Originally published on Forbes.com April 18th, 2014
The IRS Office of Chief Counsel probably has some of the smartest lawyers in the country working in it. Some of the odd provisions of the Tax Code have them answering questions that might be better handled by other professionals. For example, I think it is possible that social workers might have come up with a different answer than Senior Counsel Susan Kassell came up with in a memorandum designated CCA 201414014. The question was about how much use poor people might have for wrinkle creams, hair gels and a plethora of similar products.
You may be wondering why a senior tax attorney in the IRS Chief Counsel office would have to answer such a question. It is a little complicated, but I will do my best.
The general rule is that you get a charitable deduction in the amount of the fair market value of property that you give to qualified charities. That’s too simple of course. So you have to reduce the charitable contribution by the amount of gain which would not be long term capital if you sold the property.
So, generally, if a company were to give some of its inventory to a charity, the deduction will be limited to the company’s basis in the inventory. There is an exception to the exception, though. If the inventory is given to a charity with an exempt function of caring for the ill, the needy or infants and it is stuff that will be used to care for them, the reduction is cut in half. I’ll give you an illustration.
Think of Andy Warhol’s iconic Campbell Soup paintings. They appreciated mightily in value. According to this story, a dealer paid $1,000 for 32 of them and sold the group for $15 million. Say you had had that kind of foresight and had bought one of them for $30, but being a generous soul donated it to the Worcester Art Museum. Using round numbers and assuming one Warhol soup can is like another, you would get a charitable deduction of $500,000.
The dealer, however, might have his donation limited to $30 (although I bet we could find a workaround). If Andy Warhol had made the contribution, his deduction would be the cost of the material. If on the other hand, the Campbell Soup Company were to give 500,000 cans of soup to the Worcester County Food Bank that it could have sold for $1.00 each that cost it $0.50 to manufacture, it would get a deduction of $375,000. If, on the third hand, it gave the soup to the Worcester Art Museum, which sold it in order to buy a painting of a can of soup, the deduction would be only $250,000.
So that’s why the IRS has to decide whether hair care products and nail polish are things that the needy need.
Here are the high points of the analysis.
Taxpayer’s contributions of wrinkle creams, hair gels, perfumes, hair sprays, hair texturizers, curling irons, hair dyes, nail polishes, epilators, and hair restoration treatments (the “Donated Products”), are not “qualified contributions” that are eligible for the enhanced deduction under I.R.C. § 170(e)(3), because they are not needed for the care of the ill, the needy, or infants under I.R.C. § 170(e)(3)(A)(i) and Treas. Reg. § 1.170A-4A(b)(ii).
Congress enacted I.R.C. § 170(e)(3) in response to a decline in donations of food, clothing, medical equipment and supplies, and other necessary items for the needy and disaster victims. ……The legislative history is clear that Congress intended only “certain types” of inventory property to qualify for the enhanced deduction.The Donated Products are not medical in nature, they serve no medical purpose, and they do not alleviate or cure an existing illness. Therefore, Taxpayer has not shown that the Donated Products are needed for the care of the ill.The Donated Products do not satisfy a bona fide need of infants. The Donated Products are luxury items rather than necessities of life. Therefore, Taxpayer has not shown that the Donated Products are needed for the care of an infant or minor child.
Treas. Reg. § 1.170A-4A(b)(2)(ii)(D) defines a needy person as a person who lacks the necessities of life, involving physical, mental, or emotional well-being, as a result of poverty or temporary distress. …………. Since a person may be needy in some respects and not needy in other respects, care of the needy must relate to the particular need that causes the person to be needy.
The Donated Products have no relation to alleviating or satisfying a “necessity of life” such as the need for food, clothing, or shelter (or other basic needs). A person who cannot afford the Donated Products may be needy, but the Donated Products do not relate to the specific need that caused the person to be needy (such as lack of financial resources, for example). See Treas. Reg. § 1.170A-4A(b)(2)(ii)(E) (“a person whose temporary need arises from a natural disaster may need temporary shelter and food but not recreational facilities”). The Donated Products are luxury items rather than “necessities of life;” they do not alleviate or satisfy an existing need within the meaning of Treas. Reg. § 1.170A-4A(b)(2)(ii)(E).
I really think it is possible that someone could have reasonably come up with a different answer. There are probably some people who if quite ill might get a valuable morale boost from a bit of nail polish. What do you think?
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