Rev. Rul. 55-138

I.T. 3910, C.B. 1948-1, 15, has been reconsidered in the light of the decisions in David C. White v. Broderick , 104 Fed.Supp. 213, Campbell v. Prothro , 209 F.2d 331, Mamie F. Farrier v. Commissioner , 15 T.C. 277, and Elsie SoRelle v. Commissioner , 22 T.C. 459.

I.T. 3910, supra , holds (1) that the fair market value of agricultural products contributed by a farmer or other producer to an organization described in section 23(o) or section 23(q) of the Internal Revenue Code of 1939 is includible in the gross income of the donor; (2) that such fair market value may be deducted from gross income, subject to the limitations contained in section 23(o) and section 23(q) of the Code; and (3) that expenses of production are deductible under section 23(a)(1)(A) of the Code as ordinary and necessary business expenses.

The foregoing ruling was based upon the decision of the Supreme Court of the United States in Helvering v. Paul R. G. Horst , 311 U.S. 112, Ct. D. 1472, C.B. 1940-2, 206. In that case the owner of negotiable bonds detached interest coupons therefrom shortly before their due date and delivered them as a gift to his son who procured their payment. The Court held the donor taxable on the amount received by the son. In support of the conclusion reached, the Court said in part:

Although the donor here, by the transfer of the coupons, has precluded any possibility of his collecting them himself he has nevertheless, by his act, procured payment of the interest, as a valuable gift to a member of his family. Such a use of his economic gain, the right to receive income, to procure a satisfaction which can be obtained only by the expenditure of money or property, would seem to be the enjoyment of the income whether the satisfaction is the purchase of goods at the corner grocery, the payment of his debt there, or such nonmaterial satisfactions as may result from the payment of a campaign or community chest contribution, or a gift to his favorite son. * * * The enjoyment of the economic benefit accruing to him by virtue of his acquisition of the coupons is realized as completely as it would have been if he had collected the interest in dollars and expended them for any of the purposes named.

In the White case, the court had under consideration a charitable contribution in 1947 of wheat by a farmer to an organization described in section 23(o) of the Internal Revenue Code. This wheat had been raised by the taxpayer during 1946 and 1947 and all costs incurred in raising, harvesting, and storing the crops of wheat, of which weat so donated was a part, had been allowed as deductions for those years. The court held that the taxpayer did not realize any taxable income or gain by the donation and disposition of the wheat.

In the Prothro case the taxpayer, who was a member of a partnership engaged in ranching, donated to the Young Men's Christian Association by an instrument in writing one hundred head of calves to be selected by the donee's agent from a larger number. The calves were kept for sale in the ordinary course of business of the partnership and the expense of raising them had been allowed as a deduction. A contract was entered into, to which the donee was a party, for the sale of the entire herd of calves. The calves were kept in a common pasture until delivery to the purchaser, at which time the proportionate part of the proceeds of sale was paid by the purchaser to the Young Men's Christian Association. The appellate court, affirming the judgment of the lower court, held that raised livestock do not constitute taxable income per se , that when the calves were transferred by gift they were not income to the taxpayer, and that no income was realized by him as a result of the transaction.

The same principle has been applied by the courts to gifts within a family unit in the Farrier and SoRelle cases.

In the light of the above cases it follows that no income is realized by a farmer or other producer by reason of his contribution of farm or other products to an organization described in section 23(o) or section (q) of the Internal Revenue Code of 1939.

Within the limits provided by section 23(o) and section 23(q) of the Internal Revenue Code of 1939 a donor is allowed a deduction for contributions to an organization described therein which, in the case of property other than money, is the fair market value of the property at the time of the contribution or gift. Regulations 118, section 39.23(o)-1(g). For this purpose, the fair market value will be considered to be the amount which the donor would have to spend in his most favorable market to immediately replace the donated property. This represents the true measure of the detriment he has sustained by the contribution.

In many instances, the taxpayer has deducted at least some items representing cost of the donated property in the years in which such costs were paid or incurred. In other cases involving inventoriable property, such costs have been reflected as part of the `cost of goods,' thereby, under permissible accounting methods, providing in effect for the deduction of such costs upon sale of the goods. This has been done on the assumption that such costs have been a part of the costs incurred in the business of the taxpayer. When the goods become the subject to a contribution or gift they are in effect removed from the business operations of the taxpayer and such costs attributable thereto should likewise be eliminated from business costs. If, for example, the products or goods were grown or manufactured in the year of the contribution, such costs allocable thereto should be disallowed. If the cost has been paid or incurred in an earlier year and is reflected in cost of goods carried in opening inventory of the year in which the gift is made, it becomes evident that an inventory adjustment should be made as of the time of the gift of property included therein to reflect the removal from the business of the donated asset and its cost, thereby counterbalancing the reduction of income caused by the removal of the goods from the business.

To allow a donor who is in business both the charitable deduction for property removed from business and donated to charity and a deduction for items of cost of such property would allow him, at least in part, a double deduction with respect to the same goods. The allowance of such a double deduction does not properly reflect income for tax purposes. Compare Charles Ilfeld Co. v. Hernandez , 292 U.S. 62, Ct. D. 819, C.B. XIII-1, 139 (1934); Mergott Co. v. Commissioner , 176 Fed.(2d) 860. One, who under permissible accounting methods reflects in inventory the cost items of prior years pertaining to the donated asset, must remove such costs from business channels by the indicated inventory adjustment, with the result that no deduction for such costs has ever been made or will be made. That is, if such costs so reflected in inventory total $500 and the fair market value of the donated goods is $1,000 at the time of the gift, the allowable contribution deduction is $1,000, and the inventory adjustment results in no further allowance for the $500 cost, thereby eliminating any possibility of double deduction.

It follows that similar costs incurred by one treating them as deductible items when paid or incurred must reduce the contribution deduction by any such deductions taken in prior years. To hold otherwise would make the total amount deducted respecting a donated asset variable depending upon the accounting method used. This would clearly be contrary to the well recognized principle that any permissible accounting method must clearly reflect items of income and deductions. If one has deducted $500 in costs of the donated property, the allowance of a contribution deduction of the full $1,000 would give him a total deduction amounting to $1,500. Thus, while the cost of a donated property is immaterial to a contribution deduction measured by its fair market value at the date of gift, if items of cost of the donated property have been deducted in prior years, the allowable contribution deduction must be reduced accordingly in order to avoid a double deduction as respects the same asset.

In view of the foregoing, it is held that the following treatment should be accorded contributions or gifts of property, other than money, to charitable organizations mentioned in section 23(o) and section 23(q) of the Internal Revenue Code:

(1) The fair market value of agricultural or manufactured products or property held for sale in the ordinary course of business which is contributed to an organization described in section 23(o) or section 23(q) of the Internal Revenue Code of 1939 is not includible in the gross income of the donor for Federal income tax purposes.

(2) The fair market value of the donated property as of the date of the gift will constitute and allowable deduction under section 23(o) and section 23(q) of the Code subject to the limitations provided therein, and for this purpose the fair market value will be the replacement cost to the donor in his most favorable market.

(3) There must be an adjustment to inventory effecting the removal of the donated asset and the costs pertaining thereto from the opening inventory in the year of the gift. Items of cost of the current year applicable to such property are not deductible by the donor, and similar items which have been deducted in prior years must be removed from the amount of the contribution in order to avoid a double deduction.

Accordingly, I.T. 3910, C.B. 1948-1, 15, is hereby revoked