfer of an installment obligation to a charitable organization,38
The transfer of an obligation issued at a discount to a charitable organization,39 or
The assignment of income to a charitable organization.40
Also, this deduction rule does not apply to a charitable contribution by a nonresident alien individual or a foreign corporation of property, the sale or other disposition of which within the United States would have resulted in gain that is not effectively connected with the conduct of a trade or business in the United States.41
§ 3.5 CERTAIN CONTRIBUTIONS OF CAPITAL GAIN PROPERTY
In general, contributions of long-term capital gain property to public charitable organizations are deductible, with the federal income tax charitable contribution deduction computed on the basis of the fair market value of the property.42
When contributions are made to a charitable organization that is not a public charitable organization, however, a deduction reduction rule applies. Nonetheless, this rule does not apply with respect to gifts to a private operating foundation, a pass-through foundation, and a common fund foundation.43
