Issue of Charitable Contribution

Falcon Corporation ("Falcon") has contributed a library with a fair market value of $3 million to a state historical society that qualifies as a charitable organization for the purposes of the Internal Revenue Code ("IRC"). Falcon is the owner and operator of a large newspaper, and the library is a compilation of past news items from Falcon's and other newspapers. Falcon estimates that it has spent over $10 million creating the library. However, this amount was deducted as the expenses were incurred and Falcon's adjusted basis for the library is zero. After contributing the library to the historical society, Falcon claimed a charitable contribution deduction of $3 million, the fair market value of the library. The Internal Revenue Service ("IRS") has disallowed the deduction on the rationale that Falcon's basis in the library for tax purposes is zero.

The applicable sections of the Internal Revenue Code are sections 170(e)(1), 170(e)(1)(A), 1012, 1221, 1221(3)(A), and 1222(3). Section 170(e)(1) relates to the charitable contribution deduction for capital assets. Basically, it states that the amount of any charitable contribution of property must be reduced by the amount of long-term capital gain that would have been realized if the property had been sold at its fair market value.

Section 170(e)(1)(A) also relates to the deduction allowable for charitable contributions. It states that "[t]he amount of any charitable c

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taxpayer are not capital assets for the purposes of the IRC. Thus, each library clipping personally created by Falcon as a corporation is not a capital asset for the purposes of the IRC. The problem states, however, that Falcon has also incorporated clippings created by newspapers owned by corporations other than its own. This raises the question of whether these clippings could be considered capital assets. This is an important question, but it will be addressed later. For now, we will assume that all the clippings in the library qualify as noncapital assets. Assuming that the library qualifies as a noncapital asset, we must treat the income likely to be generated from a sale of the library as ordinary income. Ordinary income property is any property that, if sold, will result in the recognition of ordinary income. This term includes inventory for sale in the taxpayer's trade or business, a work of art created by the taxpayer, and a manuscript prepared by the donor. A rereading of section 1221 will reveal that these are the very items excluded under that section. Generally, if ordinary income property is contributed, the deduction is equal to the fair market value of the property less the amount of ordinary income that

Category: Government - I