Sleepypharma Research Paper

Substance Over Form
Tax Research Project

[Pick the date]

Requirement (1)
Q1-a: How much could SleepyPharma deduct on its tax return as a current year charitable contribution for the donated inventory assuming that § 170(e) (3) does not apply under SleepyPharma’s facts? Pursuant to income tax regulation 1.170A-1 (c), if the contribution is property rather than money, the amount of the contribution is the fair market value of the property at the time the contribution is made. However, under IRC 170(e)(1)(A) and in accordance with regulation 1.170 A-4(a) (1), the contribution shall be reduced by the amount of gain which would not have been long-term capital gain (determined without regard to section 1221(b)(3)) if the
To calculate the enhanced deduction under 170(e)(3), we must first determine if the property being donated is a “qualified contribution.” The code stipulates that a qualified contribution must be in accordance with 1221(a)(1) and 1221(a)(2). Pursuant to section1221(a)(1), the property in question is a qualified contribution and not a 1221 capital asset, because it is property that is held by the taxpayer for sale in the normal course of business. Therefore, this property is not capital gain property it is ordinary income property as defined in income tax regulation 1.170 A-4(b)(1). Under IRC 170(e)(3)(B) the amount of the charitable contribution of ordinary income property must be reduced in accordance with the following subsections to determine the final value of the deduction. The reduction under paragraph (1)(A) shall be no greater than the sum of the following:
(i) One half of the amount computed under paragraph (1)(A)
FMV of Contribution = $198.00 x100,000 = $19,800,000
Book Basis = $74.00 x 100,000 =
Durden v. Comm’r. T.C. Memo, 2012-2014 (may 17, 2012). Furthermore, “the essence of section IRC 170 is to allow certain taxpayers a charitable deduction for contributions made to certain organizations.” Bond v. Comm’r, 100 T.C. 32, at 41 (1993). Statute 170(e)(3) was enacted to provide an enhanced deduction to companies donating for charitable purposes. The following cases demonstrate instances when the United States Tax Court granted substantial compliance to taxpayers who did not meet all of the statutory requirements to receive the exemption. In Bond v. Comm’r, the taxpayer failed to attach a qualified appraisal to his income tax return, rather than a full appraisal. The Tax Court found that the taxpayer substantially complied with the statutory requirements to receive a charitable contribution deduction because “the substance or essence of whether the charitable contribution was made” fulfilled the legislative purpose. Bond v. Comm’r, 100 T.C. 32