Copyright (c) 2002 New York University School of Law
Tax Law Review
ARTICLE: A Charitable Contribution of Appreciated Property and the Realization of Built-In Gains
56 Tax L. Rev. 1
Abel purchases 100 shares of Microsoft for $ 10 per share, a total of $ 1,000. When the price reaches $ 100 per share, he donates the stock to the Museum of Fine Arts and claims a deduction for the market value, $ 10,000. His $ 9,000 gain is never taxed. On the other hand, if Betty, an artist, contributes her own painting to the museum, which similarly is worth $ 10,000 and cost her $ 1,000 to create, her gain is taxed indirectly. Her deduction is limited to basis, 1 which is generally equivalent to taxing the gain. 2
When, however, a sale would result in a long-term capital gain, the deduction is limited to basis only if the donee is a private foundation 3 or the property is tangible personal property and its use by the donee is unrelated to the donee's exempt function. 4 While this provision seems intended to achieve indirect taxation of gain, it is not always equivalent to gain recognition followed by a fair market value deduction. 5 Since long-term capital gains are taxed at a lower rate, the taxpayer often would be better off if she sold the property, paid tax at the lower rate, and utilized the charitable deduction from a donation of the proceeds to offset higher-taxed ordinary income. 6 This two-step maneuver would be unnecessary if the transfer resulted in constructive realization of gain and a fair market value deduction. 7
This Article explores whether ...
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