Rev. Rul. 83-130

ISSUES

(1) What is the amount of gain recognized by an individual taxpayer on the sale of the taxpayer's personal residence to a charitable organization that subsequently awards the house as a raffle prize under the circumstances described below? (2) Has the taxpayer made any deductible charitable contribution under section 170 of the Internal Revenue Code? (3) Are amounts paid to the charitable organization for the purchase of raffle tickets deductible as charitable contributions under section 170 of the Code?

(4) Is the cost of a losing raffle ticket deductible as a wagering loss under section 165(d) of the Code?

(5) What amount, if any, is includible in the gross income of the winner?

FACTS

A, an individual taxpayer under the age of 55, owned a house for many years. The house was A's principal residence within the meaning of section 1034 of the Code, and A's adjusted basis in the house was $30,000.

On October 7, 198 1, A entered into a contract in which A granted X, a charitable organization described in section 170(c)(2) of the Code, a 60 day option to purchase the house for $100,000.

X paid A $100 for the option, which provided that, if X exercised the option, the $100 was to be applied to the purchase price of the house. It was understood that X would attempt to raise the remaining $99,900 by selling raffle tickets and that X would award the house as a prize to the holder of the winning raffle ticket. If X failed to sell $120,000 in raffle tickets at the end of the 60-day period, X would allow the option to lapse and A would retain the $100. X would also cancel the raffle and return the money raised from the sale of the tickets to the purchasers of the tickets.

X sold raffle tickets to the general public for $100 each. The raffle tickets entitled the holders to participate in a drawing to win A's house. At the end of the 60-day period X had raised $200,000 from the sale of the raffle tickets and exercised the option t purchase A's house. A transferred possession of and title to the house to X for $99,900 before the raffle drawing was held. A did not purchase another principal residence wit in any of the periods set forth in section 1034 of the Code.

On December 21, 1981, X held a raffle drawing in which B held the winning ticket. B uses the cash receipts and disbursements method of accounting and files returns on a calendar year basis. On December 26, 198 1, X transferred possession of and title to the house to B for no consideration other than the $100 B had already paid for the raffle ticket.

A did not participate in any of the activities relating to the raffle held by X. The fair market value of the house was $100,000 on October 7, 1981.

LAW AND ANALYSIS

ISSUE I

Under section 1001(a) of the Code, the gain from the sale or other disposition of property is the excess of the amount realized from the sale over the adjusted basis of the property.

Under section 1001(b) of the Code, the amount realized from the sale or other disposition of property is the sum of any money received plus the fair market value of the property (other than money) received.

Under section 1001(c) of the Code, the entire amount of the gain or loss on the sale of property is recognized for income tax purposes unless otherwise provided in the Code.

Under section 1001 of the Code, the gain that A recognizes on the sale of the residence to X is the excess of the amount realized from the sale ($100,000) over A's adjusted basis in the property ($30,000). The gain is long-term capital gain because A held the residence for more than one year and the residence was a capital asset in A's hands. See sections 1222(3) and 1221, respectively.

LAW AND ANALYSIS

ISSUE 2

Section 170(a) of the Code allows a deduction for any contribution or gift to or for the use of an organization described in section 170(c), payment of which is made within the tax year of the taxpayer.

A contracted to sell A's principal residence to X for a price reflecting the fair market value of the residence. The sale was subject to a condition precedent, and when the condition liad been met, the sale was consummated. Because the price paid by X ($ 100,000) to A reflected the fair market value of the residence at the time the option contract was entered into A made no charitable contribution to X.

LAW AND ANALYSIS

ISSUE 3

Rev. Rul. 67-246, 1967-2 C.B. 104, concerns the deductibility, as charitable contributions under section 170 of the Code, of payments made by taxpayers in connection with admission to or other participation in fundraising activities for charity, such as a charity raffle. Example 5 of the revenue ruling states that amounts paid for chances to participate in raffles, lotteries, or similar drawings or to participate in puzzle or other contests for valuable prizes conducted by a charity are not gifts and therefore do not qualify as charitable contributions.

In Goldman v. Commissioner, 46 T.C. 136 (1966), affd 388 F.2d 476 (6th Cir. 1967), the court held that a taxpayer was not allowed charitable contribution deductions for amounts paid to various charitable organizations because the taxpayer received full consideration for the payments by receiving a chance to win valuable 9, prizes.

In this situation, the taxpayers who purchased raffle tickets from X received a chance to win a valuable prize and, therefore, received full consideration for their payments to X.

LAW AND ANALYSIS

ISSUE 4

Section 165(d) of the Code states that losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

A raffle is the disposal by chance of a single prize among purchasers of separate chances, and an individual buying a raffle ticket makes a wager through such purchase.

LAW AND ANALYSIS

ISSUE 5

Section 61 of the Code defines "gross income" as all income from whatever source derived, except as otherwise provided by law.

Under section 1.61-1(a) of the Income Tax Regulations gross income includes income realized in any form, whether in money, property or services.

Winnings realized from wagering are gross income under section 61 of the Code. See Dunnock v. Commissioner, T.C.M. 1980-449.

The value of the house that B won in the raffle drawing is gambling winnings, which B must include in gross income under section 61 of the Code. The amount that B must include in gross income is $99,900, the difference between the fair market value of the house ($100,000) and the cost of the winning ticket ($ 1 00).

HOLDINGS

(1) A recognizes a long-term capital gain of $70,000 on the sale of the residence to X.

(2) A is not entitled to any charitable contribution deduction under section 170 of the Code.

(3) The purchasers of the raffle tickets may not deduct the cost of the tickets as charitable contributions under section 170 of the Code.

(4) Purchasers of losing raffle tickets are allowed a deduction, but only to the extent of the gains from wagering transactions. If a purchaser is not in the trade or business of wagering, this deduction is only allowable if the purchaser itemizes deductions.

(5) B must include $99,900 in gross income pursuant to section 61 of the Code. In addition, B's basis in the house is $100,000.