Question

Coattail Corporation manufactures and sells women and children coats. This year CC donated 1000 coats to a qualified public charity. The charity distributed the coats to needy women and children throughout the region. At the time of the contribution, the fair market value of each coat was $80. Determine the amount of charitable contribution (the taxable income limitation does not apply) for the coats assuming the following: a) CC's adjusted basis in each coat was $30. I was getting that it is $55,000, but is the max not only $20000? I dont know I am a little lost on this one

Answer 1

Answer:

a. CC's adjusted basis in each coat was $30. In general, the deductible amount of property that is not long-term capital gain property is limited to the adjusted basis of the property. However, under 170(e)(3),  if the taxpayer contributes inventory to a charitable organization for the care of the needy, the taxpayer can deduct the basis of the property plus one half of the appreciation (not to exceed twice the basis).

In this case, CC's contribution is to a qualified charity for the aid of the needy,  it is allowed to deduct $55,000  which is the basis of $30,000 (1,000 x $30) + $25,000 [1,000 x 0.5 x (80 30)].  

Twice the basis is $60,000 ($30,000 x 2) so this limitation is not binding.

b. CC's adjusted basis in each coat was $10. In general, the deductible amount of property that is not long-term capital gain property is limited to the adjusted basis of the property. However, under 170(e)(3), if the taxpayer contributes inventory to a charitable organization for the care of the needy, the taxpayer can deduct the basis of the property plus one half of the appreciation (not to exceed twice the basis).

In this case, because CC's contribution is to a qualified charity for the aid of the needy, it is allowed to deduct $20,000 which is the lesser of

(1) $45,000 [the basis of $10,000 (1,000 x $10) + $35,000 [1,000 x .5 x (80 10)] or  

(2) $20,000 which is twice the basis ($10,000 x 2). Consequently, CC's contribution is limited to $20,000.