IRS issues ruling on food donated to charity

Many food producers, wholesalers, retailers and restaurants seek out opportunities to donate excess or unsold food inventory to charity.

If you could give inventory to charity and claim a deduction at fair market value, there would be a double benefit: non-recognition of the gross profit element and a full tax deduction. To prevent this double benefit, the tax deduction for inventory is usually limited to its cost.

Food for Charity

An exception to the inventory rule applies to C corporations that make gifts of food products for the benefit of the ill, the needy or infants. This type of gift entitles the C corporation to a deduction for the lesser of:

  • Twice the cost basis of the property; or
  • The basis plus one half of the appreciation.

This exception was created to encourage corporations to give to relief organizations. It also may permit gifts of inventory by corporations to many educational institutions.

In general, a C corporation’s charitable contribution deductions for a year may not exceed 10 percent of the corporation’s taxable income. To be eligible for the enhanced deduction, the contributed property generally must be inventory and contributed to a charitable organization (except for private nonoperating foundations).

The donee must:

  • Use the property consistent with the donee’s exempt purpose solely for the care of the ill, the needy or infants;
  • Not transfer the property in exchange for money, other property or services; and
  • Provide a written statement that the use of the property will be consistent with such requirements.

In a Chief Counsel Memorandum dated Aug. 15, 2011, the IRS concluded that a corporation that failed to file the required Form 8283, Noncash Charitable Contributions, was not entitled to an enhanced charitable contribution deduction for a contribution of food inventory.

Further, because the corporation did not take into account wholesale prices, trade discounts or the impact of “best-if-sold-by” dating in its valuation, the IRS concluded that it failed to properly value the contributed inventory.

To determine the amount of the enhanced deduction, you must determine both the fair market value and the basis of the contributed property. The fair market value is the price the company would have received if it had sold the contributed property:

  • In the usual market in which it customarily sells
  • At the time and place of the contribution
  • In the quantity contributed

To determine the price the company would have received, trade discounts must be taken into account. If a discount is always allowed irrespective of time of payment, it is considered to be a trade discount, regardless of the conditions that must be met for the discount to apply.

The memorandum addresses a situation in which a company manufactured food products that it sold to wholesalers. The company routinely allowed certain discounts, or vendor allowances, to its customers.

The company contributed inventory to food banks and other organizations that deliver food to the ill, needy, and infants and provided sufficient acknowledgement documentation of the donated goods to verify they were qualified contributions.

The company determined the fair market value for the donated inventory by using the cost of the product plus a mark-up. It did not take vendor allowances into account. It also made no adjustment to reflect the fact that all of the donated products were contributed when the “best if sold by” that the company places on its food products was approaching.

The company labeled each product with a “best if sold by” that subjectively reflected the date the product could be perceived to fall below the company’s standards for quality. The “best by” date did not relate to the expiration of the usefulness or safety of the product. In fact, many products could be safely used for years beyond the “best by” date. No federal or state law or industry standard required the “best by” date for the food products.

In the memorandum, the IRS concluded that the company was not entitled to the deduction because it failed to attach the required Forms 8283, signed by the donees, to its tax return.

Even if the forms had been attached, the IRS concluded that the company was not entitled to the enhanced deduction because it failed to properly establish the fair market value of the inventory at the time of the contribution.

First, the IRS noted that the company did not use the wholesale prices it would have actually received. Instead, it used gross sales prices without any reduction for vendor allowances.

In addition, the IRS concluded that, since the inventory was approaching its “best by” date, it is unlikely the company could have sold the inventory at full wholesale price and in sufficient quantities to constitute meaningful sales. Because the company failed to substantiate that such sales could, or did, occur, it had to value the contributed inventory not at the usual selling price, but at a lower amount reflecting the approach of the “best by” date.

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