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TAX CLINIC

(FMV). When considering a sale of the
property, one planning opportunity that If the taxpayer does choose to go down the
a taxpayer may explore is a bargain sale
to a charity. bargain sale route, it will be important that
A bargain sale occurs when a tax-
payer sells property to a charitable the purchase and sale agreements document
organization for less than its FMV. both the FMV at the time of the contribution
The difference between the FMV and
the amount realized, i.e., the “bargain and the seller’s donative intent.
element,” is intended to be a charitable
contribution. If the taxpayer has both a the property. Ordinary-income prop- both the amount of the gain-on-sale
donative intent and a desire or need to erty includes but is not limited to: (1) element and the charitable deduction
raise cash at the same time, a bargain property held by the donor primarily for due to the bargain element.
sale allows the taxpayer to capture the sale to customers in the ordinary course To compute the gain on the sale, the
full amount of the property’s FMV of the donor’s trade or business (i.e., taxpayer must apportion the adjusted
at the time of sale while limiting the inventory); (2) capital assets held for basis of the property between the sale
amount of taxable gain the taxpayer will less than one year; and (3) property used portion and the donated portion. The
recognize. If the sale to the charitable in a trade or business (i.e., Sec. 1231 adjusted basis of the property that is
organization is for the property’s FMV, assets) but only to the extent ordinary sold or exchanged is the portion of
no charitable contribution element will income would be recognized under Sec. the adjusted basis of the entire prop-
be associated with the transaction. The 1245(a) and Sec. 1250(a) (see Regs. Secs. erty that bears the same ratio to the
transaction will be treated the same as 1.170A-4(b)(1) and 1.170A-4(b)(4)). adjusted basis as the amount realized
a normal property sale, with the gain When calculating the two elements bears to the FMV of the entire property
or loss determined in reference to the (gain and deduction) of a bargain sale (Regs. Sec. 1.1011-2(b)). The gain on
selling taxpayer’s basis under Secs. 1011 to a charity, the first step is to deter- the sale is recognized under normal
and 1012 (without regard for the chari- mine whether a charitable contribution tax accounting rules, generally, in the
table status of the purchaser). is allowed. In that determination, the year of the sale, irrespective of the fact
Before taking a closer look at how normal rules under Sec. 170 apply, in- that the contribution may have to be
to calculate the two elements of the cluding the percentage limitations (see carried over to a future tax year (Regs.
bargain sale — gain recognized and Regs. Sec. 1.1011-2(a)(1)). If a chari- Sec. 1.1011-2(c), Example (2)). The
a charitable contribution deduction table contribution is allowed, then the charitable deduction amount will be
— it is important to have a baseline special rules under Regs. Sec. 1.1011-2 the difference between the FMV on the
understanding of the tax treatment of will be used to determine the amount date of the sale and the amount real-
property contributions. When property of the contribution and the amount of ized, with a potential adjustment if the
is contributed to a charitable organiza- gain to be recognized on the transac- property requires a reduction under Sec.
tion, the general rule under Sec. 170 tion. It is important to note that these 170(e)(1).
is that the amount of the charitable bargain sale rules apply to the transac- These calculations can be best illus-
contribution is equal to the property’s tion even if the charitable contribution trated by some examples:
FMV. One exception to the general will not be deductible in the year of
rule is if the taxpayer would recognize the sale, as long as the contribution is Example 1: In year 1, C purchases
ordinary income from selling the permitted to be carried over to succeed- stock for $40,000. In year 10, C
property for its FMV at the time of the ing tax years, regardless of whether it sells the stock, which now has an
contribution. In that case, the charitable is actually deducted in a succeeding tax FMV of $100,000, to a charity for
contribution amount is reduced by the year (see Regs. Sec. 1.1011-2(a)(2)). If a total sale price of $50,000. The
amount of ordinary income that would a charitable contribution is not allowed, charitable deduction on the bargain
be recognized (Sec. 170(e)(1)(A)). This then the gain on the sale is computed sale is $50,000 (the difference
reduction under Sec. 170(e)(1) for under the normal rules for a property between the FMV of $100,000
certain appreciated property typically sale by subtracting the adjusted basis and the sale price of $50,000 — no
results in a taxpayer’s deduction for of the property from the sale price. If a reduction under Sec. 170(e)(1) is re-
contributing ordinary-income property charitable contribution is allowed, then quired). The portion of the adjusted
being limited to the taxpayer’s basis in the taxpayer will need to determine basis of the stock that is allocated to

16 August 2022 The Tax Adviser