IRS Releases Notice on Charitable Contributions of Inventory

the notice of traffic sign for transportation safety

On October 3, 2008, the IRS released Notice 2008-90, announcing that the IRS and the Treasury Department are studying the computation of the deductible amount and adjustment to cost of goods sold for charitable contributions of inventory property that constitute qualified contributions as defined in § 170(e)(3)(A) of the Internal Revenue Code.

The Notice provides:

The Service and the Treasury Department are aware that some taxpayers making qualified contributions may, because of the income limitation of § 170(b)(2) [which generally limits a corporation’s deduction to 10% of its taxable income], prefer to apply the provisions of § 170(e)(1) and § 1.170A-1(c) of the Income Tax Regulations [the general rule] rather than the provisions of § 170(e)(3) and § 1.170A-4A(c) [the special rule for certain contributions of inventory and other property].


For a particular qualified contribution of inventory property under § 170(e)(3) that otherwise satisfies the requirements of § 170 and the relevant regulations, the Service will not challenge a taxpayer’s computation of the deductible amount and the required adjustment to cost of goods sold under either (1) § 170(e)(3) and § 1.170A-4A(c), or (2) § 170(e)(1) and § 1.170A-1(c).

Generally, individuals and corporations can deduct charitable contributions under IRC 170(a)(1). For contributions of property, the amount of the deduction is generally the fair market value of the donated property at the time of donation. See Reg. 1.170A-1(c)(1). Under IRC 170(e)(1), however, the fair market value must be reduced by the amount of gain that would not be long-term capital gain if the property had been sold by the donor at the property’s fair market value (determined at the time of the contribution). Under this rule, deductions for donated inventory are limited to the property’s basis (generally its cost), where the fair market value exceeds the basis.

IRC 170(e)(3) provides an exception to the basis standard and gives prospective donors business reasons to consider making charitable donations of inventory. If a corporation, other than an S corporation, contributes section 1221(a)(1) or (2) property, it may deduct an amount exceeding the property’s basis (determined in accordance with Reg. 1.170A-4A(c)(2)).

To be eligible to receive deductions qualifying under IRC 170(e)(3), the donee must be an IRC 501(c)(3) organization and a public charity or a private operating foundation. Of course, other requirements for deductibility under IRC 170(c)(2) must be met. Thus, the contribution must be to or for the use of a domestic organization.

To receive the enhanced deduction, four requirements must be met:

(1) Donated property must be used solely for the care of the ill, the needy, or infants, and in a manner related to the donee’s exempt purpose. IRC 170(e)(3)(A)(i); Reg. 1.170A-4A(b)(2). A third party may not use the property unless that use is incidental to the primary use of caring for the ill, needy, or infants. Reg. 1.170A-4A(b)(2)(ii).


(2) Donated property cannot be transferred by the donee in exchange for money, other property, or services. IRC170(e)(3)(A)(ii); Reg. 1.170A-4A(b)(3).


(3) The donee must furnish a written statement to the donor that the above requirements will be met. IRC 170(e)(3)(A)(iii); Reg. 1.170A-4A(b)(4).


(4) The property must satisfy certain requirements of the Federal Food, Drug and Cosmetic Act (if applicable). Compliance is required not only for the time the contribution is made, but for the 180 day period preceding the contribution as well. IRC 170(e)(3)(A)(iv); Reg. 1.170A-4A(b)(5).

To ascertain the deduction amount, start with the fair market value of the donated inventory property, less one-half the amount of the reduction computed under IRC 170(e)(1) (i.e., the unrealized appreciation). The resulting amount must be reduced by any amount exceeding twice the property’s basis. IRC 170(e)(3)(B).

See also my previous post on Value Reduction Rules for a Contribution of Property Under IRC Sec. 170(e)(1).