The challenge of contributing off-spec food to charity.

• Author: Fincher, Michael E.

In normal circumstances, donating qualifying food inventory can result in a charitable contribution deduction greater than the tax basis of the food inventory (Sec. 170(e)(3)), which gives taxpayers an additional incentive to make the donation. However, donations of "off-spec" food may not provide that same advantage because of the difficulty of determining the proper tax basis and fair market value (FMV) for the food. "Off-spec" food is food that does not meet specified or standard requirements set by the manufacturer. It often includes benign deviations that do not affect consumption of the food.

Large food manufacturers in the United States produce tons of off-spec food byproducts and joint products that are perfectly healthy and nourishing for hungry individuals to consume, but nonetheless end up in city dumps. Consider the example of a food manufacturer that produces two types of peanut butter, chunky and creamy, on the same production line. When the food manufacturer changes over the production line from chunky to creamy, or vice versa, the result can be several hundred pounds of inconsistently chunky peanut butter that the manufacturer does not generally sell in the marketplace. Even though the partially chunky peanut butter is perfectly healthy, it may be dumped to avoid any possible brand damage from an off-spec product.

Under current law, the ability to obtain an increased deduction over tax basis for the donation of off-spec food can be challenging because the food must meet the same tax requirements as other food; that is, it must constitute inventory for tax purposes and have a supportable FMV above tax basis. Unfortunately, a manufacturer that throws away off-spec food often receives the same deduction as a manufacturer that donates the food to a qualified charity (i.e., recovery of the costs associated with the food products). In fact, the manufacturer making the donation may incur additional processing and packaging costs to get food joint products and byproducts into, a condition where they can be donated, yet the enhanced deduction may not be allowed for these products or the additional costs.

Background

Sec. 170 provides a deduction for charitable contributions made to qualified charitable organizations. As a general rule, Regs. Sec. 1.170A-1(c) provides that the amount of the deduction for a charitable contribution of property other than money is equal to the FMV of the property. However, Sec. 170(e)(1) provides that a...