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Firm Requests Expedited Charitable Contribution Guidance to Address COVID-19

JUL. 1, 2020

Firm Requests Expedited Charitable Contribution Guidance to Address COVID-19

DATED JUL. 1, 2020
DOCUMENT ATTRIBUTES
  • Authors
    Gerson, Marc J.
    Hani, George A.
  • Institutional Authors
    Miller & Chevalier Chtd
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-25785
  • Tax Analysts Electronic Citation
    2020 TNTF 130-26
    2020 EOR 8-37
  • Magazine Citation
    The Exempt Organization Tax Review, Aug. 2020, p. 208
    86 Exempt Org. Tax Rev. 208 (2020)

July 1, 2020

Michael J. Desmond, Esq.
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue NW
3026 IR
Washington, D.C. 20224

John P. Moriarty, Esq.
Associate Chief Counsel (IT&A)
Internal Revenue Service
1111 Constitution Avenue NW
4044 IR
Washington, D.C. 20224

Karla Meola, Esq.
Special Counsel to the Associate Chief Counsel (IT&A)
Internal Revenue Service
1111 Constitution Avenue
4043 IR
Washington, DC 20224

Re: Section 170(e)(3) Guidance Project — Follow-up To June 10, 2020 Telephone Conference

Dear Messrs. Desmond and Moriarty and Ms. Meola:

Thank you for the June 10, 2020 telephone conference with interested parties to discuss our April 1, 2020 request1 that the current project "[g]uidance under §170(e)(3)2 regarding charitable contributions of inventory" (the "Section 170(e)(3) Project") as contained on the 2019-2020 Priority Guidance Plan3 be expedited in light of the coronavirus crisis.4 The purpose of the letter is to elaborate, as requested, on two of the points made during the telephone conference.

As you are aware, the Section 170(e)(3) Project has been included in every priority guidance plan (“PGP”) since 2015-20165 and has been designated in more recent PGPs as a higher priority “burden reduction” project.6 As we discussed, we believe it is appropriate and timely to request that this project be expedited to ensure that Section 170(e)(3) works as intended for donors to make contributions of currently purchased food in order to satisfy the increased demand on food banks and other hunger relief agencies in light of the coronavirus crisis. In this regard, it has been widely reported that these organizations are experiencing not only a significant increase in the demand for food, but also a significant decrease in the supply of food through contributions, as a result of the coronavirus crisis.7 A similar dynamic exists for non-food donations, such as apparel and other retail goods, to the needy given the dramatic economic impact of the coronavirus crisis.

The requested guidance under the Section 170(e)(3) Project would clarify the treatment of current year acquisition costs with respect to charitable contributions of inventory and other property as cost of goods sold under current law (and, therefore, not classified and deducted as a charitable contribution).8 Such guidance will provide certainty that, consistent with the existing regulatory charitable contribution regime, donors of inventory and other property for the benefit of the ill, the needy, or infants will under all circumstances (i) be allowed to recover their basis in contributed inventory or other property, and (ii) be able to compute the enhanced deduction “bump” available under Section 170(e)(3).

With this background, we turn to the topics for which you requested further elaboration on. The first topic was the practical application of the requested guidance in the context of the current economic situation on the expected reduction to 2020 taxable income of potential donors. As we noted in our April 1, 2020 request, the modifications to the taxable income limitations contained in Section 2205 of Public Law No. 116-136, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)9 may be of limited utility given the anticipated dramatic reductions in the taxable income of potential donors. As a result of the coronavirus crisis, the benefit of the increase of these limitations may be more than offset by reductions in taxable income.

In light of this observation, we discussed whether the concerns of potential donors could potentially be addressed by operation of Notice 2008-90, 2008-2 C.B. 1000. Notice 2008-90 would allow such donors to treat current year acquisition costs as cost of goods sold if, however, they forgo the enhanced deduction “bump” under Section 170(e)(3). The question was raised whether forgoing the enhanced deduction “bump” was material in light of the fact that potential donors may not be able to benefit currently from the “bump” in light of the anticipated dramatic reductions in the taxable income of such donors. While true that taxpayers that end up in a net operating loss position for 2020 will benefit from neither the charitable deduction nor the “bump,” other taxpayers may experience a reduction but not a complete elimination of current year taxable income. These donors may, in fact, currently benefit from the enhanced deduction “bump,” particularly since the “capacity” of the taxable income limitation can be used exclusively for the “bump” given that current year acquisition costs will be treated as cost of goods sold. Furthermore, the fact that current year acquisition costs will be treated as cost of goods sold, maximizes the likelihood that any charitable contribution carryover attributable to the enhanced deduction “bump” will similarly be utilized against future taxable income (on an accelerated basis and certainly within the carryover period) as the economy recovers from the coronavirus crisis. This is particularly important given that the modifications to the taxable income limitation contained in the CARES Act only apply for the 2020 taxable year.

The second topic we discussed, and for which you requested further elaboration, is consideration of the underlying purpose of the enhanced deduction “bump.” The “bump” helps compensate potential donors for the incremental administrative costs incurred in making inventory donations (as compared to simply destroying such inventory). Such incremental administrative costs are particularly significant with respect to contributions of food, which involve not only the identification and selection of appropriate food banks and other hunger relief agencies, but also the preparation, packaging and shipping of the food in accordance with applicable food safety regulations (which involve a significant labor component). Providing potential donors with access to the enhanced deduction “bump,” even if such donors cannot currently benefit from it, is important to provide the appropriate incentive for donors to incur these costs in making these donations. This is particularly important for donors with established charitable contribution programs and/or consistent patterns of annual giving, where the ability to currently benefit from the enhanced deduction “bump” is of less importance than the knowledge that the maintenance of these programs and/or annual giving patterns is recognized by the ability to be partially reimbursed over time for the incremental administrative costs incurred with respect to such programs and giving.

* * * * * *

Thank you for the time and resources that you have devoted to this important guidance. We appreciate the opportunity to submit this letter and look forward to continuing to work with you.

Respectfully submitted,

Marc J. Gerson

George A. Hani

Miller & Chevalier
Washington, DC

FOOTNOTES

1“Firm Seeks Expedited Guidance on Charitable Contributions Costs,” 2020 TNTF 73-25 (Apr. 1, 2020).

2All section references are to the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, unless otherwise specified.

3Department of the Treasury, 2019-2020 Priority Guidance Plan, at 8 (Oct. 8, 2019).

4We note that the Internal Revenue Service recently issued Notice 2020-47, 2020-27 I.R.B. 1, requesting recommendation for the 2020-2021 Priority Guidance Plan. A recommendation that the Section 170(e)(3) Project be retained on the 2020-2021 Priority Guidance Plan is being submitted under separate cover.

5See Department of the Treasury, 2015-2016 Priority Guidance Plan, at 12 (July 31, 2015); Department of the Treasury, 2016-2017 Priority Guidance Plan, at 12 (Aug. 15, 2016); Department of the Treasury, 2017-2018 Priority Guidance Plan, at 4 (Oct. 20, 2017); Department of the Treasury, 2018-2019 Priority Guidance Plan, at 10 (Nov. 8, 2018); Department of the Treasury, 2019-20 Priority Guidance Plan, at 8 (Oct. 8, 2019).

6In this regard, the Section 170(e)(3) Project was one of the guidance projects selected as a priority on the 2017-2018 Priority Guidance Plan for "Near-Term Burden Reduction" as one of "certain projects that [the Treasury Department and the IRS] have identified as burden reducing and that [the Treasury Department and the IRS] believe[s] can be completed in the 8 ½ months remaining in the plan year." Department of the Treasury, 2017-2018 Priority Guidance Plan, at 1, 4 (Oct. 20, 2017). Similarly, the Section 170(e)(3) Project was selected as a “burden reduction” project on both the 2018-2019 Priority Guidance Plan and the 2019-2020 Priority Guidance Plan. Department of the Treasury, 2018-2019 Priority Guidance Plan, at 10 (Nov. 8, 2018); Department of the Treasury, 2019-20 Priority Guidance Plan, at 8 (Oct. 8, 2019).

7See, e.g., “Feeding America Network Faces Soaring Demand, Plummeting Supply Due to COVID-19 Crisis” (Apr. 8, 2020); Aridi, “Facing Food Insecurity on the Front Lines,” The New York Times (May 6, 2020); Aridi, “Food Banks, Depleted of Supply and Hands, Tackle Huge Demand,” The New York Times (Apr. 12, 2020); Reiley, “Food Banks Are Seeing Volunteers Disappear and Supplies Evaporate as Coronavirus Fears Mount,” The Washington Post (Mar. 16, 2020).

8See, e.g., "Guidance Requested on Treatment of Charitable Contribution Costs," 2014 TNT 88-20 (Apr. 30, 2014).

9For subchapter C corporations, these modifications include (i) an increase in the taxable income limitation of Section 170(b)(2) from 10 percent to 25 percent, and (ii) an increase in the taxable limitation on deductions for contributions of food inventory in Section 170(e)(3)(C)(ii) from 15 percent to 25 percent.

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Authors
    Gerson, Marc J.
    Hani, George A.
  • Institutional Authors
    Miller & Chevalier Chtd
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2020-25785
  • Tax Analysts Electronic Citation
    2020 TNTF 130-26
    2020 EOR 8-37
  • Magazine Citation
    The Exempt Organization Tax Review, Aug. 2020, p. 208
    86 Exempt Org. Tax Rev. 208 (2020)
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