- 13 -
appreciated in value, the reduction of the deduction otherwise
required under section 170(e)(1) is limited to one-half of the
ordinary income that would be recognized on a sale of the property
for its fair market value, except that the deduction may not exceed
twice the taxpayer's adjusted basis for the property. See Bittker &
Lokken, Federal Taxation of Income, Estates and Gifts, par. 35.2.2.,
at 35-25 (2d ed. 1990).
Section 170(e)(3) was added to the Internal Revenue Code by
section 2135(a) of the Tax Reform Act of 1976, Pub. L. 94-455, 90
Stat. 1520, 1928. The staff report notes that under prior law
(section 170(e) before amendment) the donor of appreciated ordinary
income property (property the sale of which would not give rise to
long-term capital gain) could deduct only his/her basis in the
property rather than its full fair market value. The purpose of
section 170(e) as originally enacted in 1969 was to prevent high-
bracket taxpayers from donating substantially appreciated ordinary
income property to charities so as to be better off after tax than
if they had simply sold the property. Staff of Joint Committee on
Taxation, General Explanation of the Tax Reform Act of 1976, at 672
(J. Comm. Print 1976), 1976-3 C.B. (Vol. 2) 1, 684.
The General Explanation goes on to explain the reasons for the
change:
The rule that the donor of appreciated ordinary income
property could deduct only his basis in the property
effectively eliminated the abuses which led to its
enactment; however, at the same time, it has resulted in
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011