Charitable contributions of inventory.

• Author: Gardner, John

Under Sec. 170(e) (3) (A), a corporation is allowed a deduction in excess of its cost basis if it donates inventory to qualified charitable organizations and the property is used for the care of the ill, needy or infants by that charity in carrying out its exempt purpose. Contributions of inventory by a corporation to public charities to be used for the care of the ill, needy or infants are reduced by only one-half of the gain that would have been ordinary income had the property been sold. This is an exception to the general rule that limits inventory contributions to the corporation's cost. One of the major issues between the IRS and corporate contributors in connection with such donations is the fair market value (FMV) of inventory that is no longer "new" merchandise.

The Tax Court recently held that a taxpayer's contributions of bakery products to qualified charitable organizations were "qualified contributions" of inventory under Sec. 170(e) (3) (A) (Lucky Stores, Inc., 105 TC No. 28 (1995)).

At issue was whether bakery products that had been pulled from the retail shelves after three days should be valued at full retail price or at a reduced value (as suggested by the Service). The Tax Court held that donations should be valued at full retail prices.

The taxpayer sold assorted bread products at its stores by having the products delivered to its retail outlets each morning except for Wednesdays and Sundays. Supplies delivered to each store were loosely calculated to provide 5% more inventory than was normally required (to guarantee there would not be a shortage). The taxpayer would remove any unsold bread on the fourth day after delivery.

The pulled...