Fourth Edition William Kratzke
Chapter 7: Personal Deductions
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- I. “Tax Expenditures”
Chapter 7: Personal DeductionsThe Tax Formula: (gross income) MINUS deductions named in § 62 EQUALS (adjusted gross income (AGI)) MINUS (standard deduction or ➔itemized deductions) MINUS (personal exemptions) EQUALS (taxable income) Compute income tax liability from tables in § 1 (indexed for inflation) ➔MINUS (credits against tax) In this chapter, we consider the Code’s provisions for deductions and credits for certain personal expenditures. We select only a few169 such provisions to examine, namely § 165's allowance of a deduction for casualty losses, § 213's allowance of a deduction for medical and dental expenses, § 170's allowance of a deduction for charitable contributions, § 164/275's allowance and disallowance for payment of certain taxes, and §§ 82/132/217's, allowance of a deduction for moving expenses or exclusion from gross income. Consider why there should be an allowable deduction of, exclusion of, or credit for any personal expenses. We might preliminarily observe that there are three basic purposes: 1. We want to encourage taxpayers to make a particular type of personal expenditure. We may choose to make a “tax expenditure.” In this group, we should place deductions, credits, or exclusions for charitable contributions, for home mortgage interest, and for adoption expenses. 2. We want to provide some relief to those taxpayers whose personal expenditures result – at best – from the exercise of choice among unappealing alternatives. When discretion among consumption choices is absent, a court is less likely to find that a taxpayer’s accession to wealth is in fact gross income. Cf. Gotcher; Benaglia, supra. Conversely, when taxpayers may spend an accession to wealth any way they choose – as when they receive cash – they have realized gross income. See Kowalski, supra. However, taxpayers must on occasion make some expenditures that we feel do not result from meaningful choices. The Code names some occasions when the absence of such discretion entitles a taxpayer to deduct (or exclude) an expenditure from her gross income. Examples include casualty losses and medical expenses. 3. We want to enlarge the tax base. Some taxpayer expenditures are not necessarily trade or business expenses, but they in fact enhance a taxpayer’s ability to generate taxable income. If they do that, they would also increase tax revenues. We should encourage taxpayers to make such expenditures. In this group, we place the Code’s provisions for moving expenses and child care. I. “Tax Expenditures”Congress may use the tax code to encourage170 (at least not to discourage) taxpayers to make certain types of expenditures. In § 170, Congress allows taxpayers a deduction for charitable contributions. This, coupled with the exemption from income tax that many charities enjoy,171 may provide sufficient incentive for some taxpayers to support the good work certain charities do. In § 164, Congress has allowed a deduction for certain taxes that taxpayer has paid or accrued. Section 275 specifically disallows a deduction for certain taxes that taxpayer may have paid or accrued. This pattern may encourage some taxpayers to engage in activities subject to a deductible tax, most notably, owning property. With respect to both charitable contributions and payment of taxes, a taxpayer may try to characterize payments that provide a benefit for the taxpayer as either a charitable contribution or as payment of a tax. For example, a taxpayer might contribute money to a university on the condition that the university grant a scholarship to taxpayer’s daughter. Or a taxpayer may pay her share of a condominium-owners’ association’s assessment to remodel the association’s common areas. In neither case should taxpayer be permitted to claim a deduction. Instead the taxpayer has simply “purchased something.” These are easy cases. How do we determine whether taxpayer has merely bought something – or has made a charitable contribution or paid a tax? A. Charitable Contributions Section 170(a)(1) permits taxpayers to deduct charitable contributions that they make within a taxable year. Section 170(c) defines a “charitable contribution” to be a gift “to or for the use of” certain specified types of organizations. Such organizations include any political subdivision of a state, so long as the “contribution is made for exclusively public purposes.” § 170(c)(1). Consider: Taxpayers entered into an agreement to purchase certain property contingent on the City Council rezoning it to permit use for a trailer court and shopping center. To assure access to the portion intended for a mobile home development, the rezoning proposal provided for dedication of a strip of the property for a public road. The road would also provide access or frontage for a public school, for a church, and for a home for the aged. Taxpayers completed their purchase and made the contemplated transfer to the city. The City Council formally adopted the rezoning ordinance. •Should taxpayers be permitted a charitable deduction for the value of the land it donated to the city to be used for a road? •Should the fact that the City of Tucson benefitted from taxpayer’s having provided the land, irrespective of taxpayer’s motive in making the donation, be sufficient in itself to permit taxpayer a deduction? •Would it matter if the dedication of the land to the City did not in fact increase the value of Taxpayers’ property? •See Stubbs v. United States, 428 F.2d 885 (9th Cir. 1970), cert. denied, 400 U.S. 1009 (1971). If a charitable contribution deduction turns on a weighing of benefits against the taxpayer’s cost, whose benefit should be relevant – benefit to the public or benefit to the taxpayer? Rolfs v. Commissioner, 668 F.3d 888 (7th Cir. 2012) HAMILTON, Circuit Judge. Taxpayers Theodore R. Rolfs and his wife Julia Gallagher (collectively, the Rolfs) purchased a three-acre lakefront property in the Village of Chenequa, Wisconsin. Not satisfied with the house that stood on the property, they decided to demolish it and build another. To accomplish the demolition, the Rolfs donated the house to the local fire department to be burned down in a firefighter training exercise. The Rolfs claimed a $76,000 charitable deduction on their 1998 tax return for the value of their donated and destroyed house. The IRS disallowed the deduction, and that decision was upheld by the United States Tax Court. The Rolfs appeal. To support the deduction, the Rolfs needed to show a value for their donation that exceeded the substantial benefit they received in return. The Tax Court found that they had not done so. We agree and therefore affirm. Charitable deductions for burning down a house in a training exercise are unusual but not unprecedented. By valuing their gifts as if the houses were given away intact and without conditions, taxpayers like the Rolfs have claimed substantial deductions from their taxable income. But this is not a complete or correct way to value such a gift. When a gift is made with conditions, the conditions must be taken into account in determining the fair market value of the donated property. As we explain below, proper consideration of the economic effect of the condition that the house be destroyed reduces the fair market value of the gift so much that no net value is ever likely to be available for a deduction, and certainly not here. What is the fair market value of a house, severed from the land, and donated on the condition that it soon be burned down? There is no evidence of a functional market of willing sellers and buyers of houses to burn. Any valuation must rely on analogy. The Rolfs relied primarily on an appraiser’s before-and-after approach, valuing their entire property both before and after destruction of the house. The difference showed the value of the house as a house available for unlimited use. The IRS, on the other hand, presented experts who attempted to value the house in light of the condition that it be burned. The closest analogies were the house’s value for salvage or removal from the site intact. The Tax Court first found that the Rolfs received a substantial benefit from their donation: demolition services valued by experts and the court at approximately $10,000. The court then found that the Rolfs’ before-and-after valuation method failed to account for the condition placed on the gift requiring that the house be destroyed. The court also found that any valuation that did account for the destruction requirement would certainly be less than the value of the returned benefit. We find no error in the court’s factual or legal analysis. The IRS analogies provide reasonable methods for approximating the fair market value of the gift here. The before-and-after method does not. I. Legal Background Concerning Charitable Donations Under Section 170(a) The legal principles governing our decision are well established, and the parties focus their dispute on competing valuation methodologies. We briefly review the relevant law, addressing some factual prerequisites along the way. The requirements for a charitable deduction are governed by statute. Taxpayers may deduct from their return the verifiable amount of charitable contributions made to qualified organizations. 26 U.S.C. § 170(a)(1). Everyone agrees that the Village of Chenequa and its volunteer fire department are valid recipients of charitable contributions as defined under section 170(c). To qualify for deduction, contributions must also be unrequited—that is, made with “no expectation of a financial return commensurate with the amount of the gift.” Hernandez v. Comm’r of Internal Revenue, 490 U.S. 680, 690 (1989). The IRS and the courts look to the objective features of the transaction, not the subjective motives of the donor, to determine whether a gift was intended or whether a commensurate return could be expected as part of a quid pro quo exchange. Id. at 690–91. The Treasury regulations implement the details of section 170, instructing taxpayers how to prove a deduction to the IRS and how to value donated property using its fair market value. Under section 1.170A–1(c) of the regulations, fair market value is to be determined as of the time of the contribution and under the hypothetical willing buyer/willing seller rule, wherein both parties to the imagined transaction are assumed to be aware of relevant facts and free from external compulsion to buy or sell. 26 C.F.R. § 1.170A–1(c). As with the question of the purpose of the claimed gift, fair market value requires an objective, economic inquiry and is a question of fact. We can assume, as the record suggests, that the Rolfs were subjectively motivated at least in part by the hope of deducting the value of the demolished house on their tax return. Applying the objective test, however, we treat their donation the same as we would if it were motivated entirely by the desire to further the training of local firefighters. Objectively, the purpose of the transaction was to make a charitable contribution to the fire department for a specific use. ... The Tax Court found ... that when the transaction was properly evaluated, the Rolfs (a) received a substantial benefit in exchange for the donated property and (b) did not show that the value of the donated property exceeded the value of the benefit they received. We also agree with these findings. There was no net deductible value in this donation in light of the return benefit to the Rolfs. A charitable contribution is a “transfer of money or property without adequate consideration.” United States v. American Bar Endowment, 477 U.S. 105, 118 (1986). A charitable deduction is not automatically disallowed if the donor received any consideration in return. Instead, as the Supreme Court observed in American Bar Endowment, some donations may have a dual purpose, as when a donor overpays for admission to a fund-raising dinner, but does in fact expect to enjoy the proverbial rubber-chicken dinner and accompanying entertainment. Where “the size of the payment is clearly out of proportion to the benefit received,” taxpayers can deduct the excess, provided that they objectively intended it as a gift. Id. at 116–18 (...). In practice then, the fair market value of any substantial returned benefit must be subtracted from the fair market value of the donation. This approach differs from that of the Tax Court in Scharf v. Comm’r of Internal Revenue, T.C.M. 1973-265, an earlier case that allowed a charitable deduction for property donated to a fire department to be burned. In Scharf, a building had been partially burned and was about to be condemned. The owner donated the building to the fire department so it could burn it down the rest of the way. The Tax Court compared the value of the benefit obtained by the donor (land cleared of a ruined building) to the value of the public benefit in the form of training for the firefighters, and found that the public benefit substantially exceeded the private return benefit. Thus, the donation was deemed allowable as a legitimate charitable deduction, and the court proceeded to value the donation using the established insurance loss figure for the building. The Scharf court did not actually calculate a dollar value for the public benefit, and if it had tried, it probably would have found the task exceedingly difficult. Although Scharf supports the taxpayers’ claimed deduction here, its focus on public benefit measured against the benefit realized by the donor is not consistent with the Supreme Court’s later reasoning in American Bar Endowment. The Supreme Court did not rely on amorphous concepts of public benefit at all, but focused instead on the fair market value of the donated property relative to the fair market value of the benefit returned to the donor. 477 U.S. at 116–18. The Tax Court ruled correctly in this case that the Scharf test “has no vitality” after American Bar Endowment. 135 T.C. at 487. With this background, the decisive legal principle for the Tax Court and for us is the common-sense requirement that the fair market valuation of donated property must take into account conditions on the donation that affect the market value of the donated property. This has long been the law. See Cooley v. Comm’r of Internal Revenue, 33 T.C. 223, 225 (1959) (“property otherwise intrinsically more valuable which is encumbered by some restriction or condition limiting its marketability must be valued in light of such limitation”). ... II. Valuation Methods As this case demonstrates, however, knowing that one must account for a condition in a valuation opens up a second tier of questions about exactly how to do so. … In this case there is no evidence of an actual market for, and thus no real or hypothetical willing buyers of, doomed houses as firefighter training sites. ... Sometimes fire departments ... conduct exercises using donated or abandoned property, but there is also no record evidence of any fire departments paying for such property. Without comparators from any established markets, the parties presented competing experts who advocated different valuation methods. The taxpayers relied on the conventional real estate market, as if they had given the fire department fee ownership of the house. The IRS relied on the salvage market and the market for relocated houses, attempting to account for the conditions proposed in the gift. The taxpayers’ expert witness is a residential appraiser. ... The taxpayers argued that the “before-and-after” method should be applied. Their appraiser started with an estimated value of $675,000 for the land and house together, based on comparisons to recent sales of similar properties in the area. Using the same method, he estimated a value of $599,000 for the land alone, without any house on it. He subtracted the latter from the former to estimate $76,000 as the value of the house alone. … While this approach might superficially seem like a reasonable way to back into an answer for the house’s value apart from the underlying land, the before-and-after method cannot properly account for the conditions placed on the recipient with a gift of this type. The Tax Court properly rejected use of the before-and-after method for valuing a donation of property on the condition that the property be destroyed. ... The IRS asserted that a comparable market could be sales of houses, perhaps historically or architecturally important structures, where the buyer intends to have the house moved to her own land. Witness Robert George is a professional house mover who has experience throughout Wisconsin lifting houses from their foundations and transporting them to new locations. He concluded that it would cost at least $100,000 to move the Rolfs’ house off of their property. Even more important, he opined that no one would have paid the owners more than nominal consideration to have moved this house. In his expert opinion, the land in the surrounding area was too valuable to warrant moving such a modest house to a lot in the neighborhood. George also opined that the salvage value of the component materials of the house was minimal and would be offset by the labor cost of hauling them away. ... Based on this testimony, the IRS argued that since the house would have had negligible value if sold under the condition that it be separated from the land and moved away, the house must also have had negligible value if sold under the condition that it be burned down. The Tax Court found that the parties to the donation understood that the house must be promptly burned down, and the court credited testimony by the fire chief that he knew the house could be put to no other use by the department. The court rejected the taxpayers’ before-and-after method as an inaccurate measure of the value of the house “as donated” to the department. The taxpayers’ method measured the value of a house that remained a house, on the land, and available for residential use. The conditions of the donation, however, required that the house be severed from the land and destroyed. The Tax Court, accepting the testimony of the IRS experts, concluded that a house severed from the land had no substantial value, either for moving off-site or for salvage. Moving and salvage were analogous situations that the court found to be reasonable approximations of the actual scenario. We agree with these conclusions, which follow the Cooley principle by taking into account the economic effect of the main condition that the taxpayers put on their donation. The Tax Court correctly required, as a matter of law, that the valuation must incorporate any reduction in market value resulting from a restriction on the gift. We review the Tax Court’s findings of fact for clear error and its conclusions of law de novo. Freda v. Comm’r of Internal Revenue, 656 F.3d 570, 573 (7th Cir. 2011). We find no clear error in the factual findings and conclude further that it would have been an error of law to ascribe any weight to the taxpayers’ before-and-after valuation evidence. .... ... The taxpayers here gave away only the right to come onto their property and demolish their house, a service for which they otherwise would have paid a substantial sum. ... The demolition condition placed on the donation of the house reduced the fair market value of the house to a negligible amount, well enough approximated by its negligible salvage value. …. … The value of the training exercises to the fire department is not in evidence. The fire chief testified in the Tax Court that he could not assign a specific value to the significant public benefit of the training—but in any event, we know from American Bar Endowment that trying to measure the benefit to the charity is not the appropriate approach. ... The Tax Court also undertook a fair market valuation of the benefit received by the taxpayers. The expert witnesses for the IRS both agreed with Mr. Rolfs’ own testimony (based on his investigation) that the house would cost upwards of $10,000 to demolish. ... We see no error in the Tax Court’s factual determination, based on the available evidence and testimony, that the Rolfs received a benefit worth at least $10,000. When property is donated to a charity on the condition that it be destroyed, that condition must be taken into account when valuing the gift. In light of that condition, the value of the gift did not exceed the fair market value of the benefit that the donating taxpayers received in return. Accordingly, the judgment of the Tax Court is Affirmed. [footnote omitted] Notes and Questions: 1. How does the test of American Bar Endowment as the court articulates it differ from the test that the Tax Court (evidently) applied in Scharf? •Basis is how a taxpayer keeps score with the government. No one’s argument in Rolfs concerning an allowable charitable contribution deduction involved consideration of the house’s pro-rated share of the overall basis of the property. Why not? 2. Why should taxpayer be able to claim the fmv of the property as the amount to be deducted when that amount is greater than the adjusted basis of the property? •Shouldn’t taxpayer be limited to a deduction equal to the property’s adjusted basis? See § 170(e)(1)(A). 3. A gift “to” an organization and a gift “for the use of” an organization are not the same thing. The Supreme Court construed the meaning of the phrase “to or for the use of” in § 170(c) in Davis v. United States, 495 U.S. 472 (1990). Taxpayers’ sons were missionaries for the Church of Jesus Christ of Latter-Day Saints. Taxpayers deposited amounts into the individual accounts of their sons. The Church had requested the payments and set their amounts. The Church issued written guidelines, instructing that the funds be used exclusively for missionary work. In accordance with the guidelines, petitioners’ sons used the money primarily to pay for rent, food, transportation, and personal needs while on their missions. Taxpayers claimed that these amounts were deductible under § 170. The Supreme Court denied the deductibility of such payments and adopted the IRS’s interpretation of the phrase. “[W]e conclude that a gift or contribution is ‘for the use of’ a qualified organization when it is held in a legally enforceable trust for the qualified organization or in a similar legal arrangement.” Id. at 485. “[B]ecause petitioners did not donate the funds in trust for the Church, or in a similarly enforceable legal arrangement for the benefit of the Church, the funds were not donated ‘for the use of’ the Church for purposes of § 170.” Id. at 486. And while “the Service’s interpretation does not require that the qualified organization take actual possession of the contribution, it nevertheless reflects that the beneficiary [(organization)] must have significant legal rights with respect to the disposition of donated funds.” Id. at 483. 4. In 1971, the IRS issued Rev. Rul. 71-447 in which it stated the position that a private school that does not have a racially non-discriminatory policy as to students is not “charitable” within the common-law concepts reflected in §§ 170 and 501(c)(3). The IRS relied on this position to revoke the tax-exempt status of two private schools. The United States Supreme Court upheld this determination: There can thus be no question that the interpretation of § 170 and § 501(c)(3) announced by the IRS in 1970 was correct. That it may be seen as belated does not undermine its soundness. It would be wholly incompatible with the concepts underlying tax exemption to grant the benefit of tax-exempt status to racially discriminatory educational entities, which “exer[t] a pervasive influence on the entire educational process.” [citation omitted] Whatever may be the rationale for such private schools’ policies, and however sincere the rationale may be, racial discrimination in education is contrary to public policy. Racially discriminatory educational institutions cannot be viewed as conferring a public benefit within the “charitable” concept … or within the Congressional intent underlying § 170 and § 501(c)(3). Bob Jones University v. United States, 461 U.S. 574, 595-96 (1983). The schools’ tax-exempt status was lost. Donors could not claim a charitable contribution deduction for contributing money to it. •This is one area where public policy is a part of income tax law. 5. There are limits to the amount of a charitable contribution that a taxpayer may deduct. Section 170's rules are complex. •An individual has a “contribution base,” i.e., adjusted gross income without regard to an NOL carryback. § 170(b)(1)(G). •A taxpayer may deduct in a taxable year only a certain percentage of her “contribution base,” the percentage limit dependent on the type of charity to which the contribution is made and the form of the contribution.
•A charitable contribution may be of “capital gain property,” i.e., a “capital asset the sale of which at its fair market value at the time of the contribution would have resulted in gain which would have been long-term capital gain” (LTCG) or § 1231 property. § 170(b)(1)(C)(iv). •The fmv of the property is the amount of the allowable deduction. Reg. § 1.170A-1(c)(1). This means that the LTCG on such property is never taxed – thus creating a true loophole.172 •If the donee’s use of the property is unrelated to the charity’s purpose, the charity disposes of the property before the last day of the taxable year without a certification that it made a substantial use related to its charitable purpose, the charity is a certain type of private foundation, the property was intellectual property, or the property is self-created taxidermy property – then the deduction is limited to the taxpayer’s basis in the property or its fmv, whichever is lower. § 170(e)(1)(B). •A charitable contribution may be of property, the gain on whose sale would not be long-term capital gain. •The taxpayer’s deduction is limited to her adjusted basis in the property or its fmv, whichever is less. § 170(e)(1)(A). •If a charitable contribution of property is partly a sale, then the taxpayer’s basis in the property is allocated pro rata according to the amount realized on the sale portion of the transaction and the fmv of the property. § 170(e)(2); Reg. § 1.1011-2(b). Taxpayer recognizes gain on the sale portion of such a transaction.
•The Code creates so-called “A” charities, § 170(b)(1)(A), and “B” charities, § 170(b)(1)(B). •Generally,173 “A” charities include churches, educational organizations, an organization whose principal purpose is medical research or education, university endowment funds, governmental units if the gift is for public purposes, publicly supported organizations with certain specified purposes, certain private foundations, and organizations that support certain other tax-exempt organizations. § 170(b)(1)(A). •“B” charities are all other charities. § 170(b)(1)(B). This generally174 includes veterans’ organizations, fraternal societies, nonprofit cemeteries, and certain nonoperating foundations. 8. A taxpayer’s allowable contributions are subject to the following limitations: •Taxpayer may deduct up to 50% of her contribution base to “A” charities, § 170(b)(1)(A); •Taxpayer may carry excess contributions to “A” charities to each of the succeeding five tax years in sequence, § 170(d)(1)(A); •Taxpayer may deduct up to 30% of her contribution base to “B” charities, or for the use of “A” or “B” charities, § 170(b)(1)(B); •Taxpayer may carry excess contributions to “B” charities or for the use of “A” or “B” charities to each of the succeeding five tax years in sequence, §§ 170(d)(1)(B), 170(d)(1)(A). •Taxpayer may deduct up to 30% of her contribution base to “A” charities of “capital gain property,” § 170(b)(1)(C)(i); •Taxpayer may carry excess contributions of “capital gain property” to “A” charities to each of the succeeding five tax years in sequence, §§ 170(b)(1)(C)(ii), 170(d)(1)(A);
•Taxpayer may carry excess contributions of “capital gain property” to “B” charities or for the use of “A” or “B” charities to each of the succeeding five tax years in sequence, §§ 170(b)(1)(D)(ii), 170(d)(1)(A). •These limitations are presented in a certain order. Every type of contribution is subject to the limitations imposed on gifts above it. •Example: Taxpayer contributed 40% of her contribution base in cash to an “A” charity. Taxpayer also contributed “capital gain property” with a fmv equal to 20% of her contribution base to “A” charities. This latter contribution is subject to the 50% limit on contributions to “A” charities. Hence, taxpayer must carry half of her “capital gain property” contributions to the next succeeding tax year as a contribution of “capital gain property” to an “A” charity. •Moreover, as the sequence of the list implies, carryovers may be used only subject to the contribution limits of the succeeding year. § 170(d)(1)(A)(i). The carryforward period is five years. § 170(d)(1)(A). This may discourage particularly generous taxpayers from making contributions in excess of the limits any more frequently than once every five years. 9. Corporations: A corporation may deduct only 10% of its taxable income as charitable contributions. § 170(b)(2)(A). A corporation may not circumvent this limitation by recharacterizing a contribution or gift that qualifies as a charitable contribution as a business expenditure. § 162(b). A corporation computes its taxable income for purposes of calculating this limit without regard to any dividends-received deduction, NOL carryback, § 199 deduction for domestic production activities, and capital loss carryback. § 170(b)(2)(C). A corporation may carry over an excess contribution to each of the next succeeding five tax years. § 170(d)(2)(A). The carryover cannot operate to increase an NOL in a succeeding year. § 170(d)(2)(B). 10. Taxpayer made a $1000 contribution to WKNO-FM, the local public radio station. WKNO-FM is an “A” organization. Because Taxpayer gave “at the $1000 level,” WKNO-FM presented Taxpayer with a HD radio. WKNO-FM had purchased several such radios for its fund-raising drive at a cost of $163 each. The fmv of the radio was $200. Taxpayer already owned an HD radio so she put the new one – still in the box it came in – in the attic. How much may Taxpayer deduct as a charitable contribution? •See Shoshone-First National Bank v. United States, 29 A.F.T.R.2d 72-323, 72-1 USTC (CCH) ¶ 9119, 1971 WL 454 (D. Wyo. 1971). 10a. Playhouse on the Circle will “sell the house” to any organization willing to pay $2500 to see a private showing on a Sunday afternoon of the play it is currently showing. A ticket to see the same play on Saturday night – the immediately preceding night – normally costs $35. Many charities engage Playhouse on the Circle to raise funds for their organization. St. Marlboro, an “A” organization engaged in medical research to determine the consequences of smoking only a few cigarettes a day, has “bought the house” and is selling tickets for $35/each. If Taxpayer purchased four tickets at a total cost of $140, how much should Taxpayer be permitted to deduct as a charitable contribution if Taxpayer throws the tickets away because she is not the least bit interested in seeing the play that Playhouse is currently showing? •See Rev. Rul. 67-246 (Example 3). 10b. Taxpayer has $200,000 of adjusted gross income and no NOL carryback. Taxpayer made the following charitable contributions: •$20,000 cash to her church, an “A” charity; •”long-term capital gain property” to her favorite university, an “A” charity, ab = $10,000, fmv = $80,000; •”long-term capital gain property” to the sorority of which she was a member during her years in college, a “B” organization, ab = $15,000, fmv = $40,000. What is Taxpayer’s allowable charitable contribution deduction? What charitable contribution carryovers will Taxpayer have? 10c. Taxpayer has $200,000 of adjusted gross income and no NOL carryback. Taxpayer made no charitable contributions except for the following transaction: •Taxpayer sold to a “B” charity some stock that he purchased many years ago for $10,000. Its current fmv = $50,000. Taxpayer sold the stock to the charity for $10,000. What are the tax consequences to Taxpayer? 
11. Do the CALI Lesson, Basic Federal Income Taxation: Deductions: Charitable Contribution Deductions: Basic Concepts and Computations. B. Taxes Paid Section 164 names some taxes that are deductible, irrespective of the circumstances of the taxpayer. The payments do not have to be connected with a trade or business, or with the production of income. They are deductible simply because taxpayer paid them. Section 275 names certain taxes that are not deductible. There is of course an involuntary element of paying any of the taxes that § 164 names. However, there is also an element of choice involved in the sense that some taxes are simply the cost of owning property – wherever situated – or making income in one place rather than another. Moreover, the taxes named support governments other than the federal government. Thus the taxpayer’s costs of taxes associated with the choices that taxpayer makes are borne at least in part by the federal government. Some important points about §§ 164/275 are the following: •To be deductible, a “personal property tax” must be an ad valorem tax, § 164(b)(1), i.e., “substantially in proportion to the value of the personal property.” Reg. § 1.164-3(c)(1). Thus payment of a uniform “wheel tax” imposed on automobiles is not deductible. •A taxpayer may deduct either state and local income taxes or state and local sales taxes. § 164(b)(5)(A). For a time, state and local sales taxes were not deductible. •What are the fairness implications of these current and former rules for taxpayers who reside in states that raise most of their revenue through income taxes, through sales taxes, or through a combination of income and sales taxes? •Section 164(c)(1) provides in part: “Taxes assessed against local benefits of a kind tending to increase the value of the property assessed” are not deductible. Reg. § 1.164-4(a) provides in part: “A tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The real property taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction.” •If a property owner may not deduct an assessment for the construction of, say, sidewalks in her neighborhood, should the property owner be permitted to add the amount of the assessment to her basis in her property? •If real property is sold during a tax year, § 164(d) pro rates the real property tax allocable to seller and buyer by the number of days each owned the property. The seller is treated as owning the property up to the day before the sale. § 164(d)(1)(A). •How should a seller treat real estate taxes that the seller has already paid and for which she received reimbursement from the buyer? See § 1001(b)(1); Reg. § 1.1001-1(b)(1). •How should a seller treat real estate taxes that are the obligation of the seller but which the purchaser pays, perhaps because they are only due after the date of sale? See § 1001(b)(2); Reg. § 1.1001-1(b)(2).
•If this treatment of such taxes does not (ultimately) alter taxpayer’s taxable income, what difference does it make to deduct a payment as opposed to reducing the amount realized or increasing the cost?
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