Court Opinion

ID: 4485566
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:33:46.663629+00
Date Added: 2024-06-11T15:03:46.952911
License: Public Domain

PARKER, J., concurring and dissenting: If my choices were between the majority’s position (invalidating portions of certain regulations) or Judge Whitaker’s dissent (resolving doubts in favor of the regulations), I would simply join in the dissent. However, I do not see the choices as so narrowly restricted. I would follow another route to reach the same result the majority has reached, but without invalidating any portion of the regulations and by merely applying the regulations in a different method and sequence. For the reasons set forth below, I concur in the majority’s result only. In a “bargain sale” transaction,1 petitioners sold capital gain property with a fair market value of $1,106,478 to an organization described in section 170(b)(1)(A) for the amount of $941,684. Petitioners’ adjusted basis in the property at the time of the sale was $654,632. In the year of the sale (1977), petitioners elected under section 170(b)(l)(C)(iii) to apply section 170(e)(1) to all contributions of capital gain property to which subsection (e)(1)(B) did not otherwise apply made by petitioners during that year. The parties in this case apparently agree that the regulations under sections 170(e) and 1011(b) preclude petitioners from any charitable contributions deduction in connection with the bargain sale. The majority accepts the parties’ litigating position as the correct reading of the regulations, and hence must decide whether or not the regulations are valid. However, I think both parties misread or misapply the regulations. Under an alternative application that I believe to be the correct one, the validity of these regulations is not in issue and petitioners Eire allowed a charitable contributions deduction of $131,146 in connection with the bargain sale, most of which is available as a carryover to the years before the Court. But for petitioners’ election under section 170(b)(l)(C)(iii), this case would never have arisen. See, i.e., sec. 1.1011-2(c), example (7), Income Tax Regs. Therefore, I think the appropriate issue presented in this case is whether, in a bargain sale transaction, an election under section 170(b)(l)(C)(iii) to apply section 170(e)(1)(B) requires the entire property to be taken into account, as provided in section 1.1011-2(a)(l), Income Tax Regs., in determining the amount of the reduction required under section 170(e)(1)(B). As I see the case, there are two separate steps involving reductions under section 170(e)(1)(B) — one involving section 1.101 l-2(a)(l), Income Tax Regs., and one not involving it. As explained below, I think that the reduction required under section 170(e)(1)(B) resulting from an election by the taxpayer under section 170(b)(l)(C)(iii) has no applicability to section 1.1011-2(a)(l), Income Tax Regs. Consequently, I reach the same result that the majority reaches without addressing the validity of any regulation. In a bargain sale to a charitable organization, part of the transaction is treated as a sale and part is treated as a charitable contribution. Generally, the charitable contribution is the difference between the fair market value of the property at the time of the sale and the amount realized. However, prior to calculating either the amount of gain on the sale or the amount of the deduction allowed under section 170, an initial determination is required under section 1011(b) and section 1.1011-2(a)(l), Income Tax Regs., to decide whether or not basis is to be allocated. This is sometimes called the “allowability test,” and if the bargain sale does not pass this initial test, no charitable contribution is allowable and all of the basis remains available to reduce the amount of taxable gain on the sale.2  Section 1011(b) provides that: SEC. 1011(b). Bargain Sale To A Charitable Organization. — If a deduction is allowable under section 170 (relating to charitable contributions) 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. Section 1.1011-2(a)(l), Income Tax Regs., is a specific regulation pertaining only to bargain sales to charitable organizations. This regulation determines whether or not the adjusted basis must be allocated between the property that was sold and the property that was contributed. If no charitable contributions deduction is allowable, the adjusted basis of the property does not have to be allocated, and the entire adjusted basis is used in determining the amount of gain on the sale. However, if it is determined under this regulation that the adjusted basis must be allocated, i.e., if a charitable contributions deduction is allowable, then the amount of gain is determined under section 1011(b) and section 1.1011-2(b), Income Tax Regs. The amount allowed or allowable for the charitable contribution (fair market value - amount realized) is then computed under section 170 and the regulations thereunder in the same manner as though the contribution was an outright gift to a charitable organization. This computation will then be made, in my opinion, without going back to section 1.1011-2(a)(l), Income Tax Regs. Pursuant to section 1.1011-2(a)(l), Income Tax Regs., the adjusted basis of the property must be allocated under section 1011(b) and section 1.1011-2(b), Income Tax Regs., only if after applying the provisions of section 170, including the percentage limitations of section 170(b),3 a deduction is allowable under section 170. In ascertaining whether or not a charitable contributions deduction is allowable under section 170 for the taxable year “for such purposes” (to determine whether or not the adjusted basis must be allocated pursuant to section 1011(b) and the regulations thereunder), section 170 is to be applied without regard to this regulation and the amount by which the contribution must be reduced under section 170(e)(1) is the amount determined as if the entire property had been sold by the donor at its fair market value at the time of the sale or exchange. In other words, the adjusted basis must be allocated only if the charitable contribution (fair market value - amount realized) is greater than the reductions required under section 170(e)(1) determined by applying such section to the entire property. After satisfying this initial allowability test and determining that the adjusted basis of the property must be allocated, the taxpayer is no longer concerned with section 1.1011-2(a)(l), Income Tax Regs., and that regulation has no further applicability. The majority has accepted the parties’ litigating position that the election by petitioners under section 170(b)(l)(C)(iii) requires that the contribution portion of the bargain sale must be reduced under section 170(e)(1)(B) by taking into account the long-term capital gain attributable to the entire property as required by section 1.1011-2(a)(l), Income Tax Regs. I do not see the connection. I think the allowability test in which the entire property is considered is an earlier, preliminary test which petitioners have satisfied and that the reductions under section 170(e)(1)(B) pursuant to their election comes at a later stage and involves only the contributed portion of the property. In other words, the reduction contemplated by section 170(e)(1)(B) pursuant to petitioners’ election requires only that portion of the long-term capital gain attributable to the contributed property be taken into account. While the statute and regulations are complex, a logical tracking of the Code and regulations supports my view. The method for computing the amount of long-term capital gain attributable to the contributed property is clearly set forth in section 1.170A-4(c)(3), Income Tax Regs. Indeed, an analysis of section 170(b)(1)(C) supports my interpretation. Generally, charitable contributions to organizations described in section 170(b)(1)(A) (“50 percent charities”) are allowed in any taxable year to the extent that the aggregate of such contributions does not exceed 50 percent of the taxpayer’s contribution base4 (adjusted gross income) for such year. However, an additional limitation is provided in section 170(b)(1)(C) with respect to contributions of certain capital gain property. Section 170(b)(1)(C) provides: (C) Special limitation with Respect to contributions of certain CAPITAL GAIN PROPERTY.— (i) In the case of charitable contributions of capital gain property to which subsection (e)(1)(B) does not apply, the total amount of contributions of such property which may be taken into account under subsection (a) for any taxable year shall not exceed 30 percent of the taxpayer’s contribution base for such year. For purposes of this subsection, contributions of capital gain property to which this paragraph applies shall be taken into account after all other charitable contributions. (ii) If charitable contributions described in subparagraph (A) of capital gain property to which clause (i) applies exceeds 30 percent of the taxpayer’s contribution base for any taxable year, such excess shall be treated, in a manner consistent with the rules of subsection (d)(1), as a charitable contribution of capital gain property to which clause (i) applies in each of the 5 succeeding taxable years in order of time. (iii) At the election of the taxpayer (made at such time and in such manner as the Secretary prescribes by regulations), subsection (e)(1) shall apply to all contributions of capital gain property (to which subsection (e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year. If such an election is made, clauses (i) and (ii) shall not apply to contributions of capital gain property made during the taxable year, and, in applying subsection (d)(1) for such taxable year with respect to contributions of capital gain property made in any prior contribution year for which an election was not made under this clause, such contributions shall be reduced as if subsection (e)(1) had applied to such contributions in the year in which made. (iv) For purposes of this subparagraph, the term “capital gain property” means, with respect to any contribution, any 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. For purposes of the preceding sentence, any property which is property used in the trade or business (as defined in section 1231(b)) shall be treated as a capital asset. Thus, section 170(b)(l)(C)(i) limits the total amount of contributions of capital gain property to which subsection (e)(1)(B) does not apply that may be taken into account each year to 30 percent of the taxpayer’s contribution base (adjusted gross income). Section 170(b)(l)(C)(ii) provides that contributions of capital gain property exceeding that 30-percent limitation are carried over to subsequent years as contributions of capital gain property in a manner consistent with section 170(d). However, in lieu of accepting this 30-percent limitation for contributions of capital gain property, a taxpayer may make an election under section 170(b)(l)(C)(iii) to apply section 170(e)(1) to all contributions of capital gain property (to which subsection (e)(1)(B) does not otherwise apply) made by the taxpayer during the taxable year.5 If the election is made, the taxpayer must reduce the amount of the charitable contributions deduction otherwise allowable under section 170(b)(1)(C) by 50 percent of the gain that would have been long-term capital gain if the contributed property had been sold by the taxpayer at its fair market value determined at the time of such contribution.6 The effect of the election is twofold: First, the election removes the otherwise allowable charitable contribution from the 30-percent limitation under section 170(b)(1)(C) and removes the capital gain property taint from the contribution.7  With respect to a bargain sale transaction, to accept the position that an election under section 170(b)(l)(C)(iii) requires the application of section 170(e)(1)(B) in accordance with section 1.1011-2(a)(l), Income Tax Regs., is simply, in my opinion, an erroneous application of the statute and the regulations. Both section 170(b)( 1 )(C)(iii) and section 1011(b) (and section 1.1011-2(a)(l), Income Tax Regs.) require reductions under section 170(e)(1). However, when interpreted and applied in the proper sequence within the entire statutory and regulatory framework, these two reductions operate in different spheres and are, in my opinion, mutually exclusive. I will demonstrate below what I believe to be the proper sequence and proper application of the statute and regulations. In a bargain sale transaction, section 170(e)(1) is applied under section 1.1011-2(a)(l), Income Tax Regs., to reduce the amount of the charitable contribution (fair market value - amount realized). The purpose of this initial application is to determine whether or not any charitable contributions deduction is allowable so that the basis of the property must be apportioned as provided in section 1011(b) and section 1.1011-2(b), Income Tax Regs. This is what is referred to above as the allowability test for the particular piece of property. Indeed, section 1.1011-2(a)(l), Income Tax Regs., by clear and unambiguous language specifically limits the application of section 170(e)(1) for such purposes. After this initial allowability determination has been made for the particular piece of property, section 1.1011-2(a)(l), Income Tax Regs., has no further applicability. In contrast, the reductions contemplated by section 170(e)(1)(B) pursuant to an election under section 170(b)( 1 )(C)(iii) apply to all contributions of capital gain property made during the taxable year. The position advanced by the parties as their litigating position and accepted by the majority necessitates a different treatment for contributions of capital gain property to which the election applies depending on whether such contributions were outright gifts or were made in connection with a bargain sale. I do not think that the election under section 170(b)(l)(C)(iii) was ever intended to draw such a distinction. Indeed, in the absence of an election, the amount of the contribution of capital gain property that is not otherwise subject to section 170(e)(1)(B) (and the only capital gain property to which an election could apply) is fixed and ascertained and is otherwise allowable under section 170(b)(1)(C) subject only to the percentage limitations contained therein. The interpretation accepted by the majority requires a quantum leap backward from section 170(b)(l)(C)(iii) back to section 1.1011-2(a)(l), Income Tax Regs., which I do not think is mandated either by the statute or the regulations. Having once satisfied section 1011(b) and section 1.1011-2(a)(l), Income Tax Regs., in the initial determination that some charitable contribution is allowable and that basis must be allocated, there is no need to return to section 1.1011-2(a)(l). I think the election under section 170(b)(l)(C)(iii) requires the application of section 170(e)(1)(B) computed under section 1.170A-4(c)(2) and (3), Income Tax Regs., and not under section 1011-2(a)(1), Income Tax Regs. Thus only the property contributed in the bargain sale is taken into account in that computation. Accordingly, I would analyze the instant case in the following manner. Petitioners in the instant case sold capital gain property to a section 170(b)(1)(A) organization for the amount of $941,684. The fair market value at the time of the sale was $1,106,478, resulting in a charitable contribution of $164,794. The taxpayer’s basis in the property was $654,632 that reflected the potential recapture of depreciation in the amount of $43,392. However, since neither the majority opinion nor the parties’ briefs otherwise indicate, it is assumed that no portion of this depreciation will be treated as ordinary income on disposition of the property. My analysis begins with section 1.1011-2(a)(l), Income Tax Regs., since the transaction was a bargain sale to a charitable organization. Under section 1.1011-2(a)(l), Income Tax Regs., it must be determined whether or not any charitable contributions deduction is allowable under section 170. If a deduction is allowable under section 170, then the basis of the property must be allocated between the sale portion and the contributed portion of the bargain sale. In making this initial determination, the contribution of property must be reduced under section 170(e)(1), determined as if the entire property had been sold by the donor at its fair market value at the time of the sale. This is the mandatory reduction under section 170(e)(1). The taxpayer made a charitable contribution in the amount of $164,794 (1,106,478 fair market value - 941,684 amount realized). If the property had been sold at its fair market value at the time of its contribution, $451,846 of gain would have been realized. However, since no part of this gain would have been ordinary income, no mandatory reduction is required under section 170(e)(1)(A). Moreover, at this stage, no mandatory reduction is made under section 170(e)(1)(B) since that section does not otherwise apply.8 Accordingly, after applying section 1.1011-2(a)(l), Income Tax Regs., a charitable contributions deduction in the amount of $164,794 is allowable under section 170 subject only to the percentage limitations of section 170(b), and the basis of the property must be apportioned. At this point, section 1.1011-2(a)(l), Income Tax Regs., has no further applicability and the provision in regard to the gain on the entire property has served its limited purpose. Petitioners have passed this initial allowability test, and basis of the particular property must now be allocated. Pursuant to section 1011(b) and section 1.1011-2(b), Income Tax Regs., petitioners have an adjusted basis of $552,133 for the part of the property constituting the sale (adjusted basis X amount realized/fair market value of entire property) (654,632 X 941,684/1,106,478), resulting in a total gain of $384,551 (941,684 - 557,133), all of which is long-term capital gain. Under section 1.170A-4(c)(2)(i), Income Tax Regs., petitioners’ adjusted basis for the property contributed is $97,498 (adjusted basis X fair market value of contributed property/fair market value of entire property) (654,632 X 164,794/1,106,478). Basis having now been allocated, the next step is to compute the amount of the charitable contributions deduction to be allowed. The charitable contribution of $164,794 (fair market value -amount realized) is now treated essentially in the same manner as an outright gift of capital gain property to an organization described in section 170(b)(1)(A). Accordingly, the fair market value of the contributed property must be reduced by the amounts required under section 170(e)(1). If the contributed property had been sold at its fair market value, the taxpayer would have realized a total gain of $67,296 (164,794 - 97,498) all of which would have been long-term capital gain. Sec. 1.170A-4(c)(3), Income Tax Regs. Since no part of this gain attributable to the contributed property would have been ordinary income, no reduction is required under section 170(e)(1)(A). Moreover, no reduction is necessary under the express language of section 170(e)(1)(B), since that section does not otherwise apply. At this stage, petitioners are otherwise allowed a charitable contributions deduction of $164,794 subject to the 30-percent bmitation under section 170(b)(1)(C). However, petitioners have elected to have section 170(e)(1) apply to all of their contributions of capital gain property made in the year 1977, and the only contribution of capital gain property is this amount of $164,794. Accordingly, the amount of $164,794 is reduced under section 170(e)(1)(B) by 50 percent of the gain that would have been long-term capital gain if the contributed property had been sold at its fair market value at the time of the contribution. However, at this stage we do not go back to section 1.1011-2(a)(l), Income Tax Regs., because basis has already been allocated. Thus, the $164,794 is reduced by the amount of $33,648 (50 percent of 67,296) (451,846 X 164,794/1,106,478) (long-term capital gain X fair market value of contributed property/fair market value of entire property). This gives petitioners a deduction in the amount of $131,146 for the contributed portion of the bargain sale, subject to the percentage limitations of section 170(b)(1)(A).9 This charitable contributions deduction can be carried over from the year of the bargain sale (1977) to the years before the Court (1978 and 1979). This would also mean that an adjustment would have to be made to the sale portion since respondent in the statutory notice of deficiency allocated all of the basis to the sale portion, thus decreasing the amount of petitioners’ taxable gain. I would hold for petitioners by applying the pertinent statutory and regulatory provisions in the sequence indicated above, thus pretermitting any determination of the validity of the regulations. Accordingly, while I agree with Judge Whitaker’s views, I concur with the majority solely as to the result the majority reached. However, since the majority has chosen to invalidate the regulations, I join in Judge Whitaker’s dissent. WHITAKER, J., agrees with this concurring and dissenting opinion.   The term “bargain sale” means a transfer of property which is in part a sale or exchange of the property and in part a charitable contribution, as defined in sec. 170(c), of the property. Sec. 1.170A-4(c)(2)(iii), Income Tax Regs.    See Weber & Stevenson, “Charitable Bargain Sales and The Allowability Test — A Tax Trap,” 56 Taxes 101 (February 1978).    Sec. 1.1011-2(a)(2), Income Tax Regs., provides that the basis of the property must be apportioned in the year of the bargain sale if the sale or exchange gives rise to a charitable contribution that is carried over to a subsequent taxable year, whether or not such contribution is allowable as a deduction under sec. 170 in such subsequent taxable year. Since both sec. 170(b)(1)(A) and sec. 170(b)(1)(C) allow carryovers for contributions in excess of the percentage limitations contained therein, the reference to the percentage limitations of sec. 170(b) contained in sec. 1.1011-2(a)(l), Income Tax Regs., was intended to apply with respect to bargain sales made to organizations described in sec. 170(b)(1)(B). See, i.e., sec. 1.1011-2(c), example (3), Income Tax Regs. However, since the Tax Reform Act of 1984, inter alia, extended the applicability of the 5-year carryover deduction under sec. 170(d) to excess contributions by individuals made to sec. 170(b)(1)(B) organizations, it is doubtful whether, under the present law, the percentage limitations of sec. 170(b) would preclude the allocation of basis under sec. 1.1011-2(a)(l), Income Tax Regs., with respect to bargain sales to any charitable organization. See generally Tax Reform Act of 1984, Pub. L. 98-369, sec. 301, 98 Stat. 777.    The term “contribution base” means adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under sec. 172). Sec. 170(b)(1)(E).    In addition, the election may be made with respect to contributions of 30-percent capital gain property carried over to the taxable year even though the individual has not made any contribution of 30-percent capital gain property in such year. Sec. 1.170A-8(d)(2)(i)(a), Income Tax Regs. Note that the reference in this regulation to the election under sec. 170(b)(l)(iii) bears the old numbering of what is now sec. 170(b)(l)(C)(iii).    It should be emphasized that an election under sec. 170(b)(l)(C)(iii) applies to all contributions of capital gain property to which subsec. (e)(1)(B) does not otherwise apply made during the year of the election. In addition, in applying the carryover provisions of sec.l70(d) for the year of the election with respect to contributions of capital gain property made in any prior contribution year for which an election was not made, such contributions shall be reduced as if subsec. (e)(1) had applied to such contributions in the year in which made. Sec. 170(b)(l)(C)(iii) (last sentence).    Removing the capital gain property taint from the contribution means that after applying sec. 170(e)(1)(B) as required by the election, clauses (i) and (ii) of sec. 170(b)(1)(C) are no longer applicable to contributions of capital gain property made dining the taxable year. In other words, these contributions are then treated as contributions subject to the 50-percent limitation under sec. 170(b)(1)(A), and any amount in excess of this 50-percent limitation is carried over to subsequent years under sec. 170(d) as a sec. 170(b)(1)(A) contribution rather than as a sec. 170(b)(1)(C) contribution.    Sec. 170(e)(1)(B) does not apply because (1) any part of this contribution that consisted of tangible personal property is not used by the donee in a manner unrelated to the purpose or function constituting the basis for its exemption under sec. 501, and (2) the donee was not á private foundation as defined in sec. 509(a) other than a private foundation described in subsec. (b)(1)(D).    While I have discussed what I call “the parties’ litigating position” (and the basic premise of the majority opinion), I think my position is the same as petitioners’ alternative argument which is alluded to but not well articulated in petitioners’ brief. I believe my position was also anticipated in an early article discussing what was then the proposed regulations under the 1969 Tax Reform Act. See Whitaker, “Dealing with Outright Gifts to Charity in Kind,” 30th Annual N.Y.U. Institute 45, 64-73 (1972).