Category: Contributions Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Taxpayer is an S corporation. The corporation was formed to produce a particular type of computer software to be sold to customers in the ordinary course of business. Having successfully completed the product, the taxpayer chose to contribute the software to a charitable organization. Issue Can the taxpayer take a charitable deduction related to the computer software? If so, how much? Answer Any charitable contribution is limited to the taxpayer's basis in the software, presumably zero. Discussion Section 170(e)(1)(A) provides as follows. The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of-- (A) the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution). It seems clear that the computer software is not a capital asset in the taxpayer's hands either under Section 1221(1)as property held for sale to customers in the ordinary course of businessor under Section 1221(3) as a copyright or similar work. It seems to me a case for non-capital status could be made fairly easily under either theory. See, for example, D.D. Levy, 64 TCM 534, TC Memo 1992-471, holding that gain recognized by a computer programmer on sale of a computer program he created is ordinary gain. Assuming the computer software is not a capital asset, then Section 170(e)(1)(A) reduces the charitable contribution deduction by any gain other than long-term capital gain. This is an indirect way of saying the charitable contribution is limited to the taxpayer's basis. Assume the property is worth $100,000 and has a $10,000 basis. If the property were sold, the taxpayer would recognize an ordinary gain of $90,0000. Contributing the property to a qualified charity would produce a contribution of $100,000, the fair market value, reduced by the ordinary gain of $90,000, thus leaving a contribution deduction of $10,000, the basis of the property in the contributing taxpayer's hands. There are some special rules for corporate charitable contributions of various kinds of ordinary income type property including computer software. See IRC Sections 170(e)(3) and (e)(4). These provisions are applicable only to C corporations. IRC Sections 170(e)(3)(A) and 170(e)(4)(D). |
