Bullard v. Comm'r of Internal Revenue (In re Estate of Bullard)
| Citation | 87 T.C. No. 17,87 T.C. 261 |
| Decision Date | 31 July 1986 |
| Docket Number | Docket No. 24933-83. |
| Parties | ESTATE OF PAULINE E. BULLARD, DECEASED, VICTOR M. BULLARD, EXECUTOR, AND VICTOR M. BULLARD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps sold certain ‘capital gain property‘ to a charitable institution for less than fair market value and elected to apply the ‘appreciation reduction‘ rules of section 170(e)(1), I.R.C. 1954, as amended, to the bargain sale. HELD, the amount of Ps' charitable contribution is reduced by 50 percent of the unrealized appreciation of only the ‘contributed‘ portion of the property. Section 1011(b), I.R.C. 1954, as amended, applies to the ‘sold‘ portion of the property. HELD FURTHER, to the extent that sections 1.170A-4(c) and 1.1011-2, Income Tax Regs., provide otherwise, the regulations are invalid. Victor M. Bullard, pro se.
Erin Collins, for the respondent.
Respondent determined deficiencies in Victor M. and Pauline E. Bullard's Federal income taxes for 1978 and 1979 of $2,397 and $8,647, respectively. The only issue for decision is the availability of a charitable contribution deduction under section 170 1 with respect to the ‘bargain sale‘ of certain appreciated capital gain property.
The parties submitted this case fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure.
Victor M. and Pauline E. Bullard filed joint Federal income tax returns for 1977, 1978, and 1979 with the Internal Revenue Service Center in Fresno, California. Pauline E. Bullard died on April 30, 1982, and Victor M. Bullard, a resident of Palm Desert, California, is executor of her estate. The term ‘petitioners‘ herein refers to Victor and Pauline Bullard or to Victor Bullard and the estate of Pauline Bullard, as appropriate.
On May 24, 1977, petitioners sold their interest in Weimar Medical Center (Weimar) to the Hewitt Research Center (Hewitt), a nonprofit corporation affiliated with the Seventh-Day Adventist Church. Weimar included both ‘capital gain property‘ as defined in section 170(b)(1)(C)(iv) and ‘ordinary income property‘ as defined in section 1.170A-4(b)(1), Income Tax Regs. To reflect the previous transfer of an interest in Weimar from petitioners to Ureeken and Lakeport Hospital, Ureeken and Lakeport Hospital received a portion of the proceeds from the sale of Weimar. The following table summarizes petitioners' sale of Weimar to Hewitt:
+-----------------------------------------------------------------------------+
¦ ¦Capital ¦Ordinary ¦ ¦
¦ ¦gain ¦income ¦ ¦
+-------------------------------------------+----------+-----------+----------¦
¦ ¦property ¦property ¦Total ¦
+-------------------------------------------+----------+-----------+----------¦
¦Fair market value ¦ ¦ ¦$1,325,000¦
+-------------------------------------------+----------+-----------+----------¦
¦Less: Portion attributable to Ureeken and ¦ ¦ ¦150,000 ¦
¦Lakeport Hospital ¦ ¦ ¦ ¦
+-------------------------------------------+----------+-----------+----------¦
¦Fair market value Petitioners' interest ¦$1,106,478¦$68,522 ¦1,175,000 ¦
+-------------------------------------------+----------+-----------+----------¦
¦Sales proceeds ¦ ¦ ¦1,150,000 ¦
+-------------------------------------------+----------+-----------+----------¦
¦Less:Portion attributable to Ureeken and ¦ ¦ ¦150,000 ¦
¦Lakeport Hospital ¦ ¦ ¦ ¦
+-------------------------------------------+----------+-----------+----------¦
¦Proceeds from sale of petitioners' interest¦941,684 ¦58,316 ¦1,000,000 ¦
+-------------------------------------------+----------+-----------+----------¦
¦Contribution portion ¦164,794 ¦10,206 ¦175,000 ¦
+-------------------------------------------+----------+-----------+----------¦
¦Fair market value ¦1,106,478 ¦68,522 ¦ ¦
+-------------------------------------------+----------+-----------+----------¦
¦Cost plus improvements ¦698,024 ¦78,727 ¦ ¦
+-------------------------------------------+----------+-----------+----------¦
¦Depreciation--per return ¦2 ¦(9,841) ¦ ¦
¦ ¦(43,392) ¦ ¦ ¦
+-------------------------------------------+----------+-----------+----------¦
¦Adjusted basis ¦654,632 ¦68,886 ¦ ¦
+-------------------------------------------+----------+-----------+----------¦
¦Total gain ¦451,846 ¦(364) ¦ ¦
+-----------------------------------------------------------------------------+
In their 1977 Federal income tax return, petitioners elected under section 170(b)(1)(C)(iii) to apply section 170(e)(1) to the contribution portion of the ‘bargain sale‘ of the Weimar capital gain property to Hewitt and reported a charitable contribution deduction as a result of the sale. Petitioners applied section 1011(b) to the portion of the property sold and reported the resulting gain under the installment method. Respondent does not contest petitioners' use of the installment method but argues that no contribution deduction is allowable and section 1011(b) is inapplicable.
The issue in this case involves the interaction between section 170(e)(1), which limits the deduction for the charitable contribution of certain appreciated property, and section 1011(b), which requires allocation of basis to determine gain resulting from a bargain sale to charity, with respect to the Weimar capital gain property. The treatment of the ordinary income property is not disputed. The deficiencies determined for 1978 and 1979 resulted from carryovers from 1977 to those years under section 170(d).
Section 170(a) allows a deduction for any charitable contribution, defined in section 170(c) to include a contribution or gift to certain charitable organizations. Under section 170(b)(1)(C) and (E), the taxpayer's annual deduction for the contribution of capital gain property (i.e., any capital asset the sale of which at fair market would result in long-term capital gain) generally is limited to 30 percent of the taxpayer's adjusted gross income. If the taxpayer elects application of the ‘appreciated property‘ rules of section 170(e)(1) to such contributions, however, the annual deduction limitation is instead the general 50 percent standard of section 170(b)(1)(A). Section 170(b)(1)(C)(iii).
Section 170(e)(1) provides as follows:
50 percent (62-1/2 percent, in the case of a corporation) of the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution).
For purposes of applying this paragraph (other than in the case of gain to which section 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a), or 1254(a) applies), property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset.
Application of section 170(e)(1) to the contribution of property thus requires that the amount of the charitable contribution be reduced by 50 percent of the gain that would have been long-term capital gain, and 100 percent of the gain that would not, if the taxpayer had sold the property at its fair market value. 3
A taxpayer may make a charitable contribution by selling property to a charity for less than its fair market value. The amount of the charitable contribution resulting from such a ‘bargain sale‘ generally is the excess of the fair market value of the property over its sales price. See Stark v. Commissioner, 86 T.C. 243, 255-256 (1988); Knott v. Commissioner, 67 T.C. 681 (1977); Waller v. Commissioner, 39 T.C. 665, 677 (1963). Section 1011(b) provides as follows with respect to bargain sales:
SEC. 1011(b). Bargain Sale to a Charitable Organization.—If a deduction is allowable under section 170 () by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.
In the present case, respondent does not deny that petitioners made a charitable contribution to a qualifying organization through the bargain sale of Weimar to Hewitt. In dispute is the amount by which petitioners' contribution must be reduced under section 170(e)(1). According to respondent, section 170(e)(1) precludes any deduction for the contribution of the Weimar capital gain property. As petitioners...
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