[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2013 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

Title 26

Internal Revenue


________________________

Part 1 (Sec. Sec.  1.170 to 1.300)

                         Revised as of April 1, 2013

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2013
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     933
      Alphabetical List of Agencies Appearing in the CFR......     953
      Table of OMB Control Numbers............................     963
      List of CFR Sections Affected...........................     981

[[Page iv]]





                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 26 CFR 1.170-0 
                       refers to title 26, part 
                       1, section 170-0.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 2013), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

PAST PROVISIONS OF THE CODE

    Provisions of the Code that are no longer in force and effect as of 
the revision date stated on the cover of each volume are not carried. 
Code users may find the text of provisions in effect on any given date 
in the past by using the appropriate List of CFR Sections Affected 
(LSA). For the convenience of the reader, a ``List of CFR Sections 
Affected'' is published at the end of each CFR volume. For changes to 
the Code prior to the LSA listings at the end of the volume, consult 
previous annual editions of the LSA. For changes to the Code prior to 
2001, consult the List of CFR Sections Affected compilations, published 
for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.

``[RESERVED]'' TERMINOLOGY

    The term ``[Reserved]'' is used as a place holder within the Code of 
Federal Regulations. An agency may add regulatory information at a 
``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used 
editorially to indicate that a portion of the CFR was left vacant and 
not accidentally dropped due to a printing or computer error.

INCORPORATION BY REFERENCE

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established by statute and allows Federal agencies to meet the 
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to materials already published elsewhere. For an incorporation to be 
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if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
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CFR INDEXES AND TABULAR GUIDES

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separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Authorities 
and Rules. A list of CFR titles, chapters, subchapters, and parts and an 
alphabetical list of agencies publishing in the CFR are also included in 
this volume.

[[Page vii]]

    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

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in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-741-6000 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, 8601 Adelphi Road, College Park, MD 
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ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
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    The e-CFR is a regularly updated, unofficial editorial compilation 
of CFR material and Federal Register amendments, produced by the Office 
of the Federal Register and the Government Printing Office. It is 
available at www.ecfr.gov.

    Charles A. Barth,
    Director,
    Office of the Federal Register.
    April 1, 2013.







[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2013. The first thirteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Sec. Sec.  1.0-1.60; 
Sec. Sec.  1.61-1.169; Sec. Sec.  1.170-1.300; Sec. Sec.  1.301-1.400; 
Sec. Sec.  1.401-1.440; Sec. Sec.  1.441-1.500; Sec. Sec.  1.501-1.640; 
Sec. Sec.  1.641-1.850; Sec. Sec.  1.851-1.907; Sec. Sec.  1.908-1.1000; 
Sec. Sec.  1.1001-1.1400; Sec. Sec.  1.1401-1.1550; and Sec.  1.1551 to 
end of part 1. The fourteenth volume containing parts 2-29, includes the 
remainder of subchapter A and all of Subchapter B--Estate and Gift 
Taxes. The last six volumes contain parts 30-39 (Subchapter C--
Employment Taxes and Collection of Income Tax at Source); parts 40-49; 
parts 50-299 (Subchapter D--Miscellaneous Excise Taxes); parts 300-499 
(Subchapter F--Procedure and Administration); parts 500-599 (Subchapter 
G--Regulations under Tax Conventions); and part 600 to end (Subchapter 
H--Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec.  602.101 of this 
chapter. For the convenience of the user, Sec.  602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

    For this volume, Michele Bugenhagen was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of 
Michael L. White, assisted by Ann Worley.

[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




         (This book contains part 1, Sec. Sec. 1.170 to 1.300)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................           1

[[Page 3]]



    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)




  --------------------------------------------------------------------

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes (Continued)....................           5

Supplementary Publications: Internal Revenue Service Looseleaf 
  Regulations System.

  Additional supplementary publications are issued covering Alcohol and 
Tobacco Tax Regulations, and Regulations Under Tax Conventions.

[[Page 5]]



                   SUBCHAPTER A_INCOME TAX (CONTINUED)





PART 1_INCOME TAXES (CONTINUED)--Table of Contents



                  Normal Taxes and Surtaxes (Continued)

                COMPUTATION OF TAXABLE INCOME (CONTINUED)

    Itemized Deductions for Individuals and Corporations (Continued)

Sec.
1.170-0 Effective dates.
1.170-1 Charitable, etc., contributions and gifts; allowance of 
          deduction (before amendment by Tax Reform Act of 1969).
1.170-2 Charitable deductions by individuals; limitations (before 
          amendment by Tax Reform Act of 1969).
1.170-3 Contributions or gifts by corporations (before amendment by Tax 
          Reform Act of 1969).
1.170A-1 Charitable, etc., contributions and gifts; allowance of 
          deduction.
1.170A-2 Amounts paid to maintain certain students as members of the 
          taxpayer's household.
1.170A-3 Reduction of charitable contribution for interest on certain 
          indebtedness.
1.170A-4 Reduction in amount of charitable contributions of certain 
          appreciated property.
1.170A-4A Special rule for the deduction of certain charitable 
          contributions of inventory and other property.
1.170A-5 Future interests in tangible personal property.
1.170A-6 Charitable contributions in trust.
1.170A-7 Contributions not in trust of partial interests in property.
1.170A-8 Limitations on charitable deductions by individuals.
1.170A-9 Definition of section 170(b)(1)(A) organization.
1.170A-10 Charitable contributions carryovers of individuals.
1.170A-11 Limitation on, and carryover of, contributions by 
          corporations.
1.170A-12 Valuation of a remainder interest in real property for 
          contributions made after July 31, 1969.
1.170A-13 Recordkeeping and return requirements for deductions for 
          charitable contributions.
1.170A-14 Qualified conservation contributions.
1.171-1 Bond premium.
1.171-1T Bond premium (temporary).
1.171-2 Amortization of bond premium.
1.171-2T Amortization of bond premium (temporary).
1.171-3 Special rules for certain bonds.
1.171-4 Election to amortize bond premium on taxable bonds.
1.171-5 Effective date and transition rules.
1.172-1 Net operating loss deduction.
1.172-2 Net operating loss in case of a corporation.
1.172-3 Net operating loss in case of a taxpayer other than a 
          corporation.
1.172-4 Net operating loss carrybacks and net operating loss carryovers.
1.172-5 Taxable income which is subtracted from net operating loss to 
          determine carryback or carryover.
1.172-6 Illustration of net operating loss carrybacks and carryovers.
1.172-7 Joint return by husband and wife.
1.172-8 Net operating loss carryovers for regulated transportation 
          corporations.
1.172-9 Election with respect to portion of net operating loss 
          attributable to foreign expropriation loss.
1.172-10 Net operating losses of real estate investment trusts.
1.172-13 Product liability losses.
1.173-1 Circulation expenditures.
1.174-1 Research and experimental expenditures; in general.
1.174-2 Definition of research and experimental expenditures.
1.174-3 Treatment as expenses.
1.174-4 Treatment as deferred expenses.
1.175-1 Soil and water conservation expenditures; in general.
1.175-2 Definition of soil and water conservation expenditures.
1.175-3 Definition of ``the business of farming.''
1.175-4 Definition of ``land used in farming.''
1.175-5 Percentage limitation and carryover.
1.175-6 Adoption or change of method.
1.175-7 Allocation of expenditures in certain circumstances.
1.177-1 Election to amortize trademark and trade name expenditures.
1.178-1 Depreciation or amortization of improvements on leased property 
          and cost of acquiring a lease.
1.178-2 Related lessee and lessor.
1.178-3 Reasonable certainty test.
1.179-0 Table of contents for section 179 expensing rules.
1.179-1 Election to expense certain depreciable assets.
1.179-2 Limitations on amount subject to section 179 election.
1.179-3 Carryover of disallowed deduction.
1.179-4 Definitions.
1.179-5 Time and manner of making election.
1.179-5T Time and manner of making election (temporary).
1.179-6 Effective date.

[[Page 6]]

1.179A-1 Recapture of deduction for qualified clean-fuel vehicle 
          property and qualified clean-fuel vehicle refueling property.
1.179B-1T Deduction for capital costs incurred in complying with 
          Environmental Protection Agency sulfur regulations 
          (temporary).
1.179C-1 Election to expense certain refineries.
1.180-1 Expenditures by farmers for fertilizer, etc.
1.180-2 Time and manner of making election and revocation.
1.181-0 Table of contents.
1.181-1 Deduction for qualified film and television production costs.
1.181-2 Election to deduct production costs.
1.181-3 Qualified film or television production.
1.181-4 Special rules.
1.181-5 Examples.
1.181-6 Effective/applicability date.
1.182-1 Expenditures by farmers for clearing land; in general.
1.182-2 Definition of ``the business of farming.''
1.182-3 Definition, exceptions, etc., relating to deductible 
          expenditures.
1.182-4 Definition of ``land suitable for use in farming'', etc.
1.182-5 Limitation.
1.182-6 Election to deduct land clearing expenditures.
1.183-1 Activities not engaged in for profit.
1.183-2 Activity not engaged in for profit defined.
1.183-3 Election to postpone determination with respect to the 
          presumption described in section 183(d). [Reserved]
1.183-4 Taxable years affected.
1.186-1 Recoveries of damages for antitrust violations, etc.
1.187-1 Amortization of certain coal mine safety equipment.
1.187-2 Definitions.
1.188-1 Amortization of certain expenditures for qualified on-the-job 
          training and child care facilities.
1.190-1 Expenditures to remove architectural and transportation barriers 
          to the handicapped and elderly.
1.190-2 Definitions.
1.190-3 Election to deduct architectural and transportation barrier 
          removal expenses.
1.193-1 Deduction for tertiary injectant expenses.
1.194-1 Amortization of reforestation expenditures.
1.194-2 Amount of deduction allowable.
1.194-3 Definitions.
1.194-4 Time and manner of making election.
1.195-1 Election to amortize start-up expenditures.
1.197-0 Table of contents.
1.197-1T Certain elections for intangible property (temporary).
1.197-2 Amortization of goodwill and certain other intangibles.
1.197-2T Amortization of goodwill and certain other intangibles 
          (temporary).
1.199-0 Table of contents.
1.199-1 Income attributable to domestic production activities.
1.199-2 Wage limitation.
1.199-3 Domestic production gross receipts.
1.199-4 Costs allocable to domestic production gross receipts.
1.199-5 Application of section 199 to pass-thru entities for taxable 
          years beginning after May 17, 2006, the enactment date of the 
          Tax Increase Prevention and Reconciliation Act of 2005.
1.199-6 Agricultural and horticultural cooperatives.
1.199-7 Expanded affiliated groups.
1.199-8 Other rules.
1.199-9 Application of section 199 to pass-thru entities for taxable 
          years beginning on or before May 17, 2006, the enactment date 
          of the Tax Increase Prevention and Reconciliation Act of 2005.

             Additional Itemized Deductions for Individuals

1.211-1 Allowance of deductions.
1.212-1 Nontrade or nonbusiness expenses.
1.213-1 Medical, dental, etc., expenses.
1.215-1 Periodic alimony, etc., payments.
1.215-1T Alimony, etc., payments (temporary).
1.216-1 Amounts representing taxes and interest paid to cooperative 
          housing corporation.
1.216-2 Treatment as property subject to depreciation.
1.217-1 Deduction for moving expenses paid or incurred in taxable years 
          beginning before January 1, 1970.
1.217-2 Deduction for moving expenses paid or incurred in taxable years 
          beginning after December 31, 1969.
1.219-1 Deduction for retirement savings.
1.219-2 Definition of active participant.
1.221-1 Deduction for interest paid on qualified education loans after 
          December 31, 2001.
1.221-2 Deduction for interest due and paid on qualified education loans 
          before January 1, 2002.

                   Special Deductions for Corporations

1.241-1 Allowance of special deductions.
1.242-1 Deduction for partially tax-exempt interest.
1.243-1 Deduction for dividends received by corporations.
1.243-2 Special rules for certain distributions.
1.243-3 Certain dividends from foreign corporations.

[[Page 7]]

1.243-4 Qualifying dividends.
1.243-5 Effect of election.
1.244-1 Deduction for dividends received on certain preferred stock.
1.244-2 Computation of deduction.
1.245-1 Dividends received from certain foreign corporations.
1.246-1 Deductions not allowed for dividends from certain corporations.
1.246-2 Limitation on aggregate amount of deductions.
1.246-3 Exclusion of certain dividends.
1.246-4 Dividends from a DISC or former DISC.
1.246-5 Reduction of holding periods in certain situations.
1.247-1 Deduction for dividends paid on preferred stock of public 
          utilities.
1.248-1 Election to amortize organizational expenditures.
1.249-1 Limitation on deduction of bond premium on repurchase.
1.249-1T Limitation on deduction of bond premium on repurchase 
          (temporary).

                          Items Not Deductible

1.261-1 General rule for disallowance of deductions.
1.262-1 Personal, living, and family expenses.
1.263(a)-0 Table of contents.
1.263(a)-0T Table of contents (temporary).
1.263(a)-1 Capital expenditures; In general.
1.263(a)-1T Capital expenditures; in general (temporary)--
1.263(a)-2 Amounts paid to acquire or produce tangible property.
1.263(a)-2T Amounts paid to acquire or produce tangible property 
          (temporary).
1.263(a)-3 Amounts paid to improve tangible property.
1.263(a)-3T Amounts paid to improve tangible property (temporary).
1.263(a)-4 Amounts paid to acquire or create intangibles.
1.263(a)-5 Amounts paid or incurred to facilitate an acquisition of a 
          trade or business, a change in the capital structure of a 
          business entity, and certain other transactions.
1.263(a)-6T Election to deduct or capitalize certain expenditures 
          (temporary).
1.263(b)-1 Expenditures for advertising or promotion of good will.
1.263(c)-1 Intangible drilling and development costs in the case of oil 
          and gas wells.
1.263(e)-1 Expenditures in connection with certain railroad rolling 
          stock.
1.263(f)-1 Reasonable repair allowance.
1.263A-0 Outline of regulations under section 263A.
1.263A-1 Uniform capitalization of costs.
1.263A-1T Uniform capitalization of costs (temporary).
1.263A-2 Rules relating to property produced by the taxpayer.
1.263A-3 Rules relating to property acquired for resale.
1.263A-4 Rules for property produced in a farming business.
1.263A-5 Exception for qualified creative expenses incurred by certain 
          free-lance authors, photographers, and artists. [Reserved]
1.263A-6 Rules for foreign persons. [Reserved]
1.263A-7 Changing a method of accounting under section 263A.
1.263A-8 Requirement to capitalize interest.
1.263A-9 The avoided cost method.
1.263A-10 Unit of property.
1.263A-11 Accumulated production expenditures.
1.263A-12 Production period.
1.263A-13 Oil and gas activities.
1.263A-14 Rules for related persons.
1.263A-15 Effective dates, transitional rules, and anti-abuse rule.
1.264-1 Premiums on life insurance taken out in a trade or business.
1.264-2 Single premium life insurance, endowment, or annuity contracts.
1.264-3 Effective date; taxable years ending after March 1, 1954, 
          subject to the Internal Revenue Code of 1939.
1.264-4 Other life insurance, endowment, or annuity contracts.
1.265-1 Expenses relating to tax-exempt income.
1.265-2 Interest relating to tax-exempt income.
1.265-3 Nondeductibility of interest relating to exempt-interest 
          dividends.
1.266-1 Taxes and carrying charges chargeable to capital account and 
          treated as capital items.
1.267(a)-1 Deductions disallowed.
1.267(a)-2T Temporary regulations; questions and answers arising under 
          the Tax Reform Act of 1984 (temporary).
1.267(a)-3 Deduction of amounts owed to related foreign persons.
1.267(b)-1 Relationships.
1.267(c)-1 Constructive ownership of stock.
1.267(d)-1 Amount of gain where loss previously disallowed.
1.267(d)-2 Effective date; taxable years subject to the Internal Revenue 
          Code of 1939.
1.267(f)-1 Controlled groups.
1.268-1 Items attributable to an unharvested crop sold with the land.
1.269-1 Meaning and use of terms.
1.269-2 Purpose and scope of section 269.
1.269-3 Instances in which section 269(a) disallows a deduction, credit, 
          or other allowance.
1.269-4 Power of district director to allocate deduction, credit, or 
          allowance in part.
1.269-5 Time of acquisition of control.
1.269-6 Relationship of section 269 to section 382 before the Tax Reform 
          Act of 1986.

[[Page 8]]

1.269-7 Relationship of section 269 to sections 382 and 383 after the 
          Tax Reform Act of 1986.
1.269B-1 Stapled foreign corporations.
1.270-1 Limitation on deductions allowable to individuals in certain 
          cases.
1.271-1 Debts owed by political parties.
1.272-1 Expenditures relating to disposal of coal or domestic iron ore.
1.273-1 Life or terminable interests.
1.274-1 Disallowance of certain entertainment, gift and travel expenses.
1.274-2 Disallowance of deductions for certain expenses for 
          entertainment, amusement, recreation, or travel.
1.274-3 Disallowance of deduction for gifts.
1.274-4 Disallowance of certain foreign travel expenses.
1.274-5 Substantiation requirements.
1.274-5T Substantiation requirements (temporary).
1.274-6 Expenditures deductible without regard to trade or business or 
          other income producing activity.
1.274-6T Substantiation with respect to certain types of listed property 
          for taxable years beginning after 1985 (temporary).
1.274-7 Treatment of certain expenditures with respect to entertainment-
          type facilities.
1.274-8 Effective date.
1.274-9 Entertainment provided to specified individuals.
1.274-10 Special rules for aircraft used for entertainment.
1.275-1 Deduction denied in case of certain taxes.
1.276-1 Disallowance of deductions for certain indirect contributions to 
          political parties.
1.278-1 Capital expenditures incurred in planting and developing citrus 
          and almond groves.
1.279-1 General rule; purpose.
1.279-2 Amount of disallowance of interest on corporate acquisition 
          indebtedness.
1.279-3 Corporate acquisition indebtedness.
1.279-4 Special rules.
1.279-5 Rules for application of section 279(b).
1.279-6 Application of section 279 to certain affiliated groups.
1.279-7 Effect on other provisions.
1.280B-1 Demolition of structures.
1.280C-1 Disallowance of certain deductions for wage or salary expenses.
1.280C-3 Disallowance of certain deductions for qualified clinical 
          testing expenses when section 28 credit is allowable.
1.280C-4 Credit for increasing research activities.
1.280F-1T Limitations on investment tax credit and recovery deductions 
          under section 168 for passenger automobiles and certain other 
          listed property; overview of regulations (temporary).
1.280F-2T Limitations on recovery deductions and the investment tax 
          credit for certain passenger automobiles (temporary).
1.280F-3T Limitations on recovery deductions and the investment tax 
          credit when the business use percentage of listed property is 
          not greater than 50 percent (temporary).
1.280F-4T Special rules for listed property (temporary).
1.280F-5T Leased property (temporary).
1.280F-6 Special rules and definitions.
1.280F-7 Property leased after December 31, 1986.
1.280G-1 Golden parachute payments.
1.280H-0T Table of contents (temporary).
1.280H-1T Limitation on certain amounts paid to employee-owners by 
          personal service corporations electing alternative taxable 
          years (temporary).

            Taxable Years Beginning Prior to January 1, 1986

1.274-5A Substantiation requirements.

          Terminal Railroad Corporations and Their Shareholders

1.281-1 In general.
1.281-2 Effect of section 281 upon the computation of taxable income.
1.281-3 Definitions.
1.281-4 Taxable years affected.
1.282-1.300 [Reserved]

    Authority: 26 U.S.C. 7805.
    Section 1.170A-1 also issued under 26 U.S.C. 170(a).
    Section 1.170A-6 also issued under 26 U.S.C. 170(f)(4); 26 U.S.C. 
642(c)(5).
    Section 1.170A-12 also issued under 26 U.S.C. 170(f)(4).
    Section 1.170A-13 also issued under 26 U.S.C. 170(f)(8).
    Section 1.171-2 also issued under 26 U.S.C. 171(e).
    Section 1.171-2T also issued under 26 U.S.C. 171(e).
    Section 1.171-3 also issued under 26 U.S.C. 171(e).
    Section 1.171-4 also issued under 26 U.S.C. 171(c).
    Section 1.179-1 also issued under 26 U.S.C. 179(d)(6) and (10).
    Section 1.179-4 also issued under 26 U.S.C. 179(c).
    Section 1.179-6 also issued under 26 U.S.C. 179(c).
    Section 1.179A-1 also issued under 26 U.S.C. 179A(e)(4).
    Section 1.197-2 also issued under 26 U.S.C. 197.
    Section 1.199-1 also issued under 26 U.S.C. 199(d).
    Section 1.199-2 also issued under 26 U.S.C. 199(d).

[[Page 9]]

    Section 1.199-3 also issued under 26 U.S.C. 199(d).
    Section 1.199-4 also issued under 26 U.S.C. 199(d).
    Section 1.199-5 also issued under 26 U.S.C. 199(d).
    Section 1.199-6 also issued under 26 U.S.C. 199(d).
    Section 1.199-7 also issued under 26 U.S.C. 199(d).
    Section 1.199-8 also issued under 26 U.S.C. 199(d).
    Section 1.199-9 also issued under 26 U.S.C. 199(d).
    Section 1.216-2 also issued under 26 U.S.C. 216(d).
    Section 1.221-2 also issued under 26 U.S.C. 221(d).
    Section 1.263A-1 also issued under 26 U.S.C. 263A.
    Section 1.263A-2 also issued under 26 U.S.C. 263A.
    Section 1.263A-3 also issued under 26 U.S.C. 263A.
    Section 1.263A-4 also issued under 26 U.S.C. 263A.
    Section 1.263A-4T also issued under 26 U.S.C. 263A.
    Section 1.263A-5 also issued under 26 U.S.C. 263A.
    Section 1.263A-6 also issued under 26 U.S.C. 263A.
    Section 1.263A-7 also issued under 26 U.S.C. 263A.
    Section 1.263A-7T also issued under 26 U.S.C. 263A.
    Sections 1.263A-8 through 1.263A-15 also issued under 26 U.S.C. 
263A(i).
    Section 1.267(a)-3 also issued under 26 U.S.C. 267(a)(3).
    Section 1.267(f)-1 also issued under 26 U.S.C. 267 and 1502.
    Section 1.269-3(d) also issued under 26 U.S.C. 382(m).
    Section 1.274-5 also issued under 26 U.S.C. 274(d).
    Section 1.274-5T also issued under 26 U.S.C. 274(d).
    Section 1.274-9 also issued under 26 U.S.C. 274(o).
    Section 1.274-10 also issued under 26 U.S.C. 274(o).
    Section 1.274(d)-1 also issued under 26 U.S.C. 274(d).
    Section 1.274(d)-1T also issued under 26 U.S.C. 274(d).
    Section 1.280C-4 also issued under 26 U.S.C. 280C(c) and 103 Stat. 
2413.
    Section 1.280F-1T also issued under 26 U.S.C. 280F.
    Section 1.280F-6 also issued under 26 U.S.C. 280F.
    Section 1.280F-7 also issued under 26 U.S.C. 280F(c).
    Section 1.280G-1 also issued under 26 U.S.C. 280G(b) and (e).

    Source: T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 
1960, T.D. 9381, 73 FR 8604, Feb. 15, 2008 unless otherwise noted.

                COMPUTATION OF TAXABLE INCOME (CONTINUED)

    Itemized Deductions for Individuals and Corporations (Continued)



Sec. 1.170-0  Effective dates.

    Except as otherwise provided in this section, the provisions of 
section 170 and Sec. Sec. 1.170-1 through 1.170-3 are applicable to 
contributions paid in taxable years beginning before January 1, 1970, 
and all references therein to sections of the Code are to sections of 
the Internal Revenue Code of 1954 prior to the amendments made by 
section 201(a) of the Tax Reform Act of 1969 (83 Stat. 549). Except as 
otherwise provided therein, Sec. Sec. 1.170A through 1.170A-11 are 
applicable to contributions paid in taxable years beginning after 
December 31, 1969. In a case where a provision in Sec. Sec. 1.170A 
through 1.170A-11 is applicable to a contribution paid in a taxable year 
beginning before January 1, 1970, such provision shall apply to the 
contribution and Sec. Sec. 1.170-1 through 1.170-3 shall not apply to 
the contribution.

[T.D. 7207, 37 FR 20767, Oct. 5, 1972]



Sec. 1.170-1  Charitable, etc., contributions and gifts; allowance of 
deduction (before amendment by Tax Reform Act of 1969).

    (a) In general--(1) General rule. Any charitable contribution (as 
defined in section 170(c)) actually paid during the taxable year is 
allowable as a deduction in computing taxable income, regardless of the 
method of accounting employed or when pledged. In addition, 
contributions by corporations may under certain circumstances be 
deductible even though not paid during the taxable year (see Sec. 
1.170-3), and subject to the provisions of section 170(b)(5) and 
paragraph (g) of Sec. 1.170-2, certain excess charitable contributions 
made by individuals in taxable years beginning after December 31, 1963, 
shall be treated as paid in certain succeeding taxable years. The 
deduction is subject to the limitations of section 170(b) (see 
Sec. Sec. 1.170-2 and 1.170-3) and is subject to verification by the 
district director. For rules relating to the determination

[[Page 10]]

of, and the deduction for, amounts paid to maintain certain students as 
members of the taxpayer's household and treated under section 170(d) as 
paid for the use of an organization described in section 170(c) (2), 
(3), or (4), see paragraph (f) of Sec. 1.170-2. For a special rule 
relating to the computation of the amount of the deduction with respect 
to a contribution of section 1245 or section 1250 property, see section 
170(e).
    (2) Information required in support of deductions for taxable years 
beginning before January 1, 1964. In connection with claims for 
deductions for charitable contributions paid in taxable years beginning 
before January 1, 1964, taxpayers shall state in their income tax 
returns the name and address of each organization to which a 
contribution was made and the amount and approximate date of the actual 
payment of each contribution. Any deduction for charitable contribution 
must be substantiated, when required by the district director, by a 
statement from the organization to which the contribution was made 
indicating whether the organization is a domestic organization, the name 
and address of the contributor, the amount of the contribution, and the 
date of its actual payment, and by such other information as the 
district director may deem necessary.
    (3) Information required in support of deductions for taxable years 
beginning after December 31, 1963--(i) In general. In connection with 
claims for deductions for charitable contributions paid in taxable years 
beginning after December 31, 1963, taxpayers shall state in their income 
tax returns the name of each organization to which a contribution was 
made and the amount and date of the actual payment of each contribution. 
If a contribution is made in property other than money, the taxpayer 
shall state the kind of property contributed (for example, used 
clothing, paintings, securities) and shall state the method utilized in 
determining the fair market value of the property at the time the 
contribution was made. In any case in which a taxpayer makes numerous 
cash contributions to an organization during the taxable year, the 
taxpayer may state the total cash payments made to such organization 
during the taxable year in lieu of listing each cash contribution and 
the date of payment.
    (ii) Contribution by individual of property other than money. If an 
individual taxpayer makes a charitable contribution of an item of 
property other than money and claims a deduction in excess of $200 in 
respect of his contribution of such item, he shall attach to his income 
tax return a statement setting forth the following information with 
respect to such item:
    (a) The name and address of the organization to which the 
contribution was made.
    (b) The date of the actual contribution.
    (c) A description of the property in sufficient detail to identify 
the particular property contributed including, in the case of tangible 
property, the physical condition of the property at the time of 
contribution. In the case of securities, the name of the issuer, the 
type of security, and whether or not such security is regularly traded 
on a stock exchange or in an over-the-counter market.
    (d) The manner (for example, by purchase, gift, bequest, 
inheritance, exchange, etc.) and the approximate date of acquisition of 
the property by the taxpayer. If the property was created, produced, or 
manufactured by the taxpayer, the approximate date the property was 
substantially completed.
    (e) The fair market value of the property at the time the 
contribution was made, showing the method utilized in determining the 
fair market value. (If the valuation was determined by appraisal, a copy 
of the signed report of the appraiser should be submitted.)
    (f) In the case of property (not including securities) held by the 
taxpayer for a period less than five years immediately preceding the 
date on which the contribution was made, the cost or other basis, 
adjusted as provided by section 1016. If available, the cost or other 
basis, adjusted as provided by section 1016, of property (not including 
securities) held for a period of five years or more prior to the time of 
contribution should be submitted.
    (g) In the case of section 1245 or section 1250 property, the 
reduction by reason of section 170(e) in the amount

[[Page 11]]

of the charitable contribution taken into account under section 170.
    (h) The terms of any agreement or understanding entered into by or 
on behalf of the taxpayer relating to the use, sale, or disposition of 
the property contributed. For example, there must be attached to the 
income tax return of an individual taxpayer the terms of any agreement 
or understanding which restricts the donee's right to dispose of the 
donated property (either temporarily or permanently) or which reserves 
to, or confers upon, anyone other than the donee organization (or an 
organization participating with such organization in cooperative fund 
raising) any right to the income from such property, to the possession 
of the property (including the right to vote securities), to acquire 
such property by purchase or otherwise, or to designate who shall have 
such income, possession, or right to acquire. Notwithstanding the above, 
it will not be necessary to set forth the terms of any agreement or 
understanding which merely earmarks contributed property for a 
particular charitable use, such as the use of donated furniture in the 
reading room of the donee organization's library.
    (i) The total amount claimed as a deduction for the taxable year due 
to the contribution of the property. If less than the entire interest in 
the property is contributed during the taxable year, the amount claimed 
as a deduction in any prior year or years for contributions of other 
interests in such property, the name and address of each organization to 
which any such contribution was made, the place where the property (if 
tangible property) is located or kept and the name of the person having 
actual possession of the property, if other than the organization to 
which the property giving rise to the deduction was contributed.
    (iii) Statement from donee organization. Any deduction for a 
charitable contribution must be substantiated, when required by the 
district director, by a statement from the organization to which the 
contribution was made indicating whether the organization is a domestic 
organization, the name and address of the contributor, the amount of the 
contribution, the date of actual receipt of the contribution, and such 
other information as the district director may deem necessary. If the 
contribution includes an item of property (other than money or 
securities which are regularly traded on a stock exchange or in an over-
the-counter market) which the donee deems to have a fair market value in 
excess of $200 at the time of receipt, such statement shall also 
indicate for each such item its location if retained by the 
organization, the amount received by the organization on any sale of the 
property and the date of sale, or in case of other disposition of the 
property, the method of disposition.
    (b) Time of making contribution. Ordinarly a contribution is made at 
the time delivery is effected. In the case of a check, the unconditional 
delivery (or mailing) of a check which subsequently clears in due course 
will constitute an effective contribution on the date of delivery (or 
mailing). If a taxpayer unconditionally delivers (or mails) a properly 
endorsed stock certificate to a charitable donee or the donee's agent, 
the gift is completed on the date of delivery (or mailing, provided that 
such certificate is received in the ordinary course of the mails). If 
the donor delivers the certificate to his bank or broker as the donor's 
agent, or to the issuing corporation or its agent, for transfer into the 
name of the donee, the gift is completed on the date the stock is 
transferred on the books of the corporation. For rules relating to a 
contribution consisting of a future interest in tangible personal 
property, see paragraph (d)(2) of this section.
    (c) Contribution in property--(1) General rules. If a contribution 
is made in property other than money, the amount of the deduction is 
determined by the fair market value of the property at the time of the 
contribution. The fair market value is the price at which the property 
would change hands between a willing buyer and a willing seller, neither 
being under any compulsion to buy or sell and both having reasonable 
knowledge of relevant facts. If the contribution is made in property of 
a type which the taxpayer sells in the course of his business, the fair 
market value is the price which the taxpayer would have received if he 
had sold the

[[Page 12]]

contributed property in the lowest usual market in which he customarily 
sells, at the time and place of the contribution (and in the case of a 
contribution of goods in quantity, in the quantity contributed). The 
usual market of a manufacturer or other producer consists of the 
wholesalers or other distributors to or through whom he customarily 
sells, unless he sells only at retail in which event it is his retail 
customers. If a donor makes a charitable contribution of, for example, 
stock in trade at a time when he could not reasonably have been expected 
to realize its usual selling price, the value of the gift is not the 
usual selling price but is the amount for which the quantity of 
merchandise contributed would have been sold by the donor at the time of 
the contribution. Costs and expenses incurred in the year of 
contribution in producing or acquiring the contributed property are not 
deductible and are not a part of the cost of goods sold. Similarly, to 
the extent that costs and expenses incurred in a prior taxable year in 
producing or acquiring the contributed property are reflected in the 
cost of goods sold in the year of contribution, cost of goods sold must 
be reduced by such costs and expenses. Transfers of property to an 
organization described in section 170(c) which bear a direct 
relationship to the taxpayer's business and which are made with a 
reasonable expectation of financial return commensurate with the amount 
of the transfer may constitute allowable deductions as trade or business 
expenses rather than as charitable contributions. See section 162 and 
the regulations thereunder.
    (2) Reduction for certain interest. (i) With respect to charitable 
contributions made after December 31, 1957, section 170(b)(4) requires 
that the amount of the charitable deduction be reduced for certain 
interest to the extent necessary to avoid the reduction of the same 
amount both as an interest deduction under section 163 and as a 
deduction for charitable contributions under section 170. The reduction 
is to be determined in accordance with subdivisions (ii) and (iii) of 
this subparagraph.
    (ii) With respect to charitable contributions made after December 
31, 1957, in determining the amount to be taken into account as a 
charitable contribution for purposes of section 170, the amount 
determined without regard to section 170(b)(4) or this subparagraph 
shall be reduced by the amount of interest which has been paid (or is to 
be paid) by the taxpayer, which is attributable to any liability 
connected with the contribution, and which is attributable to any period 
of time after the making of the contribution. The deduction otherwise 
allowable for charitable contributions under section 170 is required to 
be reduced pursuant to section 170(b)(4) only if, in connection with a 
charitable contribution, a liability is assumed by the recipient of the 
contribution or by any other person, or if the charitable contribution 
is of property which is subject to a liability. Thus, if the 
contribution is made in property and the transfer is conditioned upon 
the assumption of a liability by the donee or by some other person, any 
interest paid (or to be paid) by the taxpayer, attributable to the 
liability, and with respect to a period after the making of the 
contribution, will serve to reduce the amount that may be taken into 
account as a charitable contribution for purposes of section 170. The 
adjustment referred to in this subdivision must also be made where the 
contributed property is subject to a liability and the value of the 
property reflects the payment by the donor of interest with respect to a 
period of time after the making of the contribution.
    (iii) If, in connection with the charitable contribution, after 
December 31, 1957, of a bond, a liability is assumed by the recipient or 
by any other person, or if the bond is subject to a liability, then, in 
determining the amount to be taken into account as a charitable 
contribution under section 170, the amount determined without regard to 
section 170(b)(4) or this subparagraph shall, without regard to whether 
any reduction may be required by subdivision (ii) of this subparagraph, 
also be reduced for interest which has been paid (or is to be paid) by 
the taxpayer on indebtedness incurred or continued to purchase or carry 
such bond, and which is attributable to any period before the making of 
the contribution.

[[Page 13]]

However, the reduction referred to in this subdivision shall be made 
only to the extent that such reduction does not exceed the interest 
(including bond discount and other interest equivalent) receivable on 
the bond, and attributable to any period before the making of the 
contribution which is not, by reason of the taxpayer's method of 
accounting, includible in the taxpayer's gross income for any taxable 
year. For purposes of section 170(b)(4) and this subdivision the term 
bond means any bond, debenture, note, or certificate or other evidence 
of indebtedness.
    (iv) The provisions of this subparagraph may be illustrated by the 
following examples:

    Example 1. A, an individual using the cash receipts and 
disbursements method of accounting, on January 1, 1960, contributed to a 
charitable organization real estate having a fair market value of 
$10,000. In connection with the contribution the charitable organization 
assumed an indebtedness of $8,000 which A had incurred. A has prepaid 
two years' interest on that indebtedness (for 1960 and 1961) amounting 
to $960, and has taken an interest deduction of $960 for such amount. 
The amount of the gift, determined without regard to this subparagraph, 
is $2,960 ($10,000 less $8,000, the outstanding indebtedness, plus $960, 
the amount of prepaid interest). In determining the amount of the 
deduction for charitable contributions, the value of the gift ($2,960) 
must be reduced by $960 to eliminate from the computation of such 
deduction that portion thereof for which A has been allowed an interest 
deduction.
    Example 2. On January 1, 1960, B, an individual using the cash 
receipts and disbursements method of accounting, purchased for $9,600 a 
5\1/2\ percent $10,000, 20-year M Corporation bond, the interest on 
which was payable semiannually on June 30 and December 31. The M 
Corporation had issued the bond on January 1, 1950, at a discount of 
$720 from the principal amount. On December 1, 1960, B donated the bond 
to a charitable organization, and, in connection with the contribution, 
the charitable organization assumed an indebtedness of $7,000 which B 
had incurred to purchase and carry the bond. During the calendar year 
1960 B paid accrued interest of $330 on the indebtedness for the period 
from January 1 to December 1, 1960, and has taken an interest deduction 
of $330 for such amount. No portion of the bond discount of $36 a year 
($720 divided by 20 years) has been included in B's income, and of the 
$550 of annual interest receivable on the bond, he included in income 
only the June 30 payment of $275. The market value of the bond on the 
date of the contribution was $9,902. Such value reflects a proportionate 
part of the original bond discount ($9,280 plus $393, or $9,673) and of 
interest receivable of $229 which had accrued from July 1 to December 1, 
1960. The amount of the charitable contribution determined without 
regard to this subparagraph is $2,902 ($9,902, the value of the property 
on the date of gift, less $7,000, the amount of the liability assumed by 
the charitable organization). In determining the amount of the allowable 
deduction for charitable contributions, the value of the gift ($2,902) 
must be reduced to eliminate from the deduction that portion thereof for 
which B has been allowed an interest deduction. Although the amount of 
such interest deduction was $330, the reduction required by this 
subparagraph is limited to $262, since the reduction is not in excess of 
the amount of interest income on the bond ($229 of accrued interest plus 
$33, the amount of bond discount attributable to the eleven-month period 
B held the bond).

    (3) Reduction for depreciable property. (i) With respect to a 
charitable contribution of section 1245 property (as defined in section 
1245(a)(3)), or section 1250 property (as defined in section 1250(c)), 
section 170(e) requires that the amount of the charitable contribution 
taken into account under section 170 shall be reduced by the amount 
which would have been treated (but was not actually treated) as gain to 
which section 1245(a)(1) or 1250(a) (relating to gain from dispositions 
of depreciable property) applies if the property contributed had been 
sold at its fair market value (determined at the time of such 
contribution).
    (ii) Section 170(e) applies to charitable contributions of section 
1245 property in taxable years beginning after December 31, 1962, except 
that in respect of section 1245 property which is an elevator or 
escalator section 170(e) applies to charitable contributions after 
December 31, 1963. Section 170(e) applies to charitable contributions of 
section 1250 property after December 31, 1963.
    (iii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Jones contributes to a charitable organization section 1245 
property which has an adjusted basis of $10,000, a recomputed basis (as 
defined in section 1245 (a)(2)) of $14,000, and a fair market value of 
$17,000. If Jones had instead sold the property at its fair market 
value, he would have recognized

[[Page 14]]

gain under section 1245(a)(1) of $4,000. See paragraph (b) of Sec. 
1.1245-1. Under section 170(e), the amount of the charitable 
contribution taken into account under section 170 is reduced by $4,000. 
Accordingly, the amount of the charitable contribution is $13,000 
($17,000 minus $4,000).

    (d) Transfers of income and future interests--(1) In general. A 
deduction may be allowed for a contribution of an interest in the income 
from property or an interest in the remainder (but see subparagraph (2) 
of this paragraph for rules relating to transfers, after December 31, 
1963, of future interests in tangible personal property). The income or 
remainder interest shall be valued according to the tables referred to 
in paragraph (d) of Sec. 1.170-2. For rules with respect to certain 
transfers to a trust, see paragraph (d) of Sec. 1.170-2.
    (2) Future interests in tangible personal property. (i) Except as 
otherwise provided in subdivision (iii) of this subparagraph, a 
contribution consisting of a transfer, after December 31, 1963, in a 
taxable year ending after such date, of a future interest in tangible 
personal property shall be treated as made only when:
    (a) All intervening interests in, and rights to the actual 
possession or enjoyment of, the property have expired, or
    (b) Are held by persons other than the taxpayer or those standing in 
a relationship to the taxpayer described in section 267(b) and the 
regulations thereunder (relating to losses, expenses, and interest with 
respect to transactions between related taxpayers).

Section 170(f) and this subparagraph have no application in respect of a 
transfer of an undivided present interest in property. For example, a 
contribution of an undivided one-quarter interest in a painting with 
respect to which the donee is entitled to possession during three months 
of each year shall be treated as made upon the receipt by the donee of a 
formally executed and acknowledged deed of gift. Section 170(f) and this 
subparagraph have no application in respect of a transfer of a future 
interest in intangible personal property or in real property. However, a 
fixture which is intended to be severed from real property shall be 
treated as tangible personal property. For example, a contribution of a 
future interest in a chandelier which is attached to a building is 
considered a contribution which consists of a future interest in 
tangible personal property if the transferor intends that it be detached 
from the building at or prior to the time when the charitable 
organization's right to possession or enjoyment of the chandelier is to 
commence. For purposes of section 170(f) and this subparagraph, the term 
future interest has generally the same meaning as it has when used in 
section 2503, relating to taxable gifts, see Sec. 25.2503-3 of Part 25 
of this chapter (Gift Tax Regulations), and such term includes 
reversions, remainders, and other interests or estates, whether vested 
or contingent, and whether or not supported by a particular interest or 
estate, which are limited to commence in use, possession or enjoyment at 
some future date or time. The term future interest includes situations 
in which a donor purports to give tangible personal property to a 
charitable organization, but has an understanding, arrangement, 
agreement, etc. (whether written or oral) with the charitable 
organization which has the effect of reserving to, or retaining in, such 
donor a right to the use, possession, or enjoyment of the property.
    (ii) The provisions of subdivision (i) of this subparagraph may be 
illustrated by the following examples:

    Example 1. On December 31, 1964, A, an individual who reports his 
income on the calendar year basis, conveys by deed of gift to a museum 
title to a painting, but reserves to himself the right to the use, 
possession, and enjoyment of the painting during his lifetime. At the 
time of the gift the value of the painting is $90,000. Since the 
contribution consists of a future interest in tangible personal property 
in which the donor has retained an intervening interest, no contribution 
is considered as having been made in 1964.
    Example 2. Assume the same facts as in Example 1 except that on 
December 31, 1965, A relinquishes all of his right to the use, 
possession, and enjoyment of the painting and delivers the painting to 
the museum. Assuming that the value of the painting has increased to 
$95,000, A is treated as having made a charitable contribution of 
$95,000 in 1965.

[[Page 15]]

    Example 3. Assume the same facts as Example 1 except A dies without 
relinquishing his right to the use, possession, and enjoyment of the 
painting. Since A did not relinquish his right to the use, possession, 
and enjoyment of the property during his life, A is treated as not 
having made a charitable contribution of the painting for income tax 
purposes.
    Example 4. Assume the same facts as in Example 1 except A, on 
December 31, 1965, transfers his interest in the painting to his son, B. 
Since the relationship between A and B is one described in section 
267(b), no contribution of the remainder interest in the painting is 
considered as having been made in 1965.
    Example 5. Assume the same facts as in Example 4. Also assume that 
on December 31, 1966, B conveys the interest measured by A's life to the 
museum. B has made a charitable contribution of the present interest in 
the painting conveyed to the museum (i.e., the life interest measured by 
A's life expectancy in 1966 valued according to paragraph (f), Table 1, 
of Sec. 20.2031-7 of Part 20 of this chapter (Estate Tax Regulations)). 
In addition, since all intervening interests in, and rights to the 
actual possession or enjoyment of the property, have expired, a 
charitable contribution of the remainder interest is treated as having 
been made by A in 1966. Such remainder interest shall also be valued 
according to paragraph (f), Table 1, of Sec. 20.2031-7 of Part 20 of 
this chapter (Estate Tax Regulations)).

    (iii) Section 209(f)(3) of the Revenue Act of 1964 (78 Stat. 47) 
provides an exception to the rule set forth in section 170(f). Pursuant 
to the exception, section 170(f) and subdivision (i) of this 
subparagraph shall not apply in the case of a transfer of a future 
interest in tangible personal property made after December 31, 1963, and 
before July 1, 1964, where:
    (a) The sole intervening interest or right is a nontransferable life 
interest reserved by the donor, or
    (b) In the case of a joint gift by husband and wife, the sole 
intervening interest or right is a nontransferable life interest 
reserved by the donors which expires not later than the death of 
whichever of such donors dies later.

For purposes of the preceding sentence, the right to make a transfer of 
the reserved life interest to the donee of the future interest shall not 
be treated as making a life interest transferable.
    (e) Transfers subject to a condition or a power. If as of the date 
of a gift a transfer for charitable purposes is dependent upon the 
performance of some act or the happening of a precedent event in order 
that it might become effective, no deduction is allowable unless the 
possibility that the charitable transfer will not become effective is so 
remote as to be negligible. If an interest passes to or is vested in 
charity on the date of the gift and the interest would be defeated by 
the performance of some act or the happening of some event, the 
occurrence of which appeared to have been highly improbable on the date 
of the gift, the deduction is allowable. The deduction is not allowed in 
the case of a transfer in trust conveying a present interest in income 
if by reason of all the conditions and circumstances surrounding the 
transfer it appears that the charity may not receive the beneficial 
enjoyment of the interest. For example, assume that assets placed in 
trust consist of stock in a corporation the fiscal policies of which are 
controlled by the donor and his family, that the trustees and 
remaindermen are likewise members of the donor's family, and that the 
governing instrument contains no adequate guarantee of the requisite 
income to the charitable organization. Under such circumstances, no 
deduction will be allowed. Similarly, if the trustees were not members 
of the donor's family but had no power to sell or otherwise dispose of 
closely held stock, or otherwise insure the requisite enjoyment of 
income to the charitable organization, no deduction would be allowed.
    (f) Exceptions. (1) This section does not apply to contributions by 
estates and trusts (see section 642(c)). For disallowance of certain 
charitable deductions otherwise allowable under section 170, see 
sections 503(e) and 681(b)(5) (relating to organizations engaged in 
prohibited transactions). For disallowance of deductions for 
contributions to or for the use of communist controlled organizations, 
see section 11(a) of the Internal Security Act of 1950, as amended (50 
U.S.C. 790). For denial of deduction for charitable contributions as 
trade or business expenses and rules with respect to treatment of 
payments to organizations other than those described in section 170(c), 
see section 162 and the regulations thereunder.

[[Page 16]]

    (2) No deduction shall be allowed under section 170 for amounts paid 
to an organization:
    (i) A substantial part of the activities of which is carrying on 
propaganda, or otherwise attempting, to influence legislation, or
    (ii) Which participates in or intervenes in any political campaign 
on behalf of any candidate for public office.

For purposes of determining whether an organization is attempting to 
influence legislation or is engaging in political activities, see 
section 501(c)(3) and the regulations thereunder. Moreover, no deduction 
shall be allowed under section 170 for expenditures for lobbying 
purposes, promotion or defeat of legislation, etc. See also the 
regulations under section 162.
    (3) No deduction for charitable contributions is allowed in 
computing the taxable income of a common trust fund or of a partnership. 
See sections 584(d) and 703(a)(2)(D). However, a partner's distributive 
share of charitable contributions actually paid by a partnership during 
its taxable year may be allowed as a deduction in the partner's separate 
return for his taxable year with or within which the taxable year of the 
partnership ends, to the extent that the aggregate of his share of the 
partnership contributions and his own contributions does not exceed the 
limitations in section 170 (b). In the case of a nonresident alien 
individual, or a citizen of the United States entitled to the benefits 
of section 931, see sections 873(c), 876, and 931.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6605, 27 FR 
8094, Aug. 15, 1962; T.D. 6785, 29 FR 18499, Dec. 29, 1964; T.D. 6832, 
30 FR 8574, July 7, 1965; T.D. 6900, 31 FR 14633, Nov. 17, 1966; T.D. 
7084, 36 FR 266, Jan. 8, 1971; T.D. 7207, 37 FR 20768, Oct. 4, 1972]



Sec. 1.170-2  Charitable deductions by individuals; limitations (before 
amendment by Tax Reform Act of 1969).

    (a) In general. (1) A deduction is allowable to an individual under 
section 170 only for charitable contributions actually paid during the 
taxable year, regardless of when pledged and regardless of the method of 
accounting employed by the taxpayer in keeping his books and records. A 
contribution to an organization described in section 170(c) is 
deductible even though some portion of the funds of the organization may 
be used in foreign countries for charitable or educational purposes. The 
deduction by an individual for charitable contributions under section 
170 is limited generally to 20 percent of the taxpayer's adjusted gross 
income (computed without regard to any net operating loss carryback to 
the taxable year under section 172). If a husband and wife make a joint 
return, the deduction for contributions is the aggregate of the 
contributions made by the spouses, and the limitation in section 170(b) 
is based on the aggregate adjusted gross income of the spouses. The 20-
percent limitation applies to amounts contributed during the taxable 
year ``to or for the use of'' those recipients described in section 
170(c), including amounts treated under section 170(d) as paid for the 
use of an organization described in section 170(c) (2), (3), or (4). See 
paragraph (f) of this section. The limitation is computed without regard 
to contributions qualifying for the additional 10-percent deduction. For 
examples of the application of the 10- and 20-percent limitation, see 
paragraph (b)(5) of this section. For special rules reducing amount of 
certain charitable deductions, see paragraph (c)(2) of Sec. 1.170-1.
    (2) No deduction is allowable for contribution of services. However, 
unreimbursed expenditures made incident to the rendition of services to 
an organization contributions to which are deductible may constitute a 
deductible contribution. For example, the cost of a uniform without 
general utility which is required to be worn in performing donated 
services is deductible. Similarly, out-of-pocket transportation expenses 
necessarily incurred in rendering donated services are deductible. 
Reasonable expenditures for meals and lodging necessarily incurred while 
away from home in the course of rendering donated services also are 
deductible. For the purposes of this section, the phrase while away from 
home has the same meaning as that phrase is used for purposes of section 
162.
    (3)(i) In the case of an annuity or portion thereof purchased from 
an organization described in section 170(c), there

[[Page 17]]

shall be allowed as a deduction the excess of the amount paid over the 
value at the time of purchase of the annuity or portion purchased.
    (ii) The value of the annuity or portion is the value of the annuity 
determined in accordance with section 101(b) and the regulations 
thereunder.
    (b) Additional 10-percent deduction--(1) In general. In addition to 
the deduction which may be allowed for contributions subject to the 
general 20-percent limitation, an individual may deduct charitable 
contributions made during the taxable year to the organizations 
specified in section 170(b)(1)(A) to the extent that such contributions 
in the aggregate do not exceed 10 percent of his adjusted gross income 
(computed without regard to any net operating loss carryback to the 
taxable year under section 172). The additional 10-percent deduction may 
be allowed with respect to contributions to:
    (i) A church or a convention or association of churches,
    (ii) An educational organization referred to in section 503(b)(2) 
and defined in subparagraph (3)(i) of this paragraph,
    (iii) A hospital referred to in section 503(b)(5) and defined in 
subparagraph (4)(i) of this paragraph,
    (iv) Subject to certain conditions and limitations set forth in 
subparagraph (4)(ii) of this paragraph, and for taxable years beginning 
after December 31, 1955, a medical research organization referred to in 
section 503(b)(5),
    (v) Subject to certain limitations and conditions set forth in 
subparagraph (3)(ii) of this paragraph, and for taxable years beginning 
after December 31, 1960, an organization referred to in section 
503(b)(3) which is organized and operated for the benefit of certain 
State and municipal colleges and universities,
    (vi) For taxable years beginning after December 31, 1963, a 
governmental unit referred to in section 170(c)(1), and
    (vii) Subject to certain limitations and conditions set forth in 
subparagraph (5) of this paragraph, and for taxable years beginning 
after December 31, 1963, an organization referred to in section 
170(c)(2).

To qualify for the additional 10-percent deduction the contributions 
must be made ``to'', and not merely ``for the use of'', one of the 
specified organizations. A contribution to an organization referred to 
in section 170(c)(2) (other than an organization specified in 
subdivisions (i) through (vi) of this subparagraph) which, for taxable 
years beginning after December 31, 1963, is not ``publicly supported'' 
under the rules of subparagraph (5) of this paragraph will not qualify 
for the additional 10-percent deduction even though such organization 
makes the contribution available to an organization which is specified 
in section 170(b)(1)(A). The computation of this additional deduction is 
not necessary unless the total contributions paid during the taxable 
year are in excess of the general 20-percent limitation. Where the total 
contributions exceed the 20-percent limitation, the taxpayer should 
first ascertain the amount of charitable contributions subject to the 
10-percent limitation, and any excess over the 10-percent limitation 
should then be added to all other contributions and limited by the 20-
percent limitation. For provisions relating to a carryover of certain 
charitable contributions made by individuals, see paragraph (g) of this 
section.
    (2) Church. For definition of church, see the regulations under 
section 511.
    (3) Educational organization and organizations for the benefit of 
certain State and municipal colleges and universities--(i) Educational 
organization. An educational organization within the meaning of section 
170(b)(1)(A) is one whose primary function is the presentation of formal 
instruction and which normally maintains a regular faculty and 
curriculum and normally has a regularly enrolled body of pupils or 
students in attendance at the place where its educational activities are 
regularly carried on. The term, therefore, includes institutions such as 
primary, secondary, preparatory, or high schools, and colleges and 
universities. It includes Federal, State, and other public-supported 
schools which otherwise come within the definition. It does not include 
organizations engaged in both educational and noneducational activities 
unless the latter are merely incidental to and growing out of the 
educational activities. A recognized university which incidentally 
operates a

[[Page 18]]

museum or sponsors concerts is an educational organization. However, the 
operation of a school by a museum does not necessarily qualify the 
museum as an educational organization. A gift to an educational 
institution through an alumni association or a class organization, which 
acts simply as a fund-raising or collection agency through which gifts 
may be made currently to the institution, is a gift to the educational 
organization if the entire gift inures to its benefit, but not if any 
part of it inures to the general or operating fund of the agency. 
Similarly, a gift to one or more educational institutions through an 
association of educational institutions will be considered a gift to the 
institutions if it inures entirely to their benefit.
    (ii) Organizations for the benefit of certain State and municipal 
colleges and universities. (a) For taxable years beginning after 
December 31, 1960, gifts made to an organization referred to in section 
503(b)(3) organized and operated exclusively to receive, hold, invest, 
and administer property and to make expenditures to or for the benefit 
of certain colleges and universities, may be taken into account in 
computing the additional 10-percent limitation. The phrase expenditures 
to or for the benefit of certain colleges and universities includes 
expenditures made for any one or more of the normally accepted functions 
of colleges and universities, for example, for the acquisition and 
maintenance of real property comprising part of the campus area, the 
erection of or participation in the erection of college or university 
buildings, scholarships, libraries, student loans, and the acquisition 
and maintenance of equipment and furnishings used for or in conjunction 
with normally accepted functions of colleges and universities.
    (b) The recipient organization must be one which normally receives a 
substantial portion of its support from the United States or any State 
or political subdivision thereof or from direct or indirect 
contributions from the general public, or from a combination of two or 
more of such sources. An example of an indirect contribution from the 
public would be the receipt by the organization of its share of the 
proceeds of an annual collection campaign of a community chest, 
community fund, or united fund.
    (c) The college or university (including land grant colleges and 
universities) to be benefited must be an educational organization 
referred to in section 170(b)(1)(A)(ii) and subdivision (i) of this 
subparagraph; and must be an agency or instrumentality of a State or 
political subdivision thereof, or must be owned or operated by a State 
or political subdivision thereof or by an agency or instrumentality of 
one or more States or political subdivisions.
    (4) Hospital and medical research organization--(i) Hospital. The 
term hospital, as used in section 170(b)(1)(A), means an organization 
the principal purposes or functions of which are the providing of 
hospital or medical care. The term includes Federal and State hospitals 
otherwise coming within the definition but does not include medical 
education organizations, or medical research organizations. See, 
however, subdivision (ii) of this subparagraph, relating to 
contributions to certain medical research organizations for taxable 
years beginning after December 31, 1955. A rehabilitation institution or 
an outpatient clinic may qualify as a hospital if its principal purposes 
or functions are the providing of hospital or medical care. The term 
hospital does not include convalescent homes or homes for children or 
the aged, nor does the term include institutions whose principal 
purposes or functions are to train handicapped individuals to pursue 
some vocation.
    (ii) Certain medical research organizations. (a) For taxable years 
beginning after December 31, 1955, certain charitable contributions made 
to certain medical research organizations may be taken into account in 
computing the additional 10-percent limitation. To be so taken into 
account the charitable contribution must be made to a medical research 
organization that is directly engaged in the continuous active conduct 
of medical research in conjunction with a hospital (as defined in 
subdivision (i) of this subparagraph), and, during the calendar year in 
which the contribution is made, the organization must be committed to 
spend the contribution for such active conduct of

[[Page 19]]

medical research before January 1 of the fifth calendar year beginning 
after the date the contribution is made.
    (b) As used in section 170(b)(1)(A) and this subparagraph, the term 
medical research organization means an organization the principal 
purpose or function of which is to engage in medical research. Medical 
research may be defined as the conduct of investigations, experiments, 
and studies to discover, develop, or verify knowledge relating to the 
causes, diagnosis, treatment, prevention, or control of physical or 
mental diseases and impairments of man. To qualify as a medical research 
organization, the organization must have the appropriate equipment and 
professional personnel necessary to carry out its principal function.
    (c) The organization must, at the time of the contribution, be 
directly engaged in the continuous active conduct of medical research in 
conjunction with a hospital described in subdivision (i) of this 
subparagraph. The organization need not be formally affiliated with a 
hospital to be considered engaged in the active conduct of medical 
research in conjunction with a hospital, but it must be physically 
connected, or closely associated, with a hospital. In any case, there 
must be a joint effort on the part of the research organization and the 
hospital pursuant to an understanding that the two organizations shall 
maintain continuing close cooperation in the active conduct of medical 
research. For example, the necessary joint effort will normally be found 
to exist if the activities of the medical research organization are 
carried on in space located within or adjacent to a hospital provided 
that the organization is permitted to utilize the facilities (including 
equipment, case studies, etc.) of the hospital on a continuing basis in 
the active conduct of medical research. A medical research organization 
which is closely associated, in the manner described above, with a 
particular hospital or particular hospitals, may be considered to be 
pursuing research in conjunction with a hospital if the necessary joint 
effort is supported by substantial evidence of the close cooperation of 
the members of the research organization and the staff of the particular 
hospital or hospitals. The active participation in medical research by 
the staff of the particular hospital or hospitals will be considered as 
evidence of the requisite joint effort. If the organization's primary 
purpose is to disburse funds to other organizations for the conduct of 
research by them, or, if the organization's primary purpose is to extend 
research grants or scholarships to others, it is not directly engaged in 
the active conduct of medical research, and contributions to such an 
organization may not be taken into account for purposes of the 
additional 10-percent limitation.
    (d) A charitable contribution to a medical research organization may 
be taken into account in computing the additional 10-percent limitation 
only if the organization is committed to spend such contribution for 
medical research in conjunction with a hospital on or before the first 
day of the fifth calendar year which begins after the date the 
contribution is made. The organization's commitment that the 
contribution will be spent within the prescribed time only for the 
prescribed purposes must be legally enforceable. A promise in writing to 
the donor in consideration of his making a contribution that such 
contribution will be so spent within the prescribed time will constitute 
a commitment. The expenditure of contributions received for plant, 
facilities, or equipment, used solely for medical research purposes 
shall ordinarily be considered to be an expenditure for medical research 
for purposes of section 170(b) and this section. If a contribution is 
made in other than money, it shall be considered spent for medical 
research if the funds from the proceeds of a disposition thereof are 
spent by the organization within the five-year period for medical 
research; or, if such property is of such a kind that it is used on a 
continuing basis directly in connection with such research, it shall be 
considered spent for medical research in the year in which it is first 
so used.
    (5) Corporation, trust, or community chest, fund, or foundation--(i) 
In general. (a) For taxable years beginning after December 31, 1963, 
gifts made to a corporation, trust, or community chest,

[[Page 20]]

fund, or foundation, referred to in section 170(c)(2) (other than an 
organization specified in subparagraph (1) (i) through (vi) of this 
paragraph), may be taken into account in computing the additional 10-
percent limitation, provided the organization is a ``publicly 
supported'' organization. For purposes of this subparagraph, an 
organization is ``publicly supported'' if it normally receives a 
substantial part of its support from a governmental unit referred to in 
section 170(c)(1) or from direct or indirect contributions from the 
general public.
    (b) An important factor in determining whether an organization 
normally receives a substantial part of its support from ``direct or 
indirect contributions from the general public'' is the extent to which 
the organization derives its support from or through voluntary 
contributions made by persons representing the general public. Except in 
unusual situations (particularly in the case of newly created 
organizations), an organization is not ``publicly supported'' if it 
receives contributions only from the members of a single family or from 
a few individuals.
    (ii) Special rules and meaning of terms. (a) For purposes of this 
subparagraph, the term support, except as otherwise provided in (b) of 
this subdivision (ii), means all forms of support including (but not 
limited to) contributions received by the organization, investment 
income (such as, interest, rents, royalties, and dividends), and net 
income from unrelated business activities whether or not such activities 
are carried on regularly as a trade or business.
    (b) The term support does not include:
    (1) Any amounts received from the exercise or performance by an 
organization of its charitable, educational, or other purpose or 
function constituting the basis for its exemption under section 501(a). 
In general, such amounts include amounts received from any activity the 
conduct of which is substantially related to the furtherance of such 
purpose or function (other than through the production of income).
    (2) Any gain upon the sale or exchange of property which would be 
considered under any section of the Code as gain from the sale or 
exchange of a capital asset.
    (3) Contributions of services for which a deduction is not 
allowable.
    (c) The term support from a governmental unit includes:
    (1) Any amounts received from a governmental unit including 
donations or contributions and amounts received in connection with a 
contract entered into with a governmental unit for the performance of 
services or in connection with a government research grant, provided 
such amounts are not excluded from the term support under (b) of this 
subdivision (ii). For purposes of (b)(1) of this subdivision (ii), an 
amount paid by a governmental unit to an organization is not received 
from the exercise or performance of its charitable, educational, or 
other purpose or function constituting the basis for its exemption under 
section 501(a) if the purpose of the payment is to enable the 
organization to provide a service to, or maintain a facility for, the 
direct benefit of the public, as, for example, the maintenance of 
library facilities which are open to the public.
    (2) Tax revenues levied for the benefit of the organization and 
either paid to or expended on behalf of the organization.
    (3) The value of services or facilities (exclusive of services or 
facilities generally furnished, without charge, to the public) furnished 
by a governmental unit to the organization without charge, as, for 
example, where a city pays the salaries of personnel used to guard a 
museum, art gallery, etc., or provides, rent free, the use of a 
building. However, the term does not include the value of any exemption 
from Federal, State, or local tax or any similar benefit.
    (d) The term indirect contributions from the general public includes 
contributions received by the organization from organizations which 
normally receive a substantial part of their support from direct 
contributions from the general public.
    (iii) Determination of whether organization is ``publicly 
supported''--(a) In general. No single test which would be appropriate 
in every case may be prescribed for determining whether a corporation, 
trust, or community chest, fund, or foundation, referred to in section 
170(c)(2), is ``publicly supported''.

[[Page 21]]

For example, since the statutory test is whether the organization 
normally receives a substantial part of its support from the prescribed 
sources, a test which would be appropriate in the case of an 
organization which has been in operation for a number of years would not 
necessarily be appropriate in the case of a newly established 
organization. The determination of whether an organization is ``publicly 
supported'' depends on the facts and circumstances in each case. Thus, 
although a ``mechanical test'' is set forth in (b) of this subdivision 
(iii), such test is not an exclusive test. Accordingly, an organization 
which does not qualify as a ``publicly supported'' organization by 
application of the ``mechanical test'' may qualify as a ``publicly 
supported'' organization on the basis of the facts and circumstances in 
its case. For provisions relating to the facts and circumstances test, 
see (c) of this subdivision (iii).
    (b) Mechanical test. An organization will be considered to be a 
``publicly supported'' organization for its current taxable year and the 
taxable year immediately succeeding its current year, if, for the four 
taxable years immediately preceding the current taxable year, the total 
amount of the support which the organization receives from governmental 
units, from donations made directly or indirectly by the general public, 
or from a combination of these sources equals 33\1/3\ percent or more of 
the total support of the organization for such four taxable years. The 
rule in the preceding sentence does not apply if there are substantial 
changes in the organization's character, purposes, or methods of 
operation in the current year, and does not apply in respect of the 
immediately succeeding taxable year if such changes occur in such year. 
In determining whether the 33\1/3\-percent-of-support test is met, 
contributions by an individual, trust, or corporation shall be taken 
into account only to the extent that the total amount of the 
contributions by any such individual, trust, or corporation during the 
four-taxable-year period does not exceed 1 percent of the organization's 
total support for such four taxable years. In applying the 1-percent 
limitation, all contributions made by a donor and by any person or 
persons standing in a relationship to the donor which is described in 
section 267(b) and the regulations thereunder shall be treated as made 
by one person. The 1-percent limitation shall not apply to support from 
governmental units referred to in section 170(c)(1) or to contributions 
from ``publicly supported'' organizations. A national organization which 
carries out its purposes through local chapters with which it has an 
identity of aims and purposes may, for purposes of determining whether 
the organization and the local chapters meet the mechanical test, make 
the computation on an aggregate basis.

    Example. For the years 1964 through 1967, X, an organization 
referred to in section 170(c)(2), received support (as defined in 
subdivision (ii) of this subparagraph) of $600,000 from the following 
sources:

Investment income...........................................    $300,000
City Y (a governmental unit referred to in section                40,000
 170(c)(1)).................................................
United Fund (an organization referred to in section               40,000
 170(c)(2) which is ``publicly supported'').................
Contributions...............................................     220,000
                                                             -----------
   Total support............................................     600,000
 

    For the years 1964 through 1967, X received in excess of 33\1/3\ 
percent of its support from a governmental unit referred to in section 
170(c)(1) and from direct and indirect contributions from the general 
public computed as follows:

33\1/3\ percent of total support............................    $200,000
                                                             ===========
Support from a governmental unit referred to in section           40,000
 170(c)(1)..................................................
Indirect contributions from the general public (United Fund)      40,000
Contributions by various donors (no one donor having made         50,000
 contributions which total in excess of $6,000--1 percent of
 total support).............................................
12 contributions (each in excess of $6,000--1 percent of          72,000
 total support) 12x$6,000...................................
                                                             -----------
                                                                 202,000
                                                             ===========
 

    Since the amount of X's support from governmental units referred to 
in section 170 (c)(1) and from direct and indirect contributions from 
the general public in the years 1964 through 1967 is in excess of 33\1/
3\ percent of X's total support for such four taxable years, X is 
considered a ``publicly supported'' organization with respect to 
contributions made to it during 1968 and 1969 without regard to whether 
X receives 33\1/3\ percent of its support during 1968 or 1969 from such 
sources (assuming that there are no substantial changes in X's 
character, purposes, or methods of operation).


[[Page 22]]


    (c) Facts and circumstances test. (1) A corporation, trust, or 
community chest, fund or foundation referred to in section 170(c)(2) 
which does not qualify as a ``publicly supported'' organization under 
the mechanical test described in (b) of this subdivision (iii) 
(including an organization which has not been in existence for a 
sufficient length of time to make such test applicable) may be a 
``publicly supported'' organization on the basis of the facts and 
circumstances in its case.
    (2) The facts and circumstances which are relevant and the weight to 
be accorded such facts and circumstances may differ in certain cases 
depending, for example, on the nature of the organization and the period 
of time it has been in existence. However, under no circumstances will 
an organization which normally receives substantially all of its 
contributions (directly or indirectly) from the members of a single 
family or from a few individuals qualify as a ``publicly supported'' 
organization.
    (3) For purposes of the facts and circumstances test the most 
important consideration is the organization's source of support. An 
organization will be considered a ``publicly supported'' organization if 
it is constituted so as to attract substantial support from 
contributions, directly or indirectly, from a representative number of 
persons in the community or area in which it operates. In determining 
what is a ``representative number of persons,'' consideration must be 
given to the type of organization and whether or not the organization 
limits its activities to a special field which can be expected to appeal 
to a limited number of persons. An organization is so constituted if, 
for example, it establishes that it does in fact receive substantial 
support from contributions from a representative number of persons; that 
pursuant to its organizational structure and method of operation it 
makes bona fide solicitations for broad based public support, or, in the 
case of a newly created organization, that its organizational structure 
and method of operation are such as to require bona fide solicitations 
for broad based public support; that it receives substantial support 
from a community chest or similar public federated fund raising 
organization, such as a United Fund or United Appeal; or that it has a 
substantial number of members (in relation to the community it serves, 
the nature of its activities, and its total support) who pay annual 
membership dues.
    (4) Although primary consideration will be given to the source of an 
organization's support, other relevant factors may be taken into account 
in determining whether or not the organization is of a public nature, 
such as:
    (i) Whether the organization has a governing body (whether 
designated in the organization's bylaws, certificate of incorporation, 
deed of trust, etc., as a Board of Directors, Board of Trustees, etc.) 
which is comprised of public officials, of individuals chosen by public 
officials acting in their capacity as such, or of citizens broadly 
representative of the interests and views of the public. This 
characteristic does not exist if the membership of an organization's 
governing body is such as to indicate that it represents the personal or 
private interests of a limited number of donors to the organization (or 
persons standing in a relationship to such donors which is described in 
section 267(b) and the regulations thereunder), rather than the 
interests of the community or the general public.
    (ii) Whether the organization annually or more frequently makes 
available to the public financial reports or, in the case of a newly 
created organization, is constituted so as to require such reporting. 
For this purpose an information or other return made pursuant to a 
requirement of a governmental unit shall not be considered a financial 
report. An organization shall be considered as making financial reports 
of its operations available to the public if it publishes a financial 
report in a newspaper which is widely circulated in the community in 
which the organization operates or if it makes a bona fide dissemination 
of a brochure containing a financial report.
    (iii) If the organization is of a type which generally holds open to 
the public its buildings (as in the case of a museum) or performances 
conducted by it (as in the case of a symphonic orchestra), whether the 
organization actually follows such practice, or, in the case of

[[Page 23]]

a newly created organization, is so organized as to require that its 
facilities be open to the public.
    (5) The application of this subdivision (c) may be illustrated by 
the following examples:

    Example 1. M, a community trust, is an organization referred to in 
section 170(c)(2). In 1950, M was organized in the X Community by 
several leading trusts and financial institutions with the purpose of 
serving permanently the educational and charitable needs of the X 
Community by providing a means by which the public may establish funds 
or make gifts of various amounts to established funds which are 
administered as an aggregate fund with provision for distribution of 
income and, in certain cases, principal for educational or charitable 
purposes by a single impartial committee. The M Organization, by 
distribution of pamphlets to the public through participating trustee 
banks, actively solicits members of the X Community and other concerned 
parties to establish funds within the trust or to contribute to 
established funds within the trust. Under the declaration of trust, a 
contributor to a fund may suggest or request (but not require) that his 
contribution be used in respect of his preferred charitable, 
educational, or other benevolent purpose, and distributions of the 
income from the fund, and in certain cases the principal, will be made 
by the Distribution Committee with regard to such request unless 
changing conditions make such purpose unnecessary, undesirable, 
impractical, or impossible in which case income and (where the 
contributor has so specified) principal will be distributed by the 
Distribution Committee in order to promote the public welfare more 
effectively. Where a contributor has not expressed a desire as to a 
charitable, educational, or other benevolent purpose, the Distribution 
Committee will distribute the entire annual income from the fund to such 
a purpose agreed upon by such committee. The Distribution Committee is 
composed of representatives of the community chosen one each by the X 
Bar Association, the X Medical Society, the mayor of X Community, the 
judge of the highest X Court, and the president of the X College, and 
two representatives chosen by the participating trustee banks. There are 
a number of separate funds within the trust administered by several 
participating banks. M has consistently distributed or used its entire 
annual income for projects with purposes described in section 
170(c)(2)(B) from which members of the public may benefit or to other 
organizations described in section 170(b)(1)(A) which so distribute or 
use such income. Through its participating trustee banks, M annually 
makes available to the public a brochure containing a financial 
statement of its operations including a list of all receipts and 
disbursements. Under the facts and circumstances, M is a ``publicly 
supported'' organization.
    Example 2. Assume the same facts as in Example 1 except that M has 
been in existence for only one year and only two contributors have 
established funds within the trust. The Distribution Committee has been 
chosen and is required by the governing declaration of trust to make 
annual distribution of the entire income of the trust to projects with 
purposes described in section 170(c)(2)(B) from which members of the 
public may benefit or to other organizations described in section 
170(b)(1)(A) which so distribute or use such income. The declaration of 
trust and other governing instruments require (1) that the M Community 
Trust actively solicit contributions from members of the X Community 
through dissemination of literature and other public appeals, and (2) 
that it make available to the members of the X Community, annual 
financial reports of its operations. Under the facts and circumstances, 
M is a ``publicly supported'' organization.
    Example 3. N, an art museum, is an organization referred to in 
section 170(c)(2). In 1930, N was founded in Y City by the members of a 
single family to collect, preserve, interpret, and display to the public 
important works of art. N is governed by a self-perpetuating Board of 
Trustees limited by the governing instruments to a maximum membership of 
20 individuals. The original board consisted almost entirely of members 
of the founding family. Since 1945, members of the founding family or 
persons standing in a relationship to the members of such family 
described in section 267(b) have annually constituted less than one-
fifth of the Board of Trustees. The remaining board members are citizens 
of Y City from a variety of professions and occupations who represent 
the interests and views of the people of Y City in the activities 
carried on by the organization rather than the personal or private 
interests of the founding family. N solicits contributions from the 
general public and for each of its four most recent taxable years has 
received total contributions in small sums (less than $100) in excess of 
$10,000. For N's four most recent taxable years, investment income from 
several large endowment funds has constituted 75 percent of its total 
support. N normally expends a substantial part of its annual income for 
purposes described in section 170(c)(2)(B). N has, for the entire period 
of its existence, been open to the public and more than 300,000 people 
(from the Y City and elsewhere) have visited the museum in each of its 
four most recent taxable years. N annually publishes a financial report 
of its operation in the Y City newspaper. Under the facts and 
circumstances, N museum is a ``publicly supported'' organization.

[[Page 24]]

    Example 4. In 1960, the O Philharmonic Orchestra was organized in Z 
City through the combined efforts of a local music society and a local 
women's club to present to the public a wide variety of musical programs 
intended to foster music appreciation in the community. O is an 
organization referred to in section 170(c)(2). The orchestra is composed 
of professional musicians who are paid by the association. Twelve 
performances, open to the public, are scheduled each year. The admission 
charge for each of these performances is $3. In addition, several 
performances are staged annually without charge. In each of its four 
most recent taxable years, O has received separate contributions of 
$10,000 from A, B, C, and D (not members of a single family) and support 
of $5,000 from the Z Community Chest, a public federated fund raising 
organization operating in Z City. O is governed by a Board of Directors 
comprised of five individuals. A faculty member of a local college, the 
president of a local music society, the head of a local banking 
institution, a prominent doctor, and a member of the governing body of 
the local Chamber of Commerce currently serve on the Board and represent 
the interests and views of the community in the activities carried on by 
O. O annually files a financial report with Z City which makes such 
report available for public inspection. Under the facts and 
circumstances, O is a ``publicly supported'' organization.
    Example 5. P is a newly created organization of a type referred to 
in section 170 (c)(2). P's charter requires that its governing body be 
selected by public officials and by public organizations representing 
the community in which it operates. Pursuant to P's charter, a 
continuing fund raising campaign which will encompass the entire 
community has been planned. P's charter requires that its entire annual 
income be distributed to or used for projects with purposes described in 
section 170(c)(2)(B) and that it make available to the public annual 
financial reports of its operations. By reason of the express provisions 
of P's charter relating to its organizational structure and prescribed 
methods of operation, P is a ``publicly supported'' organization.

    (6) Examples. The application of the special 10-percent limitation 
and the general 20-percent limitation on contributions by individuals 
may be illustrated by the following examples:

    Example 1. A, an individual, reports his income on the calendar year 
basis and for the year 1957 has an adjusted gross income of $10,000. 
During 1957 he made the following charitable contributions:

1. Contributions qualifying for the additional        $2,400
 10-percent deduction under section 170(b)(1)(A)
2. Other charitable contributions...............         700
                                                 -----------------------
3. Total contributions paid.....................       3,100
                                                 =======================
 


 
                                                             Deductible
                                                           contributions
 
4. Contributions qualifying for the                 2,400
 additional 10-percent deduction under
 section 170(b)(1)(A)........................
5. Special limitation under section                 1,000
 170(b)(1)(A): 10 percent of adjusted gross
 income......................................
6. Deductible amount: line 4 or line 5,        ..........        $1,000
 whichever is the lesser.....................
                                              ------------
7. Excess of line 4 over line 5..............       1,400
8. Add: Other charitable contributions.......         700
                                              -------------
9. Contributions subject to the general 20-         2,100
 percent limitation under section
 170(b)(1)(B)................................
10. Limitation under section 170(b)(1)(B): 20       2,000
 percent of the adjusted gross income........
11. Deductible amount: line 9 or line 10,      ..........         2,000
 whichever is the lesser.....................
                                              ------------
12. Contributions not deductible.............         100
                                              ============--------------
13. Total deduction for contributions........  ..........         3,000
                                                          ==============
 

    Example 2. B, an individual, reports his income on the calendar year 
basis and for the year 1957 has an adjusted gross income of $10,000. 
During 1957 he made the following charitable contributions:

1. Contributions qualifying for the additional          $700
 10-percent deduction under section 170(b)(1)(A)
2. Other charitable contributions...............       2,400
                                                 ------------
3. Total contributions paid.....................       3,100
                                                 ============
4. Contributions qualifying for the additional           700
 10-percent deduction under section 170(b)(1)(A)
5. Limitation described in section 170(b)(1)(A):       1,000
 10 percent of the adjusted gross income........

[[Page 25]]

 
6. Deductible amount: line 4 or line 5,           ..........        $700
 whichever is the lesser........................
                                                 ------------
7. Excess of line 4 over line 5.................           0
8. Add: Other charitable contributions..........       2,400
                                                 ------------
9. Contributions subject to the general 20-            2,400
 percent limitation under section 170(b)(1)(B)..
10. Limitation under section 170(b)(1)(B): 20          2,000
 percent of the adjusted gross income...........
11. Deductible amount: line 9 or line 10,         ..........       2,000
 whichever is the lesser........................
                                                 ------------
12. Contributions not deductible................         400
                                                 ============-----------
13. Total deduction for contributions...........  ..........       2,700
                                                             ===========
 

    (c) Unlimited deduction for individuals--(1) In general. (i) The 
deduction for charitable contributions made by an individual is not 
subject to the 10- and 20-percent limitations of section 170(b) if in 
the taxable year and each of 8 of the 10 preceding taxable years the sum 
of his charitable contributions paid during the year, plus his payments 
during the year on account of Federal income taxes, is more than 90 
percent of his taxable income for the year (or net income, in years 
governed by the Internal Revenue Code of 1939). In determining the 
applicability of the 10- and 20-percent limitations of section 170(b) 
for taxable years beginning after December 31, 1957, there may be 
substituted, in lieu of the amount of income tax paid during any year, 
the amount of income tax paid in respect of such year, provided that any 
amount so included for the year in respect of which payment was made 
shall not be included for any other year. For the purpose of the first 
sentence of this paragraph, taxable income under the 1954 Code is 
determined without regard to the deductions for charitable contributions 
under section 170, for personal exemptions under section 151, or for a 
net operating loss carryback under section 172. On the other hand, for 
this purpose net income under the 1939 Code is computed without the 
benefit only of the deduction for charitable contributions. See section 
120 of the Internal Revenue Code of 1939. The term income tax as used in 
section 170(b)(1)(C) means only Federal income taxes, and does not 
include the taxes imposed on self-employment income, on employees under 
the Federal Insurance Contributions Act, and on railroad employees and 
their representatives under the Railroad Retirement Tax Act by Chapters 
2, 21, and 22, respectively, or corresponding provisions of the Internal 
Revenue Code of 1939. For purposes of section 170(b)(1)(C) and this 
paragraph, the amount of income tax paid during a taxable year shall be 
determined (except as provided in subdivision (ii) of this subparagraph) 
by including all payments made by the taxpayer during such taxable year 
on account of his Federal income taxes (whether for the taxable year or 
for preceding taxable years). Such payments would include any amount 
paid during the taxable year as estimated tax (exclusive of any portion 
of such amount for taxable years beginning after December 31, 1966, 
which is attributable to the self-employment tax imposed by chapter (2) 
for that year, payment of the final installment of estimated tax 
(exclusive of any portion of such installment, for taxable years 
beginning after December 31, 1966, which is attributable to the self-
employment tax imposed by chapter 2) for the preceding taxable year, 
final payment for the preceding taxable year, and any payment of a 
deficiency for an earlier taxable year, to the extent that such payments 
do not exceed the tax for the taxable year for which payment is made. 
Any payment of income tax with respect to which the taxpayer receives a 
refund or credit shall be reduced by the amount of such refund or 
credit. Any such refund or credit shall be applied against the most 
recent payments for the taxable year in respect of which the refund or 
credit arose.
    (ii) For any taxable year beginning after December 31, 1957, the 
applicability of the 10- and 20-percent limitations of section 170(b) 
may be determined either with reference to the income tax paid during 
the year or any prior year, or with reference to the income tax paid in 
respect of any such

[[Page 26]]

year or prior years. The 90-percent test of section 170(b)(1)(C) may be 
applied for the taxable year, or for any one or more of the preceding 10 
taxable years, by taking into account the income taxes paid in respect 
of that year or years, and for the balance of the 10 years by taking 
into account the income tax payments made during those years. Thus, a 
taxable year which qualifies under either of the two permissible methods 
shall be considered as a qualifying year irrespective of whether the 
taxable year begins before or after December 31, 1957. However, a 
particular income tax payment may only be taken into account once, 
either with respect to the year of liability or for the year of payment.
    (2) Joint returns--(i) Joint return for current taxable year. If a 
husband and wife make a joint return for any taxable year, their 
deduction for charitable contributions is not subject to the 10- and 20-
percent limitations of section 170(b), if, under the rules of 
subparagraph (1) of this paragraph, in the taxable year and in each of 8 
of the 10 preceding taxable years (regardless of whether separate or 
joint returns were filed), the aggregate charitable contributions of 
both spouses paid during the year, plus their aggregate payments during 
the year on account of Federal income taxes (or, if the taxable year 
begins after December 31, 1957, the aggregate tax paid in respect of 
such taxable year or any preceding taxable year) exceed 90 percent of 
their aggregate taxable incomes for the year.
    (ii) Separate return by spouse or by unremarried widow or widower. 
If a spouse, or the unremarried widow or widower of a deceased spouse, 
makes a separate return for any taxable year, his deduction for 
charitable contributions is not subject to the 10- and 20-percent 
limitations of section 170(b), if, under the rules of subparagraph (1) 
of this paragraph, in the taxable year and each of 8 of the 10 preceding 
taxable years:
    (a) For which the taxpayer filed a joint return with his spouse, 
either their aggregate charitable contributions and payments of Federal 
income taxes made during the taxable year (or if the taxable year begins 
after December 31, 1957, made in respect of such taxable year or any 
preceding taxable year) exceed 90 percent of their aggregate taxable 
income for that year, or the taxpayer's separate charitable 
contributions and payments of Federal income taxes allocable to his 
separate income and made during the taxable year (or if the taxable year 
begins after December 31, 1957, made in respect of such taxable year or 
any preceding taxable year) exceed 90 percent of his separate taxable 
income for that year, and (b) For which the taxpayer did not file a 
joint return with his spouse, the aggregate of his charitable 
contributions and payments of Federal income taxes made during the 
taxable year (or, if the taxable year begins after December 31, 1957, 
the payments of income taxes made in respect of such taxable year or any 
preceding taxable year) exceeds 90 percent of his taxable income for 
that year.

For the purpose of the preceding sentence, the word spouse does not 
include a spouse from whom the taxpayer has been divorced.
    (iii) Joint return with former spouse for prior taxable year. A 
divorced or remarried taxpayer who filed a joint return for a prior 
taxable year with a former spouse shall, for purposes of applying this 
paragraph, be treated in the same manner as if he had filed a separate 
return for such prior taxable year, and as if his Federal income tax 
liability and taxable income for such prior taxable year were his 
allocable portions of the joint tax liability and combined taxable 
income, respectively, for such year.
    (iv) Allocation. Whenever it is necessary to allocate the joint tax 
liability or the combined taxable income, or both, for a taxable year 
for which a joint return was filed, a computation shall be made for the 
taxpayer and for his spouse or former spouse showing for each of them 
the Federal income taxes and taxable income which would be determined if 
separate returns had been filed by them for such taxable year. The joint 
tax liability and conbined taxable income for such taxable year shall 
then be allocated proportionately to the income taxes and taxable 
income, respectively, so computed. Whenever it is necessary to determine

[[Page 27]]

the separate payments made by a taxpayer in respect of a joint tax 
liability, the amount paid by him during the taxable year as estimated 
tax (exclusive of any portion of such amount for taxable years beginning 
after December 31, 1966, which is attributable to the self-employment 
tax imposed by Chapter 2) for that year shall be included to the extent 
it does not exceed his allocable portion of the joint tax under Chapter 
1 (exclusive of tax under section 56) for the taxable year, and any 
amount paid by him for a prior year (whether as the final installment of 
estimated tax--exclusive of any portion of such installment, for taxable 
years beginning after December 31, 1966, which is attributable to the 
self-employment tax imposed by Chapter 2--for the preceding taxable 
year, or a final payment for the preceding year, or the payment of a 
deficiency for an earlier year) shall be included to the extent such 
amount, when added to amounts previously paid by him for such prior 
year, does not exceed his allocable portion of the joint tax liability 
for the prior year.
    (d) Denial of deduction in case of certain transfers in trust--(1) 
Reversionary interest in grantor. No charitable deduction will be 
allowed for the value of any interest in property transferred to a trust 
after March 9, 1954, if the grantor at the time of the transfer has a 
reversionary interest in the corpus or income and the value of such 
reversionary interest exceeds 5 percent of the total value on which the 
charitable deduction would, but for section 170(b)(1)(D), be determined. 
For purposes of this paragraph, the term reversionary interest means a 
possibility that after the possession or enjoyment of property or its 
income has been obtained by a charitable donee, the property or its 
income may revest in the grantor or his estate, or may be subject to a 
power exercisable by the grantor or a nonadverse party (within the 
meaning of section 672 (b)), or both, to revest in, or return to or for 
the benefit of, the grantor or his estate the property or income 
therefrom. An interest of the grantor which, in any event, will 
terminate before the ripening of the assured charitable gift for which a 
deduction is claimed is not considered a reversionary interest for 
purposes of this section. For example, assume that a taxpayer conveyed 
property to a trust under the terms of which the income is payable to 
the taxpayer's wife for her life, and, if she predeceases him, to him 
for his life, and after the death of both the property is to be 
transferred to a charitable organization.
    (2) Valuation of interests. The present value of the remainder 
interest in the property, taking into account the value of the life 
estates reserved to the taxpayer and his wife, may be allowed as a 
charitable deduction. Where the corpus of the trust is to return to the 
grantor after a number of years certain, the value of the reversionary 
interest at the time of the transfer may be computed by the use of 
tables showing the present value at 3\1/2\ percent a year, compuounded 
annually, of $1 payable at the end of a number of years certain. See 
paragraph (f), Table II, of Sec. 20.2031-7 of this chapter (Estate Tax 
Regulations). Where the value of a reversionary interest is dependent 
upon the continuation or termination of the life of one or more persons, 
it must be determined on the basis of Table 38 of United States Life 
Tables and Actuarial Tables 1939-1941, published by the United States 
Department of Commerce, Bureau of the Census, and interest at the rate 
of 3\1/2\ percent a year, compounded annually. See paragraph (f), Table 
I, of Sec. 20.2031-7 of this chapter (Estate Tax Regulations) for 
valuations based on one life, and ``Actuarial Values for Estate and Gift 
Tax`` (Internal Revenue Service Publication No. 11, Rev. 5-59) for 
values based on more than one life. In an actual case (not merely 
hypothetical), the grantor or his legal representative may, upon 
request, obtain the information necessary to determine such a value from 
the district director with whom the grantor files his return. The 
request must be accompanied by a statement showing the date of birth of 
each person the duration of whose life may affect the value of the 
reversionary interest and by copies of the instruments relevant to the 
transfer.
    (e) Fiscal years and short taxable years ending after March 9, 1954, 
subject to the Internal Revenue Code of 1939. Pursuant to section 
7851(a)(1)(C) of the Internal

[[Page 28]]

Revenue Code of 1954, the regulations prescribed in paragraph (d) of 
this section, to the extent that they relate to transfers in trust 
occurring after March 9, 1954, shall apply to all taxable years ending 
after March 9, 1954, even though those years may be subject to the 
Internal Revenue Code of 1939.
    (f) Amounts paid to maintain certain students as members of the 
taxpayer's household--(1) In General. (i) For taxable years beginning 
after December 31, 1959, the term charitable contribution includes 
amounts paid by the taxpayer during the taxable year to maintain certain 
students as members of his household which, under the provisions of 
section 170(d) and this paragraph, are treated as amounts paid for the 
use of an organization described in section 170(c) (2), (3), or (4), and 
such amounts, to the extent they do not exceed the limitations under 
section 170(d)(2) and paragraph (f)(2) of this section, are deductible 
contributions under section 170. In order for such amounts to be so 
treated, the student must be an individual who is neither a dependent 
(as defined in section 152) of the taxpayer nor related to the taxpayer 
in a manner described in any of the paragraphs (1) through (8) of 
section 152(a), and such individual must be a member of the taxpayer's 
household pursuant to a written agreement between the taxpayer and an 
organization described in section 170(c) (2), (3), or (4) to implement a 
program of the organization to provide educational opportunities for 
pupils or students placed in private homes by such organization. 
Furthermore, such amounts must be paid to maintain such individual 
during the period in the taxable year he is a member of the taxpayer's 
household and is a full-time pupil or student in the twelfth or any 
lower grade at an educational institution (as defined in section 
151(e)(4)) located in the United States. Amounts paid outside of the 
period (but within the taxable year) for expenses necessary for the 
maintenance of the student during the period will qualify for the 
charitable deduction if the other limitation requirements of the section 
are met.
    (ii) For purposes of paragraph (i) of this section, amounts treated 
as charitable contributions include only those amounts actually paid by 
the taxpayer during the taxable year which are directly attributable to 
the maintenance of the student while he is a member of the taxpayer's 
household and is attending school on a full-time basis. This would 
include amounts paid to ensure the well-being of the individual and to 
carry out the purpose for which the individual was placed in the 
taxpayer's home. For example, a deduction would be allowed for amounts 
paid for books, tuition, food, clothing, transportation, medical and 
dental care, and recreation for the individual. Amounts treated as 
charitable contributions under this paragraph do not include amounts 
which the taxpayer would have expended had the student not been in the 
household. They would not include, for example, amounts paid in 
connection with the taxpayer's home for taxes, insurance, interest on a 
mortgage, repairs, etc. Moreover, such amounts do not include any 
depreciation sustained by the taxpayer in maintaining such student or 
students in his household, nor do they include the value of any services 
rendered on behalf of such student or students by the taxpayer or any 
member of the taxpayer's household.
    (iii) For purposes of section 170(d) and this paragraph, an 
individual will be considered to be a full-time pupil or student at an 
educational institution only if he is enrolled for a course of study 
(prescribed for a full-time student) at such institution and is 
attending classes on a full-time basis. Nevertheless, such individual 
may be absent from school due to special circumstances and still be 
considered to be in full-time attendance. Periods during the regular 
school term when the school is closed for holidays, such as Christmas 
and Easter, and for periods between semesters are treated as periods 
during which the pupil or student is in full-time attendance at the 
school. Also, absences during the regular school term due to illness of 
such individual shall not prevent him from being considered as a full-
time pupil or student. Similarly, absences from the taxpayer's household 
due to special circumstances will not disqualify the student as a member 
of the household. Summer vacations between regular

[[Page 29]]

school terms are not considered periods of school attendance.
    (iv) As in the case of other charitable deductions, any deduction 
claimed for amounts described in section 170(d) and this paragraph which 
are treated as charitable contributions under section 170(c) is subject 
to verification by the district director. When claiming a deduction for 
such amounts, the taxpayer should submit a copy of his agreement with 
the organization sponsoring the individual placed in the taxpayer's 
household together with a summary of the various items for which amounts 
were paid to maintain such individual, and a statement as to the date 
the individual became a member of the household and the period of his 
attendance at school and the name and location of such school. 
Substantiation of amounts claimed must be supported by adequate records 
of the amounts actually paid. Due to the nature of certain items, such 
as food, a record of amounts spent for all members of the household, 
with an equal portion thereof allocated to each member, will be 
acceptable.
    (2) Limitations. Section 170(d) and this paragraph shall apply to 
amounts paid during the taxable year only to the extent that the amounts 
paid in maintaining each pupil or student do not exceed $50 multiplied 
by the number of full calendar months in the taxable year that the pupil 
or student is maintained in accordance with the provisions of this 
paragraph. For purposes of such limitation, if 15 or more days of a 
calendar month fall within the period to which the maintenance of such 
pupil or student relates, such month is considered as a full calendar 
month. To the extent that such amounts qualify as charitable 
contributions under section 170(c), the aggregate of such amounts plus 
other contributions made during the taxable year is deductible under 
section 170, subject to the 20-percent limitation provided in section 
170(b)(1)(B). Also, see Sec. 1.170-2(a)(1).
    (3) Compensation or reimbursement. Amounts paid during the taxable 
year to maintain a pupil or student as a member of the taxpayer's 
household, as provided in paragraph (f)(1) of this section, shall not be 
taken into account under section 170(d) of this paragraph, if the 
taxpayer receives any money or other property as compensation or 
reimbursement for any portion of such amounts. The taxpayer will not be 
denied the benefits of section 170(d) if he prepays an extraordinary or 
nonrecurring expense, such as a hospital bill or vacation trip, at the 
request of the individual's parents or the sponsoring organization and 
is reimbursed for such prepayment. The value of services performed by 
the pupil or student in attending to ordinary chores of the household 
will not generally be considered to constitute compensation or 
reimbursement. However, if the pupil or student is taken into the 
taxpayer's household to replace a former employee of the taxpayer or 
gratuitously to perform substantial services for the taxpayer, the facts 
and circumstances may warrant a conclusion that the taxpayer received 
reimbursement for maintaining the pupil or student.
    (4) No other amount allowed as deduction. Except to the extent that 
amounts described in section 170(d) and this paragraph are treated as 
charitable contributions under section 170(c) and, therefore, deductible 
under section 170(a), no deduction is allowed for any amount paid to 
maintain an individual, as a member of the taxpayer's household, in 
accordance with the provisions of section 170(d) and this paragraph.
    (5) Examples. Application of the provisions of this paragraph may be 
illustrated by the following examples:

    Example 1. The X organization is an organization described in 
section 170(c)(2) and is engaged in a program under which a number of 
European children are placed in the homes of United States residents in 
order to further the children's high school education. In accordance 
with the provisions of subparagraph (1) of this paragraph, the taxpayer, 
A, who reports his income on the calendar year basis, agreed with X to 
take two of the children, and they were placed in the taxpayer's home on 
January 2, 1960, where they remained until January 21, 1961, during 
which time they were fully maintained by the taxpayer. The children 
enrolled at the local high school for the full course of study 
prescribed for tenth grade students and attended the school on a full-
time basis for the spring semester starting January 18, 1960, and ending 
June 3, 1960, and for the fall semester starting September 1, 1960, and 
ending January 13, 1961. The total cost of food

[[Page 30]]

paid by A in 1960 for himself, his wife, and the two children amounted 
to $1,920, or $40 per month for each member of the household. Since the 
children were actually full-time students for only 8\1/2\ months during 
1960, the amount paid for food for each child during that period 
amounted to $340. Other amounts paid during the 8\1/2\ month period for 
each child for laundry, lights, water, recreation, and school supplies 
amounted to $160. Thus, the amounts treated under section 170(d) and 
this paragraph as paid for the use of X would, with respect to each 
child, total $500 ($340+$160), or a total for both children of $1,000, 
subject to the limitations of subparagraph (2) of this paragraph. Since, 
for purposes of such limitations, the children were full-time students 
for only 8 full calendar months during 1960 (less than 15 days in 
January 1960), the taxpayer may treat only $800 as a charitable 
contribution made in 1960, that is, $50 multiplied by the 8 full 
calendar months, or $400 paid for the maintenance of each child. Neither 
the excess payments nor amounts paid to maintain the children during the 
period before school opened and for the period in summer between regular 
school terms is taken into account by reason of section 170(d). Also, 
because the children were full-time students for less than 15 days in 
January 1961 (although maintained in the taxpayer's household for 21 
days), amounts paid to maintain the children during 1961 would not 
qualify as a charitable contribution.
    Example 2. A religious organization described in section 170(c)(2) 
has a program for providing educational opportunities for children it 
places in private homes. In order to implement the program, the 
taxpayer, H, who resides with his wife, son, and daughter of high school 
age in a town in the United States, signs an agreement with the 
organization to maintain a girl sponsored by the organization as a 
member of his household while the child attends the local high school 
for the regular 1960-61 school year. The child is a full-time student at 
the school during the school year starting September 6, 1960, and ending 
June 6, 1961, and is a member of the taxpayer's household during that 
period. Although the taxpayer pays $200 during the school period falling 
in 1960, and $240 during the school period falling in 1961, to maintain 
the child, he cannot claim either amount as a charitable contribution 
because the child's parents, from time to time during the school year, 
send butter, eggs, meat, and vegetables to H to help defray the expenses 
of maintaining the child. This is considered property received as 
reimbursement under subparagraph (3) of this paragraph. Had her parents 
not contributed the food, the fact that the child, in addition to the 
normal chores she shared with the taxpayer's daughter, such as cleaning 
their own rooms and helping with the shopping and cooking, was 
responsible for the family laundry and for the heavy cleaning of the 
entire house while the taxpayer's daughter had no comparable 
responsibilities would also preclude a claim for a charitable deduction. 
These substantial gratuitous services are considered property received 
as reimbursement under subparagraph (3) of this paragraph.
    Example 3. A taxpayer resides with his wife in a city in the eastern 
United States. He agrees, in writing, with a fraternal society described 
in section 170(c)(4) to accept a child selected by the society for 
maintenance by him as a member of his household during 1961 in order 
that the child may attend the local grammar school as a part of the 
society's program to provide elementary education for certain children 
selected by it. The taxpayer maintains the child, who has as his 
principal place of abode the home of the taxpayer, and is a member of 
the taxpayer's household, during the entire year 1961. The child is a 
full-time student at the local grammar school for 9 full calendar months 
during the year. Under the agreement, the society pays the taxpayer $30 
per month to help maintain the child. Since the $30 per month is 
considered as compensation or reimbursement to the taxpayer for some 
portion of the maintenance paid on behalf of the child, no amounts paid 
with respect to such maintenance can be treated as amounts paid in 
accordance with section 170(d). In the absence of the $30 per month 
payments, if the child qualifies as a dependent of the taxpayer under 
section 152(a)(9), that fact would also prevent the maintenance payments 
from being treated as charitable contributions paid for the use of the 
fraternal society.

    (g) Charitable contributions carryover of individuals--(1) 
Computation of excess charitable contributions made in contribution 
year. Subject to certain conditions and limitations, the excess of:
    (i) The amount of the charitable contributions made by an individual 
in a taxable year beginning after December 31, 1963 (hereinafter in this 
paragraph referred to as the ``contribution year''), to organizations 
specified in section 170(b)(1)(A) (see paragraph (b) of this section), 
over
    (ii) Thirty percent of his adjusted gross income (computed without 
regard to any net operating loss carryback to such year under section 
172) for such contribution year, shall be treated as a charitable 
contribution paid by him to an organization specified in section 
170(b)(1)(A) and paragraph (b) of this section, relating to the 
additional 10-percent deduction, in each of the 5 taxable years 
immediately succeeding the

[[Page 31]]

contribution year in order of time. (For provisions requiring a 
reduction of such excess, see subparagraph (5) of this paragraph.) The 
provisions of this subparagraph apply even though the taxpayer elects 
under section 144 to take the standard deduction in the contribution 
year instead of itemizing the deductions (other than those specified in 
sections 62 and 151) allowable in computing taxable income for the 
contribution year. No excess charitable contribution carryover shall be 
allowed with respect to contributions ``for the use of'' rather than 
``to'' organizations described in section 170(b)(1)(A) and paragraph (b) 
of this section or with respect to contributions made ``to'' or ``for 
the use of'' organizations which are not described in such sections. The 
provisions of section 170(b)(5) and this paragraph are not applicable in 
the case of estates or trusts, see section 642(c), relating to 
deductions for amounts paid or permanently set aside for a charitable 
purpose, and the regulations thereunder. The provisions of this 
subparagraph may be illustrated by the following examples:

    Example 1. Assume that H and W (husband and wife) have adjusted 
gross income for 1964 of $50,000 and for 1965 of $40,000 and file a 
joint return for each year. Assume further that in 1964 they contribute 
$16,500 to a church and $1,000 to X (an organization not referred to in 
section 170(b)(1)(A)) and in 1965 contribute $11,000 to the church and 
$400 to X. They may claim a charitable contribution deduction of $15,000 
in 1964, and the excess of $16,500 (contribution to the church) over 
$15,000 (30 percent of adjusted gross income) or $1,500 constitutes a 
charitable contribution carryover which shall be treated as a charitable 
contribution paid by them to an organization referred to in section 
170(b)(1)(A) in each of the 5 succeeding taxable years in order of time. 
No carryover is allowed with respect to the $1,000 contribution made to 
X in 1964. Since 30 percent of their adjusted gross income for 1965 
($12,000) exceeds the charitable contributions of $11,000 made by them 
in 1965 to organizations referred to in section 170(b)(1)(A) (computed 
without regard to section 170(b)(5) and this paragraph) the portion of 
the 1964 carryover equal to such excess of $1,000 ($12,000 minus 
$11,000) is treated, pursuant to the provisions of subparagraph (2) of 
this paragraph, as paid to a section 170(b)(1)(A) organization in 1965; 
the remaining $500 constitutes an unused charitable contribution 
carryover. No carryover is allowed with respect to the $400 contribution 
made to X in 1965.
    Example 2. Assume the same facts as in Example 1 except that H and W 
have adjusted gross income for 1965 of $42,000. Since 30 percent of 
their adjusted gross income for 1965 ($12,600) exceeds by $1,600 the 
charitable contribution of $11,000 made by them in 1965 to organizations 
referred to in section 170(b)(1)(A) (computed without regard to section 
170(b)(5) and this paragraph), the full amount of the 1964 carryover of 
$1,500 is treated, pursuant to the provisions of subparagraph (2) of 
this paragraph, as paid to a section 170(b)(1)(A) organization in 1965. 
They may also claim a charitable contribution of $100 ($12,600 -$12,500 
($11,000+$1,500)) with respect to the gift to X in 1965. No carryover is 
allowed with respect to the $300 ($400-$100) of the contribution to X 
which is not deductible in 1965.

    (2) Determination of amount treated as paid in taxable years 
succeeding contribution year. Notwithstanding the provisions of 
subparagraph (1) of this paragraph, the amount of the excess computed in 
accordance with the provisions of subparagraphs (1) and (5) of this 
paragraph which is to be treated as paid in any one of the 5 taxable 
years immediately succeeding the contribution year to an organization 
specified in section 170(b)(1)(A) shall not exceed the lesser of the 
amount computed under subdivision (i) or (ii) of this subparagraph:
    (i) The amount by which (a) 30 percent of the taxpayer's adjusted 
gross income for such succeeding taxable year (computed without regard 
to any net operating loss carryback to such succeeding taxable year 
under section 172) exceeds (b) the sum of (1) the charitable 
contributions actually made (computed without regard to the provisions 
of section 170(b)(5) and this paragraph) by the taxpayer in such 
succeeding taxable year to organizations referred to in section 
170(b)(1)(A), and (2) the charitable contributions made to organizations 
referred to in section 170(b)(1)(A) in taxable years (excluding any 
taxable year beginning before January 1, 1964) preceding the 
contribution year which, pursuant to the provisions of section 170(b)(5) 
and this paragraph, are treated as having been paid to an organization 
referred to in section 170(b)(1)(A) in such succeeding year.
    (ii) In the case of the first taxable year succeeding the 
contribution year,

[[Page 32]]

the amount of the excess charitable contribution in the contribution 
year, computed under subparagraphs (1) and (5) of this paragraph. In the 
case of the second, third, fourth, and fifth succeeding taxable years, 
the portion of the excess charitable contribution in the contribution 
year (computed under subparagraphs (1) and (5) of this paragraph) which 
has not been treated as paid to a section 170(b)(1)(A) organization in a 
year intervening between the contribution year and such succeeding 
taxable year.

If a taxpayer, in any one of the four taxable years succeeding a 
contribution year, elects under section 144 to take the standard 
deduction in the amount provided for in section 141 instead of itemizing 
the deductions (other than those specified in sections 62 and 151) 
allowable in computing taxable income, there shall be treated as paid 
(but not allowable as a deduction) in the standard deduction year the 
amount determined under subdivision (i) or (ii) of this subparagraph, 
whichever is the lesser. The provisions of this subparagraph may be 
illustrated by the following examples:

    Example 1. Assume that B has adjusted gross income for 1966 of 
$20,000 and for 1967 of $30,000. Assume further that in 1966 B 
contributed $8,000 to a church and in 1967 he contributes $7,500 to the 
church. B may claim a charitable contribution deduction of $6,000 in 
1966, and the excess of $8,000 (contribution to the church) over $6,000 
(30 percent of B's adjusted gross income) or $2,000 constitutes a 
charitable contribution carryover which shall be treated as a charitable 
contribution paid by B to an organization referred to in section 
170(b)(1)(A) in the 5 taxable years succeeding 1966 in order of time. (B 
made no excess contributions in 1964 or 1965 which should be treated as 
paid in years succeeding 1964 or 1965.) B may claim a charitable 
contribution deduction of $9,000 in 1967. Such $9,000 consists of the 
$7,500 contribution to the church in 1967 and $1,500 carried over from 
1966 and treated as a charitable contribution paid to a section 
170(b)(1)(A) organization in 1967. The $1,500 contribution treated as 
paid in 1967 is computed as follows:

1966 excess contributions.......................  ..........      $2,000
                                                             ===========
30 percent of B's adjusted gross income for 1967  ..........       9,000
Less:
  Contributions actually made in 1967 to section      $7,500
   170(b)(1)(A) organizations...................
  Contributions made to section 170(b)(1)(A)               0       7,500
   organizations in taxable years prior to 1966
   treated as having been paid in 1967..........
                                                             ===========
                                                  ..........       1,500
                                                             ===========
Amount of 1966 excess treated as paid in 1967--   ..........       1,500
 the lesser of $2,000 (1966 excess
 contributions) or $1,500 (30 percent of
 adjusted gross income for 1967 ($9,000) over
 the section 170(b)(1)(A) contributions actually
 made in 1967 ($7,500) and the section
 170(b)(1)(A) contributions made in years prior
 to 1966 treated as having been paid in 1967
 (0))...........................................
                                                             ===========
 


If the excess contributions made by B in 1966 had been $1,000 instead of 
$2,000, then, for purposes of this example, the amount of the 1966 
excess treated as paid in 1967 would be $1,000 rather than $1,500.
    Example 2. Assume the same facts as in Example 1, and, in addition, 
that B has adjusted gross income for 1968 of $10,000 and for 1969 of 
$20,000. Assume further with respect to 1968 that B elects under section 
144 to take the standard deduction in computing taxable income and that 
his actual contributions to organizations specified in section 
170(b)(1)(A) are $300. Assume further with respect to 1969, that B 
itemizes his deductions which include a $5,000 contribution to a church. 
B's deductions for 1968 are not increased by reason of the $500 
available as a charitable contribution carryover from 1966 (excess 
contributions made in 1966 ($2,000) less the amount of such excess 
treated as paid in 1967 ($1,500)) since B elected to take the standard 
deduction in 1968. However, for purposes of determining the amount of 
the excess charitable contributions made in 1966 which is available as a 
carryover to 1969, B is required to treat such $500 as a charitable 
contribution paid in 1968--the lesser of $500 or $2,700 (30 percent of 
adjusted gross income ($3,000) over contributions actually made in 1968 
to section 170(b)(1)(A) organizations ($300)). Therefore, even though 
the $5,000 contribution made by B in 1969 to a church does not amount to 
30 percent of B's adjusted gross income for 1969 (30 percent of 
$20,000=$6,000), B may claim a charitable contribution deduction of only 
the $5,000 actually paid in 1969 since the entire excess charitable 
contribution made in 1966 ($2,000) has been treated as paid in 1967 
($1,500) and 1968 ($500).

[[Page 33]]

    Example 3. Assume the following factual situation for C who itemizes 
his deductions in computing taxable income for each of the years set 
forth in the example:

----------------------------------------------------------------------------------------------------------------
                                                                  1964      1965      1966      1967      1968
----------------------------------------------------------------------------------------------------------------
Adjusted gross income.........................................   $10,000    $7,000   $15,000   $10,000    $9,000
                                                               -------------------------------------------------
Contributions to section 170(b)(1)(A) organizations (no other      4,000     3,000     5,000     1,000     1,500
 contributions)...............................................
Allowable charitable contributions deductions computed without     3,000     2,100     4,500     1,000     1,500
 regard to carryover of contributions.........................
                                                               -------------------------------------------------
Excess contributions for taxable year to be treated as paid in     1,000       900       500         0         0
 5 succeeding taxable years...................................
----------------------------------------------------------------------------------------------------------------


Since C's contributions in 1967 and 1968 to section 170(b)(1)(A) 
organizations are less than 30 percent of his adjusted gross income for 
such years, the excess contributions for 1964, 1965, and 1966 are 
treated as having been paid to section 170(b)(1)(A) organizations in 
1967 and 1968 as follows:

                                  1967
------------------------------------------------------------------------
                                                    Less:
                                                   Amount
                                                   treated    Available
           Contribution year              Total    as paid   charitable
                                         excess    in year  contribution
                                                  prior to   carryovers
                                                    1967
------------------------------------------------------------------------
1964..................................    $1,000         0      $1,000
1965..................................       900         0         900
1966..................................       500         0         500
                                                           -------------
                                        ........  ........       2,400
                                                           -------------
30 percent of B's adjusted gross income for 1967..........       3,000
Less: Charitable contributions made in 1967 to section           1,000
 170(b)(1)(A) organizations...............................
                                                           -------------
                                                                 2,000
                                                           =============
Amount of excess contributions treated as paid in 1967--         2,000
 the lesser of $2,400 (available carryovers to 1967) or
 $2,000 (excess of 30 percent of adjusted gross income
 ($3,000) over contributions actually made in 1967 to
 section 170(b)(1)(A) organizations ($1,000)).............
                                                           =============
------------------------------------------------------------------------


                                  1968
------------------------------------------------------------------------
                                                    Less:
                                                   Amount
                                                   treated    Available
           Contribution year              Total    as paid   charitable
                                         excess    in year  contribution
                                                  prior to   carryovers
                                                    1968
------------------------------------------------------------------------
1964..................................    $1,000    $1,000           0
1965..................................       900       900           0
1966..................................       500       100        $400
1967..................................         0         0           0
                                                           -------------
                                        ........  ........         400
                                                           =============
30 percent of B's adjusted gross income for 1968..........       2,700
Less: Charitable contributions made in 1968 to section           1,500
 170(b)(1)(A) organizations...............................
                                                           -------------
                                                                 1,200
                                                           =============
Amount of excess contributions treated as paid in 1968--           400
 the lesser of $400 (available carryovers to 1968) or
 $1,200 (30 percent of adjusted gross income $2,700) over
 contributions actually made in 1968 to section
 170(b)(1)(A) organizations ($1,500)......................
                                                           =============
------------------------------------------------------------------------

    (3) Effect of net operating loss carryback to contribution year. The 
amount of the excess contribution for a contribution year (computed as 
provided in subparagraphs (1) and (5) of this paragraph) shall not be 
increased because a net operating loss carryback is available as a 
deduction in the contribution year. In addition, in determining (under 
the provisions of section 172(b)(2)) the amount of the net operating 
loss for any year subsequent to the contribution year which is a 
carryback or carryover to taxable years succeeding the contribution 
year, the amount of contributions made to organizations referred to in 
section 170(b)(1)(A) shall be limited to the amount of such 
contributions which did not exceed 30 percent of the donor's adjusted 
gross income (computed without regard to any net operating loss 
carryback or any of the modifications referred to in section 172(d)) for 
the contribution year.
    (4) Effect of net operating loss carryback to taxable years 
succeeding the contribution year. The amount of the charitable 
contribution from a preceding taxable year which is treated as paid (as 
provided in subparagraph (2) of

[[Page 34]]

this paragraph) in a current taxable year (hereinafter referred to in 
this subparagraph as the ``deduction year'') shall not be reduced 
because a net operating loss carryback is available as a deduction in 
the deduction year. In addition, in determining (under the provisions of 
section 172(b)(2)) the amount of the net operating loss for any year 
subsequent to the deduction year which is a carryback or carryover to 
taxable years succeeding the deduction year, the amount of contributions 
made to organizations referred to in section 170(b)(1)(A) in the 
deduction year shall be limited to the amount of such contributions 
which were actually made in such year and those which were treated as 
paid in such year which did not exceed 30 percent of the donor's 
adjusted gross income (computed without regard to any net operating loss 
carryback or any of the modifications referred to in section 172(d)) for 
the deduction year.
    (5) Reduction of excess contributions. An individual having a net 
operating loss carryover from a prior taxable year which is available as 
a deduction in a contribution year must apply the special rule of 
section 170(b)(5)(B) and this subparagraph in computing the excess 
described in subparagraph (1) of this paragraph for such contribution 
year. In determining the amount of excess charitable contributions that 
shall be treated as paid in each of the 5 taxable years succeeding the 
contribution year, the excess charitable contributions described in such 
subparagraph (1) must be reduced by the amount by which such excess 
reduces taxable income (for purposes of determining the portion of a net 
operating loss which shall be carried to taxable years succeeding the 
contribution year under the second sentence of section 172(b)(2)) and 
increases the net operating loss which is carried to a succeeding 
taxable year. In reducing taxable income under the second sentence of 
section 172(b)(2), an individual who has made charitable contributions 
in the contribution year to both organizations specified in section 
170(b)(1)(A) (see paragraph (b) of this section) and to organizations 
not so specified must first deduct contributions made to the section 
170(b)(1)(A) organizations from his adjusted gross income computed 
without regard to his net operating loss deduction before any of the 
contributions made to organizations not specified in section 
170(b)(1)(A) may be deducted from such adjusted gross income. Thus, if 
the excess of the contributions made in the contribution year to 
organizations specified in section 170(b)(1)(A) over the amount 
deductible in such contribution year is utilized to reduce taxable 
income (under the provisions of section 172 (b)(2)) for such year, 
thereby serving to increase the amount of the net operating loss 
carryover to a succeeding year or years, no part of the excess 
charitable contributions made in such contribution year shall be treated 
as paid in any of the 5 immediately succeeding taxable years. If only a 
portion of the excess charitable contributions is so used, the excess 
charitable contributions will be reduced only to that extent. The 
provisions of this subparagraph may be illustrated by the following 
examples:

    Example 1. B, an individual, reports his income on the calendar year 
basis and for the year 1964 has adjusted gross income (computed without 
regard to any net operating loss deduction) of $50,000. During 1964 he 
made charitable contributions in the amount of $20,000 all of which were 
to organizations specified in section 170(b)(1)(A). B has a net 
operating loss carryover from 1963 of $50,000. In the absence of the net 
operating loss deduction B would have been allowed a deduction for 
charitable contributions of $15,000. After the application of the net 
operating loss deduction, B is allowed no deduction for charitable 
contributions, and there is (before applying the special rule of section 
170(b)(5)(B) and this subparagraph) a tentative excess charitable 
contribution of $20,000. For purposes of determining the net operating 
loss which remains to be carried over to 1965, B computes his taxable 
income for his prior taxable year, 1964, under section 172(b)(2) by 
deducting the $15,000 charitable contribution. After the $50,000 net 
operating loss carryover is applied against the $35,000 of taxable 
income for 1964 (computed in accordance with section 172(b)(2), assuming 
no deductions other than the charitable contribution deduction are 
applicable in making such computation), there remains a $15,000 net 
operating loss carryover to 1965. Since the application of the net 
operating loss carryover of $50,000 from 1963 reduces the 1964 adjusted 
gross income (for purposes of determining 1964 tax liability) to zero, 
no part of the $20,000 of charitable contributions in that year is 
deductible under section 170(b)(1). However, in determining the

[[Page 35]]

amount of the excess charitable contributions which shall be treated as 
paid in taxable years 1965, 1966, 1967, 1968, 1969, the $20,000 must be 
reduced by the portion thereof ($15,000) which was used to reduce 
taxable income for 1964 (as computed for purposes of the second sentence 
of section 172(b)(2)) and which thereby served to increase the net 
operating loss carryover to 1965 from zero to $15,000.
    Example 2. Assume the same facts as in Example 1, except that B's 
total contributions of $20,000 made during 1964 consisted of $15,000 to 
organizations specified in section 170(b)(1)(A) and $5,000 to 
organizations not so specified. Under these facts there is a tentative 
excess charitable contribution of $15,000, rather than $20,000 as in 
Example 1. For purposes of determining the net operating loss which 
remains to be carried over to 1965, B computes his taxable income for 
his prior taxable year, 1964, under section 172(b)(2) by deducting the 
$15,000 of charitable contributions made to organizations specified in 
section 170(b)(1)(A). Since the excess charitable contribution of 
$15,000 determined in accordance with subparagraph (1) of this paragraph 
was used to reduce taxable income for 1964 (as computed for purposes of 
the second sentence of section 172(b)(2)) and thereby served to increase 
the net operating loss carryover to 1965 from zero to $15,000, no part 
of such excess charitable contributions made in the contribution year 
shall be treated as paid in any of the five immediately succeeding 
taxable years. No carryover is allowed with respect to the $5,000 of 
charitable contributions made in 1964 to organizations not specified in 
section 170(b)(1)(A).

    (6) Change in type of return filed--(i) From joint return to 
separate returns. If a husband and wife--
    (a) Make a joint return for a contribution year and compute an 
excess charitable contribution for such year in accordance with the 
provisions of subparagraphs (1) and (5) of this paragraph, and
    (b) Make separate returns for one or more of the 5 taxable years 
immediately succeeding such contribution year, any excess charitable 
contribution for the contribution year which is unused at the beginning 
of the first such taxable year for which separate returns are filed 
shall be allocated between the husband and wife. For purposes of the 
allocation, a computation shall be made of the amount of any excess 
charitable contribution which each spouse would have computed in 
accordance with subparagraphs (1) and (5) of this paragraph if separate 
returns (rather than a joint return) had been filed for the contribution 
year. The portion of the total unused excess charitable contribution for 
the contribution year allocated to each spouse shall be an amount which 
bears the same ratio to such unused excess charitable contribution as 
such spouse's excess contribution (based on the separate return 
computation) bears to the total excess contributions of both spouses 
(based on the separate return computation). To the extent that a portion 
of the amount allocated to either spouse in accordance with the 
foregoing provisions of this subdivision is not treated in accordance 
with the provisions of subparagraph (2) of this paragraph as a 
charitable contribution paid to an organization specified in section 
170(b)(1)(A) in the taxable year in which a separate return or separate 
returns are filed, each spouse shall for purposes of subparagraph (2) of 
this paragraph treat his respective unused portion as the available 
charitable contributions carryover to the next succeeding taxable year 
in which the joint excess charitable contribution may be treated as paid 
in accordance with subparagraph (1) of this paragraph. If such husband 
and wife make a joint return in one of the five taxable years 
immediately succeeding the contribution year with respect to which a 
joint excess charitable contribution is computed and following the first 
succeeding year in which such husband and wife filed a separate return 
or separate returns, the amounts allocated to each spouse in accordance 
with this subdivision for such first year reduced by the portion of such 
amounts treated as paid to an organization specified in section 
170(b)(1)(A) in such first year and in any taxable year intervening 
between such first year and the succeeding taxable year in which the 
joint return is filed shall be aggregated for purposes of determining 
the amount of the available charitable contributions carryover to such 
succeeding taxable year. The provisions of this subdivision (i) may be 
illustrated by the following example:

    Example. H and W file joint returns for 1964, 1965, and 1966, and in 
1967 they file separate returns. In each such year H and W itemize

[[Page 36]]

their deductions in computing taxable income. Assume the following 
factual situation with respect to H and W for 1964:

                                  1964
 
                                                                  Joint
                                                H         W      return
 
Adjusted gross income.....................   $50,000   $40,000   $90,000
                                           =============================
Contributions to section 170(b)(1)(A)         27,000    20,000    47,000
 organization (no other contributions)....
Allowable charitable contribution             15,000    12,000    27,000
 deductions...............................
                                           -----------------------------
Excess contributions for taxable year to      12,000     8,000    20,000
 be treated as paid in 5 succeeding
 taxable years............................
                                           =============================
 


The joint excess charitable contribution of $20,000 is to be treated as 
having been paid to a section 170(b)(1)(A) organization in the five 
succeeding taxable years. Assume that in 1965, the portion of such 
excess treated as paid by H and W is $3,000 and that in 1966, the 
portion of such excess treated as paid is $7,000. Thus, the unused 
portion of the excess charitable contribution made in the contribution 
year is $10,000 ($20,000 less $3,000 (amount treated as paid in 1965) 
and $7,000 (amount treated as paid in 1966)). Since H and W file 
separate returns in 1967, $6,000 of such $10,000 is allocable to H and 
$4,000 is allocable to W. Such allocation is computed as follows:

$12,000 (excess charitable contributions made by H (based on separate 
          return computation) in 1964)/$20,000 (total excess charitable 
          contributions made by H and W (based on separate return 
          computation) in 1964)x$10,000=$6,000
$8,000 (excess charitable contributions made by W (based on separate 
          return computation) in 1964)/$20,000 (total excess charitable 
          contributions made by H and W (based on separate return 
          computation) in 1964)x$10,000=$4,000

    In 1967 H has adjusted gross income of $70,000 and he contributes 
$14,000 to an organization specified in section 170(b)(1)(A). In 1967 W 
has adjusted gross income of $50,000, and she contributes $10,000 to an 
organization specified in section 170(b)(1)(A). H may claim a charitable 
contribution deduction of $20,000 in 1967, and W may claim a charitable 
contribution deduction of $14,000 in 1967. H's $20,000 deduction 
consists of the $14,000 contribution to the section 170(b)(1)(A) 
organization in 1967 and $6,000 carried over from 1964 and treated as a 
charitable contribution paid to a section 170(b)(1)(A) organization in 
1967. W's $14,000 deduction consists of the $10,000 contribution made to 
a section 170(b)(1)(A) organization in 1967 and $4,000 carried over from 
1964 and treated as a charitable contribution paid to a section 
170(b)(1)(A) organization in 1967. The $6,000 contribution treated as 
paid in 1967 by H, and the $4,000 contribution treated as paid in 1967 
by W are computed as follows:

 
                                                          H         W
 
Available charitable contribution carryover (see        $6,000    $4,000
 computations above)................................
                                                     ===================
30-percent of adjusted gross income.................    21,000    15,000
Contributions made in 1967 to section 170(b)(1)(A)      14,000    10,000
 organization (no other contributions)..............
                                                     -------------------
Amount of allowable deduction unused................     7,000     5,000
                                                     ===================
Amount of excess contributions treated as paid in        6,000
 1967--the lesser of $6,000 (available carryover of
 H to 1967) or $7,000 (excess of 30 percent of
 adjusted gross income ($21,000) over contributions
 actually made in 1967 to section 170(b)(1)(A)
 organizations ($14,000))...........................
                                                     ==========
The lesser of $4,000 (available carryover of W to     ........     4,000
 1967) or $5,000 (excess of 30 percent of adjusted
 gross income ($15,000) over contributions actually
 made in 1967 to section 170(b)(1)(A) organizations
 ($10,000)).........................................
                                                     ===================
 


    (ii) From separate returns to joint return and remarried taxpayers. 
If in the case of a husband and wife:
    (a) Either or both of the spouses make a separate return for a 
contribution year and compute an excess charitable contribution for such 
year in accordance with the provisions of subparagraphs (1) and (5) of 
this paragraph, and
    (b) Such husband and wife make a joint return for one or more of the 
taxable years immediately succeeding such contribution year, the excess 
charitable contribution of the husband and wife for the contribution 
year which is unused at the beginning of the first taxable year for 
which a joint return is filed shall be aggregated for purposes of 
determining the portion of such unused charitable contribution which 
shall be treated in accordance with subparagraph (2) of this paragraph 
as a charitable contribution paid to an organization specified in 
section 170(b)(1)(A). The provisions of this subdivision are also 
applicable in the case of two single individuals who are subsequently 
married and file a joint return. A remarried taxpayer who filed a joint 
return with a former spouse in a contribution year with respect to which 
an

[[Page 37]]

excess charitable contribution was computed and who in any one of the 
five taxable years immediately succeeding such contribution year files a 
joint return with his (or her) present spouse shall treat the unused 
portion of such excess charitable contribution allocated to him (or her) 
in accordance with subdivision (i) of this subparagraph in the same 
manner as the unused portion of an excess charitable contribution 
computed in a contribution year in which he filed a separate return for 
purposes of determining the amount which in accordance with subparagraph 
(2) of this paragraph shall be treated as paid to an organization 
specified in section 170(b)(1)(A) in such succeeding year.
    (iii) Unused excess charitable contribution of deceased spouse. In 
case of the death of one spouse, any unused portion of an excess 
charitable contribution which is allocable (in accordance with 
subdivision (i) of this subparagraph) to such spouse shall not be 
treated as paid in the taxable year in which such death occurs or in any 
subsequent taxable year except on a separate return made for the 
deceased spouse by a fiduciary for the taxable year which ends with the 
date of death or on a joint return for the taxable year in which such 
death occurs. The application of this subdivision may be illustrated by 
the following example:

    Example. Assume the same facts as in the example in subdivision (i) 
of this subparagraph except that H dies in 1966 and W files a separate 
return for 1967. W made a joint return for herself and H for 1966. In 
that example, the unused excess charitable contribution as of January 1, 
1967, was $10,000, $6,000 of which was allocable to H and $4,000 to W. 
No portion of the $6,000 allocable to H may be treated as paid by W or 
any other person in 1967 or any subsequent year.

    (7) Information required in support of a deduction of an amount 
treated as paid. If, in a taxable year, a deduction is claimed in 
respect of an excess charitable contribution which, in accordance with 
the provisions of subparagraph (2) of this paragraph, is treated (in 
whole or in part) as paid in such taxable year, the taxpayer shall 
attach to his return a statement showing:
    (i) The year (or years) in which the excess charitable contributions 
were made (the contribution year or years),
    (ii) The excess charitable contributions made in each contribution 
year,
    (iii) The portion of such excess (or each such excess) treated as 
paid in accordance with subparagraph (2) of this paragraph in any 
taxable year intervening between the contribution year and the taxable 
year for which the return is made, and
    (iv) Such other information as the return or the instructions 
relating thereto may require.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6605, 27 FR 
8096, Aug. 15, 1962; T.D. 6639, 28 FR 1762, Feb. 26, 1963; T.D. 6732, 29 
FR 6280, May 13, 1964; T.D. 6900, 31 FR 14634, Nov. 17, 1966; T.D. 7207, 
37 FR 20768, Oct. 4, 1972; T.D. 7427, 41 FR 34026, Aug. 12, 1976]



Sec. 1.170-3  Contributions or gifts by corporations (before amendment 
by Tax Reform Act of 1969).

    (a) In general. The deduction by a corporation in any taxable year 
for charitable contributions, as defined in section 170(c), is limited 
to 5 percent of its taxable income for the year computed without regard 
to:
    (1) The deduction for charitable contributions,
    (2) The special deductions for corporations allowed under part VIII 
(except section 248), subchapter B, chapter 1 of the Code,
    (3) Any net operating loss carryback to the taxable year under 
section 172,
    (4) The special deduction for Western Hemisphere trade corporations 
under section 922, and
    (5) Any capital loss carryback to the taxable year under section 
1212(a)(1).

A contribution by a corporation to a trust, chest, fund, or foundation 
organized and operated exclusively for religious, charitable, 
scientific, literary, or educational purposes or for the prevention of 
cruelty to children or animals is deductible only if the contribution is 
to be used in the United States or its possessions for those purposes. 
See section 170(c)(2). For the purposes of section 170, amounts excluded 
from the gross income of a corporation under section 114 (relating to 
sports programs conducted for the American

[[Page 38]]

National Red Cross) are not to be considered contributions or gifts. For 
reduction or disallowance of certain charitable, etc., deductions, see 
paragraphs (c)(2), (e), and (f) of Sec. 1.170-1.
    (b) Election by corporations on an accrual method. A corporation 
reporting its taxable income on an accrual method may elect to have a 
charitable contribution (as defined in section 170 (c)) considered as 
paid during the taxable year, if payment is actually made on or before 
the fifteenth day of the third month following the close of the year and 
if, during the year, the board of directors authorized the contribution. 
The election must be made at the time the return for the taxable year is 
filed, by reporting the contribution on the return. There shall be 
attached to the return when filed a written declaration that the 
resolution authorizing the contribution was adopted by the board of 
directors during the taxable year, and the declaration shall be verified 
by a statement signed by an officer authorized to sign the return that 
it is made under the penalties of perjury. There shall also be attached 
to the return when filed a copy of the resolution of the board of 
directors authorizing the contribution.
    (c) Charitable contributions carryover of corporations--(1) 
Contributions made in taxable years beginning before January 1, 1962. 
Subject to the rules set forth in subparagraph (3) of this paragraph, 
any contributions made by a corporation in a taxable year (hereinafter 
in this paragraph referred to as the contribution year) subject to the 
Code beginning before January 1, 1962, in excess of the amount 
deductible in such contribution year under the 5-percent limitation of 
section 170(b)(2) are deductible in each of the two succeeding taxable 
years in order of time, but only to the extent of the lesser of the 
following amounts:
    (i) The excess of the maximum amount deductible for the succeeding 
year under the 5-percent limitation of section 170(b)(2) over the 
contributions made in that year; and
    (ii) In the case of the first taxable year succeeding the 
contribution year, the amount of the excess contributions; and, in the 
case of the second taxable year succeeding the contribution year, the 
portion of the excess contributions not deductible in the first 
succeeding taxable year.


The application of the rules in this subparagraph may be illustrated by 
the following example:

    Example. A corporation which reports its income on the calendar year 
basis makes a charitable contribution of $10,000 in June 1961, 
anticipating taxable income for 1961 of $200,000. Its actual taxable 
income (without regard to any deduction for charitable contributions) 
for 1961 is only $50,000 and the charitable deduction for that year is 
limited to $2,500 (5 percent of $50,000). The excess charitable 
contribution not deductible in 1961 ($7,500) represents a carryover 
potentially available as a deduction in the two succeeding taxable 
years. The corporation has taxable income (without regard to any 
deduction for charitable contributions) of $150,000 in 1962 and makes a 
charitable contribution of $2,500 in that year. For 1962, the 
corporation may deduct as a charitable contribution the amount of $7,500 
(5 percent of $150,000). This amount consists first of the $2,500 
contribution made in 1962, and $5,000 of the $7,500 carried over from 
1961. The remaining $2,500 carried over from 1961 and not allowable as a 
deduction in 1962 because of the 5-percent limitation may be carried 
over to 1963. The corporation has taxable income (without regard to any 
deduction for charitable contributions) of $100,000 in 1963 and makes a 
charitable contribution of $3,000. For 1963, the corporation may deduct 
under section 170 the amount of $5,000 (5 percent of $100,000). This 
amount consists first of the $3,000 contributed in 1963, and $2,000 of 
the $2,500 carried over from 1961 to 1963. The remaining $500 of the 
carryover from 1961 is not allowable as a deduction in any year because 
of the 2-year limitation with respect to excess contributions made in 
taxable years beginning before January 1, 1962.

    (2) Contributions made in taxable years beginning after December 31, 
1961. Subject to the rules set forth in subparagraph (3) of this 
paragraph, any contributions made by a corporation in a taxable year 
(hereinafter in this paragraph referred to as the contribution year) 
beginning after December 31, 1961, in excess of the amount deductible in 
such contribution year under the 5-percent limitation of section 
170(b)(2) are deductible in each of the five succeeding taxable years in 
order of time, but only to the extent of the lesser of the following 
amounts:
    (i) The excess of the maximum amount deductible for such succeeding

[[Page 39]]

taxable year under the 5-percent limitation of section 170(b)(2) over 
the sum of the contributions made in that year plus the aggregate of the 
excess contributions which were made in taxable years before the 
contribution year and which are deductible under this paragraph in such 
succeeding taxable year; or
    (ii) In the case of the first taxable year succeeding the 
contribution year, the amount of the excess contributions, and in the 
case of the second, third, fourth, or fifth taxable years succeeding the 
contribution year, the portion of the excess contributions not 
deductible under this subparagraph for any taxable year intervening 
between the contribution year and such succeeding taxable year.


The application of the rules of this subparagraph may be illustrated by 
the following example:

    Example. A corporation which reports its income on the calendar year 
basis makes a charitable contribution of $20,000 in June 1964, 
anticipating taxable income for 1964 of $400,000. Its actual taxable 
income (without regard to any deduction for charitable contributions) 
for 1964 is only $100,000 and the charitable deduction for that year is 
limited to $5,000 (5 percent of $100,000). The excess charitable 
contribution not deductible in 1964 ($15,000) represents a carryover 
potentially available as a deduction in the five succeeding taxable 
years. The corporation has taxable income (without regard to any 
deduction for charitable contributions) of $150,000 in 1965 and makes a 
charitable contribution of $5,000 in that year. For 1965 the corporation 
may deduct as a charitable contribution the amount of $7,500 (5 percent 
of $150,000). This amount consists first of the $5,000 contribution made 
in 1965, and $2,500 carried over from 1964. The remaining $12,500 
carried over from 1964 and not allowable as a deduction for 1965 because 
of the 5-percent limitation may be carried over to 1966. The corporation 
has taxable income (without regard to any deduction for charitable 
contributions) of $200,000 in 1966 and makes a charitable contribution 
of $5,000. For 1966, the corporation may deduct the amount of $10,000 (5 
percent of $200,000). This amount consists first of the $5,000 
contributed in 1966, and $5,000 of the $12,500 carried over from 1964 to 
1966. The remaining $7,500 of the carryover from 1964 is available for 
purposes of computing the charitable contributions carryover from 1964 
to 1967, 1968, and 1969.

    (3) Reduction of excess contributions. A corporation having a net 
operating loss carryover (or carryovers) must apply the special rule of 
section 170(b)(3) and this subparagraph before computing under 
subparagraph (1) or (2) of this paragraph the charitable contributions 
carryover for any taxable year subject to the Internal Revenue Code of 
1954. In determining the amount of charitable contributions that may be 
deducted in accordance with the rules set forth in subparagraph (1) or 
(2) of this paragraph in taxable years succeeding the contribution year, 
the excess of contributions made by a corporation in the contribution 
year over the amount deductible in such year must be reduced by the 
amount by which such excess reduces taxable income (for purposes of 
determining the net operating loss carryover under the second sentence 
of section 172(b)(2) and increases a net operating loss carryover to a 
succeeding taxable year. Thus, if the excess of the contributions made 
in a taxable year over the amount deductible in the taxable year is 
utilized to reduce taxable income (under the provisions of section 
172(b)(2)) for such year, thereby serving to increase the amount of the 
net operating loss carryover to a succeeding year or years, no 
charitable contributions carryover will be allowed. If only a portion of 
the excess charitable contributions is so used, the charitable 
contributions carryover. will be reduced only to that extent. The 
application of the rules of this subparagraph may be illustrated by the 
following example:

    Example. A corporation which reports its income on the calendar year 
basis makes a charitable contribution of $10,000 during the taxable year 
1960. Its taxable income for 1960 is $80,000 (computed without regard to 
any net operating loss deduction and computed in accordance with section 
170(b)(2) without regard to any deduction for charitable contributions). 
The corporation has a net operating loss carryover from 1959 of $80,000. 
In the absence of the net operating loss deduction the corporation would 
have been allowed a deduction for charitable contributions of $4,000 (5 
percent of $80,000). After the application of the net operating loss 
deduction the corporation is allowed no deduction for charitable 
contributions, and there is a tentative charitable contribution 
carryover of $10,000. For purposes of determining the net operating loss 
carryover to 1961 the corporation computes its taxable income for its 
prior taxable year 1960 under section 172(b)(2)

[[Page 40]]

by deducting the $4,000 charitable contribution. Thus, after the $80,000 
net operating loss carryover is applied against the $76,000 of taxable 
income for 1960 (computed in accordance with section 172(b)(2)), there 
remains a $4,000 net operating loss carryover to 1961. Since the 
application of the net operating loss carryover of $80,000 from 1959 
reduces the taxable income for 1960 to zero, no part of the $10,000 of 
charitable contributions in that year is deductible under section 
170(b)(2). However, in determining the amount of the allowable 
charitable contributions carryover to the taxable years 1961 and 1962, 
the $10,000 must be reduced by the portion thereof ($4,000) which was 
used to reduce taxable income for 1960 (as computed for purposes of the 
second sentence of section 172(b)(2)) and which thereby served to 
increase the net operating loss carryover to 1961 from zero to $4,000.

    (4) Year contribution is made. For purposes of this paragraph, 
contributions made by a corporation in a contribution year include 
contributions which, in accordance with the provisions of section 
170(a)(2) and paragraph (b) of this section, are considered as paid 
during such contribution year.
    (5) Effect of net operating loss carryback to contribution year. The 
amount of the excess contribution for a contribution year (computed as 
provided in this paragraph) shall not be increased because a net 
operating loss carryback is available as a deduction in the contribution 
year. In addition, in determining (under the provisions of section 
172(b)(2)) the amount of the net operating loss for any year subsequent 
to the contribution year which is a carryback or carryover to taxable 
years succeeding the contribution year, the amount of contributions 
shall be limited to the maximum amount deductible under the 5-percent 
limitation of section 170(b)(2) (computed without regard to any net 
operating loss carryback or any of the modifications referred to in 
section 172(d)) for the contribution year.
    (6) Effect of net operating loss carryback to taxable years 
succeeding the contribution year. The amount of the charitable 
contribution from a preceding taxable year which is deductible (as 
provided in this paragraph) in a current taxable year (hereinafter 
referred to in this subparagraph as the ``deduction year'') shall not be 
reduced because a net operating loss carryback is available as a 
deduction in the deduction year. In addition, in determining (under the 
provisions of section 172(b)(2)) the amount of the net operating loss 
for any year subsequent to the deduction year which is a carryback or a 
carryover to taxable years succeeding the deduction year, the amount of 
contributions shall be limited to the maximum amount deductible under 
the 5-percent limitation of section 170(b)(2) (computed without regard 
to any net operating loss carryback or any of the modifications referred 
to in section 172(d)) for the deduction year.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6605, 27 FR 
8096, Aug. 15, 1962; T.D. 6900, 31 FR 14640, Nov. 17, 1966; T.D. 7207, 
37 FR 20768, Oct. 4, 1972]



Sec. 1.170A-1  Charitable, etc., contributions and gifts; allowance of 
deduction.

    (a) Allowance of deduction. Any charitable contribution, as defined 
in section 170(c), actually paid during the taxable year is allowable as 
a deduction in computing taxable income irrespective of the method of 
accounting employed or of the date on which the contribution is pledged. 
However, charitable contributions by corporations may under certain 
circumstances be deductible even though not paid during the taxable year 
as provided in section 170(a)(2) and Sec. 1.170A-11. For rules relating 
to recordkeeping and return requirements in support of deductions for 
charitable contributions (whether by an itemizing or nonitemizing 
taxpayer) see Sec. 1.170A-13. The deduction is subject to the 
limitations of section 170(b) and Sec. 1.170A-8 or Sec. 1.170A-11. 
Subject to the provisions of section 170(d) and Sec. Sec. 1.170A-10 and 
1.170A-11, certain excess charitable contributions made by individuals 
and corporations shall be treated as paid in certain succeeding taxable 
years. For provisions relating to direct charitable deductions under 
section 63 by nonitemizers, see section 63 (b)(1)(C) and (i) and section 
170(i). For rules relating to the detemination of, and the deduction 
for, amounts paid to maintain certain students as members of the 
taxpayer's household and treated under section 170(g) as paid for the 
use of an organization described in

[[Page 41]]

section 170(c) (2), (3), or (4), see Sec. 1.170A-2. For the reduction 
of any charitable contributions for interest on certain indebtedness, 
see section 170(f)(5) and Sec. 1.170A-3. For a special rule relating to 
the computation of the amount of the deduction with respect to a 
charitable contribution of certain ordinary income or capital gain 
property, see section 170(e) and Sec. Sec. 1.170A-4 and 1.170A-4A. For 
rules for postponing the time for deduction of a charitable contribution 
of a future interest in tangible personal property, see section 
170(a)(3) and Sec. 1.170A-5. For rules with respect to transfers in 
trust and of partial interests in property, see section 170(e), section 
170(f) (2) and (3), Sec. Sec. 1.170A-4, 1.170A-6, and 1.170A-7. For 
definition of the term section 170(b)(1)(A) organization, see Sec. 
1.170A-9. For valuation of a remainder interest in real property, see 
section 170(f)(4) and the regulations thereunder. The deduction for 
charitable contributions is subject to verification by the district 
director.
    (b) Time of making contribution. Ordinarily, a contribution is made 
at the time delivery is effected. The unconditional delivery or mailing 
of a check which subsequently clears in due course will constitute an 
effective contribution on the date of delivery or mailing. If a taxpayer 
unconditionally delivers or mails a properly endorsed stock certificate 
to a charitable donee or the donee's agent, the gift is completed on the 
date of delivery or, if such certificate is received in the ordinary 
course of the mails, on the date of mailing. If the donor delivers the 
stock certificate to his bank or broker as the donor's agent, or to the 
issuing corporation or its agent, for transfer into the name of the 
donee, the gift is completed on the date the stock is transferred on the 
books of the corporation. For rules relating to the date of payment of a 
contribution consisting of a future interest in tangible personal 
property, see section 170(a)(3) and Sec. 1.170A-5.
    (c) Value of a contribution in property. (1) If a charitable 
contribution is made in property other than money, the amount of the 
contribution is the fair market value of the property at the time of the 
contribution reduced as provided in section 170(e)(1) and paragraph (a) 
of Sec. 1.170A-4, or section 170(e)(3) and paragraph (c) of Sec. 
1.170A-4A.
    (2) The fair market value is the price at which the property would 
change hands between a willing buyer and a willing seller, neither being 
under any compulsion to buy or sell and both having reasonable knowledge 
of relevant facts. If the contribution is made in property of a type 
which the taxpayer sells in the course of his business, the fair market 
value is the price which the taxpayer would have received if he had sold 
the contributed property in the usual market in which he customarily 
sells, at the time and place of the contribution and, in the case of a 
contribution of goods in quantity, in the quantity contributed. The 
usual market of a manufacturer or other producer consists of the 
wholesalers or other distributors to or through whom he customarily 
sells, but if he sells only at retail the usual market consists of his 
retail customers.
    (3) If a donor makes a charitable contribution of property, such as 
stock in trade, at a time when he could not reasonably have been 
expected to realize its usual selling price, the value of the gift is 
not the usual selling price but is the amount for which the quantity of 
property contributed would have been sold by the donor at the time of 
the contribution.
    (4) Any costs and expenses pertaining to the contributed property 
which were incurred in taxable years preceding the year of contribution 
and are properly reflected in the opening inventory for the year of 
contribution must be removed from inventory and are not a part of the 
cost of goods sold for purposes of determining gross income for the year 
of contribution. Any costs and expenses pertaining to the contributed 
property which are incurred in the year of contribution and would, under 
the method of accounting used, be properly reflected in the cost of 
goods sold for such year are to be treated as part of the costs of goods 
sold for such year. If costs and expenses incurred in producing or 
acquiring the contributed property are, under the method of accounting 
used, properly deducted under section 162 or other section of the Code, 
such costs and expenses will be allowed

[[Page 42]]

as deductions for the taxable year in which they are paid or incurred 
whether or not such year is the year of the contribution. Any such costs 
and expenses which are treated as part of the cost of goods sold for the 
year of contribution, and any such costs and expenses which are properly 
deducted under section 162 or other section of the Code, are not to be 
treated under any section of the Code as resulting in any basis for the 
contributed property. Thus, for example, the contributed property has no 
basis for purposes of determining under section 170(e)(1)(A) and 
paragraph (a) of Sec. 1.170A-4 the amount of gain which would have been 
recognized if such property had been sold by the donor at its fair 
market value at the time of its contribution. The amount of any 
charitable contribution for the taxable year is not to be reduced by the 
amount of any costs or expenses pertaining to the contributed property 
which was properly deducted under section 162 or other section of the 
Code for any taxable year preceding the year of the contribution. This 
subparagraph applies only to property which was held by the taxpayer for 
sale in the course of a trade or business. The application of this 
subparagraph may be illustrated by the following examples:

    Example 1. In 1970, A, an individual using the calendar year as the 
taxable year and the accrual method of accounting, contributed to a 
church property from inventory having a fair market value of $600. The 
closing inventory at the end of 1969 properly included $400 of costs 
attributable to the acquisition of such property, and in 1969 A properly 
deducted under section 162 $50 of administrative and other expenses 
attributable to such property. Under section 170(e)(1)(A) and paragraph 
(a) of Sec. 1.170A-4, the amount of the charitable contribution allowed 
for 1970 is $400 ($600-[$600-$400]). Pursuant to this subparagraph, the 
cost of goods sold to be used in determining gross income for 1970 may 
not include the $400 which was included in opening inventory for that 
year.
    Example 2. The facts are the same as in Example 1 except that the 
contributed property was acquired in 1970 at a cost of $400. The $400 
cost of the property is included in determining the cost of goods sold 
for 1970, and $50 is allowed as a deduction for that year under section 
162. A is not allowed any deduction under section 170 for the 
contributed property, since under section 170(e)(1)(A) and paragraph (a) 
of Sec. 1.170A-4 the amount of the charitable contribution is reduced 
to zero ($600-[$600-$0]).
    Example 3. In 1970, B, an individual using the calendar year as the 
taxable year and the accrual method of accounting, contributed to a 
church property from inventory having a fair market value of $600. Under 
Sec. 1.471-3(c), the closing inventory at the end of 1969 properly 
included $450 costs attributable to the production of such property, 
including $50 of administrative and other indirect expenses which, under 
his method of accounting, was properly added to inventory rather than 
deducted as a business expense. Under section 170(e)(1)(A) and paragraph 
(a) of Sec. 1.170A-4, the amount of the charitable contribution allowed 
for 1970 is $450 ($600-[$600-$450]). Pursuant to this subparagraph, the 
cost of goods sold to be used in determining gross income for 1970 may 
not include the $450 which was included in opening inventory for that 
year.
    Example 4. The facts are the same as in Example 3 except that the 
contributed property was produced in 1970 at a cost of $450, including 
$50 of administrative and other indirect expenses. The $450 cost of the 
property is included in determining the cost of goods sold for 1970. B 
is not allowed any deduction under section 170 for the contributed 
property, since under section 170(e)(1)(A) and paragraph (a) of Sec. 
1.170A-4 the amount of the charitable contribution is reduced to zero 
($600-[$600-$0]).
    Example 5. In 1970, C, a farmer using the cash method of accounting 
and the calendar year as the taxable year, contributed to a church a 
quantity of grain which he had raised having a fair market value of 
$600. In 1969, C paid expenses of $450 in raising the property which he 
properly deducted for such year under section 162. Under section 
170(e)(1)(A) and paragraph (a) of Sec. 1.170A-4, the amount of the 
charitable contribution in 1970 is reduced to zero ($600-[$600-$0]). 
Accordingly, C is not allowed any deduction under section 170 for the 
contributed property.
    Example 6. The facts are the same as in Example 5 except that the 
$450 expenses incurred in raising the contributed property were paid in 
1970. The result is the same as in Example 5, except the amount of $450 
is deductible under section 162 for 1970.

    (5) Transfers of property to an organization described in section 
170(c) which bear a direct relationship to the taxpayer's trade or 
business and which are made with a reasonable expectation of financial 
return commensurate with the amount of the transfer may constitute 
allowable deductions as trade or business expenses rather than as 
charitable contributions. See section 162 and the regulations 
thereunder.

[[Page 43]]

    (d) Purchase of an annuity. (1) In the case of an annuity or portion 
thereof purchased from an organization described in section 170(c), 
there shall be allowed as a deduction the excess of the amount paid over 
the value at the time of purchase of the annuity or portion purchased.
    (2) The value of the annuity or portion is the value of the annuity 
determined in accordance with paragraph (e)(1)(iii) (b)(2) of Sec. 
1.101-2.
    (3) For determining gain on any such transaction constituting a 
bargain sale, see section 1011(b) and Sec. 1.1011-2.
    (e) Transfers subject to a condition or power. If as of the date of 
a gift a transfer for charitable purposes is dependent upon the 
performance of some act or the happening of a precedent event in order 
that it might become effective, no deduction is allowable unless the 
possibility that the charitable transfer will not become effective is so 
remote as to be negligible. If an interest in property passes to, or is 
vested in, charity on the date of the gift and the interest would be 
defeated by the subsequent performance of some act or the happening of 
some event, the possibility of occurrence of which appears on the date 
of the gift to be so remote as to be negligible, the deduction is 
allowable. For example, A transfers land to a city government for as 
long as the land is used by the city for a public park. If on the date 
of the gift the city does plan to use the land for a park and the 
possibility that the city will not use the land for a public park is so 
remote as to be negligible, A is entitled to a deduction under section 
170 for his charitable contribution.
    (f) Special rules applicable to certain contributions. (1) See 
section 14 of the Wild and Scenic Rivers Act (Pub. L. 90-542, 82 Stat. 
918) for provisions relating to the claim and allowance of the value of 
certain easements as a charitable contribution under section 170.
    (2) For treatment of gifts accepted by the Secretary of State or the 
Secretary of Commerce, for the purpose of organizing and holding an 
international conference to negotiate a Patent Corporation Treaty, as 
gifts to or for the use of the United States, see section 3 of joint 
resolution of December 24, 1969 (Pub. L. 91-160, 83 Stat. 443).
    (3) For treatment of gifts accepted by the Secretary of the 
Department of Housing and Urban Development, for the purpose of aiding 
or facilitating the work of the Department, as gifts to or for the use 
of the United States, see section 7(k) of the Department of Housing and 
Urban Development Act (42 U.S.C. 3535), as added by section 905 of Pub. 
L. 91-609 (84 Stat. 1809).
    (g) Contributions of services. No deduction is allowable under 
section 170 for a contribution of services. However, unreimbursed 
expenditures made incident to the rendition of services to an 
organization contributions to which are deductible may constitute a 
deductible contribution. For example, the cost of a uniform without 
general utility which is required to be worn in performing donated 
services is deductible. Similarly, out-of-pocket transportation expenses 
necessarily incurred in performing donated services are deductible. 
Reasonable expenditures for meals and lodging necessarily incurred while 
away from home in the course of performing donated services also are 
deductible. For the purposes of this paragraph, the phrase while away 
from home has the same meaning as that phrase is used for purposes of 
section 162 and the regulations thereunder.
    (h) Payment in exchange for consideration--(1) Burden on taxpayer to 
show that all or part of payment is a charitable contribution or gift. 
No part of a payment that a taxpayer makes to or for the use of an 
organization described in section 170(c) that is in consideration for 
(as defined in Sec. 1.170A-13(f)(6)) goods or services (as defined in 
Sec. 1.170A-13(f)(5)) is a contribution or gift within the meaning of 
section 170(c) unless the taxpayer--
    (i) Intends to make a payment in an amount that exceeds the fair 
market value of the goods or services; and
    (ii) Makes a payment in an amount that exceeds the fair market value 
of the goods or services.
    (2) Limitation on amount deductible--(i) In general. The charitable 
contribution deduction under section 170(a) for a payment a taxpayer 
makes partly in consideration for goods or services may not exceed the 
excess of--
    (A) The amount of any cash paid and the fair market value of any 
property

[[Page 44]]

(other than cash) transferred by the taxpayer to an organization 
described in section 170(c); over
    (B) The fair market value of the goods or services the organization 
provides in return.
    (ii) Special rules. For special limits on the deduction for 
charitable contributions of ordinary income and capital gain property, 
see section 170(e) and Sec. Sec. 1.170A-4 and 1.170A-4A.
    (3) Certain goods or services disregarded. For purposes of section 
170(a) and paragraphs (h)(1) and (h)(2) of this section, goods or 
services described in Sec. 1.170A-13(f)(8)(i) or Sec. 1.170A-
13(f)(9)(i) are disregarded.
    (4) Donee estimates of the value of goods or services may be treated 
as fair market value--(i) In general. For purposes of section 170(a), a 
taxpayer may rely on either a contemporaneous written acknowledgment 
provided under section 170(f)(8) and Sec. 1.170A-13(f) or a written 
disclosure statement provided under section 6115 for the fair market 
value of any goods or services provided to the taxpayer by the donee 
organization.
    (ii) Exception. A taxpayer may not treat an estimate of the value of 
goods or services as their fair market value if the taxpayer knows, or 
has reason to know, that such treatment is unreasonable. For example, if 
a taxpayer knows, or has reason to know, that there is an error in an 
estimate provided by an organization described in section 170(c) 
pertaining to goods or services that have a readily ascertainable value, 
it is unreasonable for the taxpayer to treat the estimate as the fair 
market value of the goods or services. Similarly, if a taxpayer is a 
dealer in the type of goods or services provided in consideration for 
the taxpayer's payment and knows, or has reason to know, that the 
estimate is in error, it is unreasonable for the taxpayer to treat the 
estimate as the fair market value of the goods or services.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (h).

    Example 1. Certain goods or services disregarded. Taxpayer makes a 
$50 payment to Charity B, an organization described in section 170(c), 
in exchange for a family membership. The family membership entitles 
Taxpayer and members of Taxpayer's family to certain benefits. These 
benefits include free admission to weekly poetry readings, discounts on 
merchandise sold by B in its gift shop or by mail order, and invitations 
to special events for members only, such as lectures or informal 
receptions. When B first offers its membership package for the year, B 
reasonably projects that each special event for members will have a cost 
to B, excluding any allocable overhead, of $5 or less per person 
attending the event. Because the family membership benefits are 
disregarded pursuant to Sec. 1.170A-13(f)(8)(i), Taxpayer may treat the 
$50 payment as a contribution or gift within the meaning of section 
170(c), regardless of Taxpayer's intent and whether or not the payment 
exceeds the fair market value of the goods or services. Furthermore, any 
charitable contribution deduction available to Taxpayer may be 
calculated without regard to the membership benefits.
    Example 2. Treatment of good faith estimate at auction as the fair 
market value. Taxpayer attends an auction held by Charity C, an 
organization described in section 170(c). Prior to the auction, C 
publishes a catalog that meets the requirements for a written disclosure 
statement under section 6115(a) (including C's good faith estimate of 
the value of items that will be available for bidding). A representative 
of C gives a copy of the catalog to each individual (including Taxpayer) 
who attends the auction. Taxpayer notes that in the catalog C's estimate 
of the value of a vase is $100. Taxpayer has no reason to doubt the 
accuracy of this estimate. Taxpayer successfully bids and pays $500 for 
the vase. Because Taxpayer knew, prior to making her payment, that the 
estimate in the catalog was less than the amount of her payment, 
Taxpayer satisfies the requirement of paragraph (h)(1)(i) of this 
section. Because Taxpayer makes a payment in an amount that exceeds that 
estimate, Taxpayer satisfies the requirements of paragraph (h)(1)(ii) of 
this section. Taxpayer may treat C's estimate of the value of the vase 
as its fair market value in determining the amount of her charitable 
contribution deduction.
    Example 3. Good faith estimate not in error. Taxpayer makes a $200 
payment to Charity D, an organization described in section 170(c). In 
return for Taxpayer's payment, D gives Taxpayer a book that Taxpayer 
could buy at retail prices typically ranging from $18 to $25. D provides 
Taxpayer with a good faith estimate, in a written disclosure statement 
under section 6115(a), of $20 for the value of the book. Because the 
estimate is within the range of typical retail prices for the book, the 
estimate contained in the written disclosure statement is not in error. 
Although Taxpayer knows that the book is sold for as much as $25, 
Taxpayer may treat the estimate of $20 as the fair market value of

[[Page 45]]

the book in determining the amount of his charitable contribution 
deduction.

    (i) [Reserved]
    (j) Exceptions and other rules. (1) The provisions of section 170 do 
not apply to contributions by an estate; nor do they apply to a trust 
unless the trust is a private foundation which, pursuant to section 
642(c)(6) and Sec. 1.642(c)-4, is allowed a deduction under section 170 
subject to the provisions applicable to individuals.
    (2) No deduction shall be allowed under section 170 for a charitable 
contribution to or for the use of an organization or trust described in 
section 508(d) or 4948(c)(4), subject to the conditions specified in 
such sections and the regulations thereunder.
    (3) For disallowance of deductions for contributions to or for the 
use of communist controlled organizations, see section 11(a) of the 
Internal Security Act of 1950, as amended (50 U.S.C. 790).
    (4) For denial of deductions for charitable contributions as trade 
or business expenses and rules with respect to treatment of payments to 
organizations other than those described in section 170(c), see section 
162 and the regulations thereunder.
    (5) No deduction shall be allowed under section 170 for amounts paid 
to an organization:
    (i) Which is disqualified for tax exemption under section 501(c)(3) 
by reason of attempting to influence legislation, or
    (ii) Which participates in, or intervenes in (including the 
publishing or distribution of statements), any political campaign on 
behalf of or in opposition to any candidate for public office.

For purposes of determining whether an organization is attempting to 
influence legislation or is engaging in political activities, see 
sections 501(c)(3), 501(h), 4911 and the regulations thereunder.
    (6) No deduction shall be allowed under section 170 for expenditures 
for lobbying purposes, the promotion or defeat of legislation, etc. See 
also the regulations under sections 162 and 4945.
    (7) No deduction for charitable contributions is allowed in 
computing the taxable income of a common trust fund or of a partnership. 
See sections 584(d)(3) and 703(a)(2)(D). However, a partner's 
distributive share of charitable contributions actually paid by a 
partnership during its taxable year may be allowed as a deduction in the 
partner's separate return for his taxable year with or within which the 
taxable year of the partnership ends, to the extent that the aggregate 
of his share of the partnership contributions and his own contributions 
does not exceed the limitations in section 170(b).
    (8) For charitable contributions paid by a nonresident alien 
individual or a foreign corporation, see Sec. 1.170A-4(b)(5) and 
sections 873, 876, 877, and 882(c), and the regulations thereunder.
    (9) Charitable contributions paid by bona fide residents of a 
section 931 possession as defined in Sec. 1.931-1(c)(1) or Puerto Rico 
are deductible only to the extent allocable to income that is not 
excluded under section 931 or 933. For the rules for allocating 
deductions for charitable contributions, see the regulations under 
section 861.
    (10) For carryover of excess charitable contributions in certain 
corporate acquisitions, see section 381(c)(19) and the regulations 
thereunder.
    (11) No deduction shall be allowed under section 170 for out-of-
pocket expenditures on behalf of an eligible organization (within the 
meaning of Sec. 1.501(h)-2(b)(1)) if the expenditure is made in 
connection with influencing legislation (within the meaning of section 
501(c)(3) or Sec. 56.4911-2), or in connection with the payment of the 
organization's tax liability under section 4911. For the treatment of 
similar expenditures on behalf of other organizations see paragraph 
(h)(6) of this section.
    (k) Effective/applicability date. In general this section applies to 
contributions made in taxable years beginning after December 31, 1969. 
Paragraph (j)(11) of this section, however, applies only to out-of-
pocket expenditures made in taxable years beginning after December 31, 
1976. In addition, paragraph (h) of this section applies only to 
payments made on or after December 16, 1996. However, taxpayers may rely 
on the rules of paragraph (h) of this section for payments made on or 
after January 1, 1994. Paragraph (j)(9) of this

[[Page 46]]

section is applicable for taxable years ending after April 9, 2008.

(68A Stat. 58, 26 U.S.C. 170(a)(1); 68A Stat. 917, 26 U.S.C. 7805)

[T.D. 7207, 37 FR 20771, Oct. 4, 1972, as amended by T.D. 7340, 40 FR 
1238, Jan. 7, 1975; T.D. 7807, 47 FR 4510, Feb. 1, 1982; T.D. 8002, 49 
FR 50666, Dec. 31, 1984; T.D. 8308, 55 FR 35587, Aug. 31, 1990; T.D. 
8690, 61 FR 65951, Dec. 16, 1996; T.D. 9194, 70 FR 18928, Apr. 11, 2005; 
T.D. 9391, 73 FR 19358, Apr. 9, 2008]



Sec. 1.170A-2  Amounts paid to maintain certain students as members 
of the taxpayer's household.

    (a) In general. (1) The term charitable contributions includes 
amounts paid by the taxpayer during the taxable year to maintain certain 
students as members of his household which, under the provisions of 
section 170(h) and this section, are treated as amounts paid for the use 
of an organization described in section 170(c) (2), (3), or (4), and 
such amounts, to the extent they do not exceed the limitations under 
section 170(h)(2) and paragraph (b) of this section, are contributions 
deductible under section 170. In order for such amounts to be so 
treated, the student must be an individual who is neither a dependent 
(as defined in section 152) of the taxpayer nor related to the taxpayer 
in a manner described in any of the paragraphs (1) through (8) of 
section 152(a), and such individual must be a member of the taxpayer's 
household pursuant to a written agreement between the taxpayer and an 
organization described in section 170(c) (2), (3), or (4) to implement a 
program of the organization to provide educational opportunities for 
pupils or students placed in private homes by such organization. 
Furthermore, such amounts must be paid to maintain such individual 
during the period in the taxable year he is a member of the taxpayer's 
household and is a full-time pupil or student in the 12th or any lower 
grade at an educational institution, as defined in section 151(e)(4) and 
Sec. 1.151-3, located in the United States. Amounts paid outside of 
such period, but within the taxable year, for expenses necessary for the 
maintenance of the student during the period will qualify for the 
charitable contributions deduction if the other limitation requirements 
of the section are met.
    (2) For purposes of subparagraph (1) of this paragraph, amounts 
treated as charitable contributions include only those amounts actually 
paid by the taxpayer during the taxable year which are directly 
attributable to the maintenance of the student while he is a member of 
the taxpayer's household and is attending an educational institution on 
a full-time basis. This would include amounts paid to insure the well-
being of the individual and to carry out the purpose for which the 
individual was placed in the taxpayer's home. For example, a deduction 
under section 170 would be allowed for amounts paid for books, tuition, 
food, clothing, transportation, medical and dental care, and recreation 
for the individual. Amounts treated as charitable contributions under 
this section do not include amounts which the taxpayer would have 
expended had the student not been in the household. They would not 
include, for example, amounts paid in connection with the taxpayer's 
home for taxes, insurance, interest on a mortgage, repairs, etc. 
Moreover, such amounts do not include any depreciation sustained by the 
taxpayer in maintaining such student or students in his household, nor 
do they include the value of any services rendered on behalf of such 
student or students by the taxpayer or any member of the taxpayer's 
household.
    (3) For purposes of section 170(h) and this section, an individual 
will be considered to be a full-time pupil or student at an educational 
institution only if he is enrolled for a course of study prescribed for 
a full-time student at such institution and is attending classes on a 
full-time basis. Nevertheless, such individual may be absent from school 
due to special circumstances and still be considered to be in full-time 
attendance. Periods during the regular school term when the school is 
closed for holidays, such as Christmas and Easter, and for periods 
between semesters are treated as periods during which the pupil or 
student is in full-time attendance at the school. Also, absences during 
the regular school term due to illness of such individual

[[Page 47]]

shall not prevent him from being considered as a full-time pupil or 
student. Similarly, absences from the taxpayer's household due to 
special circumstances will not disqualify the student as a member of the 
household. Summer vacations between regular school terms are not 
considered periods of school attendance.
    (4) When claiming a deduction for amounts described in section 
170(h) and this section, the taxpayer must submit with his return a copy 
of his agreement with the organization sponsoring the individual placed 
in the taxpayer's household, together with a summary of the various 
items for which amounts were paid to maintain such individual, and a 
statement as to the date the individual became a member of the household 
and the period of his full-time attendance at school and the name and 
location of such school. Substantiation of amounts claimed must be 
supported by adequate records of the amounts actually paid. Due to the 
nature of certain items, such as food, a record of amount spent for all 
members of the household, with an equal portion thereof allocated to 
each member, will be acceptable.
    (b) Limitations. Section 170(h) and this section shall apply to 
amounts paid during the taxable year only to the extent that the amounts 
paid in maintaining each pupil or student do not exceed $50 multiplied 
by the number of full calendar months in the taxable year that the pupil 
or student is maintained in accordance with the provisions of this 
section. For purposes of such limitation if 15 or more days of a 
calendar month fall within the period to which the maintenance of such 
pupil or student relates, such month is considered as a full calendar 
month. To the extent that such amounts qualify as charitable 
contributions under section 170(c), the aggregate of such amounts plus 
other contributions made during the taxable year for the use of an 
organization described in section 170(c) is deductible under section 170 
subject to the limitation provided in section 170(b)(1)(B) and paragraph 
(c) of Sec. 1.170A-8.
    (c) Compensation or reimbursement. Amounts paid during the taxable 
year to maintain a pupil or student as a member of the taxpayer's 
household as provided in paragraph (a) of this section, shall not be 
taken into account under section 170(h) and this section, if the 
taxpayer receives any money or other property as compensation or 
reimbursement for any portion of such amounts. The taxpayer will not be 
denied the benefits of section 170(h) if he prepays an extraordinary or 
nonrecurring expense such as a hospital bill or vacation trip, at the 
request of the individual's parents or the sponsoring organization and 
is reimbursed for such prepayment. The value of services performed by 
the pupil or student in attending to ordinary chores of the household 
will generally not be considered to constitute compensation or 
reimbursement. However, if the pupil or student is taken into the 
taxpayer's household to replace a former employee of the taxpayer or 
gratuitously to perform substantial services for the taxpayer, the facts 
and circumstances may warrant a conclusion that the taxpayer received 
reimbursement for maintaining the pupil or student.
    (d) No other amount allowed as deduction. Except to the extent that 
amounts described in section 170(h) and this section are treated as 
charitable contributions under section 170(c) and, therefore, deductible 
under section 170(a), no deduction is allowed for any amount paid to 
maintain an individual, as a member of the taxpayer's household, in 
accordance with the provisions of section 170(h) and this section.
    (e) Illustrations. The application of this section may be 
illustrated by the following examples:

    Example 1. The X organization is an organization described in 
section 170(c)(2) and is engaged in a program under which a number of 
European children are placed in the homes of U.S. residents in order to 
further the children's high school education. In accordance with 
paragraph (a) of this section, the taxpayer, A, who reports his income 
on the calendar year basis, agreed with X to take two of the children, 
and they were placed in the taxpayer's home on January 2, 1970, where 
they remained until January 21, 1971, during which time they were fully 
maintained by the taxpayer. The children enrolled at the local high 
school for the full course of study prescribed for 10th grade students 
and attended the school on a full-time basis for the spring semester 
starting January 18, 1970,

[[Page 48]]

and ending June 3, 1970, and for the fall semester starting September 1, 
1970, and ending January 13, 1971. The total cost of food paid by A in 
1970 for himself, his wife, and the two children amounted to $1,920, or 
$40 per month for each member of the household. Since the children were 
actually full-time students for only 8\1/2\ months during 1970, the 
amount paid for food for each child during that period amounted to $340. 
Other amounts paid during the 8 1/2-month period for each child for 
laundry, lights, water, recreation, and school supplies amounted to 
$160. Thus, the amounts treated under section 170(h) and this section as 
paid for the use of X would, with respect to each child, total $500 
($340+$160), or a total for both children of $1,000, subject to the 
limitations of paragraph (b) of this section. Since, for purposes of 
such limitations, the children were full-time students for only 8 full 
calendar months during 1970 (less than 15 days in January 1970), the 
taxpayer may treat only $800 as a charitable contribution made in 1970, 
that is, $50 multiplied by the 8 full calendar months, or $400 paid for 
the maintenance of each child. Neither the excess payments nor amounts 
paid to maintain the children during the period before school opened and 
for the period in summer between regular school terms is taken into 
account by reason of section 170(h). Also, because the children were 
full-time students for less than 15 days in January 1971 (although 
maintained in the taxpayer's household for 21 days), amounts paid to 
maintain the children during 1971 would not qualify as a charitable 
contribution.
    Example 2. A religious organization described in section 170(c)(2) 
has a program for providing educational opportunities for children it 
places in private homes. In order to implement the program, the 
taxpayer, H, who resides with his wife, son, and daughter of high school 
age in a town in the United States, signs an agreement with the 
organization to maintain a girl sponsored by the organization as a 
member of his household while the child attends the local high school 
for the regular 1970-71 school year. The child is a full-time student at 
the school during the school year starting September 6, 1970, and ending 
June 6, 1971, and is a member of the taxpayer's household during that 
period. Although the taxpayer pays $200 during the school period falling 
in 1970, and $240 during the school period falling in 1971, to maintain 
the child, he cannot claim either amount as a charitable contribution 
because the child's parents, from time to time during the school year, 
send butter, eggs, meat, and vegetables to H to help defray the expenses 
of maintaining the child. This is considered property received as 
reimbursement under paragraph (c) of this section. Had her parents not 
contributed the food, the fact that the child, in addition to the normal 
chores she shared with the taxpayer's daughter, such as cleaning their 
own rooms and helping with the shopping and cooking, was responsible for 
the family laundry and for the heavy cleaning of the entire house while 
the taxpayer's daughter had no comparable responsibilities would also 
preclude a claim for a charitable contributions deduction. These 
substantial gratuitous services are considered property received as 
reimbursement under paragraph (c) of this section.
    Example 3. A taxpayer resides with his wife in a city in the eastern 
United States. He agrees, in writing, with a fraternal society described 
in section 170(c)(4) to accept a child selected by the society for 
maintenance by him as a member of his household during 1971 in order 
that the child may attend the local grammar school as a part of the 
society's program to provide elementary education for certain children 
selected by it. The taxpayer maintains the child, who has as his 
principal place of abode the home of the taxpayer, and is a member of 
the taxpayer's household, during the entire year 1971. The child is a 
full-time student at the local grammar school for 9 full calendar months 
during the year. Under the agreement, the society pays the taxpayer $30 
per month to help maintain the child. Since the $30 per month is 
considered as compensation or reimbursement to the taxpayer for some 
portion of the maintenance paid on behalf of the child, no amounts paid 
with respect to such maintenance can be treated as amounts paid in 
accordance with section 170(h). In the absence of the $30 per month 
payments, if the child qualifies as a dependent of the taxpayer under 
section 152(a)(9), that fact would also prevent the maintenance payments 
from being treated as charitable contributions paid for the use of the 
fraternal society.

    (f) Effective date. This section applies only to contributions paid 
in taxable years beginning after December 31, 1969.

[T.D. 7207, 37 FR 20774, Oct. 4, 1972]



Sec. 1.170A-3  Reduction of charitable contribution for interest on 
certain indebtedness.

    (a) In general. Section 170(f)(5) requires that the amount of a 
charitable contribution be reduced for certain interest to the extent 
necessary to avoid the deduction of the same amount both as an interest 
deduction under section 163 and as a deduction for charitable 
contributions under section 170. The reduction is to be determined in 
accordance with paragraphs (b) and (c) of this section.

[[Page 49]]

    (b) Interest attributable to postcontribution period. In determining 
the amount to be taken into account as a charitable contribution for 
purposes of section 170, the amount determined without regard to section 
170(f)(5) or this section shall be reduced by the amount of interest 
which has been paid, or is to be paid, by the taxpayer, which is 
attributable to any liability connected with the contribution, and which 
is attributable to any period of time after the making of the 
contribution. The deduction otherwise allowable for charitable 
contributions under section 170 is required to be reduced pursuant to 
section 170(f)(5) and this section only if, in connection with a 
charitable contribution, a liability is assumed by the recipient of the 
contribution or by any other person or if the charitable contribution is 
of property which is subject to a liability. Thus, if a charitable 
contribution is made in property and the transfer is conditioned upon 
the assumption of a liability by the donee or by some other person, the 
contribution must be reduced by the amount of any interest which has 
been paid, or will be paid, by the taxpayer, which is attributable to 
the liability, and which is attributable to any period after the making 
of the contribution. The adjustment referred to in this paragraph must 
also be made where the contributed property is subject to a liability 
and the value of the property reflects the payment by the donor of 
interest with respect to a period of time after the making of the 
contribution.
    (c) Interest attributable to precontribution period. If, in 
connection with the charitable contribution of a bond, a liability is 
assumed by the recipient or by any other person, or if the bond is 
subject to a liability, then, in determining the amount to be taken into 
account as a charitable contribution under section 170, the amount 
determined without regard to section 170(f)(5) and this section shall, 
without regard to whether any reduction may be required by paragraph (b) 
of this section, also be reduced for interest which has been paid, or is 
to be paid, by the taxpayer on indebtedness incurred or continued to 
purchase or carry such bond, and which is attributable to any period 
before the making of the contribution. However, the reduction referred 
to in this paragraph shall be made only to the extent that such 
reduction does not exceed the interest (including bond discount and 
other interest equivalent) receivable on the bond, and attributable to 
any period before the making of the contribution which is not, by reason 
of the taxpayer's method of accounting, includible in the taxpayer's 
gross income for any taxable year. For purposes of section 170(f)(5) and 
this section the term bond means any bond, debenture, note, or 
certificate or other evidence of indebtedness.
    (d) Illustrations. The application of this section may be 
illustrated by the following examples:

    Example 1. On January 1, 1970, A, a cash basis taxpayer using the 
calendar year as the taxable year, contributed to a charitable 
organization real estate having a fair market value and adjusted basis 
of $10,000. In connection with the contribution the charitable 
organization assumed an indebtedness of $8,000 which A had incurred. On 
December 31, 1969, A prepaid one year's interest on that indebtedness 
for 1970, amounting to $960, and took an interest deduction of $960 for 
such amount. The amount of the gift, determined without regard to this 
section, is $2,960 ($10,000 less $8,000, the outstanding indebtedness, 
plus $960, the amount of prepaid interest). In determining the amount of 
the deduction for the charitable contribution, the value of the gift 
($2,960) must be reduced by $960 to eliminate from the computation of 
such deduction that portion thereof for which A has been allowed an 
interest deduction.
    Example 2. (a) On January 1, 1970, B, an individual using the cash 
receipts and disbursements method of accounting, purchased for $9,950 a 
5\1/2\ percent $10,000, 20-year M Corporation bond, the interest on 
which was payable semiannually on June 30 and December 31. The M 
Corporation had issued the bond on January 1, 1960, at a discount of 
$720 from the principal amount. On December 1, 1970, B donated the bond 
to a charitable organization, and, in connection with the contribution, 
the charitable organization assumed an indebtedness of $7,000 which B 
had incurred to purchase and carry the bond.
    (b) During the calendar year 1970 B paid accrued interest of $330 on 
the indebtedness for the period from January 1, 1970, to December 1, 
1970, and has taken an interest deduction of $330 for such amount. No 
portion of the bond discount of $36 a year ($720 divided by 20 years) 
has been included in B's income, and of the $550 of annual interest 
receivable on

[[Page 50]]

the bond, he included in income only the June 30, 1970, payment of $275.
    (c) The market value of the bond on December 1, 1970, was $9,902. 
Such value includes $229 of interest receivable which had accrued from 
July 1 to December 1, 1970.
    (d) The amount of the charitable contribution determined without 
regard to this section is $2,902 ($9,902, the value of the property on 
the date of gift, less $7,000, the amount of the liability assumed by 
the charitable organization). In determining the amount of the allowable 
deduction for charitable contributions, the value of the gift ($2,902) 
must be reduced to eliminate from the deduction that portion thereof for 
which B has been allowed an interest deduction. Although the amount of 
such interest deduction was $330, the reduction required by this section 
is limited to $262, since the reduction is not in excess of the amount 
of interest income on the bond ($229 of accrued interest plus $33, the 
amount of bond discount attributable to the 11-month period B held the 
bond).

    (e) Effective date. This section applies only to contributions paid 
in taxable years beginning after December 31, 1969.

[T.D. 7207, 37 FR 20775, Oct. 4, 1972]



Sec. 1.170A-4  Reduction in amount of charitable contributions of 
certain appreciated property.

    (a) Amount of reduction. Section 170(e)(1) requires that the amount 
of the charitable contribution which would be taken into account under 
section 170(a) without regard to section 170(e) shall be reduced before 
applying the percentage limitations under section 170(b):
    (1) In the case of a contribution by an individual or by a 
corporation of ordinary income property, as defined in paragraph (b)(1) 
of this section, by the amount of gain (hereinafter in this section 
referred to as ordinary income) which would have been recognized as gain 
which is not long-term capital gain if the property had been sold by the 
donor at its fair market value at the time of its contribution to the 
charitable organization,
    (2) In the case of a contribution by an individual of section 170(e) 
capital gain property, as defined in paragraph (b)(2) of this section, 
by 50 percent of the amount of gain (hereinafter in this section 
referred to as long-term capital gain) which would have been recognized 
as long-term capital gain if the property had been sold by the donor at 
its fair market value at the time of its contribution to the charitable 
organization, and
    (3) In the case of a contribution by a corporation of section 170(e) 
capital gain property, as defined in paragraph (b)(2) of this section, 
by 62\1/2\ percent of the amount of gain (hereinafter in this section 
referred to as long-term capital gain) which would have been recognized 
as long-term capital gain if the property had been sold by the donor at 
its fair market value at the time of its contribution to the charitable 
organization.

Section 170(e)(1) and this paragraph do not apply to reduce the amount 
of the charitable contribution where, by reason of the transfer of the 
contributed property, ordinary income or capital gain is recognized by 
the donor in the same taxable year in which the contribution is made. 
Thus, where income or gain is recognized under section 453(d) upon the 
transfer of an installment obligation to a charitable organization, or 
under section 454(b) upon the transfer of an obligation issued at a 
discount to such an organization, or upon the assignment of income to 
such an organization, section 170(e)(1) and this paragraph do not apply 
if recognition of the income or gain occurs in the same taxable year in 
which the contribution is made. Section 170(e)(1) and this paragraph 
apply to a charitable contribution of an interest in ordinary income 
property or section 170(e) capital gain property which is described in 
paragraph (b) of Sec. 1.170A-6, or paragraph (b) of Sec. 1.170A-7. For 
purposes of applying section 170(e)(1) and this paragraph it is 
immaterial whether the charitable contribution is made ``to'' the 
charitable organization or whether it is made ``for the use of'' the 
charitable organization. See Sec. 1.170A-8(a)(2).
    (b) Definitions and other rules. For purposes of this section:
    (1) Ordinary income property. The term ordinary income property 
means property any portion of the gain on which would not have been long 
term capital gain if the property had been sold by the donor at its fair 
market value at the time of its contribution to the charitable 
organization. Such term includes, for example, property held by

[[Page 51]]

the donor primarily for sale to customers in the ordinary course of his 
trade or business, a work of art created by the donor, a manuscript 
prepared by the donor, letters and memorandums prepared by or for the 
donor, a capital asset held by the donor for not more than 1 year (6 
months for taxable years beginning before 1977; 9 months for taxable 
years beginning in 1977), and stock described in section 306(a), 341(a), 
or 1248(a) to the extent that, after applying such section, gain on its 
disposition would not have been long-term capital gain. The term does 
not include an income interest in respect of which a deduction is 
allowed under section 170(f)(2)(B) and paragraph (c) of Sec. 1.170A-6.
    (2) Section 170(e) capital gain property. The term section 170(e) 
capital gain property means property any portion of the gain on which 
would have been treated as long-term capital gain if the property had 
been sold by the donor at its fair market value at the time of its 
contribution to the charitable organization and which:
    (i) Is contributed to or for the use of a private foundation, as 
defined in section 509(a) and the regulations thereunder, other than a 
private foundation described in section 170(b)(1)(E),
    (ii) Constitutes tangible personal property contributed to or for 
the use of a charitable organization, other than a private foundation to 
which subdivision (i) of this subparagraph applies, which is put to an 
unrelated use by the charitable organization within the meaning of 
subparagraph (3) of this paragraph, or
    (iii) Constitutes property not described in subdivision (i) or (ii) 
of this subparagraph which is 30-percent capital gain property to which 
an election under paragraph (d)(2) of Sec. 1.170A-8 applies.

For purposes of this subparagraph a fixture which is intended to be 
severed from real property shall be treated as tangible personal 
property.
    (3) Unrelated use--(i) In general. The term unrelated use means a 
use which is unrelated to the purpose or function constituting the basis 
of the charitable organization's exemption under section 501 or, in the 
case of a contribution of property to a governmental unit, the use of 
such property by such unit for other than exclusively public purposes. 
For example, if a painting contributed to an educational institution is 
used by that organization for educational purposes by being placed in 
its library for display and study by art students, the use is not an 
unrelated use; but if the painting is sold and the proceeds used by the 
organization for educational purposes, the use of the property is an 
unrelated use. If furnishings contributed to a charitable organization 
are used by it in its offices and buildings in the course of carrying 
out its functions, the use of the property is not an unrelated use. If a 
set or collection of items of tangible personal property is contributed 
to a charitable organization or governmental unit, the use of the set or 
collection is not an unrelated use if the donee sells or otherwise 
disposes of only an insubstantial portion of the set or collection. The 
use by a trust of tangible personal property contributed to it for the 
benefit of a charitable organization is an unrelated use if the use by 
the trust is one which would have been unrelated if made by the 
charitable organization.
    (ii) Proof of use. For purposes of applying subparagraph (2)(ii) of 
this paragraph, a taxpayer who makes a charitable contribution of 
tangible personal property to or for the use of a charitable 
organization or governmental unit may treat such property as not being 
put to an unrelated use by the donee if:
    (a) He establishes that the property is not in fact put to an 
unrelated use by the donee, or
    (b) At the time of the contribution or at the time the contribution 
is treated as made, it is reasonable to anticipate that the property 
will not be put to an unrelated use by the donee. In the case of a 
contribution of tangible personal property to or for the use of a 
museum, if the object donated is of a general type normally retained by 
such museum or other museums for museum purposes, it will be reasonable 
for the donor to anticipate, unless he has actual knowledge to the 
contrary, that the object will not be put to an unrelated use by the 
donee, whether or not the object is later sold or exchanged by the 
donee.

[[Page 52]]

    (4) Property used in trade or business. For purposes of applying 
subparagraphs (1) and (2) of this paragraph, property which is used in 
the trade or business, as defined in section 1231(b), shall be treated 
as a capital asset, except that any gain in respect of such property 
which would have been recognized if the property had been sold by the 
donor at its fair market value at the time of its contribution to the 
charitable organization shall be treated as ordinary income to the 
extent that such gain would have constituted ordinary income by reason 
of the application of section 617 (d)(1), 1245(a), 1250(a), 1251(c), 
1252(a), or 1254(a).
    (5) Nonresident alien individuals and foreign corporations. The 
reduction in the case of a nonresident alien individual or a foreign 
corporation shall be determined by taking into account the gain which 
would have been recognized and subject to tax under chapter 1 of the 
Code if the property had been sold or disposed of within the United 
States by the donor at its fair market value at the time of its 
contribution to the charitable organization. However, the amount of such 
gain which would have been subject to tax under section 871(a) or 881 
(relating to gain not effectively connected with the conduct of a trade 
or business within the United States) if there had been a sale or other 
disposition within the United States shall be treated as long-term 
capital gain. Thus, a charitable contribution by a nonresident alien 
individual or a foreign corporation of property the sale or other 
disposition of which within the United States would have resulted in 
gain subject to tax under section 871(a) or 881 will be reduced only as 
provided in section 170(e)(1)(B) and paragraph (a) (2) or (3) of this 
section, but only if the property contributed is described in 
subdivision (i), (ii), or (iii) of subparagraph (2) of this paragraph. A 
charitable contribution by a nonresident alien individual or a foreign 
corporation of property the sale or other disposition of which within 
the United States would have resulted in gain subject to tax under 
section 871(a) or 881 will in no case be reduced under section 
170(e)(1)(A) and paragraph (a)(1) of this section.
    (c) Allocation of basis and gain--(1) In general. Except as provided 
in subparagraph (2) of this paragraph:
    (i) If a taxpayer makes a charitable contribution of less than his 
entire interest in appreciated property, whether or not the transfer is 
made in trust, as, for example, in the case of a transfer of appreciated 
property to a pooled income fund described in section 642(c)(5) and 
Sec. 1.642(c)-5, and is allowed a deduction under section 170 for a 
portion of the fair market value of such property, then for purposes of 
applying the reduction rules of section 170(e)(1) and this section to 
the contributed portion of the property the taxpayer's adjusted basis in 
such property at the time of the contribution shall be allocated under 
section 170(e)(2) between the contributed portion of the property and 
the noncontributed portion.
    (ii) The adjusted basis of the contributed portion of the property 
shall be that portion of the adjusted basis of the entire property which 
bears the same ratio to the total adjusted basis as the fair market 
value of the contributed portion of the property bears to the fair 
market value of the entire property.
    (iii) The ordinary income and the long-term capital gain which shall 
be taken into account in applying section 170(e)(1) and paragraph (a) of 
this section to the contributed portion of the property shall be the 
amount of gain which would have been recognized as ordinary income and 
long-term capital gain if such contributed portion had been sold by the 
donor at its fair market value at the time of its contribution to the 
charitable organization.
    (2) Bargain sale. (i) Section 1011(b) and Sec. 1.1011-2 apply to 
bargain sales of property to charitable organizations. For purposes of 
applying the reduction rules of section 170(e)(1) and this section to 
the contributed portion of the property in the case of a bargain sale, 
there shall be allocated under section 1011(b) to the contributed 
portion of the property that portion of the adjusted basis of the entire 
property that bears the same ratio to the total adjusted basis as the 
fair market value of the contributed portion of the property bears to 
the fair market value of the

[[Page 53]]

entire property. For purposes of applying section 170(e)(1) and 
paragraph (a) of this section to the contributed portion of the property 
in such a case, there shall be allocated to the contributed portion the 
amount of gain that is not recognized on the bargain sale but that would 
have been recognized if such contributed portion had been sold by the 
donor at its fair market value at the time of its contribution to the 
charitable organization.
    (ii) The term bargain sale, as used in this subparagraph, means a 
transfer of property which is in part a sale or exchange of the property 
and in part a charitable contribution, as defined in section 170(c), of 
the property.
    (3) Ratio of ordinary income and capital gain. For purposes of 
applying subparagraphs (1)(iii) and (2)(i) of this paragraph, the amount 
of ordinary income (or long-term capital gain) which would have been 
recognized if the contributed portion of the property had been sold by 
the donor at its fair market value at the time of its contribution shall 
be that amount which bears the same ratio to the ordinary income (or 
long-term capital gain) which would have been recognized if the entire 
property had been sold by the donor at its fair market value at the time 
of its contribution as (i) the fair market value of the contributed 
portion at such time bears to (ii) the fair market value of the entire 
property at such time. In the case of a bargain sale, the fair market 
value of the contributed portion for purposes of subdivision (i) is the 
amount determined by subtracting from the fair market value of the 
entire property the amount realized on the sale.
    (4) Donee's basis of property acquired. The adjusted basis of the 
contributed portion of the property, as determined under subparagraph 
(1) or (2) of this paragraph, shall be used by the donee in applying to 
the contributed portion such provisions as section 514(a)(1), relating 
to adjusted basis of debt-financed property; section 1015(a), relating 
to basis of property acquired by gift; section 4940(c)(4), relating to 
capital gains and losses in determination of net investment income; and 
section 4942(f)(2)(B), relating to net short-term capital gain in 
determination of tax on failure to distribute income. The fair market 
value of the contributed portion of the property at the time of the 
contribution shall not be used by the donee as the basis of such 
contributed portion.
    (d) Illustrations. The application of this section may be 
illustrated by the following examples:

    Example 1. (a) On July 1, 1970, C, an individual, makes the 
following charitable contributions, all of which are made to a church 
except in the case of the stock (as indicated):

------------------------------------------------------------------------
                                            Fair
                Property                   market   Adjusted  Recognized
                                            value     basis    gain sold
------------------------------------------------------------------------
Ordinary income property................   $50,000   $35,000    $15,000
Property which, if sold, would produce
 long-term capital gain:
  (1) Stock held more than 6 months
   contributed to--.....................
    (i) A church........................    25,000    21,000      4,000
    (ii) A private foundation not           15,000    10,000      5,000
     described in section 170(b)(1)(E)..
  (2) Tangible personal property held       12,000     6,000      6,000
   more than 6 months (put to unrelated
   use by church).......................
                                         -------------------------------
 Total..................................   102,000    72,000     30,000
------------------------------------------------------------------------

    (b) After making the reductions required by paragraph (a) of this 
section, the amount of charitable contributions allowed (before 
application of section 170(b) limitations) is as follows:

------------------------------------------------------------------------
                                         Fair
               Property                 market   Reduction  Contribution
                                         value                 allowed
------------------------------------------------------------------------
Ordinary income property.............   $50,000    $15,000     $35,000
Property which, if sold, would
 produce long-term capital gain:
  (1) Stock contributed to:..........
    (i) The church...................    25,000  .........      25,000
    (ii) The private foundation......    15,000      2,500      12,500
  (2) Tangible personal property.....    12,000      3,000       9,000
                                      ----------------------------------
 Total...............................   102,000     20,500      81,500
------------------------------------------------------------------------

    (c) If C were a corporation, rather than an individual, the amount 
of charitable contributions allowed (before application of section 
170(b) limitation) would be as follows:

------------------------------------------------------------------------
                                         Fair
               Property                 market   Reduction  Contribution
                                         value                 allowed
------------------------------------------------------------------------
Ordinary income property.............   $50,000    $15,000     $35,000

[[Page 54]]

 
Property which, if sold, would
 produce long-term capital gain:
  (1) Stock contributed to:..........
    (i) The church...................    25,000  .........      25,000
    (ii) The private foundation......    15,000      3,125      11,875
  (2) Tangible personal property.....    12,000      3,750       8,250
                                      ----------------------------------
    Total............................   102,000     21,875      80,125
------------------------------------------------------------------------

    Example 2. On March 1, 1970, D, an individual, contributes to a 
church intangible property to which section 1245 applies which has a 
fair market value of $60,000 and an adjusted basis of $10,000. At the 
time of the contribution D has used the property in his business for 
more than 6 months. If the property had been sold by D at its fair 
market value at the time of its contribution, it is assumed that under 
section 1245 $20,000 of the gain of $50,000 would have been treated as 
ordinary income and $30,000 would have been long-term capital gain. 
Under paragraph (a)(1) of this section, D's contribution of $60,000 is 
reduced by $20,000.
    Example 3. The facts are the same as in Example 2 except that the 
property is contributed to a private foundation not described in section 
170(b)(1)(E). Under paragraph (a) (1) and (2) of this section, D's 
contribution is reduced by $35,000 (100 percent of the ordinary income 
of $20,000 and 50 percent of the long-term capital gain of $30,000).
    Example 4. (a) In 1971, E, an individual calendar-year taxpayer, 
contributes to a church stock held for more than 6 months which has a 
fair market value of $90,000 and an adjusted basis of $10,000. In 1972, 
E also contributes to a church stock held for more than 6 months which 
has a fair market value of $20,000 and an adjusted basis of $10,000. E's 
contribution base for 1971 is $200,000; and for 1972, is $150,000. E 
makes no other charitable contributions for these 2 taxable years.
    (b) For 1971 the amount of the contribution which may be taken into 
account under section 170(a) is limited by section 170(b)(1)(D)(i) to 
$60,000 ($200,000x30%), and A is allowed a deduction for $60,000. Under 
section 170(b)(1)(D)(ii), E has a $30,000 carryover to 1972 of 30-
percent capital gain property, as defined in paragraph (d)(3) of Sec. 
1.170A-8. For 1972 the amount of the charitable contributions deduction 
is $45,000 (total contributions of $50,000 [$30,000+$20,000] but not to 
exceed 30% of $150,000).
    (c) Assuming, however, that in 1972 E elects under section 
170(b)(1)(D)(iii) and paragraph (d)(2) of Sec. 1.170A-8 to have section 
170(e)(1)(B) apply to his contributions and carryovers of 30-percent 
capital gain property, he must apply section 170(d)(1) as if section 
170(e)(1)(B) had applied to the contribution for 1971. If section 170 
(e)(1)(B) had applied in 1971 to his contributions of 30-percent capital 
gain property, E's contribution would have been reduced from $90,000 to 
$50,000, the reduction of $40,000 being 50 percent of the gain of 
$80,000 ($90,000-$10,000) which would have been recognized as long-term 
capital gain if the property had been sold by E at its fair market value 
at the time of its contribution to the church. Accordingly, by taking 
the election into account, E has no carryover of 30-percent capital gain 
property to 1972 since the charitable contributions deduction of $60,000 
allowed for 1971 in respect of that property exceeds the reduced 
contribution of $50,000 for 1971 which may be taken into account by 
reason of the election. The charitable contributions deduction of 
$60,000 allowed for 1971 is not reduced by reason of the election.
    (d) Since by reason of the election E is allowed under paragraph 
(a)(2) of this section a charitable contributions deduction for 1972 of 
$15,000 ($20,000-[($20,000- $10,000)x50%]) and since the $30,000 
carryover from 1971 is eliminated, it would not be to E's advantage to 
make the election under section 170(b)(1)(D)(iii) in 1972.
    Example 5. In 1970, F, an individual calendar-year taxpayer, sells 
to a church for $4,000 ordinary income property with a fair market value 
of $10,000 and an adjusted basis of $4,000. F's contribution base for 
1970 is $20,000, and F makes no other charitable contributions in 1970. 
Thus, F makes a charitable contribution to the church of $6,000 
($10,000-$4,000 amount realized), which is 60% of the value of the 
property. The amount realized on the bargain sale is 40% ($4,000/
$10,000) of the value of the property. In applying section 1011(b) to 
the bargain sale, adjusted basis in the amount of $1,600 ($4,000 
adjusted basis x 40%) is allocated under Sec. 1.1011-2(b) to the 
noncontributed portion of the property, and F recognizes $2,400 ($4,000 
amount realized less $1,600 adjusted basis) of ordinary income. Under 
paragraphs (a)(1) and (c)(2)(i) of this section, F's contribution of 
$6,000 is reduced by $3,600 ($6,000 - [$4,000 adjusted basis x 60%]) 
(i.e., the amount of ordinary income that would have been recognized on 
the contributed portion had the property been sold). The reduced 
contribution of $2,400 consists of the portion ($4,000 x 60%) of the 
adjusted basis not allocated to the noncontributed portion of the 
property. That is, the reduced contribution consists of the portion of 
the adjusted basis allocated to the contributed portion. Under sections 
1012 and 1015(a) the basis of the property to the church is $6,400 
($4,000 + $2,400).
    Example 6. In 1970, G, an individual calendar-year taxpayer, sells 
to a church for $6,000 ordinary income property with a fair market value 
of $10,000 and an adjusted basis of $4,000. G's contribution base for 
1970 is

[[Page 55]]

$20,000, and G makes no other charitable contributions in 1970. Thus, G 
makes a charitable contribution to the church of $4,000 ($10,000 - 
$6,000 amount realized), which is 40% of the value of the property. The 
amount realized on the bargain sale is 60% ($6,000/$10,000) of the value 
of the property. In applying section 1011(b) to the bargain sale, 
adjusted basis in the amount of $2,400 ($4,000 adjusted basis x 60%) is 
allocated under Sec. 1.1011-2(b) to the noncontributed portion of the 
property, and G recognizes $3,600 ($6,000 amount realized less $2,400 
adjusted basis) of ordinary income. Under paragraphs (a)(1) and 
(c)(2)(i) of this section, G's contribution of $4,000 is reduced by 
$2,400 ($4,000 - [$4,000 adjusted basis x 40%]) (i.e., the amount of 
ordinary income that would have been recognized on the contributed 
portion had the property been sold). The reduced contribution of $1,600 
consist of the portion ($4,000x40%) of the adjusted basis not allocated 
to the noncontributed portion of the property. That is, the reduced 
contribution consists of the portion of the adjusted basis allocated to 
the contributed portion. Under sections 1012 and 1015(a) the basis of 
the property to the church is $7,600 ($6,000+$1,600).
    Example 7. In 1970, H, an individual calendar-year taxpayer, sells 
to a church for $2,000 stock held for not more than 6 months which has 
an adjusted basis of $4,000 and a fair market value of $10,000. H's 
contribution base for 1970 is $20,000, and H makes no other charitable 
contributions in 1970. Thus, H makes a charitable contribution to the 
church of $8,000 ($10,000-$2,000 amount realized), which is 80% of the 
value of the property. The amount realized on the bargain sale is 20% 
($2,000/$10,000) of the value of the property. In applying section 
1011(b) to the bargain sale, adjusted basis in the amount of $800 
($4,000 adjusted basis x 20%) is allocated under Sec. 1.1011-2(b) to 
the noncontributed portion of the property, and H recognizes $1,200 
($2,000 amount realized less $800 adjusted basis) of ordinary income. 
Under paragraphs (a)(1) and (c)(2)(i) of this section, H's contribution 
of $8,000 is reduced by $4,800 ($8,000 - [$4,000 adjusted basisx80%]) 
(i.e., the amount of ordinary income that would have been recognized on 
the contributed portion had the property been sold). The reduced 
contribution of $3,200 consists of the portion ($4,000x80%) of the 
adjusted basis not allocated to the noncontributed portion of the 
property. That is, the reduced contribution consists of the portion of 
the adjusted basis allocated to the contributed portion. Under sections 
1012 and 1015(a) the basis of the property to the church is $5,200 
($2,000+$3,200).
    Example 8. In 1970, F, an individual calendar-year taxpayer, sells 
for $4,000 to a private foundation not described in section 170(b)(1)(E) 
property to which section 1245 applies which has a fair market value of 
$10,000 and an adjusted basis of $4,000. F's contribution base for 1970 
is $20,000, and F makes no other charitable contributions in 1970. At 
the time of the bargain sale, F has used the property in his business 
for more than 6 months. Thus F makes a charitable contribution of $6,000 
($10,000-$4,000 amount realized), which is 60% of the value of the 
property. The amount realized on the bargain sale is 40% ($4,000/
$10,000) of the value of the property. If the property had been sold by 
F at its fair market value at the time of its contribution, it is 
assumed that under section 1245 $4,000 of the gain of $6,000 ($10,000-
$4,000 adjusted basis) would have been treated as ordinary income and 
$2,000 would have been long-term capital gain. In applying section 
1011(b) to the bargain sale, adjusted basis in the amount of $1,600 
($4,000 adjusted basis x 40%) is allocated under Sec. 1.1011-2(b) to 
the noncontributed portion of the property, and F's recognized gain of 
$2,400 ($4,000 amount realized less $1,600 adjusted basis) consists of 
$1,600 ($4,000x40%) of ordinary income and $800 ($2,000x40%) of long-
term capital gain. Under paragraphs (a) and (c)(2)(i) of this section, 
F's contribution of $6,000 is reduced by $3,000 (the sum of $2,400 
($4,000x60%) of ordinary income and $600 ([$2,000x60%] x 50%) of long-
term capital gain) (i.e., the amount of gain that would have been 
recognized on the contributed portion had the property been sold). The 
reduced contribution of $3,000 consists of $2,400 ($4,000x60%) of 
adjusted basis and $600 ([$2,000x60%] x 50%) of long-term capital gain 
not used as a reduction under paragraph (a)(2) of this section. Under 
sections 1012 and 1015(a) the basis of the property to the private 
foundation is $6,400 ($4,000+$2,400).
    Example 9. On January 1, 1970, A, an individual, transfers to a 
charitable remainder annuity trust described in section 664 (d)(1) stock 
which he has held for more than 6 months and which has a fair market 
value of $250,000 and an adjusted basis of $50,000, an irrevocable 
remainder interest in the property being contributed to a private 
foundation not described in section 170(b)(1)(E). The trusts provides 
that an annuity of $12,500 a year is payable to A at the end of each 
year for 20 years. By reference to Sec. 20.2031-7A(c) of this chapter 
(Estate Tax Regulations) the figure in column (2) opposite 20 years is 
11.4699. Therefore, under Sec. 1.664-2 the fair market value of the 
gift of the remainder interest to charity is $106,626.25 ($250,000 - 
[$12,500x11.4699]). Under paragraph (c)(1)(ii) of this section, the 
adjusted basis allocated to the contributed portion of the property is 
$21,325.25 ($50,000x$106,626.25/$250,000). Under paragraphs (a)(2) and 
(c)(1) of this section, A's contribution is reduced by $42,650.50 (50 
percent x [$106,626.25-$21,325.25]) to $63,975.75 ($106,626.25-
$42,650.50). If, however, the irrevocable remainder interest in the 
property

[[Page 56]]

had been contributed to a section 170(b)(1)(A) organization, A's 
contribution of $106,626.25 would not be reduced under paragraph (a) of 
this section.
    Example 10. (a) On July 1, 1970, B, a calendar-year individual 
taxpayer, sells to a church for $75,000 intangible property to which 
section 1245 applies which has a fair market value of $250,000 and an 
adjusted basis of $75,000. Thus, B makes a charitable contribution to 
the church of $175,000 ($250,000-$75,000 amount realized), which is 70% 
($175,000/$250,000) of the value of the property, the amount realized on 
the bargain sale is 30% ($75,000/$250,000) of the value of the property. 
At the time of the bargain sale, B has used the property in his business 
for more than 6 months. B's contribution base for 1970 is $500,000, and 
B makes no other charitable contributions in 1970. If the property had 
been sold by B at its fair market value at the time of its contribution, 
it is assumed that under section 1245 $105,000 of the gain of $175,000 
($250,000-$75,000 adjusted basis) would have been treated as ordinary 
income and $70,000 would have been long-term capital gain. In applying 
section 1011(b) to the bargain sale, adjusted basis in the amount of 
$22,500 ($75,000 adjusted basis x 30%) is allocated under Sec. 1.1011-
2(b) to the noncontributed portion of the property and B's recognized 
gain of $52,500 ($75,000 amount realized less $22,500 adjusted basis) 
consists of $31,500 ($105,000x30%) of ordinary income and $21,000 
($70,000x30%) of long term capital gain.
    (b) Under paragraphs (a)(1) and (c)(2)(i) of this section B's 
contribution of $175,000 is reduced by $73,500 ($105,000x70%) (i.e., the 
amount of ordinary income that would have been recognized on the 
contributed portion had the property been sold). The reduced 
contribution of $101,500 consists of $52,500 [$75,000x70%] of adjusted 
basis allocated to the contributed portion of the property and $49,000 
[$70,000x70%] of long-term capital gain allocated to the contributed 
portion. Under sections 1012 and 1015(a) the basis of the property to 
the church is $127,500 ($75,000+$52,500).

    (e) Effective date. This section applies only to contributions paid 
after December 31, 1969, except that, in the case of a charitable 
contribution of a letter, memorandum, or property similar to a letter or 
memorandum, it applies to contributions paid after July 25, 1969.

[T.D. 7207, 37 FR 20776, Oct. 4, 1972; 37 FR 22982, Oct. 27, 1972, as 
amended by T.D. 7728, 45 FR 72650, Nov. 3, 1980; T.D. 7807, 47 FR 4510, 
Feb. 1, 1982; T.D. 8176, 53 FR 5569, Feb. 25, 1988; T.D. 8540, 59 FR 
30102, June 10, 1994]



Sec. 1.170A-4A  Special rule for the deduction of certain charitable 
contributions of inventory and other property.

    (a) Introduction. Section 170(e)(3) provides a special rule for the 
deduction of certain qualified contributions of inventory and certain 
other property. To be treated as a ``qualified contribution'', a 
contribution must meet the restrictions and requirements of section 
170(e)(3)(A) and paragraph (b) of this section. Paragraph (b)(1) of this 
section describes the corporations whose contributions may be subject to 
this section, the exempt organizations to which these contributions may 
be made, and the kinds of property which may be contributed. Under 
paragraph (b)(2) of this section, the use of the property must be 
related to the purpose or function constituting the ground for the 
exemption of the organization to which the contribution is made. Also, 
the property must be used for the care of the ill, needy, or infants. 
Under paragraph (b)(3) of this section, the recipient organization may 
not, except as there provided, require or receive in exchange money, 
property, or services for the transfer or use of property contributed 
under section 170(e)(3). Under paragraph (b)(4) of this section, the 
recipient organization must provide the contributing taxpayer with a 
written statement representing that the organization intends to comply 
with the restrictions set forth in paragraph (b) (2) and (3) of this 
section on the use and transfer of the property. Under paragraph (b)(5) 
of this section, the contributed property must conform to any applicable 
provisions of the Federal Food, Drug, and Cosmetic Act (as amended), and 
the regulations thereunder, at the date of contribution and for the 
immediately preceding 180 days. Paragraph (c) of this section provides 
the rules for determining the amount of reduction of the charitable 
contribution under section 170(e)(3). In general, the amount of the 
reduction is equal to one-half of the amount of gain (other than gain 
described in paragraph (d) of this section) which would not have been 
long-term capital gain if the property had been sold by the donor-
taxpayer at fair market value at the

[[Page 57]]

date of contribution. If, after this reduction, the amount of the 
deduction would be more than twice the basis of the contributed 
property, the amount of the deduction is accordingly further reduced 
under paragraph (c)(1) of this section. The basis of contributed 
property which is inventory is determined under paragraph (c)(2) of this 
section, and the donor's cost of goods sold for the year of contribution 
must be adjusted under paragraph (c)(3) of this section. Under paragraph 
(d) of this section, a deduction is not allowed for any amount which, if 
the property had been sold by the donor-taxpayer, would have been gain 
to which the recapture provisions of section 617, 1245, 1250, 1251, or 
1252 would have applied. For purposes of section 170(e)(3) the rules of 
Sec. 1.170A-4 apply where not inconsistent with the rules of this 
section.
    (b) Qualified contributions--(1) In general. A contribution of 
property qualifies under section 170(e)(3) of this section only if it is 
a charitable contribution:
    (i) By a corporation, other than a corporation which is an electing 
small business corporation within the meaning of section 1371(b);
    (ii) To an organization described in section 501(c)(3) and exempt 
under section 501(a), other than a private foundation, as defined in 
section 509(a), which is not an operating foundation, as defined in 
section 4942(j)(e);
    (iii) Of property described in section 1221 (1) or (2);
    (iv) Which contribution meets the restrictions and requirements of 
paragraph (b) (2) through (5) of this section.
    (2) Restrictions on use of contributed property. In order for the 
contribution to qualify under this section, the contributed property is 
subject to the following restrictions in use. If the transferred 
property is used or transferred by the donee organization (or by any 
subsequent transferee that furnished to the donee organization the 
written statement described in paragraph (b)(4)(ii) of this section) in 
a manner inconsistent with the requirements of subdivision (i) or (ii) 
of this paragraph (b)(2) or the requirements of paragraph (b)(3) of this 
section, the donor's deduction is reduced to the amount allowable under 
section 170 of the regulations thereunder, determined without regard to 
section 170(e)(3) of this section. If, however, the donor establishes 
that, at the time of the contribution, the donor reasonably anticipated 
that the property would be used in a manner consistent with those 
requirements, then the donor's deduction is not reduced.
    (i) Requirement of use for exempt purpose. The use of the property 
must be related to the purpose or function constituting the ground for 
exemption under section 501(c)(3) of the organization to which the 
contribution is made. The property may not be used in connection with 
any activity which gives rise to unrelated trade or business income, as 
defined in sections 512 and 513 and the regulations thereunder.
    (ii) Requirement of use for care of the ill, needy, or infants--(A) 
In general. The property must be used for the care of the ill, needy, or 
infants, as defined in this subdivision (ii). The property itself must 
ultimately either be transferred to (or for the use of) the ill, needy, 
or infants for their care or be retained for their care. No other person 
may use the contributed property except as incidental to primary use in 
the care of the ill, needy, or infants. The organization may satisfy the 
requirement of this subdivision by transferring the property to a 
relative, custodian, parent or guardian of the ill or needy individual 
or infant, or to any other individual if it makes a reasonable effort to 
ascertain that the property will ultimately be used primarily for the 
care of the ill or needy individual, or infant, and not for the primary 
benefit of any other person. The recipient organization may transfer the 
property to another exempt organization within the jurisdiction of the 
United States which meets the description contained in paragraph 
(b)(1)(ii) of this section, or to an organization not within the 
jurisdiction of the United States that, but for the fact that it is not 
within the jurisdiction of the United States, would be described in 
paragraph (b)(1)(ii) of this section. If an organization transfers the 
property to another organization, the transferring organization must 
obtain a written statement from the transferee organization as set forth 
in paragraph (b)(4) of this section. If

[[Page 58]]

the property is ultimately transferred to, or used for the benefit of, 
ill or needy persons, or infants, not within the jurisdiction of the 
United States, the organization which so transfers the property outside 
the jurisdiction of the United States must necessarily be a corporation. 
See section 170(c)(2) and Sec. 1.170A-11(a). For purposes of this 
subdivision, if the donee-organization charges for its transfer of 
contributed property (other than a fee allowed by paragraph (b)(3)(ii) 
of this section), the requirement of this subdivision is not met. See 
paragraph (b)(3) of this section.
    (B) Definition of the ill. An ill person is a person who requires 
medical care within the meaning of Sec. 1.213-1(e). Examples of ill 
persons include a person suffering from physical injury, a person with a 
significant impairment of a bodily organ, a person with an existing 
handicap, whether from birth or later injury, a person suffering from 
malnutrition, a person with a disease, sickness, or infection which 
significantly impairs physical health, a person partially or totally 
incapable of self-care (including incapacity due to old age). A person 
suffering from mental illness is included if the person is hospitalized 
or institutionalized for the mental disorder, or, although the person is 
nonhospitalized or noninstitutionalized, if the person's mental illness 
constitutes a significant health impairment.
    (C) Definition of care of the ill. Care of the ill means alleviation 
or cure of an existing illness and includes care of the physical, 
mental, or emotional needs of the ill.
    (D) Definition of the needy. A needy person is a person who lacks 
the necessities of life, involving physical, mental, or emotional well-
being, as a result of poverty or temporary distress. Examples of needy 
persons include a person who is financially impoverished as a result of 
low income and lack of financial resources, a person who temporarily 
lacks food or shelter (and the means to provide for it), a person who is 
the victim of a natural disaster (such as fire or flood), a person who 
is the victim of a civil disaster (such as a civil disturbance), a 
person who is temporarily not self-sufficient as a result of a sudden 
and severe personal or family crisis (such as a person who is the victim 
of a crime of violence or who has been physically abused), a person who 
is a refugee or immigrant and who is experiencing language, cultural, or 
financial difficulties, a minor child who is not self-sufficient and who 
is not cared for by a parent or guardian, and a person who is not self-
sufficient as a result of previous institutionalization (such as a 
former prisoner or a former patient in a mental institution).
    (E) Definition of care of the needy. Care of the needy means 
alleviation or satisfaction of an existing need. 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 which causes the person to be 
needy. For example, a person whose temporary need arises from a natural 
disaster may need temporary shelter and food but not recreational 
facilities.
    (F) Definition of infant. An infant is a minor child (as determined 
under the laws of the jurisdiction in which the child resides).
    (G) Definition of care of an infant. Care of an infant means 
performance of parental functions and provision for the physical, 
mental, and emotional needs of the infant.
    (3) Restrictions on Transfer of contributed property--(i) In 
general. Except as otherwise provided in subdivision (ii) of this 
paragraph (b)(3), a contribution will not qualify under this section, if 
the donee-organization or any transferee of the donee-organization 
requires or receives any money, property, or services for the transfer 
or use of property contributed under section 170(e)(3). For example, if 
an organization provides temporary shelter for a fee, and also provides 
free meals to ill or needy individuals, or infants using food 
contributed under this section the contribution of food is subject to 
this section (if the other requirements of this section are met). 
However, the fee charged by the organization for the shelter may not be 
increased merely because meals are served to the ill or needy 
individuals or infants.
    (ii) Exception. A contribution may qualify under this section if the 
donee-organization charges a fee to another

[[Page 59]]

organization in connection with its transfer of the donated property, 
if:
    (A) The fee is small or nominal in relation to the value of the 
transferred property and is not determined by this value; and
    (B) The fee is designed to reimburse the donee-organization for its 
administrative, warehousing, or other similar costs.

For example, if a charitable organization (such as a food bank) accepts 
surplus food to distribute to other charities which give the food to 
needy persons, a small fee may be charged to cover administrative, 
warehousing, and other similar costs. This fee may be charged on the 
basis of the total number of pounds of food distributed to the 
transferee charity but not on the basis of the value of the food 
distributed. The provisions of this subdivision (ii) do not apply to a 
transfer of donated property directly from an organization to ill or 
needy individuals, or infants.
    (4) Requirement of a written statement--(i) Furnished to taxpayer. 
In the case of any contribution made on or after March 3, 1982, the 
donee-organization must furnish to the taxpayer a written statement 
which:
    (A) Describes the contributed property, stating the date of its 
receipt;
    (B) Represents that the property will be used in compliance with 
section 170(e)(3) and paragraphs (b) (2) and (3) of this section;
    (C) Represents that the donee-organization meets the requirements of 
paragraph (b)(1)(ii) of this section; and
    (D) Represents that adequate books and records will be maintained, 
and made available to the Internal Revenue Service upon request.

The written statement must be furnished within a reasonable period after 
the contribution, but not later than the date (including extensions) by 
which the donor is required to file a United States corporate income tax 
return for the year in which the contribution was made. The books and 
records described in (D) of this subdivision (i) need not trace the 
receipt and disposition of specific items of donated property if they 
disclose compliance with the requirements by reference to aggregate 
quantities of donated property. The books and records are adequate if 
they reflect total amounts received and distributed (or used), and 
outline the procedure used for determining that the ultimate recipient 
of the property is an ill or needy individual, or infant. However, the 
books and records need not reflect the names of the ultimate individual 
recipients or the property distributed to (or used by) each one.
    (ii) Furnished to transferring organization. If an organization that 
received a contribution under this section transfers the contributed 
property to another organization on or after March 3, 1982, the 
transferee organization must furnish to the transferring organization a 
written statement which contains the information required in paragraph 
(b)(4)(i) (A), (B) and (D) of this section. The statement must also 
represent that the transferee organization meets the requirements of 
paragraph (b)(1)(ii) of this section (or, in the case of a transferee 
organization which is a foreign organization not within the jurisdiction 
of the United States, that, but for such fact, the organization would 
meet the requirements of paragraph (b)(1)(ii) of this section). The 
written statement must be furnished within a reasonable period after the 
transfer.
    (5) Requirement of compliance with the Federal Food, Drug, and 
Cosmetic Act--(i) In general. With respect to property contributed under 
this section which is subject to the Federal Food, Drug, and Cosmetic 
Act (as amended), and regulations thereunder, the contributed property 
must comply with the applicable provisions of that Act and regulations 
thereunder at the date of the contribution and for the immediately 
preceding 180 days. In the case of specific items of contributed 
property not in existence for the entire period of 180 days immediately 
preceding the date of contribution, the requirement of this paragraph 
(b)(5) is considered met if the contributed property complied with that 
Act and the regulations thereunder during the period of its existence 
and at the date of contribution and if, for the 180 day period prior to 
contribution other property (if any) held by the taxpayer at any time 
during that period, which property was fungible with the contributed 
property, complied with that Act

[[Page 60]]

and the regulations thereunder during the period held by the taxpayer.
    (ii) Example. The rule of this paragraph (b)(5) may be illustrated 
by the following example.

    Example. Corporation X a grocery store, contributes 12 crates of 
navel oranges. The oranges were picked and placed in the grocery store's 
stock two weeks prior to the date of contribution. The contribution 
satisfies the requirements of this paragraph (b)(5) if X complied with 
the Act and regulations thereunder for 180 days prior to the date of 
contribution with respect to all navel oranges in stock during that 
period.

    (c) Amount of reduction--(1) In general. Section 170(e)(3)(B) 
requires that the amount of the charitable contribution subject to this 
section which would be taken into account under section 170(a), without 
regard to section 170(e), must be reduced before applying the percentage 
limitations under section 170(b). The amount of the first reduction is 
equal to one-half of the amount of gain which would not have been long-
term capital gain if the property had been sold by the donor-taxpayer at 
its fair market value on the date of its contribution, excluding, 
however, any amount described in paragraph (d) of this section. If the 
amount of the charitable contribution which remains after this reduction 
exceeds twice the basis of the contributed property, then the amount of 
the charitable contribution is reduced a second time to an amount which 
is equal to twice the amount of the basis of the property.
    (2) Basis of contributed property which is inventory. For the 
purposes of this section, notwithstanding the rules of Sec. 1.170A-
1(c)(4), the basis of contributed property which is inventory must be 
determined under the donor's method of accounting for inventory for 
purposes of United States income tax. The donor must use as the basis of 
the contributed item the inventoriable carrying cost assigned to any 
similar item not included in closing inventory. For example, under the 
LIFO dollar value method of accounting for inventory, where there has 
been an invasion of a prior year's layer, the donor may choose to treat 
the item contributed as having a basis of the unit's cost with reference 
to the layer(s) of prior year(s) cost or with reference to the current 
year cost.
    (3) Adjustment to cost of goods sold. Notwithstanding the rules of 
Sec. 1.170A-1(c)(4), the donor of the property which is inventory 
contributed under this section must make a corresponding adjustment to 
cost of goods sold by decreasing the cost of goods sold by the lesser of 
the fair market value of the contributed item or the amount of basis 
determined under paragraph (c)(2) of this section.
    (4) Examples. The rules of this paragraph (c) may be illustrated by 
the following examples:

    Example 1. During 1978 corporation X, a calendar year taxpayer, 
makes a qualified contribution of women's coats which were section 
1221(1) property. The fair market value of the property at the date of 
contribution is $1,000, and the basis of the property is $200. The 
amount of the charitable contribution which would be taken into account 
under section 170(a) is the fair market value ($1,000). The amount of 
gain which would not have been long-term capital gain if the property 
had been sold is $800 ($1,000-$200). The amount of the contribution is 
reduced by one-half the amount which would not have been capital gain if 
the property had been sold ($800/2=-$400).
    After this reduction, the amount of the contribution which may be 
taken into account is $600 ($1,000-$400). A second reduction is made in 
the amount of the charitable contribution because this amount (as first 
reduced to $600) is more than $400 which is an amount equal to twice the 
basis of the property. The amount of the further reduction is $200 
[$600-(2x$200)], and the amount of the contribution as finally reduced 
is $400 [$1,00-($400+$200)]. X would also have to decrease its cost of 
goods sold for the year of contribution by $200.
    Example 2. Assume the same facts as set forth in Example 1 except 
that the basis of the property is $600. The amount of the first 
reduction is $200 (($1,000-$600)/2).
    As reduced, the amount of the contribution which may be taken into 
account is $800 ($1,000-$200). There is no second reduction because $800 
is less than $1,200 which is twice the basis of the property. However, X 
would have to decrease its cost of goods sold for the year of 
contribution by $600.

    (d) Recapture excluded. A deduction is not allowed under section 
170(e)(3) or this section for any amount which, if the property had been 
sold by the donor-taxpayer on the date of its contribution for an amount 
equal to its fair market value, would have been

[[Page 61]]

treated as ordinary income under section 617, 1245, 1250, 1251, or 1252. 
Thus, before making either reduction required by section 170(e)(3)(B) 
and paragraph (c) of this section, the fair market value of the 
contributed property must be reduced by the amount of gain that would 
have been recognized (if the property had been sold) as ordinary income 
under section 617, 1245, 1250, 1251, or 1252.
    (e) Effective date. This section applies to qualified contributions 
made after October 4, 1976.

[T.D. 7807, 47 FR 4510, Feb. 1, 1982, as amended by T.D. 7962, 49 FR 
27317, July 3, 1984]



Sec. 1.170A-5  Future interests in tangible personal property.

    (a) In general. (1) A contribution consisting of a transfer of a 
future interest in tangible personal property shall be treated as made 
only when all intervening interests in, and rights to the actual 
possession or enjoyment of, the property:
    (i) Have expired, or
    (ii) Are held by persons other than the taxpayer or those standing 
in a relationship to the taxpayer described in section 267(b) and the 
regulations thereunder, relating to losses, expenses, and interest with 
respect to transactions between related taxpayers.
    (2) Section 170(a)(3) and this section have no application in 
respect of a transfer of an undivided present interest in property. For 
example, a contribution of an undivided one-quarter interest in a 
painting with respect to which the donee is entitled to possession 
during 3 months of each year shall be treated as made upon the receipt 
by the donee of a formally executed and acknowledged deed of gift. 
However, the period of initial possession by the donee may not be 
deferred in time for more than 1 year.
    (3) Section 170(a)(3) and this section have no application in 
respect of a transfer of a future interest in intangible personal 
property or in real property. However, a fixture which is intended to be 
severed from real property shall be treated as tangible personal 
property. For example, a contribution of a future interest in a 
chandelier which is attached to a building is considered a contribution 
which consists of a future interest in tangible personal property if the 
transferor intends that it be detached from the building at or prior to 
the time when the charitable organization's right to possession or 
enjoyment of the chandelier is to commence.
    (4) For purposes of section 170(a)(3) and this section, the term 
future interest has generally the same meaning as it has when used in 
section 2503 and Sec. 25.2503-3 of this chapter (Gift Tax Regulations); 
it includes reversions, remainders, and other interests or estates, 
whether vested or contingent, and whether or not supported by a 
particular interest or estate, which are limited to commence in use, 
possession, or enjoyment at some future date or time. The term future 
interest includes situations in which a donor purports to give tangible 
personal property to a charitable organization, but has an 
understanding, arrangement, agreement, etc., whether written or oral, 
with the charitable organization which has the effect of reserving to, 
or retaining in, such donor a right to the use, possession, or enjoyment 
of the property.
    (5) In the case of a charitable contribution of a future interest to 
which section 170(a)(3) and this section apply the other provisions of 
section 170 and the regulations thereunder are inapplicable to the 
contribution until such time as the contribution is treated as made 
under section 170(a)(3).
    (b) Illustrations. The application of this section may be 
illustrated by the following examples:

    Example 1. On December 31, 1970, A, an individual who reports his 
income on the calendar year basis, conveys by deed of gift to a museum 
title to a painting, but reserves to himself the right to the use, 
possession, and enjoyment of the painting during his lifetime. It is 
assumed that there was no intention to avoid the application of section 
170(f)(3)(A) by the conveyance. At the time of the gift the value of the 
painting is $90,000. Since the contribution consists of a future 
interest in tangible personal property in which the donor has retained 
an intervening interest, no contribution is considered to have been made 
in 1970.
    Example 2. Assume the same facts as in Example 1 except that on 
December 31, 1971, A relinquishes all of his right to the use, 
possession, and enjoyment of the painting and

[[Page 62]]

delivers the painting to the museum. Assuming that the value of the 
painting has increased to $95,000, A is treated as having made a 
charitable contribution of $95,000 in 1971 for which a deduction is 
allowable without regard to section 170(f)(3)(A).
    Example 3. Assume the same facts as in Example 1 except A dies 
without relinquishing his right to the use, possession, and enjoyment of 
the painting. Since A did not relinquish his right to the use, 
possession, and enjoyment of the property during his life, A is treated 
as not having made a charitable contribution of the painting for income 
tax purposes.
    Example 4. Assume the same facts as in Example 1 except A, on 
December 31, 1971, transfers his interest in the painting to his son, B, 
who reports his income on the calendar year basis. Since the 
relationship between A and B is one described in section 267(b), no 
contribution of the remainder interest in the painting is considered to 
have been made in 1971.
    Example 5. Assume the same facts as in Example 4. Also assume that 
on December 31, 1972, B conveys to the museum the interest measured by 
A's life. B has made a charitable contribution of the present interest 
in the painting conveyed to the museum. In addition, since all 
intervening interests in, and rights to the actual possession or 
enjoyment of the property, have expired, a charitable contribution of 
the remainder interest is treated as having been made by A in 1972 for 
which a deduction is allowable without regard to section 170(f)(3)(A). 
Such remainder interest is valued according to Sec. 20.2031-7A(c) of 
this chapter (estate tax regulations), determined by subtracting the 
value of B's interest measured by A's life expectancy in 1972, and B 
receives a deduction in 1972 for the life interest measured by A's life 
expectancy and valued according to Table A(1) in such section.
    Example 6. On December 31, 1970, C, an individual who reports his 
income on the calendar year basis, transfers a valuable painting to a 
pooled income fund described in section 642(c)(5), which is maintained 
by a university. C retains for himself for life an income interest in 
the painting, the remainder interest in the painting being contributed 
to the university. Since the contribution consists of a future interest 
in tangible personal property in which the donor has retained an 
intervening interest, no charitable contribution is considered to have 
been made in 1970.
    Example 7. On January 15, 1972, D, an individual who reports his 
income on the calendar year basis, transfers a capital asset held for 
more than 6 months consisting of a valuable painting to a pooled income 
fund described in section 642(c)(5), which is maintained by a 
university, and creates an income interest in such painting for E for 
life. E is an individual not standing in a relationship to D described 
in section 267(b). The remainder interest in the property is contributed 
by D to the university. The trustee of the pooled income fund puts the 
painting to an unrelated use within the meaning of paragraph (b)(3) of 
Sec. 1.170A-4. Accordingly, D is allowed a deduction under section 170 
in 1972 for the present value of the remainder interest in the painting, 
after reducing such amount under section 170 (e)(1)(B)(i) and paragraph 
(a)(2) of Sec. 1.170A-4. This reduction in the amount of the 
contribution is required since under paragraph (b)(3) of that section 
the use by the pooled income fund of the painting is a use which would 
have been an unrelated use if it had been made by the university.

    (c) Effective date. This section applies only to contributions paid 
in taxable years beginning after December 31, 1969.

[T.D. 7207, 37 FR 20779, Oct. 4, 1972, as amended by T.D. 8540, 59 FR 
30102, June 10, 1994]



Sec. 1.170A-6  Charitable contributions in trust.

    (a) In general. (1) No deduction is allowed under section 170 for 
the fair market value of a charitable contribution of any interest in 
property which is less than the donor's entire interest in the property 
and which is transferred in trust unless the transfer meets the 
requirements of paragraph (b) or (c) of this section. If the donor's 
entire interest in the property is transferred in trust and is 
contributed to a charitable organization described in section 170(c), a 
deduction is allowed under section 170. Thus, if on July 1, 1972, 
property is transferred in trust with the requirement that the income of 
the trust be paid for a term of 20 years to a church and thereafter the 
remainder be paid to an educational organization described in section 
170(b)(1)(A), a deduction is allowed for the value of such property. See 
section 170(f)(2) and (3)(B), and paragraph (b)(1) of Sec. 1.170A-7.
    (2) A deduction is allowed without regard to this section for a 
contribution of a partial interest in property if such interest is the 
taxpayer's entire interest in the property, such as an income interest 
or a remainder interest. If, however, the property in which such partial 
interest exists was divided in order to create such interest and thus 
avoid section 170(f)(2), the deduction

[[Page 63]]

will not be allowed. Thus, for example, assume that a taxpayer desires 
to contribute to a charitable organization the reversionary interest in 
certain stocks and bonds which he owns. If the taxpayer transfers such 
property in trust with the requirement that the income of the trust be 
paid to his son for life and that the reversionary interest be paid to 
himself and immediately after creating the trust contributes the 
reversionary interest to a charitable organization, no deduction will be 
allowed under section 170 for the contribution of the taxpayer's entire 
interest consisting of the reversionary interest in the trust.
    (b) Charitable contribution of a remainder interest in trust--(1) In 
general. No deduction is allowed under section 170 for the fair market 
value of a charitable contribution of a remainder interest in property 
which is less than the donor's entire interest in the property and which 
the donor transfers in trust unless the trust is:
    (i) A pooled income fund described in section 642(c)(5) and Sec. 
1.642(c)-5,
    (ii) A charitable remainder annuity trust described in section 
664(d)(1) and Sec. 1.664-2, or
    (iii) A charitable remainder unitrust described in section 664(d)(2) 
and Sec. 1.664-3.
    (2) Value of a remainder interest. The fair market value of a 
remainder interest in a pooled income fund shall be computed under Sec. 
1.642(c)-6. The fair market value of a remainder interest in a 
charitable remainder annuity trust shall be computed under Sec. 1.664-
2. The fair market value of a remainder interest in a charitable 
remainder unitrust shall be computed under Sec. 1.664-4. However, in 
some cases a reduction in the amount of a charitable contribution of the 
remainder interest may be required. See section 170(e) and Sec. 1.170A-
4.
    (c) Charitable contribution of an income interest in trust--(1) In 
general. No deduction is allowed under section 170 for the fair market 
value of a charitable contribution of an income interest in property 
which is less than the donor's entire interest in the property and which 
the donor transfers in trust unless the income interest is either a 
guaranteed annuity interest or a unitrust interest, as defined in 
paragraph (c)(2) of this section, and the grantor is treated as the 
owner of such interest for purposes of applying section 671, relating to 
grantors and others treated as substantial owners. See section 
4947(a)(2) for the application to such income interests in trust of the 
provisions relating to private foundations and section 508(e) for rules 
relating to provisions required in the governing instruments.
    (2) Definitions. For purposes of this paragraph:
    (i) Guaranteed annuity interest. (A) An income interest is a 
``guaranteed annuity interest'' only if it is an irrevocable right 
pursuant to the governing instrument of the trust to receive a 
guaranteed annuity. A guaranteed annuity is an arrangement under which a 
determinable amount is paid periodically, but not less often than 
annually, for a specified term of years or for the life or lives of 
certain individuals, each of whom must be living at the date of transfer 
and can be ascertained at such date. Only one or more of the following 
individuals may be used as measuring lives: the donor, the donor's 
spouse, and an individual who, with respect to all remainder 
beneficiaries (other than charitable organizations described in section 
170, 2055, or 2522), is either a lineal ancestor or the spouse of a 
lineal ancestor of those beneficiaries. A trust will satisfy the 
requirement that all noncharitable remainder beneficiaries are lineal 
descendants of the individual who is the measuring life, or that 
individual's spouse, if there is less than a 15% probability that 
individuals who are not lineal descendants will receive any trust 
corpus. This probability must be computed, based on the current 
applicable Life Table contained in Sec. 20.2031-7, at the time property 
is transferred to the trust taking into account the interests of all 
primary and contingent remainder beneficiaries who are living at that 
time. An interest payable for a specified term of years can qualify as a 
guaranteed annuity interest even if the governing instrument contains a 
savings clause intended to ensure compliance with a rule against 
perpetuities. The savings clause must utilize a period for vesting

[[Page 64]]

of 21 years after the deaths of measuring lives who are selected to 
maximize, rather than limit, the term of the trust. The rule in this 
paragraph that a charitable interest may be payable for the life or 
lives of only certain specified individuals does not apply in the case 
of a charitable guaranteed annuity interest payable under a charitable 
remainder trust described in section 664. An amount is determinable if 
the exact amount which must be paid under the conditions specified in 
the governing instrument of the trust can be ascertained as of the date 
of transfer. For example, the amount to be paid may be a stated sum for 
a term of years, or for the life of the donor, at the expiration of 
which it may be changed by a specified amount, but it may not be 
redetermined by reference to a fluctuating index such as the cost of 
living index. In further illustration, the amount to be paid may be 
expressed in terms of a fraction or percentage of the cost of living 
index on the date of transfer.
    (B) An income interest is a guaranteed annuity interest only if it 
is a guaranteed annuity interest in every respect. For example, if the 
income interest is the right to receive from a trust each year a payment 
equal to the lesser of a sum certain or a fixed percentage of the net 
fair market value of the trust assets, determined annually, such 
interest is not a guaranteed annuity interest.
    (C) Where a charitable interest is in the form of a guaranteed 
annuity interest, the governing instrument of the trust may provide that 
income of the trust which is in excess of the amount required to pay the 
guaranteed annuity interest shall be paid to or for the use of a 
charitable organization. Nevertheless, the amount of the deduction under 
section 170(f)(2)(B) shall be limited to the fair market value of the 
guaranteed annuity interest as determined under paragraph (c)(3) of this 
section. For a rule relating to treatment by the grantor of any 
contribution made by the trust in excess of the amount required to pay 
the guaranteed annuity interest, see paragraph (d)(2)(ii) of this 
section.
    (D) If the present value on the date of transfer of all the income 
interests for a charitable purpose exceeds 60 percent of the aggregate 
fair market value of all amounts in the trust (after the payment of 
liabilities), the income interest will not be considered a guaranteed 
annuity interest unless the governing instrument of the trust prohibits 
both the acquisition and the retention of assets which would give rise 
to a tax under section 4944 if the trustee had acquired such assets. The 
requirement in this subdivision (D) for a prohibition in the governing 
instrument against the retention of assets which would give rise to a 
tax under section 4944 if the trustee had acquired the assets shall not 
apply to a transfer in trust made on or before May 21, 1972.
    (E) Where a charitable interest in the form of a guaranteed annuity 
interest is transferred after May 21, 1972, the charitable interest 
generally is not a guaranteed annuity interest if any amount may be paid 
by the trust for a private purpose before the expiration of all the 
charitable annuity interests. There are two exceptions to this general 
rule. First, the charitable interest is a guaranteed annuity interest if 
the amount payable for a private purpose is in the form of a guaranteed 
annuity interest and the trust's governing instrument does not provide 
for any preference or priority in the payment of the private annuity as 
opposed to the charitable annuity. Second, the charitable interest is a 
guaranteed annuity interest if under the trust's governing instrument 
the amount that may be paid for a private purpose is payable only from a 
group of assets that are devoted exclusively to private purposes and to 
which section 4947(a)(2) is inapplicable by reason of section 
4947(a)(2)(B). For purposes of this paragraph (c)(2)(i)(E), an amount is 
not paid for a private purpose if it is paid for an adequate and full 
consideration in money or money's worth. See Sec. 53.4947-1(c) of this 
chapter for rules relating to the inapplicability of section 4947(a)(2) 
to segregated amounts in a split-interest trust.
    (F) For rules relating to certain governing instrument requirements 
and to the imposition of certain excise taxes where the guaranteed 
annuity interest is in trust and for rules governing payment of private 
income interests by a

[[Page 65]]

split-interest trust, see section 4947(a)(2) and (b)(3)(A), and the 
regulations thereunder.
    (ii) Unitrust interest. (A) An income interest is a ``unitrust 
interest'' only if it is an irrevocable right pursuant to the governing 
instrument of the trust to receive payment, not less often than annually 
of a fixed percentage of the net fair market value of the trust assets, 
determined annually. In computing the net fair market value of the trust 
assets, all assets and liabilities shall be taken into account without 
regard to whether particular items are taken into account in determining 
the income of the trust. The net fair market value of the trust assets 
may be determined on any one date during the year or by taking the 
average of valuations made on more than one date during the year, 
provided that the same valuation date or dates and valuation methods are 
used each year. Where the governing instrument of the trust does not 
specify the valuation date or dates, the trustee shall select such date 
or dates and shall indicate his selection on the first return on Form 
1041 which the trust is required to file. Payments under a unitrust 
interest may be paid for a specified term of years or for the life or 
lives of certain individuals, each of whom must be living at the date of 
transfer and can be ascertained at such date. Only one or more of the 
following individuals may be used as measuring lives: the donor, the 
donor's spouse, and an individual who, with respect to all remainder 
beneficiaries (other than charitable organizations described in section 
170, 2055, or 2522), is either a lineal ancestor or the spouse of a 
lineal ancestor of those beneficiaries. A trust will satisfy the 
requirement that all noncharitable remainder beneficiaries are lineal 
descendants of the individual who is the measuring life, or that 
individual's spouse, if there is less than a 15% probability that 
individuals who are not lineal descendants will receive any trust 
corpus. This probability must be computed, based on the current 
applicable Life Table contained in Sec. 20.2031-7, at the time property 
is transferred to the trust taking into account the interests of all 
primary and contingent remainder beneficiaries who are living at that 
time. An interest payable for a specified term of years can qualify as a 
unitrust interest even if the governing instrument contains a savings 
clause intended to ensure compliance with a rule against perpetuities. 
The savings clause must utilize a period for vesting of 21 years after 
the deaths of measuring lives who are selected to maximize, rather than 
limit, the term of the trust. The rule in this paragraph that a 
charitable interest may be payable for the life or lives of only certain 
specified individuals does not apply in the case of a charitable 
unitrust interest payable under a charitable remainder trust described 
in section 664.
    (B) An income interest is a unitrust interest only if it is a 
unitrust interest in every respect. For example, if the income interest 
is the right to receive from a trust each year a payment equal to the 
lesser of a sum certain or a fixed percentage of the net fair market 
value of the trust assets, determined annually, such interest is not a 
unitrust interest.
    (C) Where a charitable interest is in the form of a unitrust 
interest, the governing instrument of the trust may provide that income 
of the trust which is in excess of the amount required to pay the 
unitrust interest shall be paid to or for the use of a charitable 
organization. Nevertheless, the amount of the deduction under section 
170(f)(2)(B) shall be limited to the fair market value of the unitrust 
interest as determined under paragraph (c)(3) of this section. For a 
rule relating to treatment by the grantor of any contribution made by 
the trust in excess of the amount required to pay the unitrust interest, 
see paragraph (d)(2)(ii) of this section.
    (D) Where a charitable interest is in the form of a unitrust 
interest, the charitable interest generally is not a unitrust interest 
if any amount may be paid by the trust for a private purpose before the 
expiration of all the charitable unitrust interests. There are two 
exceptions to this general rule. First, the charitable interest is a 
unitrust interest if the amount payable for a private purpose is in the 
form of a unitrust interest and the trust's governing instrument does 
not provide for

[[Page 66]]

any preference or priority in the payment of the private unitrust 
interest as opposed to the charitable unitrust interest. Second, the 
charitable interest is a unitrust interest if under the trust's 
governing instrument the amount that may be paid for a private purpose 
is payable only from a group of assets that are devoted exclusively to 
private purposes and to which section 4947(a)(2) is inapplicable by 
reason of section 4947(a)(2)(B). For purposes of this paragraph 
(c)(2)(ii)(D), an amount is not paid for a private purpose if it is paid 
for an adequate and full consideration in money or money's worth. See 
Sec. 53.4947-1(c) of this chapter for rules relating to the 
inapplicability of section 4947(a)(2) to segregated amounts in a split-
interest trust.
    (E) For rules relating to certain governing instrument requirements 
and to the imposition of certain excise taxes where the unitrust 
interest is in trust and for rules governing payment of private income 
interests by a split-interest trust, see section 4947(a)(2) and 
(b)(3)(A), and the regulations thereunder.
    (3) Valuation of income interest. (i) The deduction allowed by 
section 170(f)(2)(B) for a charitable contribution of a guaranteed 
annuity interest is limited to the fair market value of such interest on 
the date of contribution, as computed under Sec. 20.2031-7 or, for 
certain prior periods, 20.2031-7A of this chapter (Estate Tax 
Regulations).
    (ii) The deduction allowed under section 170(f)(2)(B) for a 
charitable contribution of a unitrust interest is limited to the fair 
market value of the unitrust interest on the date of contribution. The 
fair market value of the unitrust interest shall be determined by 
subtracting the present value of all interests in the transferred 
property other than the unitrust interest from the fair market value of 
the transferred property.
    (iii) If by reason of all the conditions and circumstances 
surrounding a transfer of an income interest in property in trust it 
appears that the charity may not receive the beneficial enjoyment of the 
interest, a deduction will be allowed under paragraph (c)(1) of this 
section only for the minimum amount it is evident the charity will 
receive. The application of this subdivision may be illustrated by the 
following examples:

    Example 1. In 1972, B transfers $20,000 in trust with the 
requirement that M Church be paid a guaranteed annuity interest (as 
defined in subparagraph (2)(i) of this paragraph) of $4,000, payable 
annually at the end of each year for 9 years, and that the residue 
revert to himself. Since the fair market value of an annuity of $4,000 a 
year for a period of 9 years, as determined under Sec. 20.2031-7A(c) of 
this chapter, is $27,206.80 ($4,000 x 6.8017), it appears that M will 
not receive the beneficial enjoyment of the income interest. 
Accordingly, even though B is treated as the owner of the trust under 
section 673, he is allowed a deduction under subparagraph (1) of this 
paragraph for only $20,000, which is the minimum amount it is evident M 
will receive.
    Example 2. In 1975, C transfers $40,000 in trust with the 
requirement that D, an individual, and X Charity be paid simultaneously 
guaranteed annuity interests (as defined in subparagraph (2)(i) of this 
paragraph) of $5,000 a year each, payable annually at the end of each 
year, for a period of 5 years and that the remainder be paid to C's 
children. The fair market value of two annuities of $5,000 each a year 
for a period of 5 years is $42,124 ([$5,000 x 4.2124] x 2), as 
determined under Sec. 20.2031-7A(c) of this chapter. The trust 
instrument provides that in the event the trust fund is insufficient to 
pay both annuities in a given year, the trust fund will be evenly 
divided between the charitable and private annuitants. The deduction 
under subparagraph (1) of this paragraph with respect to the charitable 
annuity will be limited to $20,000, which is the minimum amount it is 
evident X will receive.
    Example 3. In 1975, D transfers $65,000 in trust with the 
requirement that a guaranteed annuity interest (as defined in 
subparagraph (2)(i) of this paragraph) of $5,000 a year, payable 
annually at the end of each year, be paid to Y Charity for a period of 
10 years and that a guaranteed annuity interest (as defined in 
subparagraph (2)(i) of this paragraph) of $5,000 a year, payable 
annually at the end of each year, be paid to W, his wife, aged 62, for 
10 years or until her prior death. The annuities are to be paid 
simultaneously, and the remainder is to be paid to D's children. The 
fair market value of the private annuity is $33,877 ($5,000 x 6.7754), 
as determined pursuant to Sec. 20.2031-7A(c) of this chapter and by the 
use of factors involving one life and a term of years as published in 
Publication 723A (12-70). The fair market value of the charitable 
annuity is $36,800.50 ($5,000 x 7.3601), as determined under Sec. 
20.2031-7A(c) of this chapter. It is not evident from the governing 
instrument of the trust or

[[Page 67]]

from local law that the trustee would be required to apportion the trust 
fund between the wife and charity in the event the fund were 
insufficient to pay both annuities in a given year. Accordingly, the 
deduction under subparagraph (1) of this paragraph with respect to the 
charitable annuity will be limited to $31,123 ($65,000 less $33,877 [the 
value of the private annuity]), which is the minimum amount it is 
evident Y will receive.

    (iv) See paragraph (b)(1) of Sec. 1.170A-4 for rule that the term 
ordinary income property for purposes of section 170(e) does not include 
an income interest in respect of which a deduction is allowed under 
section 170(f)(2)(B) and this paragraph.
    (4) Recapture upon termination of treatment as owner. If for any 
reason the donor of an income interest in property ceases at any time 
before the termination of such interest to be treated as the owner of 
such interest for purposes of applying section 671, as for example, 
where he dies before the termination of such interest, he shall for 
purposes of this chapter be considered as having received, on the date 
he ceases to be so treated, an amount of income equal to (i) the amount 
of any deduction he was allowed under section 170 for the contribution 
of such interest reduced by (ii) the discounted value of all amounts 
which were required to be, and actually were, paid with respect to such 
interest under the terms of trust to the charitable organization before 
the time at which he ceases to be treated as the owner of the interest. 
The discounted value of the amounts described in subdivision (ii) of 
this subparagraph shall be computed by treating each such amount as a 
contribution of a remainder interest after a term of years and valuing 
such amount as of the date of contribution of the income interest by the 
donor, such value to be determined under Sec. 20.2031-7 of this chapter 
consistently with the manner in which the fair market value of the 
income interest was determined pursuant to subparagraph (3)(i) of this 
paragraph. The application of this subparagraph will not be construed to 
disallow a deduction to the trust for amounts paid by the trust to the 
charitable organization after the time at which the donor ceased to be 
treated as the owner of the trust.
    (5) Illustrations. The application of this paragraph may be 
illustrated by the following examples:

    Example 1. On January 1, 1971, A contributes to a church in trust a 
9-year irrevocable income interest in property. Both A and the trust 
report income on a calendar year basis. The fair market value of the 
property placed in trust is $10,000. The trust instrument provides that 
the church will receive an annuity of $500, payable annually at the end 
of each year for 9 years. The income interest is a guaranteed annuity 
interest as defined in subparagraph (2)(i) of this paragraph; upon 
termination of such interest the residue of the trust is to revert to A. 
By reference to Sec. 20.2031-7A(c) of this chapter, it is found that 
the figure in column (2) opposite 9 years is 6.8017. The present value 
of the annuity is therefore $3,400.85 ($500 x 6.8017). The present value 
of the income interest and A's charitable contribution for 1971 is 
$3,400.85.
    Example 2. (a) On January 1, B contributes to a church in trust a 9-
year irrevocable income interest in property. Both B and the trust 
report income on a calendar year basis. The fair market value of the 
property placed in trust is $10,000. The trust instrument provides that 
the trust will pay to the church at the end of each year for 9 years 5 
percent of the fair market value of all property in the trust at the 
beginning of the year. The income interest is a unitrust interest as 
defined in subparagraph (2)(ii) of this paragraph; upon termination of 
such interest the residue of the trust is to revert to B.
    (b) The section 7520 rate at the time of the transfer was 6.0 
percent. By reference to Table F(6.0) in Sec. 1.664-4(e)(6), the 
adjusted payout rate is 4.717% (5% x 0.943396). The present value of the 
reversion is $6,473.75, computed by reference to Table D in Sec. 1.664-
4(e)(6), as follows:

Factor at 4.6 percent for 9 years............................   0.654539
Factor at 4.8 percent for 9 years............................    .642292
                                                              ----------
  Difference.................................................    .012247
Interpolation adjustment:
 
                       4.717%-4.6%/0.2%=x/0.012247
                               x=0.007164
 
Factor at 4.6 percent for 9 years............................    .654539
Less: Interpolation adjustment...............................    .007164
                                                              ----------
  Interpolated factor........................................    .647375
Present value of reversion ($10,000x0.647375)................  $6,473.75
 

    (c) The present value of the income interest and B's charitable 
contribution is $3,526.25 ($10,000-$6,473.75).
    Example 3. (a) On January 1, 1971, C contributes to a church in 
trust a 9-year irrevocable income interest in property. Both C and the 
trust report income on a calendar year basis. The fair market value of 
the property placed in trust is $10,000. The trust

[[Page 68]]

instrument provides that the church will receive an annuity of $500, 
payable annually at the end of each year for 9 years. The income 
interest is a guaranteed annuity interest as defined in subparagraph 
(2)(i) of this paragraph; upon termination of such interest the residue 
of the trust is to revert to C. C's charitable contribution for 1971 is 
$3,400.85, determined as provided in Example 1. The trust earns income 
of $600 in 1971, $400 in 1972, and $500 in 1973, all of which is taxable 
to C under section 671. The church is paid $500 at the end of 1971, 
1972, and 1973, respectively. On December 31, 1973, C dies and ceases to 
be treated as the owner of the income interest under section 673.
    (b) Pursuant to subparagraph (4) of this paragraph, the discounted 
value as of January 1, 1971, of the amounts paid to the church by the 
trust is $1,336.51, determined by reference to column (4) of Sec. 
20.2031-7A(c) of this chapter, as follows:

----------------------------------------------------------------------------------------------------------------
                             Annuity                                          Years from
-----------------------------------------------------------------               Jan. 1,                Discount
                                                                    Amount     1971, to    Discount    value as
                          Payment date                               paid       payment     factor    of Jan. 1,
                                                                                 date                    1971
----------------------------------------------------------------------------------------------------------------
Dec. 31, 1971...................................................        $500           1    0.943396     $471.70
Dec. 31, 1972...................................................         500           2     .889996      445.00
Dec. 31, 1973...................................................         500           3     .839619      419.81
                                                                 -----------------------------------------------
    Total discounted value......................................  ..........  ..........  ..........    1,336.51
----------------------------------------------------------------------------------------------------------------

    (c) Pursuant to subparagraph (4) of this paragraph, there must be 
included in C's gross income for 1973 the amount of $2,064.34 ($3,400.85 
less $1,336.51).
    (d) For deduction by the trust for amounts paid to the church after 
December 31, 1973, see section 642(c)(1) and the regulations thereunder.

    (d) Denial of deduction for certain contributions by a trust. (1) If 
by reason of section 170(f)(2)(B) and paragraph (c) of this section a 
charitable contributions deduction is allowed under section 170 for the 
fair market value of an income interest transferred in trust, neither 
the grantor of the income interest, the trust, nor any other person 
shall be allowed a deduction under section 170 or any other section for 
the amount of any charitable contribution made by the trust with respect 
to, or in fulfillment of, such income interest.
    (2) Section 170(f)(2)(C) and subparagraph (1) of this paragraph 
shall not be construed, however, to:
    (i) Disallow a deduction to the trust, pursuant to section 642(c)(1) 
and the regulations thereunder, for amounts paid by the trust after the 
grantor ceases to be treated as the owner of the income interest for 
purposes of applying section 671 and which are not taken into account in 
determining the amount of recapture under paragraph (c)(4) of this 
section, or
    (ii) Disallow a deduction to the grantor under section 671 and Sec. 
1.671-2(c) for a charitable contribution made by the trust in excess of 
the contribution required to be made by the trust under the terms of the 
trust instrument with respect to, or in fulfillment of, the income 
interest.
    (3) Although a deduction for the fair market value of an income 
interest in property which is less than the donor's entire interest in 
the property and which the donor transfers in trust is disallowed under 
section 170 because such interest is not a guaranteed annuity interest, 
or a unitrust interest, as defined in paragraph (c)(2) of this section, 
the donor may be entitled to a deduction under section 671 and Sec. 
1.671-2(c) for any charitable contributions made by the trust if he is 
treated as the owner of such interest for purposes of applying section 
671.
    (e) Effective date. This section applies only to transfers in trust 
made after July 31, 1969. In addition, the rule in paragraphs 
(c)(2)(i)(A) and (ii)(A) of this section that guaranteed annuity 
interests and unitrust interests, respectively, may be payable for a 
specified term of years or for the life or lives of only certain 
individuals applies to transfers made on or after April 4, 2000. If a 
transfer is made to a trust on or after April 4, 2000 that uses an 
individual other than one permitted in paragraphs (c)(2)(i)(A) and 
(ii)(A) of this section, the trust may be reformed to satisfy this rule. 
As an alternative to reformation, rescission may be

[[Page 69]]

available for a transfer made on or before March 6, 2001. See Sec. 
25.2522(c)-3(e) of this chapter for the requirements concerning 
reformation or possible rescission of these interests.

[T.D. 7207, 37 FR 20780, Oct. 5, 1972; 37 FR 22982, Oct. 27, 1972, as 
amended by T.D. 7340, 40 FR 1238, Jan. 7, 1975; T.D. 7955, 49 FR 19975, 
May 11, 1984; T.D. 8540, 59 FR 30102, June 10, 1994; T.D. 8819, 64 FR 
23189, 23228, Apr. 30, 1999; 64 FR 33196, June 22, 1999; T.D. 8923, 66 
FR 1041, Jan. 5, 2001; T.D. 9068, 68 FR 40131, July 7, 2003]



Sec. 1.170A-7  Contributions not in trust of partial interests in 
property.

    (a) In general. (1) In the case of a charitable contribution, not 
made by a transfer in trust, of any interest in property which consists 
of less than the donor's entire interest in such property, no deduction 
is allowed under section 170 for the value of such interest unless the 
interest is an interest described in paragraph (b) of this section. See 
section 170(f)(3)(A). For purposes of this section, a contribution of 
the right to use property which the donor owns, for example, a rent-free 
lease, shall be treated as a contribution of less than the taxpayer's 
entire interest in such property.
    (2)(i) A deduction is allowed without regard to this section for a 
contribution of a partial interest in property if such interest is the 
taxpayer's entire interest in the property, such as an income interest 
or a remainder interest. Thus, if securities are given to A for life, 
with the remainder over to B, and B makes a charitable contribution of 
his remainder interest to an organization described in section 170(c), a 
deduction is allowed under section 170 for the present value of B's 
remainder interest in the securities. If, however, the property in which 
such partial interest exists was divided in order to create such 
interest and thus avoid section 170(f)(3)(A), the deduction will not be 
allowed. Thus, for example, assume that a taxpayer desires to contribute 
to a charitable organization an income interest in property held by him, 
which is not of a type described in paragraph (b)(2) of this section. If 
the taxpayer transfers the remainder interest in such property to his 
son and immediately thereafter contributes the income interest to a 
charitable organization, no deduction shall be allowed under section 170 
for the contribution of the taxpayer's entire interest consisting of the 
retained income interest. In further illustration, assume that a 
taxpayer desires to contribute to a charitable organization the 
reversionary interest in certain stocks and bonds held by him, which is 
not of a type described in paragraph (b)(2) of this section. If the 
taxpayer grants a life estate in such property to his son and 
immediately thereafter contributes the reversionary interest to a 
charitable organization, no deduction will be allowed under section 170 
for the contribution of the taxpayer's entire interest consisting of the 
reversionary interest.
    (ii) A deduction is allowed without regard to this section for a 
contribution of a partial interest in property if such contribution 
constitutes part of a charitable contribution not in trust in which all 
interests of the taxpayer in the property are given to a charitable 
organization described in section 170(c). Thus, if on March 1, 1971, an 
income interest in property is given not in trust to a church and the 
remainder interest in the property is given not in trust to an 
educational organization described in section 170(b)(1)(A), a deduction 
is allowed for the value of such property.
    (3) A deduction shall not be disallowed under section 170(f)(3)(A) 
and this section merely because the interest which passes to, or is 
vested in, the charity may be defeated by the performance of some act or 
the happening of some event, if on the date of the gift it appears that 
the possibility that such act or event will occur is so remote as to be 
negligible. See paragraph (e) of Sec. 1.170A-1.
    (b) Contributions of certain partial interests in property for which 
a deduction is allowed. A deduction is allowed under section 170 for a 
contribution not in trust of a partial interest which is less than the 
donor's entire interest in property and which qualifies under one of the 
following subparagraphs:
    (1) Undivided portion of donor's entire interest. (i) A deduction is 
allowed under section 170 for the value of a charitable contribution not 
in trust of an undivided portion of a donor's entire

[[Page 70]]

interest in property. An undivided portion of a donor's entire interest 
in property must consist of a fraction or percentage of each and every 
substantial interest or right owned by the donor in such property and 
must extend over the entire term of the donor's interest in such 
property and in other property into which such property is converted. 
For example, assuming that in 1967 B has been given a life estate in an 
office building for the life of A and that B has no other interest in 
the office building, B will be allowed a deduction under section 170 for 
his contribution in 1972 to charity of a one-half interest in such life 
estate in a transfer which is not made in trust. Such contribution by B 
will be considered a contribution of an undivided portion of the donor's 
entire interest in property. In further illustration, assuming that in 
1968 C has been given the remainder interest in a trust created under 
the will of his father and C has no other interest in the trust, C will 
be allowed a deduction under section 170 for his contribution in 1972 to 
charity of a 20-percent interest in such remainder interest in a 
transfer which is not made in trust. Such contribution by C will be 
considered a contribution of an undivided portion of the donor's entire 
interest in property. If a taxpayer owns 100 acres of land and makes a 
contribution of 50 acres to a charitable organization, the charitable 
contribution is allowed as a deduction under section 170. A deduction is 
allowed under section 170 for a contribution of property to a charitable 
organization whereby such organization is given the right, as a tenant 
in common with the donor, to possession, dominion, and control of the 
property for a portion of each year appropriate to its interest in such 
property. However, for purposes of this subparagraph a charitable 
contribution in perpetuity of an interest in property not in trust where 
the donor transfers some specific rights and retains other substantial 
rights will not be considered a contribution of an undivided portion of 
the donor's entire interest in property to which section 170(f)(3)(A) 
does not apply. Thus, for example, a deduction is not allowable for the 
value of an immediate and perpetual gift not in trust of an interest in 
original historic motion picture films to a charitable organization 
where the donor retains the exclusive right to make reproductions of 
such films and to exploit such reproductions commercially.
    (ii) With respect to contributions made on or before December 17, 
1980, for purposes of this subparagraph a charitable contribution of an 
open space easement in gross in perpetuity shall be considered a 
contribution of an undivided portion of the donor's entire interest in 
property to which section 170(f)(3)(A) does not apply. For this purpose 
an easement in gross is a mere personal interest in, or right to use, 
the land of another; it is not supported by a dominant estate but is 
attached to, and vested in, the person to whom it is granted. Thus, for 
example, a deduction is allowed under section 170 for the value of a 
restrictive easement gratuitously conveyed to the United States in 
perpetuity whereby the donor agrees to certain restrictions on the use 
of his property, such as, restrictions on the type and height of 
buildings that may be erected, the removal of trees, the erection of 
utility lines, the dumping of trash, and the use of signs. For the 
deductibility of a qualified conservation contribution, see Sec. 
1.170A-14.
    (2) Partial interests in property which would be deductible in 
trust. A deduction is allowed under section 170 for the value of a 
charitable contribution not in trust of a partial interest in property 
which is less than the donor's entire interest in the property and which 
would be deductible under section 170(f)(2) and Sec. 1.170A-6 if such 
interest had been transferred in trust.
    (3) Contribution of a remainder interest in a personal residence. A 
deduction is allowed under section 170 for the value of a charitable 
contribution not in trust of an irrevocable remainder interest in a 
personal residence which is not the donor's entire interest in such 
property. Thus, for example, if a taxpayer contributes not in trust to 
an organization described in section 170(c) a remainder interest in a 
personal residence and retains an estate in such property for life or 
for a term of years, a deduction is allowed under section

[[Page 71]]

170 for the value of such remainder interest not transferred in trust. 
For purposes of section 170(f)(3)(B)(i) and this subparagraph, the term 
personal residence means any property used by the taxpayer as his 
personal residence even though it is not used as his principal 
residence. For example, the taxpayer's vacation home may be a personal 
residence for purposes of this subparagraph. The term personal residence 
also includes stock owned by a taxpayer as a tenant-stockholder in a 
cooperative housing corporation (as those terms are defined in section 
216(b) (1) and (2)) if the dwelling which the taxpayer is entitled to 
occupy as such stockholder is used by him as his personal residence.
    (4) Contribution of a remainder interest in a farm. A deduction is 
allowed under section 170 for the value of a charitable contribution not 
in trust of an irrevocable remainder interest in a farm which is not the 
donor's entire interest in such property. Thus, for example, if a 
taxpayer contributes not in trust to an organization described in 
section 170(c) a remainder interest in a farm and retains an estate in 
such farm for life or for a term of years, a deduction is allowed under 
section 170 for the value of such remainder interest not transferred in 
trust. For purposes of section 170(f)(3)(B)(i) and this subparagraph, 
the term farm means any land used by the taxpayer or his tenant for the 
production of crops, fruits, or other agricultural products or for the 
sustenance of livestock. The term livestock includes cattle, hogs, 
horses, mules, donkeys, sheep, goats, captive fur-bearing animals, 
chickens, turkeys, pigeons, and other poultry. A farm includes the 
improvements thereon.
    (5) Qualified conservation contribution. A deduction is allowed 
under section 170 for the value of a qualified conservation 
contribution. For the definition of a qualified conservation 
contribution, see Sec. 1.170A-14.
    (c) Valuation of a partial interest in property. Except as provided 
in Sec. 1.170A-14, the amount of the deduction under section 170 in the 
case of a charitable contribution of a partial interest in property to 
which paragraph (b) of this section applies is the fair market value of 
the partial interest at the time of the contribution. See Sec. 1.170A-
1(c). The fair market value of such partial interest must be determined 
in accordance with Sec. 20.2031-7, of this chapter (Estate Tax 
Regulations), except that, in the case of a charitable contribution of a 
remainder interest in real property which is not transferred in trust, 
the fair market value of such interest must be determined in accordance 
with section 170(f)(4) and Sec. 1.170A-12. In the case of a charitable 
contribution of a remainder interest in the form of a remainder interest 
in a pooled income fund, a charitable remainder annuity trust, or a 
charitable remainder unitrust, the fair market value of the remainder 
interest must be determined as provided in paragraph (b)(2) of Sec. 
1.170A-6. However, in some cases a reduction in the amount of a 
charitable contribution of the remainder interest may be required. See 
section 170(e) and paragraph (a) of Sec. 1.170A-4.
    (d) Illustrations. The application of this section may be 
illustrated by the following examples:

    Example 1. A, an individual owning a 10-story office building, 
donates the rent-free use of the top floor of the building for the year 
1971 to a charitable organization. Since A's contribution consists of a 
partial interest to which section 170(f)(3)(A) applies, he is not 
entitled to a charitable contributions deduction for the contribution of 
such partial interest.
    Example 2. In 1971, B contributes to a charitable organization an 
undivided one-half interest in 100 acres of land, whereby as tenants in 
common they share in the economic benefits from the property. The 
present value of the contributed property is $50,000. Since B's 
contribution consists of an undivided portion of his entire interest in 
the property to which section 170(f)(3)(B) applies, he is allowed a 
deduction in 1971 for his charitable contribution of $50,000.
    Example 3. In 1971, D loans $10,000 in cash to a charitable 
organization and does not require the organization to pay any interest 
for the use of the money. Since D's contribution consists of a partial 
interest to which section 170(f)(3)(A) applies, he is not entitled to a 
charitable contributions deduction for the contribution of such partial 
interest.

    (e) Effective date. This section applies only to contributions made 
after July 31, 1969. The deduction allowable under Sec. 1.170A-
7(b)(1)(ii) shall be available

[[Page 72]]

only for contributions made on or before December 17, 1980. Except as 
otherwise provided in Sec. 1.170A-14(g)(4)(ii), the deduction allowable 
under Sec. 1.170A-7(b)(5) shall be available for contributions made on 
or after December 18, 1980.

(83 Stat. 544, 26 U.S.C. 170(f)(4); 83 Stat. 560, 26 U.S.C. 642(c)(5); 
68A Stat. 917, 26 U.S.C. 7805)

[T.D. 7207, 37 FR 20782, Oct. 4, 1972; 37 FR 22982, Oct. 27, 1972; as 
amended by T.D. 7955, 49 FR 19975, May 11, 1984; T.D. 8069, 51 FR 1498, 
Jan. 14, 1986; T.D. 8540, 59 FR 30102, June 10, 1994]



Sec. 1.170A-8  Limitations on charitable deductions by individuals.

    (a) Percentage limitations--(1) In general. An individual's 
charitable contributions deduction is subject to 20-, 30-, and 50-
percent limitations unless the individual qualifies for the unlimited 
charitable contributions deduction under section 170(b)(1)(C). For a 
discussion of these limitations and examples of their application, see 
paragraphs (b) through (f) of this section. If a husband and wife make a 
joint return, the deduction for contributions is the aggregate of the 
contributions made by the spouses, and the limitations in section 170(b) 
and this section are based on the aggregate contribution base of the 
spouses. A charitable contribution by an individual to or for the use of 
an organization described in section 170(c) may be deductible even 
though all, or some portion, of the funds of the organization may be 
used in foreign countries for charitable or educational purposes.
    (2) ``To'' or ``for the use of'' defined. For purposes of section 
170, a contribution of an income interest in property, whether or not 
such contributed interest is transferred in trust, for which a deduction 
is allowed under section 170(f)(2)(B) or (3)(A) shall be considered as 
made ``for the use of'' rather than ``to'' the charitable organization. 
A contribution of a remainder interest in property, whether or not such 
contributed interest is transferred in trust, for which a deduction is 
allowed under section 170(f)(2)(A) or (3)(A), shall be considered as 
made ``to'' the charitable organization except that, if such interest is 
transferred in trust and, pursuant to the terms of the trust instrument, 
the interest contributed is, upon termination of the predecessor estate, 
to be held in trust for the benefit of such organization, the 
contribution shall be considered as made ``for the use of'' such 
organization. Thus, for example, assume that A transfers property to a 
charitable remainder annuity trust described in section 664(d)(1) which 
is required to pay to B for life an annuity equal to 5 percent of the 
initial fair market value of the property transferred in trust. The 
trust instrument provides that after B's death the remainder interest in 
the trust is to be transferred to M Church or, in the event M Church is 
not an organization described in section 170(c) when the amount is to be 
irrevocably transferred to such church, to an organization which is 
described in section 170(c) at that time. The contribution by A of the 
remainder interest shall be considered as made ``to'' M Church. However, 
if in the trust instrument A had directed that after B's death the 
remainder interest is to be held in trust for the benefit of M Church, 
the contribution shall be considered as made ``for the use of'' M 
Church. This subparagraph does not apply to the contribution of a 
partial interest in property, or of an undivided portion of such partial 
interest, if such partial interest is the donor's entire interest in the 
property and such entire interest was not created to avoid section 
170(f)(2) or (3)(A). See paragraph (a)(2) of Sec. 1.170A-6 and 
paragraphs (a)(2)(i) and (b)(1) of Sec. 1.170A-7.
    (b) 50-percent limitation. An individual may deduct charitable 
contributions made during a taxable year to any one or more section 
170(b)(1)(A) organizations, as defined in Sec. 1.170A-9, to the extent 
that such contributions in the aggregate do not exceed 50 percent of his 
contribution base, as defined in section 170(b)(1)(F) and paragraph (e) 
of this section, for the taxable year. However, see paragraph (d) of 
this section for a limitation on the amount of charitable contributions 
of 30-percent capital gain property. To qualify for the 50-percent 
limitation the contributions must be made ``to,'' and not merely ``for 
the use of,'' one of the specified organizations. A contribution to an 
organization referred to in section 170(c)(2), other than a section 
170(b)(1)(A) organization, will

[[Page 73]]

not qualify for the 50-percent limitation even though such organization 
makes the contribution available to an organization which is a section 
170 (b)(1)(A) organization. For provisions relating to the carryover of 
contributions in excess of 50-percent of an individual's contribution 
base see section 170(d)(1) and paragraph (b) of Sec. 1.170A-10.
    (c) 20-percent limitation. (1) An individual may deduct charitable 
contributions made during a taxable year:
    (i) To any one or more charitable organizations described in section 
170(c) other than section 170(b)(1)(A) organizations, as defined in 
Sec. 1.170A-9, and,
    (ii) For the use of any charitable organization described in section 
170(c), to the extent that such contributions in the aggregate do not 
exceed the lesser of the limitations under subparagraph (2) of this 
paragraph.
    (2) For purposes of subparagraph (1) of this paragraph the 
limitations are:
    (i) 20 percent of the individual's contribution base, as defined in 
paragraph (e) of this section, for the taxable year, or
    (ii) The excess of 50 percent of the individual's contribution base, 
as so defined, for the taxable year over the total amount of the 
charitable contributions allowed under section 170(b)(1)(A) and 
paragraph (b) of this section, determined by first reducing the amount 
of such contributions under section 170(e)(1) and paragraph (a) of Sec. 
1.170A-4 but without applying the 30-percent limitation under section 
170(b)(1)(D)(i) and paragraph (d)(1) of this section.

However, see paragraph (d) of this section for a limitation on the 
amount of charitable contributions of 30-percent capital gain property. 
If an election under section 170(b)(1)(D)(iii) and paragraph (d)(2) of 
this section applies to any contributions of 30-percent capital gain 
property made during the taxable year or carried over to the taxable 
year, the amount allowed for the taxable year under paragraph (b) of 
this section with respect to such contributions for purposes of applying 
subdivision (ii) of this subparagraph shall be the reduced amount of 
such contributions determined by applying paragraph (d)(2) of this 
section.
    (d) 30-percent limitation--(1) In general. An individual may deduct 
charitable contributions of 30-percent capital gain property, as defined 
in subparagraph (3) of this paragraph, made during a taxable year to or 
for the use of any charitable organization described in section 170(c) 
to the extent that such contributions in the aggregate do not exceed 30-
percent of his contribution base, as defined in paragraph (e) of this 
section, subject, however, to the 50- and 20-percent limitations 
prescribed by paragraphs (b) and (c) of this section. For purposes of 
applying the 50-percent and 20-percent limitations described in 
paragraphs (b) and (c) of this section, charitable contributions of 30-
percent capital gain property paid during the taxable year, and limited 
as provided by this subparagraph, shall be taken into account after all 
other charitable contributions paid during the taxable year. For 
provisions relating to the carryover of certain contributions of 30-
percent capital gain property in excess of 30-percent of an individual's 
contribution base, see section 170(b)(1)(D)(ii) and paragraph (c) of 
Sec. 1.170A-10.
    (2) Election by an individual to have section 170(e)(1)(B) apply to 
contributions--(i) In general. (A) An individual may elect under section 
170(b)(1)(D)(iii) for any taxable year to have the reduction rule of 
section 170(e)(1)(B) and paragraph (a) of Sec. 1.170A-4 apply to all 
his charitable contributions of 30-percent capital gain property made 
during such taxable year or carried over to such taxable year from a 
taxable year beginning after December 31, 1969. If such election is made 
such contributions shall be treated as contributions of section 170(e) 
capital gain property in accordance with paragraph (b)(2)(iii) of Sec. 
1.170A-4. The election may be made with respect to contributions of 30-
percent capital gain property carried over to the taxable year even 
though the individual has not made any contribution of 30-percent 
capital gain property in such year. If such an election is made, section 
170(b)(1)(D) (i) and (ii) and subparagraph (1) of this paragraph shall 
not apply to such contributions made during such year. However, such 
contributions must be reduced as required

[[Page 74]]

under section 170(e)(1)(B) and paragraph (a) of Sec. 1.170A-4.
    (B) If there are carryovers to such taxable year of charitable 
contributions of 30-percent capital gain property made in preceding 
taxable years beginning after December 31, 1969, the amount of such 
contributions in each such preceding year shall be reduced as if section 
170(e)(1)(B) had applied to them in the preceding year and shall be 
carried over to the taxable year and succeeding taxable years under 
section 170(d)(1) and paragraph (b) of Sec. 1.170A-10 as contributions 
of property other than 30-percent capital gain property. For purposes of 
applying the immediately preceding sentence, the percentage limitations 
under section 170(b) for the preceding taxable year and for any taxable 
years intervening between such year and the year of the election shall 
not be redetermined and the amount of any deduction allowed for such 
years under section 170 in respect of the charitable contributions of 
30-percent capital gain property in the preceding taxable year shall not 
be redetermined. However, the amount of the deduction so allowed under 
section 170 in the preceding taxable year must be subtracted from the 
reduced amount of the charitable contributions made in such year in 
order to determine the excess amount which is carried over from such 
year under section 170(d)(1). If the amount of the deduction so allowed 
in the preceding taxable year equals or exceeds the reduced amount of 
the charitable contributions, there shall be no carryover from such year 
to the year of the election.
    (C) An election under this subparagraph may be made for each taxable 
year in which charitable contributions of 30-percent capital gain 
property are made or to which they are carried over under section 
170(b)(1)(D)(ii). If there are also carryovers under section 170(d)(1) 
to the year of the election by reason of an election made under this 
subparagraph for a previous taxable year, such carryovers under section 
170(d)(1) shall not be redetermined by reason of the subsequent 
election.
    (ii) Husband and wife making joint return. If a husband and wife 
make a joint return of income for a contribution year and one of the 
spouses elects under this subparagraph in a later year when he files a 
separate return, or if a spouse dies after a contribution year for which 
a joint return is made, any excess contribution of 30-percent capital 
gain property which is carried over to the election year from the 
contribution year shall be allocated between the husband and wife as 
provided in paragraph (d)(4) (i) and (iii) of Sec. 1.170A-10. If a 
husband and wife file separate returns in a contribution year, any 
election under this subparagraph in a later year when a joint return is 
filed shall be applicable to any excess contributions of 30-percent 
capital gain property of either taxpayer carried over from the 
contribution year to the election year. The immediately preceding 
sentence shall also apply where two single individuals are subsequently 
married and file a joint return. A remarried individual who filed a 
joint return with his former spouse for a contribution year and 
thereafter files a joint return with his present spouse shall treat the 
carryover to the election year as provided in paragraph (d)(4)(ii) of 
Sec. 1.170A-10.
    (iii) Manner of making election. The election under subdivision (i) 
of this subparagraph shall be made by attaching to the income tax return 
for the election year a statement indicating that the election under 
section 170(b)(1)(D)(iii) and this subparagraph is being made. If there 
is a carryover to the taxable year of any charitable contributions of 
30-percent capital gain property from a previous taxable year or years, 
the statement shall show a recomputation, in accordance with this 
subparagraph and Sec. 1.170A-4, of such carryover, setting forth 
sufficient information with respect to the previous taxable year or any 
intervening year to show the basis of the recomputation. The statement 
shall indicate the district director, or the director of the internal 
revenue service center, with whom the return for the previous taxable 
year or years was filed, the name or names in which such return or 
returns were filed, and whether each such return was a joint or separate 
return.
    (3) 30-percent capital gain property defined. If there is a 
charitable contribution of a capital asset which, if it were sold by the 
donor at its fair market

[[Page 75]]

value at the time of its contribution, would result in the recognition 
of gain all, or any portion, of which would be long-term capital gain 
and if the amount of such contribution is not required to be reduced 
under section 170(e)(1)(B) and Sec. 1.170A-4(a)(2), such capital asset 
shall be treated as ``30-percent capital gain property'' for purposes of 
section 170 and the regulations thereunder. For such purposes any 
property which is property used in the trade or business, as defined in 
section 1231(b), shall be treated as a capital asset. However, see 
paragraph (b)(4) of Sec. 1.170A-4. For the treatment of such property 
as section 170(e) capital gain property, see paragraph (b)(2)(iii) of 
Sec. 1.170A-4.
    (e) Contribution base defined. For purposes of section 170 the term 
contribution base means adjusted gross income under section 62, computed 
without regard to any net operating loss carryback to the taxable year 
under section 172. See section 170(b)(1)(F).
    (f) Illustrations. The application of this section may be 
illustrated by the following examples:

    Example 1. B, an individual, reports his income on the calendar-year 
basis and for 1970 has a contribution base of $100,000. During 1970 he 
makes charitable contributions of $70,000 in cash, of which $40,000 is 
given to section 170(b)(1)(A) organizations and $30,000 is given to 
other organizations described in section 170(c). Accordingly, B is 
allowed a charitable contributions deduction of $50,000 (50% of 
$100,000), which consists of the $40,000 contributed to section 
170(b)(1)(A) organizations and $10,000 of the $30,000 contributed to the 
other organizations. Under paragraph (c) of this section, only $10,000 
of the $30,000 contributed to the other organizations is allowed as a 
deduction since such contribution of $30,000 is allowed to the extent of 
the lesser of $20,000 (20% of $100,000) or $10,000 ([50% of $100,000]-
$40,000 (contributions allowed under section 170(b)(1)(A) and paragraph 
(b) of this section)). Under section 170 (b)(1)(D)(ii) and (d)(1) and 
Sec. 1.170A-10, B is not allowed a carryover to 1971 or to any other 
taxable year for any of the $20,000 ($30,000-$10,000) not deductible 
under section 170(b)(1)(B) and paragraph (c) of this section.
    Example 2. C, an individual, reports his income on the calendar-year 
basis and for 1970 has a contribution base of $100,000. During 1970 he 
makes charitable contributions of $40,000 in 30-percent capital gain 
property to section 170(b)(1)(A) organizations and of $30,000 in cash to 
other organizations described in section 170(c). The 20-percent 
limitation in section 170(b)(1)(B) and paragraph (c) of this section is 
applied before the 30-percent limitation in section 170(b)(1)(D)(i) and 
paragraph (d) of this section; accordingly section 170(b)(1)(B)(ii) 
limits the deduction for the $30,000 cash contribution to $10,000 ([50% 
of $100,000]- $40,000). The amount of the contribution of 30-percent 
capital gain property is limited by section 170(b)(1)(D)(i) and 
paragraph (d) of this section to $30,000 (30% of $100,000). Accordingly, 
C's charitable contributions deduction for 1970 is limited to $40,000 
($10,000+$30,000). Under section 170 (b)(1)(D)(ii) and paragraph (c) of 
Sec. 1.170A-10, C is allowed a carryover to 1971 of $10,000 ($40,000-
$30,000) in respect of his contributions of 30-percent capital gain 
property. C is not allowed a carryover to 1971 or to any other taxable 
year for any of the $20,000 cash ($30,000-$10,000) not deductible under 
section 170(b)(1)(B) and paragraph (c) of this section.
    Example 3. (a) D, an individual, reports his income on the calendar-
year basis and for 1970 has a contribution base of $100,000. During 1970 
he makes charitable contributions of $70,000 in cash, of which $40,000 
is given to section 170(b)(1)(A) organizations and $30,000 is given to 
other organizations described in section 170(c). During 1971 D makes 
charitable contributions to a section 170(b)(1)(A) organization of 
$12,000, consisting of cash of $1,000 and $11,000 in 30-percent capital 
gain property. His contribution base for 1971 is $10,000.
    (b) For 1970, D is allowed a charitable contributions deduction of 
$50,000 (50% of $100,000), which consists of the $40,000 contributed to 
section 170(b)(1)(A) organizations and $10,000 of the $30,000 
contributed to the other organizations. Under paragraph (c) of this 
section, only $10,000 of the $30,000 contributed to the other 
organizations is allowed as a deduction since such contribution of 
$30,000 is allowed to the extent of the lesser of $20,000 (20% of 
$100,000) or $10,000 ([50% of $100,000]-$40,000 (contributions allowed 
under section 170(b)(1)(A) and paragraph (b) of this section)). D is not 
allowed a carryover to 1971 or to any other taxable year for any of the 
$20,000 ($30,000-$10,000) not deductible under section 170(b)(1)(B) and 
paragraph (c) of this section.
    (c) For 1971, D is allowed a charitable contributions deduction of 
$4,000, consisting of $1,000 cash and $3,000 of the 30-percent capital 
gain property (30% of $10,000). Under section 170(b)(1)(D)(ii) and 
paragraph (c) of Sec. 1.170A-10, D is allowed a carryover to 1972 of 
$8,000 ($11,000-$3,000) in respect of his contribution of 30-percent 
capital gain property in 1971.
    Example 4. (a) E, an individual, reports his income on the calendar-
year basis and for 1970 has a contribution base of $100,000. During 1970 
he makes charitable contributions of $70,000 in cash, of which $40,000 
is given to

[[Page 76]]

section 170(b)(1)(A) organizations and $30,000 is given to other 
organizations described in section 170(c). During 1971 E makes 
charitable contributions to a section 170(b)(1)(A) organization of 
$14,000 consisting of cash of $3,000 and $11,000 in 30-percent capital 
gain property. His contribution base for 1971 is $10,000.
    (b) For 1970, E is allowed a charitable contributions deduction of 
$50,000 (50% of $100,000), which consists of the $40,000 contributed to 
section 170(b)(1)(A) organizations and $10,000 of the $30,000 
contributed to the other organizations. Under paragraph (c) of this 
section, only $10,000 of the $30,000 contributed to the other 
organizations is allowed as a deduction since such contribution of 
$30,000 is allowed to the extent of the lesser of $20,000 (20% of 
$100,000) or ($10,000 ([50% of $100,000]-$40,000 (contributions allowed 
under section 170(b)(1)(A) and paragraph (b) of this section)). E is not 
allowed a carryover to 1971 or to any other taxable year for any of the 
$20,000 ($30,000-$10,000) not deductible under section 170(b)(1)(B) and 
paragraph (c) of this section.
    (c) For 1971, E is allowed a charitable contributions deduction of 
$5,000 (50% of $10,000), consisting of $3,000 cash and $2,000 of the 
$3,000 (30% of $10,000) 30-percent capital gain property which is taken 
into account. This result is reached because, as provided in section 
170(b)(1)(D)(i) and paragraph (d)(1) of this section, cash contributions 
are taken into account before charitable contributions of 30-percent 
capital gain property. Under section 170(b)(1)(D)(ii) and (d)(1) and 
paragraphs (b) and (c) of Sec. 1.170A-10, E is allowed a carryover of 
$9,000 ([$11,000-$3,000] plus [$6,000 -$5,000]) to 1972 in respect of 
his contribution of 30-percent capital gain property in 1971.
    Example 5. In 1970, C, a calendar-year individual taxpayer, 
contributes to section 170(b)(1)(A) organizations the amount of $8,000, 
consisting of $3,000 in cash and $5,000 in 30-percent capital gain 
property. In 1970, C also makes charitable contributions of $8,500 in 30 
percent capital gain property to other organizations described in 
section 170(c). C's contribution base for 1970 is $20,000. The 20-
percent limitation in section 170(b)(1)(B) and paragraph (c) of this 
section is applied before the 30-percent limitation in section 
170(b)(1)(D)(i) and paragraph (d) of this section; accordingly, section 
170(b)(1)(B)(ii) limits the deduction for the $8,500 of contributions to 
the other organizations described in section 170(c) to $2,000 ([50% of 
$20,000]-[$3,000+$5,000]). However, the total amount of contributions of 
30-percent capital gain property which is allowed as a deduction for 
1970 is limited by section 170(b)(1)(D)(i) and paragraph (d) of this 
section to $6,000 (30% of $20,000), consisting of the $5,000 
contribution to the section 170(b)(1)(A) organizations and $1,000 of the 
contributions to the other organizations described in section 170(c). 
Accordingly C is allowed a charitable contributions deduction for 1970 
of $9,000, which consists of $3,000 cash and $6,000 of the $13,500 of 
30-percent capital gain property. C is not allowed to carryover to 1971 
or any other year the remaining $7,500 because his contributions of 30-
percent capital gain property for 1970 to section 170(b)(1)(A) 
organizations amount only to $5,000 and do not exceed $6,000 (30% of 
$20,000). Thus, the requirement of section 170(b)(1)(D)(ii) is not 
satisfied.
    Example 6. During 1971, D, a calendar-year individual taxpayer, 
makes a charitable contribution to a church of $8,000, consisting of 
$5,000 in cash and $3,000 in 30-percent capital gain property. For such 
year, D's contribution base is $10,000. Accordingly, D is allowed a 
charitable contributions deduction for 1971 of $5,000 (50% of $10,000) 
of cash. Under section 170(d)(1) and paragraph (b) of Sec. 1.170A-10, D 
is allowed a carryover to 1972 of his $3,000 contribution of 30-percent 
capital gain property, even though such amount does not exceed 30 
percent of his contribution base for 1971.
    Example 7. In 1970, E, a calendar-year individual taxpayer, makes a 
charitable contribution to a section 170(b)(1)(A) organization in the 
amount of $10,000, consisting of $8,000 in 30-percent capital gain 
property and of $2,000 (after reduction under section 170(e)) in other 
property. E's contribution base of 1970 is $20,000. Accordingly, E is 
allowed a charitable contributions deduction for 1970 of $8,000, 
consisting of the $2,000 of property the amount of which was reduced 
under section 170(e) and $6,000 (30% of $20,000) of the 30-percent 
capital gain property. Under section 170(b)(1)(D)(ii) and paragraph (c) 
of Sec. 1.170A-10, E is allowed to carryover to 1971 $2,000 ($8,000-
$6,000) of his contribution of 30-percent capital gain property.
    Example 8. (a) In 1972, F, calendar-year individual taxpayer, makes 
a charitable contribution to a church of $4,000, consisting of $1,000 in 
cash and $3,000 in 30-percent capital gain property. In addition, F 
makes a charitable contribution in 1972 of $2,000 in cash to an 
organization described in section 170(c)(4). F also has a carryover from 
1971 under section 170(d)(1) of $5,000 (none of which consists of 
contributions of 30-percent capital gain property) and a carryover from 
1971 under section 170(b)(1)(D)(ii) of $6,000 of contributions of 30-
percent capital gain property. F's contribution base for 1972 is 
$11,000.
    Accordingly, F is allowed a charitable contributions deduction for 
1972 of $5,500 (50% of $11,000), which consists of $1,000 cash 
contributed in 1972 to the church, $3,000 of 30-percent capital gain 
property contributed in 1972 to the church, and $1,500 (carryover of 
$5,000 but not to exceed [$5,500-($1,000 +$3,000)]) of the carryover 
from 1971 under section 170(d)(1).

[[Page 77]]

    (b) No deduction is allowed for 1972 for the contribution in that 
year of $2,000 cash to the section 170(c)(4) organization since section 
170(b)(1)(B)(ii) and paragraph (c) of this section limit the deduction 
for such contribution to $0([50% of $11,000]-[$1,000 +$1,500+$3,000]). 
Moreover, F is not allowed a carryover to 1973 or to any other year for 
any of such $2,000 cash contributed to the section 170(c)(4) 
organization.
    (c) Under section 170(d)(1) and paragraph (b) of Sec. 1.170A-10, F 
is allowed a carryover to 1973 from 1971 of $3,500 ($5,000-$1,500) of 
contributions of other than 30-percent capital gain property. Under 
section 170(b)(1)(D)(ii) and paragraph (c) of Sec. 1.170A-10, F is 
allowed a carryover to 1973 from 1971 of $6,000 ($6,000-$0 of such 
carryover treated as paid in 1972) of contributions of 30-percent 
capital gain property. The portion of such $6,000 carryover from 1971 
which is treated as paid in 1972 is $0 ([50% of $11,000]-[$4,000 
contributions to the church in 1972 plus $1,500 of section 170(d)(1) 
carryover treated as paid in 1972]).
    Example 9. (a) In 1970, A, a calendar-year individual taxpayer, 
makes a charitable contribution to a church of 30-percent capital gain 
property having a fair market value of $60,000 and an adjusted basis of 
$10,000. A's contribution base for 1970 is $50,000, and he makes no 
other charitable contributions in that year. A does not elect for 1970 
under paragraph (d)(2) of this section to have section 170(e)(1)(B) 
apply to such contribution. Accordingly, under section 170(b)(1)(D)(i) 
and paragraph (d) of this section, A is allowed a charitable 
contributions deduction for 1970 of $15,000 (30% of $50,000). Under 
section 170(b)(1)(D)(ii) and paragraph (c) of Sec. 1.170A-10, A is 
allowed a carryover to 1971 of $45,000 ($60,000-$15,000) for his 
contribution of 30-percent capital gain property.
    (b) In 1971, A makes a charitable contribution to a church of 30-
percent capital gain property having a fair market value of $11,000 and 
an adjusted basis of $10,000. A's contribution base for 1971 is $60,000, 
and he makes no other charitable contributions in that year. A elects 
for 1971 under paragraph (d)(2) of this section to have section 
170(e)(1)(B) and Sec. 1.170A-4 apply to his contribution of $11,000 in 
that year and to his carryover of $45,000 from 1970. Accordingly, he is 
required to recompute his carryover from 1970 as if section 170(e)(1)(B) 
had applied to his contribution of 30-percent capital gain property in 
that year.
    (c) If section 170(e)(1)(B) had applied in 1970 to his contribution 
of 30-percent capital gain property, A's contribution would have been 
reduced from $60,000 to $35,000, the reduction of $25,000 being 50 
percent of the gain of $50,000 ($60,000-$10,000) which would have been 
recognized as long-term capital gain if the property had been sold by A 
at its fair market value at the time of the contribution in 1970. 
Accordingly, by taking the election under paragraph (d)(2) of this 
section into account, A has a recomputed carryover to 1971 of $20,000 
($35,000- $15,000) of his contribution of 30-percent capital gain 
property in 1970. However, A's charitable contributions deduction of 
$15,000 allowed for 1970 is not recomputed by reason of the election.
    (d) Pursuant to the election for 1971, the contribution of 30-
percent capital gain property for 1971 is reduced from $11,000 to 
$10,500, the reduction of $500 being 50 percent of the gain of $1,000 
($11,000-$10,000) which would have been recognized as long-term capital 
gain if the property had been sold by A at its fair market value at the 
time of its contribution in 1971.
    (e) Accordingly, A is allowed a charitable contributions deduction 
for 1971 of $30,000 (total contributions of $30,500 [$20,000+ $10,500] 
but not to exceed 50% of $60,000).
    (f) Under section 170(d)(1) and paragraph (b) of Sec. 1.170A-10, A 
is allowed a carryover of $500 ($30,500-$30,000) to 1972 and the 3 
succeeding taxable years. The $500 carryover, which by reason of the 
election is no longer treated as a contribution of 30-percent capital 
gain property, is treated as carried over under paragraph (b) of Sec. 
1.170A-10 from 1970 since in 1971 current year contributions are 
deducted before contributions which are carried over from preceding 
taxable years.
    Example 10. The facts are the same as in Example 9 except that A 
also makes a charitable contribution in 1971 of $2,000 cash to a private 
foundation not described in section 170(b)(1)(E) and that A's 
contribution base for that year is $62,000, instead of $60,000. 
Accordingly, A is allowed a charitable contributions deduction for 1971 
of $31,000, determined in the following manner Under section 
170(b)(1)(A) and paragraph (b) of this section, A is allowed a 
charitable contributions deduction for 1971 of $30,500, consisting of 
$10,500 of property contributed to the church in 1971 and of $20,000 
(carryover of $20,000 but not to exceed [($62,000x50%)-$10,500]) of 
contributions of property carried over to 1971 under section 170(d)(1) 
and paragraph (b) of Sec. 1.170A-10. Under section 170(b)(1)(B) and 
paragraph (c) of this section, A is allowed a charitable contributions 
deduction for 1971 of $500 ([50% of $62,000]-[$10,500+ $20,000]) of cash 
contributed to the private foundation in that year. A is not allowed a 
carryover to 1972 or to any other taxable year for any of the $1,500 
($2,000-$500) cash not deductible in 1971 under section 170(b)(1)(B) and 
paragraph (c) of this section.
    Example 11. The facts are the same as in Example 9 except that A's 
contribution base for 1970 is $120,000. Thus, before making the election 
under paragraph (d)(2) of this section for 1971, A is allowed a 
charitable contributions deduction for 1970 of $36,000 (30% of $120,000) 
and is allowed a carryover to 1971 of $24,000 ($60,000-$36,000). By 
making the

[[Page 78]]

election for 1971, A is required to recompute the carryover from 1970, 
which is reduced from $24,000 to zero, since the charitable 
contributions deduction of $36,000 allowed for 1970 exceeds the reduced 
$35,000 contribution for 1970 which iay be taken into account by reason 
of the election for 1971. Accordingly, A is allowed a deduction for 1971 
of $10,500 and is allowed no carryover to 1972, since the reduced 
contribution for 1971 ($10,500) does not exceed the limitation of 
$30,000 (50% of $60,000) for 1971 which applies under section 170(d)(1) 
and paragraph (b) of Sec. 1.170A-10. A's charitable contributions 
deduction of $36,000 allowed for 1970 is not recomputed by reason of the 
election. Thus, it is not to A's advantage to make the election under 
paragraph (d)(2) of this section.
    Example 12. (a) B, an individual, reports his income on the 
calendar-year basis and for 1970 has a contribution base of $100,000. 
During 1970 he makes charitable contributions of $70,000, consisting of 
$50,000 in 30-percent capital gain property contributed to a church and 
$20,000 in cash contributed to a private foundation not described in 
section 170(b)(1)(E). For 1971, B's contribution base is $40,000, and in 
that year he makes a charitable contribution of $5,000 in cash to such 
private foundation. During the years involved B makes no other 
charitable contributions.
    (b) The amount of the contribution of 30-percent capital gain 
property which may be taken into account for 1970 is limited by section 
170(b)(1)(D)(i) and paragraph (d) of this section to $30,000 (30% of 
$100,000). Accordingly, under section 170(b)(1)(A) and paragraph (b) of 
this section B is allowed a deduction for 1970 of $30,000 of 30-percent 
capital gain property (contribution of $30,000 but not to exceed $50,000 
[50% of $100,000]). No deduction is allowed for 1970 for the 
contribution in that year of $20,000 of cash to the private foundation 
since section 170(b)(1)(B)(ii) and paragraph (c) of this section limit 
the deduction for such contribution to $0 ([50% of $100,000]- $50,000, 
the amount of the contribution of 30-percent capital gain property).
    (c) Under section 170(b)(1)(D)(ii) and paragraph (c) of Sec. 
1.170A-10, B is allowed a carryover to 1971 of $20,000 ($50,000-[30% of 
$100,000]) of his contribution in 1970 of 30-percent capital gain 
property. B is not allowed a carryover to 1971 or to any other taxable 
year for any of the $20,000 cash contribution in 1970 which is not 
deductible under section 170(b)(1)(B) and paragraph (c) of this section.
    (d) The amount of the contribution of 30-percent capital gain 
property which may be taken into account for 1971 is limited by section 
170(b)(1)(D)(i) and paragraph (d) of this section to $12,000 (30% of 
$40,000).
    Accordingly, under section 170(b)(1)(A) and paragraph (b) of this 
section B is allowed a deduction for 1971 of $12,000 of 30-percent 
capital gain property (contribution of $12,000 but not to exceed $20,000 
[50% of $40,000]). No deduction is allowed for 1971 for the contribution 
in that year of $5,000 of cash to the private foundation, since section 
170(b)(1)(B)(ii) and paragraph (c) of this section limit the deduction 
for such contribution to $0 ([50% of $40,000] -$20,000 carryover of 30-
percent capital gain property from 1970).
    (e) Under section 170(b)(1)(D)(ii) and paragraph (c) of Sec. 
1.170A-10, B is allowed a carryover to 1972 of $8,000 ($20,000-[30% of 
$40,000]) of his contribution in 1970 of 30-percent capital gain 
property. B is not allowed a carryover to 1972 or to any other taxable 
year for any of the $5,000 cash contribution for 1971 which is not 
deductible under section 170(b)(1)(B) and paragraph (c) of this section.
    Example 13. D, an individual, reports his income on the calendar-
year basis and for 1970 has a contribution base of $100,000. On March 1, 
1970, he contributes to a church intangible property to which section 
1245 applies which has a fair market value of $60,000 and an adjusted 
basis of $10,000. At the time of the contribution D has used the 
property in his business for more than 6 months. If the property had 
been sold by D at its fair market value at the time of its contribution, 
it is assumed that under section 1245 $20,000 of the gain of $50,000 
would have been treated as ordinary income and $30,000 would have been 
long-term capital gain. Since the property contributed is ordinary 
income property within the meaning of paragraph (b)(1) of Sec. 1.170A-
4, D's contribution of $60,000 is reduced under paragraph (a)(1) of such 
section to $40,000 ($60,000-$20,000 ordinary income). However, since the 
property contributed is also 30-percent capital gain property within the 
meaning of paragraph (d)(3) of this section, D's deduction for 1970 is 
limited by section 170(b)(1)(D)(i) and paragraph (d) of this section to 
$30,000 (30% of $100,000). Under section 170(b)(1)(D)(ii) and paragraph 
(c) of Sec. 1.170A-10, D is allowed to carry over to 1971 $10,000 
($40,000-$30,000) of his contribution of 30-percent capital gain 
property.
    Example 14. C, an individual, reports his income on the calendar-
year basis and for 1970 has a contribution base of $50,000. During 1970 
he makes charitable contributions to a church of $57,000, consisting of 
$2,000 cash and of 30-percent capital gain property with a fair market 
value of $55,000 and an adjusted basis of $15,000. In addition, C 
contributes $3,000 cash in 1970 to a private foundation not described in 
section 170(b)(1)(E). For 1970, C elects under paragraph (d)(2) of this 
section to have section 170(e)(1)(B) and Sec. 1.170A-4(a) apply to his 
contribution of property to the church. Accordingly, for 1970 C's 
contribution of property to the church is reduced from $55,000 to 
$35,000, the reduction of $20,000 being 50 percent of the gain of 
$40,000

[[Page 79]]

($55,000 -$15,000) which would have been recognized as long-term capital 
gain if the property had been sold by C at its fair market value at the 
time of its contribution to the church. Under section 170(b)(1)(A) and 
paragraph (b) of this section, C is allowed a charitable contributions 
deduction for 1970 of $25,000 ([$2,000+$35,000] but not to exceed 
[$50,000x50%]). Under section 170(d)(1) and paragraph (b) of Sec. 
1.170A-10, C is allowed a carryover from 1970 to 1971 of $12,000 
($37,000-$25,000). No deduction is allowed for 1970 for the contribution 
in that year of $3,000 cash to the private foundation since section 
170(b)(1)(B) and paragraph (c) of this section limit the deduction for 
such contribution to the smaller of $10,000 ($50,000x20%) or $0 
([$50,000x50%]-$25,000). C is not allowed a carryover from 1970 for any 
of the $3,000 cash contribution in that year which is not deductible 
under section 170(b)(1)(B) and paragraph (c) of this section.
    Example 15. (a) D, an individual, reports his income on the 
calendar-year basis and for 1970 has a contribution base of $100,000. 
During 1970 he makes a charitable contribution to a church of 30-percent 
capital gain property with a fair market value of $40,000 and an 
adjusted basis of $21,000. In addition, he contributes $23,000 cash in 
1970 to a private foundation not described in section 170(b)(1)(E). For 
1970, D elects under paragraph (d)(2) of this section to have section 
170(e)(1)(B) and Sec. 1.170A-4(a) apply to his contribution of property 
to the church. Accordingly, for 1970 D's contribution of property to the 
church is reduced from $40,000 to $30,500, the reduction of $9,500 being 
50 percent of the gain of $19,000 ($40,000-$21,000) which would have 
been recognized as long-term capital gain if the property had been sold 
by D at its fair market value at the time of its contribution to the 
church. Under section 170(b)(1)(A) and paragraph (b) of this section, D 
is allowed a charitable contributions deduction for 1970 of $30,500 for 
the property contributed to the church. In addition, under section 
170(b)(1)(B) and paragraph (c) of this section D is allowed a deduction 
of $19,500 for the cash contributed to the private foundation, since 
such contribution of $23,000 is allowed to the extent of the lesser of 
$20,000 (20% of $100,000) or $19,500 ([$100,000x50%]-$30,500). D is not 
allowed a carryover to 1971 or to any other taxable year for any of the 
$3,500 ($23,000-$19,500) of cash not deductible under section 
170(b)(1)(B) and paragraph (c) of this section.
    (b) If D had not made the election under paragraph (d)(2) of this 
section for 1970, his deduction for 1970 under section 170(a) for the 
$40,000 contribution of property to the church would have been limited 
by section 170(b)(1)(D)(i) and paragraph (d) of this section to $30,000 
(30% of $100,000), and under section 170(b)(1)(D)(ii) and paragraph (c) 
of Sec. 1.170A-10 he would have been allowed a carryover to 1971 of 
$10,000 ($40,000-$30,000) for his contribution of such property. In 
addition, he would have been allowed under section 170(b)(1)(B)(ii) and 
paragraph (c) of this section for 1970 a charitable contributions 
deduction of $10,000 ([$100,000x50%]-$40,000) for the cash contributed 
to the private foundation. In such case, D would not have been allowed a 
carryover to 1971 or to any other taxable year for any of the $13,000 
($23,000-$10,000) of cash not deductible under section 170(b)(1)(B) and 
paragraph (c) of this section.

    (g) Effective date. This section applies only to contributions paid 
in taxable years beginning after December 31, 1969.

[T.D. 7207, 37 FR 20783, Oct. 4, 1972; 37 FR 22982, Oct. 27, 1972]



Sec. 1.170A-9  Definition of section 170(b)(1)(A) organization.

    (a) The term section 170(b)(1)(A) organization as used in the 
regulations under section 170 means any organization described in 
paragraphs (b) through (j) of this section, effective with respect to 
taxable years beginning after December 31, 1969, except as otherwise 
provided. Section 1.170-2(b) shall continue to be applicable with 
respect to taxable years beginning prior to January 1, 1970. The term 
one or more organizations described in section 170(b)(1)(A) (other than 
clauses (vii) and (viii)) as used in sections 507 and 509 of the 
Internal Revenue Code (Code) and the regulations means one or more 
organizations described in paragraphs (b) through (f) of this section, 
except as modified by the regulations under part II of subchapter F of 
chapter 1 or under chapter 42.
    (b) Church or a convention or association of churches. An 
organization is described in section 170(b)(1)(A)(i) if it is a church 
or a convention or association of churches.
    (c) Educational organization and organizations for the benefit of 
certain State and municipal colleges and universities--(1) Educational 
organization. An educational organization is described in section 
170(b)(1)(A)(ii) if its primary function is the presentation of formal 
instruction and it normally maintains a regular faculty and curriculum 
and normally has a regularly enrolled body of pupils or students in 
attendance at

[[Page 80]]

the place where its educational activities are regularly carried on. The 
term includes institutions such as primary, secondary, preparatory, or 
high schools, and colleges and universities. It includes Federal, State, 
and other public-supported schools which otherwise come within the 
definition. It does not include organizations engaged in both 
educational and noneducational activities unless the latter are merely 
incidental to the educational activities. A recognized university which 
incidentally operates a museum or sponsors concerts is an educational 
organization within the meaning of section 170(b)(1)(A)(ii). However, 
the operation of a school by a museum does not necessarily qualify the 
museum as an educational organization within the meaning of this 
subparagraph.
    (2) Organizations for the benefit of certain State and municipal 
colleges and universities. (i) An organization is described in section 
170(b)(1)(A)(iv) if it meets the support requirements of subdivision 
(ii) of this subparagraph and is organized and operated exclusively to 
receive, hold, invest, and administer property and to make expenditures 
to or for the benefit of a college or university which is an 
organization described in subdivision (iii) of this subparagraph. The 
phrase ``expenditures to or for the benefit of a college or university'' 
includes expenditures made for any one or more of the normal functions 
of colleges and universities such as the acquisition and maintenance of 
real property comprising part of the campus area; the erection of, or 
participation in the erection of, college or university buildings; the 
acquisition and maintenance of equipment and furnishings used for, or in 
conjunction with, normal functions of colleges and universities; or 
expenditures for scholarships, libraries and student loans.
    (ii) To qualify under section 170(b)(1)(A)(iv), the organization 
receiving the contribution must normally receive a substantial part of 
its support from the United States or any State or political subdivision 
thereof or from direct or indirect contributions from the general 
public, or from a combination of two or more of such sources. For such 
purposes, the term ``support'' does not include income received in the 
exercise or performance by the organization of its charitable, 
educational, or other purpose or function constituting the basis for its 
exemption under section 501(a). An example of an indirect contribution 
from the public is the receipt by the organization of its share of the 
proceeds of an annual collection campaign of a community chest, 
community fund, or united fund. In determining the amount of support 
received by such organization with respect to a contribution of property 
which is subject to reduction under section 170(e), the fair market 
value of the property shall be taken into account.
    (iii) The college or university (including a land grant college or 
university) to be benefited must be an educational organization referred 
to in section 170(b)(1)(A)(ii) and subparagraph (1) of this paragraph 
which is an agency or instrumentality of a State or political 
subdivision thereof, or which is owned or operated by a State or 
political subdivision thereof or by an agency or instrumentality of one 
or more States or political subdivisions.
    (d) Hospitals and medical research organizations--(1) Hospitals. An 
organization (other than one described in paragraph (d)(2) of this 
section) is described in section 170(b)(1)(A)(iii) if--
    (i) It is a hospital; and
    (ii) Its principal purpose or function is the providing of medical 
or hospital care or medical education or medical research.
    (A) The term hospital includes--
    (1) Federal hospitals; and
    (2) State, county, and municipal hospitals which are 
instrumentalities of governmental units referred to in section 170(c)(1) 
and otherwise come within the definition. A rehabilitation institution, 
outpatient clinic, or community mental health or drug treatment center 
may qualify as a ``hospital'' within the meaning of paragraph (d)(1)(i) 
of this section if its principal purpose or function is the providing of 
hospital or medical care. For purposes of this paragraph (d)(1)(ii), the 
term medical care shall include the treatment of any physical or mental 
disability or condition, whether on an inpatient or outpatient basis, 
provided the cost of such treatment is deductible under section 213 by 
the person

[[Page 81]]

treated. An organization, all the accommodations of which qualify as 
being part of a ``skilled nursing facility'' within the meaning of 42 
U.S.C. 1395x(j), may qualify as a ``hospital'' within the meaning of 
paragraph (d)(1)(i) of this section if its principal purpose or function 
is the providing of hospital or medical care. For taxable years ending 
after June 28, 1968, the term hospital also includes cooperative 
hospital service organizations which meet the requirements of section 
501(e) and Sec. 1.501(e)-1.
    (B) The term hospital does not, however, include convalescent homes 
or homes for children or the aged, nor does the term include 
institutions whose principal purpose or function is to train handicapped 
individuals to pursue some vocation. An organization whose principal 
purpose or function is the providing of medical education or medical 
research will not be considered a ``hospital'' within the meaning of 
paragraph (d)(1)(i) of this section, unless it is also actively engaged 
in providing medical or hospital care to patients on its premises or in 
its facilities, on an inpatient or outpatient basis, as an integral part 
of its medical education or medical research functions. See, however, 
paragraph (d)(2) of this section with respect to certain medical 
research organizations.
    (2) Certain medical research organizations--(i) Introduction. A 
medical research organization is described in section 170(b)(1)(A)(iii) 
if the principal purpose or functions of such organization are medical 
research and if it is directly engaged in the continuous active conduct 
of medical research in conjunction with a hospital. In addition, for 
purposes of the 50 percent limitation of section 170(b)(1)(A) with 
respect to a contribution, during the calendar year in which the 
contribution is made such organization must be committed to spend such 
contribution for such research before January 1 of the fifth calendar 
year which begins after the date such contribution is made. An 
organization need not receive contributions deductible under section 170 
to qualify as a medical research organization and such organization need 
not be committed to spend amounts to which the limitation of section 
170(b)(1)(A) does not apply within the 5-year period referred to in this 
paragraph (d)(2)(i). However, the requirement of continuous active 
conduct of medical research indicates that the type of organization 
contemplated in this paragraph (d)(2) is one which is primarily engaged 
directly in the continuous active conduct of medical research, as 
compared to an inactive medical research organization or an organization 
primarily engaged in funding the programs of other medical research 
organizations. As in the case of a hospital, since an organization is 
ordinarily not described in section 170(b)(1)(A)(iii) as a hospital 
unless it functions primarily as a hospital, similarly a medical 
research organization is not so described unless it is primarily engaged 
directly in the continuous active conduct of medical research in 
conjunction with a hospital. Accordingly, the rules of this paragraph 
(d)(2) shall only apply with respect to such medical research 
organizations.
    (ii) General rule. An organization (other than a hospital described 
in paragraph (d)(1) of this section) is described in section 
170(b)(1)(A)(iii) only if within the meaning of this paragraph (d)(2):
    (A) The principal purpose or functions of such organization are to 
engage primarily in the conduct of medical research; and
    (B) It is primarily engaged directly in the continuous active 
conduct of medical research in conjunction with a hospital which is--
    (1) Described in section 501(c)(3);
    (2) A Federal hospital; or
    (3) An instrumentality of a governmental unit referred to in section 
170(c)(1).
    (C) In order for a contribution to such organization to qualify for 
purposes of the 50 percent limitation of section 170(b)(1)(A), during 
the calendar year in which such contribution is made or treated as made, 
such organization must be committed (within the meaning of paragraph 
(d)(2)(viii) of this section) to spend such contribution for such active 
conduct of medical research before January 1 of the fifth calendar year 
beginning after the date such contribution is made. For the

[[Page 82]]

meaning of the term ``medical research'' see paragraph (d)(2)(iii) of 
this section. For the meaning of the term ``principal purpose or 
functions'' see paragraph (d)(2)(iv) of this section. For the meaning of 
the term ``primarily engaged directly in the continuous active conduct 
of medical research'' see paragraph (d)(2)(v) of this section. For the 
meaning of the term ``medical research in conjunction with a hospital'' 
see paragraph (d)(2)(vii) of this section.
    (iii) Definition of medical research. Medical research means the 
conduct of investigations, experiments, and studies to discover, 
develop, or verify knowledge relating to the causes, diagnosis, 
treatment, prevention, or control of physical or mental diseases and 
impairments of man. To qualify as a medical research organization, the 
organization must have or must have continuously available for its 
regular use the appropriate equipment and professional personnel 
necessary to carry out its principal function. Medical research 
encompasses the associated disciplines spanning the biological, social 
and behavioral sciences. Such disciplines include chemistry 
(biochemistry, physical chemistry, bioorganic chemistry, etc.), 
behavioral sciences (psychiatry, physiological psychology, 
neurophysiology, neurology, neurobiology, and social psychology, etc.), 
biomedical engineering (applied biophysics, medical physics, and medical 
electronics, for example, developing pacemakers and other medically 
related electrical equipment), virology, immunology, biophysics, cell 
biology, molecular biology, pharmacology, toxicology, genetics, 
pathology, physiology, microbiology, parasitology, endocrinology, 
bacteriology, and epidemiology.
    (iv) Principal purpose or functions. An organization must be 
organized for the principal purpose of engaging primarily in the conduct 
of medical research in order to be an organization meeting the 
requirements of this paragraph (d)(2). An organization will normally be 
considered to be so organized if it is expressly organized for the 
purpose of conducting medical research and is actually engaged primarily 
in the conduct of medical research. Other facts and circumstances, 
however, may indicate that an organization does not meet the principal 
purpose requirement of this paragraph (d)(2)(iv) even where its 
governing instrument so expressly provides. An organization that 
otherwise meets all of the requirements of this paragraph (d)(2) 
(including this paragraph (d)(2)(iv)) to qualify as a medical research 
organization will not fail to so qualify solely because its governing 
instrument does not specifically state that its principal purpose is to 
conduct medical research.
    (v) Primarily engaged directly in the continuous active conduct of 
medical research--(A) In order for an organization to be primarily 
engaged directly in the continuous active conduct of medical research, 
the organization must either devote a substantial part of its assets to, 
or expend a significant percentage of its endowment for, such purposes, 
or both. Whether an organization devotes a substantial part of its 
assets to, or makes significant expenditures for, such continuous active 
conduct depends upon the facts and circumstances existing in each 
specific case. An organization will be treated as devoting a substantial 
part of its assets to, or expending a significant percentage of its 
endowment for, such purposes if it meets the appropriate test contained 
in paragraph (d)(2)(v)(B) of this section. If an organization fails to 
satisfy both of such tests, in evaluating the facts and circumstances, 
the factor given most weight is the margin by which the organization 
failed to meet such tests. Some of the other facts and circumstances to 
be considered in making such a determination are--
    (1) If the organization fails to satisfy the tests because it failed 
to properly value its assets or endowment, then upon determination of 
the improper valuation it devotes additional assets to, or makes 
additional expenditures for, such purposes, so that it satisfies such 
tests on an aggregate basis for the prior year in addition to such tests 
for the current year;
    (2) The organization acquires new assets or has a significant 
increase in the value of its securities after it had developed a budget 
in a prior year based on the assets then owned and the then current 
values;

[[Page 83]]

    (3) The organization fails to make expenditures in any given year 
because of the interrelated aspects of its budget and long-term planning 
requirements, for example, where an organization prematurely terminates 
an unsuccessful program and because of long-term planning requirements 
it will not be able to establish a fully operational replacement program 
immediately; and
    (4) The organization has as its objective to spend less than a 
significant percentage in a particular year but make up the difference 
in the subsequent few years, or to budget a greater percentage in an 
earlier year and a lower percentage in a later year.
    (B) For purposes of this section, an organization which devotes more 
than one half of its assets to the continuous active conduct of medical 
research will be considered to be devoting a substantial part of its 
assets to such conduct within the meaning of paragraph (d)(2)(v)(A) of 
this section. An organization which expends funds equaling 3.5 percent 
or more of the fair market value of its endowment for the continuous 
active conduct of medical research will be considered to have expended a 
significant percentage of its endowment for such purposes within the 
meaning of paragraph (d)(2)(v)(A) of this section.
    (C) Engaging directly in the continuous active conduct of medical 
research does not include the disbursing of funds to other organizations 
for the conduct of research by them or the extending of grants or 
scholarships to others. Therefore, if an organization's primary purpose 
is to disburse funds to other organizations for the conduct of research 
by them or to extend grants or scholarships to others, it is not 
primarily engaged directly in the continuous active conduct of medical 
research.
    (vi) Special rules. The following rules shall apply in determining 
whether a substantial part of an organization's assets are devoted to, 
or its endowment is expended for, the continuous active conduct of 
medical research activities:
    (A) An organization may satisfy the tests of paragraph (d)(2)(v)(B) 
of this section by meeting such tests either for a computation period 
consisting of the immediately preceding taxable year, or for the 
computation period consisting of the immediately preceding four taxable 
years. In addition, for taxable years beginning in 1970, 1971, 1972, 
1973, and 1974, if an organization meets such tests for the computation 
period consisting of the first four taxable years beginning after 
December 31, 1969, an organization will be treated as meeting such 
tests, not only for the taxable year beginning in 1974, but also for the 
preceding four taxable years. Thus, for example, if a calendar year 
organization failed to satisfy such tests for a computation period 
consisting of 1969, 1970, 1971, and 1972, but on the basis of a 
computation period consisting of the years 1970 through 1973, it 
expended funds equaling 3.5 percent or more of the fair market value of 
its endowment for the continuous active conduct of medical research, 
such organization will be considered to have expended a significant 
percentage of its endowment for such purposes for the taxable years 1970 
through 1974. In applying such tests for a four-year computation period, 
although the organization's expenditures for the entire four-year period 
shall be aggregated, the fair market value of its endowment for each 
year shall be summed, even though, in the case of an asset held 
throughout the four-year period, the fair market value of such an asset 
will be counted four times. Similarly, the fair market value of an 
organization's assets for each year of a four-year computation period 
shall be summed.
    (B) Any property substantially all the use of which is 
``substantially related'' (within the meaning of section 514(b)(1)(A)) 
to the exercise or performance of the organization's medical research 
activities will not be treated as part of its endowment.
    (C) The valuation of assets must be made with commonly accepted 
methods of valuation. A method of valuation made in accordance with the 
principles stated in the regulations under section 2031 constitutes an 
acceptable method of valuation. Assets may be valued as of any day in 
the organization's taxable year to which such valuation applies, 
provided the organization follows a consistent practice of valuing such 
asset as of such date in all

[[Page 84]]

taxable years. For purposes of paragraph (d)(2)(v) of this section, an 
asset held by the organization for part of a taxable year shall be taken 
into account by multiplying the fair market value of such asset by a 
fraction, the numerator of which is the number of days in such taxable 
year that the organization held such asset and the denominator of which 
is the number of days in such taxable year.
    (vii) Medical research in conjunction with a hospital. The 
organization need not be formally affiliated with a hospital to be 
considered primarily engaged directly in the continuous active conduct 
of medical research in conjunction with a hospital, but in any event 
there must be a joint effort on the part of the research organization 
and the hospital pursuant to an understanding that the two organizations 
will maintain continuing close cooperation in the active conduct of 
medical research. For example, the necessary joint effort will normally 
be found to exist if the activities of the medical research organization 
are carried on in space located within or adjacent to a hospital, the 
organization is permitted to utilize the facilities (including 
equipment, case studies, etc.) of the hospital on a continuing basis 
directly in the active conduct of medical research, and there is 
substantial evidence of the close cooperation of the members of the 
staff of the research organization and members of the staff of the 
particular hospital or hospitals. The active participation in medical 
research by members of the staff of the particular hospital or hospitals 
will be considered to be evidence of such close cooperation. Because 
medical research may involve substantial investigation, experimentation 
and study not immediately connected with hospital or medical care, the 
requisite joint effort will also normally be found to exist if there is 
an established relationship between the research organization and the 
hospital which provides that the cooperation of appropriate personnel 
and the use of facilities of the particular hospital or hospitals will 
be required whenever it would aid such research.
    (viii) Commitment to spend contributions. The organization's 
commitment that the contribution will be spent within the prescribed 
time only for the prescribed purposes must be legally enforceable. A 
promise in writing to the donor in consideration of his making a 
contribution that such contribution will be so spent within the 
prescribed time will constitute a commitment. The expenditure of 
contributions received for plant, facilities, or equipment, used solely 
for medical research purposes (within the meaning of paragraph 
(d)(2)(ii) of this section), shall ordinarily be considered to be an 
expenditure for medical research. If a contribution is made in other 
than money, it shall be considered spent for medical research if the 
funds from the proceeds of a disposition thereof are spent by the 
organization within the five-year period for medical research; or, if 
such property is of such a kind that it is used on a continuing basis 
directly in connection with such research, it shall be considered spent 
for medical research in the year in which it is first so used. A medical 
research organization will be presumed to have made the commitment 
required under this paragraph (d)(2)(viii) with respect to any 
contribution if its governing instrument or by-laws require that every 
contribution be spent for medical research before January 1 of the fifth 
year which begins after the date such contribution is made.
    (ix) Organizational period for new organizations. A newly created 
organization, for its ``organizational'' period, shall be considered to 
be primarily engaged directly in the continuous active conduct of 
medical research in conjunction with a hospital within the meaning of 
paragraphs (d)(2)(v) and (d)(2)(vii) of this section if during such 
period the organization establishes to the satisfaction of the 
Commissioner that it reasonably can be expected to be so engaged by the 
end of such period. The information to be submitted shall include 
detailed plans showing the proposed initial medical research program, 
architectural drawings for the erection of buildings and facilities to 
be used for medical research in accordance with such plans, plans to 
assemble a professional staff and detailed projections showing the 
timetable for the expected accomplishment of the

[[Page 85]]

foregoing. The ``organizational'' period shall be that period which is 
appropriate to implement the proposed plans, giving effect to the 
proposed amounts involved and the magnitude and complexity of the 
projected medical research program, but in no event in excess of three 
years following organization.
    (x) Examples. The application of this paragraph (d)(2) may be 
illustrated by the following examples:

    Example 1. N, an organization referred to in section 170(c)(2), was 
created to promote human knowledge within the field of medical research 
and medical education. All of N's assets were contributed to it by A and 
consist of a diversified portfolio of stocks and bonds. N's endowment 
earns 3.5 percent annually, which N expends in the conduct of various 
medical research programs in conjunction with Y hospital. N is located 
adjacent to Y hospital, makes substantial use of Y's facilities, and 
there is close cooperation between the staffs of N and Y. N is directly 
engaged in the continuous active conduct of medical research in 
conjunction with a hospital, meets the principal purpose test described 
in paragraph (d)(2)(iv) of this section, and is therefore an 
organization described in section 170(b)(1)(A)(iii).
    Example 2. O, an organization referred to in section 170(c)(2), was 
created to promote human knowledge within the field of medical research 
and medical education. All of O's assets consist of a diversified 
portfolio of stocks and bonds. O's endowment earns 3.5 percent annually, 
which O expends in the conduct of various medical research programs in 
conjunction with certain hospitals. However, in 1974, O receives a 
substantial bequest of additional stocks and bonds. O's budget for 1974 
does not take into account the bequest and as a result O expends only 
3.1 percent of its endowment in 1974. However, O establishes that it 
will expend at least 3.5 percent of its endowment for the active conduct 
of medical research for taxable years 1975 through 1978. O is therefore 
directly engaged in the continuous active conduct of medical research in 
conjunction with a hospital for taxable year 1975. Since O also meets 
the principal purpose test described in paragraph (d)(2)(iv) of this 
section, it is therefore an organization described in section 
170(b)(1)(A)(iii) for taxable year 1975.
    Example 3. M, an organization referred to in section 170(c)(2), was 
created to promote human knowledge within the field of medical research 
and medical education. M's activities consist of the conduct of medical 
research programs in conjunction with various hospitals. Under such 
programs, researchers employed by M engage in research at laboratories 
set aside for M within the various hospitals. Substantially all of M's 
assets consist of 100 percent of the stock of X corporation, which has a 
fair market value of approximately 100 million dollars. X pays M 
approximately 3.3 million dollars in dividends annually, which M expends 
in the conduct of its medical research programs. Since M expends only 
3.3 percent of its endowment, which does not constitute a significant 
percentage, in the active conduct of medical research, M is not an 
organization described in section 170(b)(1)(A)(iii) because M is not 
engaged in the continuous active conduct of medical research.

    (xi) Special rule for organizations with existing ruling. This 
paragraph (d)(2)(xi) shall apply to an organization that prior to 
January 1, 1970, had received a ruling or determination letter which has 
not been expressly revoked holding the organization to be a medical 
research organization described in section 170(b)(1)(A)(iii) and with 
respect to which the facts and circumstances on which the ruling was 
based have not substantially changed. An organization to which this 
paragraph (d)(2)(xi) applies shall be treated as an organization 
described in section 170(b)(1)(A)(iii) for a period not ending prior to 
90 days after February 13, 1976 (or where appropriate, for taxable years 
beginning before such 90th day). In addition, with respect to a grantor 
or contributor under sections 170, 507, 545(b)(2), 556(b)(2), 642(c), 
4942, 4945, 2055, 2106(a)(2), and 2522, the status of an organization to 
which this paragraph (d)(2)(xi) applies will not be affected until 
notice of change of status under section 170(b)(1)(A)(iii) is made to 
the public (such as by publication in the Internal Revenue Bulletin). 
The preceding sentence shall not apply if the grantor or contributor had 
previously acquired knowledge that the Internal Revenue Service had 
given notice to such organization that it would be deleted from 
classification as a section 170(b)(1)(A)(iii) organization.
    (e) Governmental unit. A governmental unit is described in section 
170(b)(1)(A)(v) if it is referred to in section 170(c)(1).
    (f) Definition of section 170(b)(1)(A)(vi) organization--(1) In 
general. An organization is described in section 170(b)(1)(A)(vi) if 
it--

[[Page 86]]

    (i) Is referred to in section 170(c)(2) (other than an organization 
specifically described in paragraphs (b) through (e) of this section); 
and
    (ii) Normally receives a substantial part of its support from a 
governmental unit referred to in section 170(c)(1) or from direct or 
indirect contributions from the general public (``publicly supported''). 
For purposes of this paragraph (f), an organization is publicly 
supported if it meets the requirements of either paragraph (f)(2) of 
this section (33\1/3\ percent support test) or paragraph (f)(3) of this 
section (facts and circumstances test). Paragraph (f)(4) of this section 
defines ``normally'' for purposes of the 33\1/3\ percent support test 
and the facts and circumstances test, and for new organizations in the 
first five years of the organization's existence as a section 501(c)(3) 
organization. Paragraph (f)(5) of this section provides for 
determinations of foundation classification and rules for reliance by 
donors and contributors. Paragraphs (f)(6), (f)(7), and (f)(8) of this 
section list the items that are included and excluded from the term 
support. Paragraph (f)(9) of this section provides examples of the 
application of this paragraph. Types of organizations that, subject to 
the provisions of this paragraph (f), generally qualify under section 
170(b)(1)(A)(vi) as ``publicly supported'' are publicly or 
governmentally supported museums of history, art, or science, libraries, 
community centers to promote the arts, organizations providing 
facilities for the support of an opera, symphony orchestra, ballet, or 
repertory drama or for some other direct service to the general public.
    (2) Determination whether an organization is ``publicly supported''; 
33\1/3\ percent support test. An organization is publicly supported if 
the total amount of support (see paragraphs (f)(6), (f)(7), and (f)(8) 
of this section) that the organization normally (see paragraph (f)(4)(i) 
of this section) receives from governmental units referred to in section 
170(c)(1), from contributions made directly or indirectly by the general 
public, or from a combination of these sources, equals at least 33\1/3\ 
percent of the total support normally received by the organization. See 
paragraph (f)(9), Example 1 of this section.
    (3) Determination whether an organization is ``publicly supported''; 
facts and circumstances test. Even if an organization fails to meet the 
33\1/3\ percent support test described in paragraph (f)(2) of this 
section, it is publicly supported if it normally (see paragraph 
(f)(4)(i) of this section) receives a substantial part of its support 
from governmental units, from contributions made directly or indirectly 
by the general public, or from a combination of these sources, and meets 
the other requirements of this paragraph (f)(3). In order to satisfy the 
facts and circumstances test, an organization must meet the requirements 
of paragraphs (f)(3)(i) and (f)(3)(ii) of this section. In addition, the 
organization must be in the nature of an organization that is publicly 
supported, taking into account all pertinent facts and circumstances, 
including the factors listed in paragraphs (f)(3)(iii)(A) through 
(f)(3)(iii)(E) of this section.
    (i) Ten-percent support limitation. The percentage of support (see 
paragraphs (f)(6), (f)(7) and (f)(8) of this section) normally received 
by an organization from governmental units, from contributions made 
directly or indirectly by the general public, or from a combination of 
these sources, must be substantial. For purposes of this paragraph 
(f)(3), an organization will not be treated as normally receiving a 
substantial amount of governmental or public support unless the total 
amount of governmental and public support normally received equals at 
least 10 percent of the total support normally received by such 
organization.
    (ii) Attraction of public support. An organization must be so 
organized and operated as to attract new and additional public or 
governmental support on a continuous basis. An organization will be 
considered to meet this requirement if it maintains a continuous and 
bona fide program for solicitation of funds from the general public, 
community, or membership group involved, or if it carries on activities 
designed to attract support from governmental units or other 
organizations described in section 170(b)(1)(A)(i) through 
(b)(1)(A)(vi). In determining whether an organization maintains a 
continuous and bona fide program for solicitation of funds from the 
general public or

[[Page 87]]

community, consideration will be given to whether the scope of its 
fundraising activities is reasonable in light of its charitable 
activities. Consideration will also be given to the fact that an 
organization, in its early years of existence, may limit the scope of 
its solicitation to persons deemed most likely to provide seed money in 
an amount sufficient to enable it to commence its charitable activities 
and expand its solicitation program.
    (iii) In addition to the requirements set forth in paragraphs 
(f)(3)(i) and (f)(3)(ii) of this section that must be satisfied, all 
pertinent facts and circumstances, including the following factors, will 
be taken into consideration in determining whether an organization is 
``publicly supported'' within the meaning of paragraph (f)(1) of this 
section. However, an organization is not generally required to satisfy 
all of the factors in paragraphs (f)(3)(iii)(A) through (f)(3)(iii)(E) 
of this section. The factors relevant to each case and the weight 
accorded to any one of them may differ depending upon the nature and 
purpose of the organization and the length of time it has been in 
existence.
    (A) Percentage of financial support. The percentage of support 
received by an organization from public or governmental sources will be 
taken into consideration in determining whether an organization is 
``publicly supported.'' The higher the percentage of support above the 
10 percent requirement of paragraph (f)(3)(i) of this section from 
public or governmental sources, the lesser will be the burden of 
establishing the publicly supported nature of the organization through 
other factors, including those described in this paragraph (f)(3), while 
the lower the percentage, the greater will be the burden. If the 
percentage of the organization's support from public or governmental 
sources is low because it receives a high percentage of its total 
support from investment income on its endowment funds, such fact will be 
treated as evidence of an organization being ``publicly supported'' if 
such endowment funds were originally contributed by a governmental unit 
or by the general public. However, if such endowment funds were 
originally contributed by a few individuals or members of their 
families, such fact will increase the burden on the organization of 
establishing that it is ``publicly supported'' taking into account all 
pertinent facts and circumstances, including the other factors described 
in paragraph (f)(3)(iii) of this section.
    (B) Sources of support. The fact that an organization meets the 
requirement of paragraph (f)(3)(i) of this section through support from 
governmental units or directly or indirectly from a representative 
number of persons, rather than receiving almost all of its support from 
the members of a single family, will be considered evidence of an 
organization being ``publicly supported.'' In determining what is a 
``representative number of persons,'' consideration will be given to the 
type of organization involved, the length of time it has been in 
existence, and whether it limits its activities to a particular 
community or region or to a special field which can be expected to 
appeal to a limited number of persons.
    (C) Representative governing body. The fact that an organization has 
a governing body which represents the broad interests of the public, 
rather than the personal or private interests of a limited number of 
donors (or persons standing in a relationship to such donors which is 
described in section 4946(a)(1)(C) through (a)(1)(G)), will be 
considered evidence of an organization being ``publicly supported.'' An 
organization will be treated as having a representative governing body 
if it has a governing body (whether designated in the organization's 
governing instrument or bylaws as a Board of Directors, Board of 
Trustees, or similar governing body) which is comprised of public 
officials acting in their capacities as such; of individuals selected by 
public officials acting in their capacities as such; of persons having 
special knowledge or expertise in the particular field or discipline in 
which the organization is operating; of community leaders, such as 
elected or appointed officials, clergymen, educators, civic leaders, or 
other such persons representing a broad cross-section of the views and 
interests of the community; or, in the case of a

[[Page 88]]

membership organization, of individuals elected pursuant to the 
organization's governing instrument or bylaws by a broadly based 
membership.
    (D) Availability of public facilities or services; public 
participation in programs or policies. (1) The fact that an organization 
generally provides facilities or services directly for the benefit of 
the general public on a continuing basis (such as a museum or library 
which holds open its building or facilities to the public, a symphony 
orchestra which gives public performances, a conservation organization 
which provides educational services to the public through the 
distribution of educational materials, or an old age home which provides 
domiciliary or nursing services for members of the general public) will 
be considered evidence that such organization is ``publicly supported.''
    (2) The fact that an organization is an educational or research 
institution which regularly publishes scholarly studies that are widely 
used by colleges and universities or by members of the general public 
will also be considered evidence that such organization is ``publicly 
supported.''
    (3) The following factors will also be considered evidence that an 
organization is ``publicly supported'':
    (i) The participation in, or sponsorship of, the programs of the 
organization by members of the public having special knowledge or 
expertise, public officials, or civic or community leaders.
    (ii) The maintenance of a definitive program by an organization to 
accomplish its charitable work in the community, such as combating 
community deterioration in an economically depressed area that has 
suffered a major loss of population and jobs.
    (iii) The receipt of a significant part of its funds from a public 
charity or governmental agency to which it is in some way held 
accountable as a condition of the grant, contract, or contribution.
    (E) Additional factors pertinent to membership organizations. The 
following are additional factors to be considered in determining whether 
a membership organization is ``publicly supported'':
    (1) Whether the solicitation for dues-paying members is designed to 
enroll a substantial number of persons in the community or area, or in a 
particular profession or field of special interest (taking into account 
the size of the area and the nature of the organization's activities).
    (2) Whether membership dues for individual (rather than 
institutional) members have been fixed at rates designed to make 
membership available to a broad cross section of the interested public, 
rather than to restrict membership to a limited number of persons.
    (3) Whether the activities of the organization will be likely to 
appeal to persons having some broad common interest or purpose, such as 
educational activities in the case of alumni associations, musical 
activities in the case of symphony societies, or civic affairs in the 
case of parent-teacher associations. See Example 2 through Example 5 
contained in paragraph (f)(9) of this section for illustrations of this 
paragraph (f)(3).
    (4) Definition of normally; general rule--(i) Normally; 33\1/3\ 
percent support test. An organization ``normally'' receives the 
requisite amount of public support and meets the 33\1/3\ percent support 
test for a taxable year and the taxable year immediately succeeding that 
year, if, for the taxable year being tested and the four taxable years 
immediately preceding that taxable year, the organization meets the 
33\1/3\ percent support test on an aggregate basis.
    (ii) Normally; facts and circumstances test. An organization 
``normally'' receives the requisite amount of public support and meets 
the facts and circumstances test of paragraph (f)(3) for a taxable year 
and the taxable year immediately succeeding that year, if, for the 
taxable year being tested and the four taxable years immediately 
preceding that taxable year, the organization meets the facts and 
circumstances test on an aggregate basis. In the case of paragraphs 
(f)(3)(iii)(A) and (f)(3)(iii)(B) of this section, facts pertinent to 
years preceding the five-year period may also be taken into 
consideration. The combination of factors set forth in paragraphs 
(f)(3)(iii)(A) through (f)(3)(iii)(E) of this section that an 
organization normally must meet does not have to be the same for

[[Page 89]]

each five-year period so long as there exists a sufficient combination 
of factors to show compliance with the facts and circumstances test.
    (iii) Special rule. The fact that an organization has normally met 
the requirements of the 33\1/3\ percent support test for a current 
taxable year, but is unable normally to meet such requirements for a 
succeeding taxable year, will not in itself prevent such organization 
from meeting the facts and circumstances test for such succeeding 
taxable year.

    (iv) Example. The application of paragraphs (f)(4)(i), (f)(4)(ii), 
and (f)(4)(iii) of this section may be illustrated by the following 
example:

    Example. (i) X is recognized as an organization described in section 
501(c)(3). On the basis of support received during taxable years 2008, 
2009, 2010, 2011, and 2012, in the aggregate, X receives at least 33\1/
3\ percent of its support from governmental units referred to in section 
170(c)(1), from contributions made directly or indirectly by the general 
public, or from a combination of these sources. Consequently, X meets 
the 33\1/3\ percent support test for taxable year 2012 (the current 
taxable year). X also meets the 33\1/3\ support test for 2013, as the 
immediately succeeding taxable year.
    (ii) In taxable years 2009, 2010, 2011, 2012, and 2013, in the 
aggregate, X does not receive at least 33\1/3\ percent of its support 
from governmental units referred to in section 170(c)(1), from 
contributions made directly or indirectly by the general public, or from 
a combination of these sources. However, X still meets the 33\1/3\ 
percent support test for taxable year 2013 based on the aggregate 
support received for taxable years 2008 through 2012.
    (iii) In taxable years 2010, 2011, 2012, 2013, and 2014, in the 
aggregate, X does not receive at least 33\1/3\ percent of its support 
from governmental units referred to in section 170(c)(1), from 
contributions made directly or indirectly by the general public, or from 
a combination of these sources. X does not meet the 33\1/3\ percent 
support test for taxable year 2014.
    (iv) X meets the facts and circumstances test for taxable year 2013 
and for taxable year 2014 (the immediately succeeding taxable year) 
based on the aggregate support X receives, X's fundraising program, and 
consideration of other factors, including those listed in paragraphs 
(f)(3)(iii)(A) through (f)(3)(iii)(E) of this section, during taxable 
years 2009, 2010, 2011, 2012, and 2013. Therefore, even though X does 
not meet the 33\1/3\ percent support test for taxable year 2014, X is 
still an organization described in section 170(b)(1)(A)(vi) for that 
year.

    (v) Normally; first five years of an organization's existence. (A) 
An organization ``normally'' receives the requisite amount of public 
support and meets the 33\1/3\ percent public support test or the facts 
and circumstances test during its first five taxable years as a section 
501(c)(3) organization if the organization can reasonably be expected to 
meet the requirements of the 33\1/3\ percent support test or the facts 
and circumstances test during that period. With respect to such 
organization's sixth taxable year, the general definition of normally 
set forth in paragraphs (f)(4)(i), (f)(4)(ii), and (f)(4)(iii) of this 
section apply. Alternatively, the organization shall be treated as 
``normally'' meeting the 33\1/3\ percent support test or the facts and 
circumstances test for its sixth taxable year (but not its seventh 
taxable year) if it meets the 33\1/3\ percent support test or the facts 
and circumstances test under the definition of normally set forth in 
paragraphs (f)(4)(i), (f)(4)(ii), and (f)(4)(iii) of this section for 
its fifth taxable year (based on support received in its first through 
fifth taxable years).
    (B) Basic consideration. In determining whether an organization can 
reasonably be expected (within the meaning of paragraph (f)(4)(v)(A) of 
this section) to meet the requirements of the 33\1/3\ percent support 
test or the facts and circumstances test during its first five taxable 
years, the basic consideration is whether its organizational structure, 
current or proposed programs or activities, and actual or intended 
method of operation are such as can reasonably be expected to attract 
the type of broadly based support from the general public, public 
charities, and governmental units that is necessary to meet such tests. 
The factors that are relevant to this determination, and the weight 
accorded to each of them, may differ from case to case, depending on the 
nature and functions of the organization. The information to be 
considered for this purpose shall consist of all pertinent facts and 
circumstances, including the factors set forth in paragraph (f)(3) of 
this section.


[[Page 90]]


    (vi) Example. The application of paragraph (f)(4)(v) of this section 
may be illustrated by the following example:

    Example. (i) Organization Y was formed in January 2008, and uses a 
taxable year ending December 31. After September 9, 2008, and before 
December 31, 2008, Organization Y filed Form 1023 requesting recognition 
of exemption as an organization described in section 501(c)(3) and in 
sections 170(b)(1)(A)(vi) and 509(a)(1). In its application, 
Organization Y established that it can reasonably be expected to operate 
as a publicly supported organization under paragraph (f)(2) or (f)(3) 
and paragraph (f)(4)(v) of this section. Subsequently, Organization Y 
received a ruling or determination letter that it is an organization 
described in section 501(c)(3) and sections 170(b)(1)(A)(vi) and 
509(a)(1) effective as of the date of its formation.
    (ii) Organization Y is described in sections 170(b)(1)(A)(vi) and 
509(a)(1) for its first five taxable years (the taxable years ending 
December 31, 2008, through December 31, 2012).
    (iii) Organization Y can qualify as a publicly supported 
organization for the taxable year ending December 31, 2013, if 
Organization Y can meet the requirements of either paragraph (f)(2) or 
paragraph (f)(3) of this section or Sec. 1.509(a)-3(a) and Sec. 
1.509(a)-(3)(b) for the taxable years ending December 31, 2009, through 
December 31, 2013, or for the taxable years ending December 31, 2008, 
through December 31, 2012.

    (vii) Organizations reclassified as private foundations. (A) New 
publicly supported organizations. If a new publicly supported 
organization described under section 170(b)(1)(A)(vi) cannot meet the 
requirements of the 33\1/3\ percent test of paragraph (f)(2) or the 
facts and circumstances test of paragraph (f)(3) for its sixth taxable 
year under the general definition of normally set forth in paragraphs 
(f)(4)(i), (f)(4)(ii), and (f)(4)(iii) of this section or under the 
alternate rule set forth in paragraph (f)(4)(v) of this section 
(effectively failing to meet a public support test for both its fifth 
and sixth taxable years), it will be treated as a private foundation as 
of the first day of its sixth taxable year only for purposes of sections 
507, 4940, and 6033. Such an organization must file a Form 990-PF, 
``Return of Private Foundation or Section 4947(a)(1) Nonexempt 
Charitable Trust Treated as a Private Foundation,'' and will be liable 
for the net investment tax imposed by section 4940 and, if applicable, 
the private foundation termination tax imposed by section 507(c), for 
its sixth taxable year. For succeeding taxable years, the organization 
will be treated as a private foundation for all purposes.
    (B) Other publicly supported organizations. A publicly supported 
organization described in section 170(b)(1)(A)(vi) (other than a new 
publicly supported organization described in paragraph (f)(4)(vii)(A) of 
this section) that has failed to meet both the 33\1/3\ percent support 
test and the facts and circumstances test for any two consecutive 
taxable years will be treated as a private foundation as of the first 
day of the second consecutive taxable year only for purposes of sections 
507, 4940, and 6033. Such an organization must file a Form 990-PF, 
``Return of Private Foundation or Section 4947(a)(1) Nonexempt 
Charitable Trust Treated as a Private Foundation,'' and will be liable 
for the net investment tax imposed by section 4940 and, if applicable, 
the private foundation termination tax imposed by section 507(c), for 
the second consecutive failed taxable year. For succeeding taxable 
years, the organization will be treated as a private foundation for all 
purposes.
    (5) Determinations of foundation classification and reliance. (i) A 
ruling or determination letter that an organization is described in 
section 170(b)(1)(A)(vi) may be issued to an organization. Such 
determination may be made in conjunction with the recognition of the 
organization's tax-exempt status or at such other time as the 
organization believes it is described in section 170(b)(1)(A)(vi). The 
ruling or determination letter that the organization is described in 
section 170(b)(1)(A)(vi) may be revoked if, upon examination, the 
organization has not met the requirements of paragraph (f) of this 
section. The ruling or determination letter that the organization is 
described in section 170(b)(1)(A)(vi) also may be revoked if the 
organization's application for a ruling or determination contained one 
or more material misstatements or omissions of fact or if such 
application was part of a scheme or plan to avoid or evade any provision 
of the Internal Revenue Code. The revocation of the determination that 
an organization is described in

[[Page 91]]

section 170(b)(1)(A)(vi) does not preclude revocation of the 
determination that the organization is described in section 501(c)(3).
    (ii) Status of grantors or contributors. For purposes of sections 
170, 507, 545(b)(2), 642(c), 4942, 4945, 4966, 2055, 2106(a)(2), and 
2522, grantors or contributors may rely upon a determination letter or 
ruling that an organization is described in section 170(b)(1)(A)(vi) 
until the IRS publishes notice of a change of status (for example, in 
the Internal Revenue Bulletin or Publication 78, ``Cumulative List of 
Organizations described in Section 170(c) of the Internal Revenue Code 
of 1986,'' which can be searched at http://www.irs.gov.) For this 
purpose, grantors or contributors also may rely on an advance ruling 
that expires on or after June 9, 2008. However, a grantor or contributor 
may not rely on such an advance ruling or any determination letter or 
ruling if the grantor or contributor was responsible for, or aware of, 
the act or failure to act that resulted in the organization's loss of 
classification under section 170(b)(1)(A)(vi) or acquired knowledge that 
the IRS had given notice to such organization that it would be deleted 
from such classification.
    (iii) Reliance by grantors or contributors. A grantor or 
contributor, other than one of the organization's founders, creators, or 
foundation managers (within the meaning of section 4946(b)), will not be 
considered to be responsible for, or aware of, the act or failure to act 
that resulted in the loss of the organization's ``publicly supported'' 
classification under section 170(b)(1)(A)(vi), if such grantor or 
contributor has made such grant or contribution in reliance upon a 
written statement by the grantee organization that such grant or 
contribution will not result in the loss of such organization's 
classification as a publicly supported organization as described in 
section 170(b)(1)(A)(vi). Such statement must be signed by a responsible 
officer of the grantee organization and must set forth sufficient 
information, including a summary of the pertinent financial data for the 
five taxable years immediately preceding the current taxable year, to 
assure a reasonably prudent person that his grant or contribution will 
not result in the loss of the grantee organization's classification as a 
publicly supported organization as described in section 
170(b)(1)(A)(vi). If a reasonable doubt exists as to the effect of such 
grant or contribution, or if the grantor or contributor is one of the 
organization's founders, creators, or foundation managers, the procedure 
set forth in paragraph (f)(6)(iv) of this section for requesting a 
determination from the IRS may be followed by the grantee organization 
for the protection of the grantor or contributor.
    (6) Definition of support; meaning of general public--(i) In 
general. In determining whether the 33\1/2\ percent support test or the 
10 percent support limitation described in paragraph (f)(3)(i) of this 
section is met, contributions by an individual, trust, or corporation 
shall be taken into account as support from direct or indirect 
contributions from the general public only to the extent that the total 
amount of the contributions by any such individual, trust, or 
corporation during the period described in paragraph (f)(4)(i) or 
paragraph (f)(4)(ii) of this section does not exceed two percent of the 
organization's total support for such period, except as provided in 
paragraph (f)(6)(ii) of this section. Therefore, for example, any 
contribution by one individual will be included in full in the 
denominator of the fraction determining the 33\1/2\ percent support or 
the 10 percent support limitation, but will be includible in the 
numerator of such fraction only to the extent that such amount does not 
exceed two percent of the denominator. In applying the two percent 
limitation, all contributions made by a donor and by any person or 
persons standing in a relationship to the donor that is described in 
section 4946(a)(1)(C) through (a)(1)(G) and the related regulations 
shall be treated as made by one person. The two percent limitation shall 
not apply to support received from governmental units referred to in 
section 170(c)(1) or to contributions from organizations described in 
section 170(b)(1)(A)(vi), except as provided in paragraph (f)(6)(v) of 
this section. For purposes of paragraphs (f)(2), (f)(3)(i), and 
(f)(7)(iii)(A)(2) of this section, the

[[Page 92]]

term indirect contributions from the general public includes 
contributions received by the organization from organizations (such as 
section 170(b)(1)(A)(vi) organizations) that normally receive a 
substantial part of their support from direct contributions from the 
general public, except as provided in paragraph (f)(6)(v) of this 
section. See the examples in paragraph (f)(9) of this section for the 
application of this paragraph (f)(6)(i). For purposes of this paragraph 
(f), the term contributions includes qualified sponsorship payments (as 
defined in Sec. 1.513-4) in the form of money or property (but not 
services).
    (ii) Exclusion of unusual grants. (A) For purposes of applying the 
two percent limitation described in paragraph (f)(6)(i) of this section 
to determine whether the 33\1/3\ percent support test or the 10 percent 
support limitation in paragraph (f)(3)(i) of this section is satisfied, 
one or more contributions may be excluded from both the numerator and 
the denominator of the applicable support fraction if such contributions 
meet the requirements of paragraph (f)(6)(iii) of this section. The 
exclusion provided by this paragraph (f)(6)(ii) is generally intended to 
apply to substantial contributions or bequests from disinterested 
parties, which contributions or bequests--
    (1) Are attracted by reason of the publicly supported nature of the 
organization;
    (2) Are unusual or unexpected with respect to the amount thereof; 
and
    (3) Would, by reason of their size, adversely affect the status of 
the organization as normally being publicly supported for the applicable 
period described in paragraph (f)(4) of this section.
    (B) In the case of a grant (as defined in Sec. 1.509(a)-3(g)) that 
meets the requirements of this paragraph (f)(6)(ii), if the terms of the 
granting instrument require that the funds be paid to the recipient 
organization over a period of years, the grant amounts received by the 
organization may be excluded for such year or years in which they would 
otherwise be includible in computing support under the method of 
accounting on the basis of which the organization regularly computes its 
income in keeping its books under section 446. However, no item of gross 
investment income may be excluded under this paragraph (f)(6). The 
provisions of this paragraph (f)(6) shall apply to exclude unusual 
grants made during any of the applicable periods described in paragraph 
(f)(4) or paragraph (f)(6) of this section. See paragraph (f)(6)(iv) of 
this section as to reliance by a grantee organization upon an unusual 
grant ruling under this paragraph (f)(6).
    (iii) Determining factors. In determining whether a particular 
contribution may be excluded under paragraph (f)(6)(ii) of this section, 
all pertinent facts and circumstances will be taken into consideration. 
No single factor will necessarily be determinative. For some of the 
factors similar to the factors to be considered, see Sec. 1.509(a)-
3(c)(4).
    (iv) Grantors and contributors. Prior to the making of any grant or 
contribution that will allegedly meet the requirements for exclusion 
under paragraph (f)(6)(ii) of this section, a potential grantee 
organization may request a determination whether such grant or 
contribution may be so excluded. Requests for such determination may be 
filed by the grantee organization in the time and manner specified by 
revenue procedure or other guidance published in the Internal Revenue 
Bulletin. The issuance of such determination will be at the sole 
discretion of the Commissioner. The organization must submit all 
information necessary to make a determination on the factors referred to 
in paragraph (f)(6)(iii) of this section. If a favorable determination 
is issued, such determination may be relied upon by the grantor or 
contributor of the particular contribution in question for purposes of 
sections 170, 507, 545(b)(2), 642(c), 4942, 4945, 4966, 2055, 
2106(a)(2), and 2522 and by the grantee organization for purposes of 
paragraph (f)(6)(ii) of this section.
    (v) Grants from public charities. Pursuant to paragraph (f)(6)(i) of 
this section, contributions received from a governmental unit or from a 
section 170(b)(1)(A)(vi) organization are not subject to the two percent 
limitation described in paragraph (f)(6)(i) of this section unless such 
contributions represent amounts which have been expressly or impliedly 
earmarked by a

[[Page 93]]

donor to such governmental unit or section 170(b)(1)(A)(vi) organization 
as being for, or for the benefit of, the particular organization 
claiming section 170(b)(1)(A)(vi) status. See Sec. 1.509(a)-3(j)(3) for 
examples illustrating the rules of this paragraph (f)(6)(v).
    (7) Definition of support; special rules and meaning of terms--(i) 
Definition of support. For purposes of this paragraph (f), the term 
``support'' shall be as defined in section 509(d) (without regard to 
section 509(d)(2)). The term ``support'' does not include--
    (A) Any amounts received from the exercise or performance by an 
organization of its charitable, educational, or other purpose or 
function constituting the basis for its exemption under section 501(a). 
In general, such amounts include amounts received from any activity the 
conduct of which is substantially related to the furtherance of such 
purpose or function (other than through the production of income); or
    (B) Contributions of services for which a deduction is not 
allowable.
    (ii) For purposes of the 33\1/3\ percent support test and the 10 
percent support limitation in paragraph (f)(3)(i) of this section, all 
amounts received that are described in paragraph (f)(7)(i)(A) or 
paragraph (f)(7)(i)(B) of this section are to be excluded from both the 
numerator and the denominator of the fractions determining compliance 
with such tests, except as provided in paragraph (f)(7)(iii) of this 
section.
    (iii) Organizations dependent primarily on gross receipts from 
related activities. (A) Notwithstanding the provisions of paragraph 
(f)(7)(i) of this section, an organization will not be treated as 
satisfying the 33\1/3\ percent support test or the 10 percent support 
limitation in paragraph (f)(3)(i) of this section if it receives--
    (1) Almost all of its support (as defined in section 509(d)) from 
gross receipts from related activities; and
    (2) An insignificant amount of its support from governmental units 
(without regard to amounts referred to in paragraph (f)(7)(i)(A) of this 
section) and contributions made directly or indirectly by the general 
public.
    (B) Example. The application of this paragraph (f)(7)(iii) may be 
illustrated by the following example:

    Example. Z, an organization described in section 501(c)(3), is 
controlled by A, its president. Z received $500,000 during the period 
consisting of the current taxable year and the four immediately 
preceding taxable years under a contract with the Department of 
Transportation, pursuant to which Z has engaged in research to improve a 
particular vehicle used primarily by the Federal government. During this 
same period, the only other support received by Z consisted of $5,000 in 
small contributions primarily from Z's employees and business 
associates. The $500,000 amount constitutes support under sections 
509(d)(2) and 509(a)(2)(A). Under these circumstances, Z meets the 
conditions of paragraphs (f)(7)(iii)(A)(1) and (f)(7)(iii)(A)(2) of this 
section and will not be treated as meeting the requirements of either 
the 33\1/3\ percent support test or the facts and circumstances test. As 
to the rules applicable to organizations that fail to qualify under 
section 170(b)(1)(A)(vi) because of the provisions of this paragraph 
(f)(7)(iii), see section 509(a)(2) and the related regulations. For the 
distinction between gross receipts (as referred to in section 509(d)(2)) 
and gross investment income (as referred to in section 509(d)(4)), see 
Sec. 1.509(a)-3(m).

    (iv) Membership fees. For purposes of this paragraph (f)(7), the 
term support shall include ``membership fees'' within the meaning of 
Sec. 1.509(a)-3(h) (that is, if the basic purpose for making a payment 
is to provide support for the organization rather than to purchase 
admissions, merchandise, services, or the use of facilities).
    (8) Support from a governmental unit. (i) For purposes of the 33\1/
3\ percent support test and the 10 percent support limitation described 
in paragraph (f)(3)(i) of this section, the term support from a 
governmental unit includes any amounts received from a governmental 
unit, including donations or contributions and amounts received in 
connection with a contract entered into with a governmental unit for the 
performance of services or in connection with a government research 
grant. However, such amounts will not constitute support from a 
governmental unit for such purposes if they constitute amounts received 
from the exercise or performance of the organization's exempt functions 
as provided in paragraph (f)(7)(i)(A) of this section.
    (ii) For purposes of paragraph (f)(8)(i) of this section, any amount 
paid by a governmental unit to an organization is not to be treated as 
received from

[[Page 94]]

the exercise or performance of its charitable, educational, or other 
purpose or function constituting the basis for its exemption under 
section 501(a) (within the meaning of paragraph (f)(7)(i)(A) of this 
section) if the purpose of the payment is primarily to enable the 
organization to provide a service to, or maintain a facility for, the 
direct benefit of the public (regardless of whether part of the expense 
of providing such service or facility is paid for by the public), rather 
than to serve the direct and immediate needs of the payor. For example--
    (A) Amounts paid for the maintenance of library facilities which are 
open to the public;
    (B) Amounts paid under government programs to nursing homes or homes 
for the aged in order to provide health care or domiciliary services to 
residents of such facilities; and
    (C) Amounts paid to child placement or child guidance organizations 
under government programs for services rendered to children in the 
community, are considered payments the purpose of which is primarily to 
enable the recipient organization to provide a service or maintain a 
facility for the direct benefit of the public, rather than to serve the 
direct and immediate needs of the payor. Furthermore, any amount 
received from a governmental unit under circumstances such that the 
amount would be treated as a ``grant'' within the meaning of Sec. 
1.509(a)-3(g) will generally constitute ``support from a governmental 
unit'' described in this paragraph (f)(8), rather than an amount 
described in paragraph (f)(7)(i)(A) of this section.
    (9) Examples. The application of paragraphs (f)(1) through (f)(8) of 
this section may be illustrated by the following examples:

    Example 1. (i) M is recognized as an organization described in 
section 501(c)(3). For the years 2008 through 2012 (the applicable 
period with respect to the taxable year 2012 under paragraph (f)(4) of 
this section), M received support (as defined in paragraphs (f)(6) 
through (8) of this section) of $600,000 from the following sources:

Investment income............................................   $300,000
City R (a governmental unit described in section 170(c)(1))..     40,000
United Fund (an organization described in section                 40,000
 170(b)(1)(A)(vi))...........................................
Contributions (including six contributions in excess of the      220,000
 two-percent limit, totaling $170,000).......................
                                                              ----------
    Total support............................................    600,000
 

    (ii) With respect to the taxable year 2012, M's public support is 
computed as follows:

Support from a governmental unit described in section            $40,000
 170(c)(1)...................................................
Indirect contributions from the general public (United Fund).     40,000
Contributions by various donors that were not in excess of        50,000
 $12,000, or two percent of total support....................
Six contributions that were each in excess of $12,000, or two     72,000
 percent of total support, up to the two-percent limitation,
 6 x $12,000.................................................
                                                              ----------
    Total support............................................    202,000
 

    (iii) M's support from governmental units referred to in section 
170(c)(1) and from direct and indirect contributions from the general 
public (as defined in paragraph (f)(6) of this section) with respect to 
the taxable year 2012 normally exceeds 33\1/3\ percent of M's total 
support ($202,000/$600,000 = 33.67 percent) for the applicable period 
(2008 through 2012). M meets the 33\1/3\ percent support test with 
respect to 2012 and is therefore publicly supported for the taxable 
years 2012 and 2013.


[[Page 95]]


    Example 2. (i) N is recognized as an organization described in 
section 501(c)(3). It was created to maintain public gardens containing 
botanical specimens and displaying statuary and other art objects. The 
facilities, works of art, and a large endowment were all contributed by 
a single contributor. The members of the governing body of the 
organization are unrelated to its creator. The gardens are open to the 
public without charge and attract a substantial number of visitors each 
year. For the current taxable year and the four taxable years 
immediately preceding the current taxable year, 95 percent of the 
organization's total support was received from investment income from 
its original endowment. N also maintains a membership society that is 
supported by members of the general public who wish to contribute to the 
upkeep of the gardens by paying a small annual membership fee. Over the 
five-year period in question, these fees from the general public 
constituted the remaining five percent of the organization's total 
support for such period.
    (ii) Under these circumstances, N does not meet the 33\1/3\ percent 
support test for its current taxable year. Furthermore, because only 
five percent of its total support is, with respect to the current 
taxable year, normally received from the general public, N does not 
satisfy the 10 percent support limitation described in paragraph 
(f)(3)(i) of this section and therefore does not qualify as publicly 
supported under the facts and circumstances test. Because N has failed 
to satisfy the 10 percent support limitation under paragraph (f)(3)(i) 
of this section, none of the other requirements or factors set forth in 
paragraphs (f)(3)(iii)(A) through (f)(3)(iii)(E) of this section can be 
considered in determining whether N qualifies as a publicly supported 
organization. For its current taxable year, therefore, N is not an 
organization described in section 170(b)(1)(A)(vi).
    Example 3. (i) O, an art museum, is recognized as an organization 
described in section 501(c)(3). In 1930, O was founded in S City by the 
members of a single family to collect, preserve, interpret, and display 
to the public important works of art. O is governed by a Board of 
Trustees that originally consisted almost entirely of members of the 
founding family. However, since 1945, members of the founding family or 
persons standing in a relationship to the members of such family 
described in section 4946(a)(1)(C) through (G) have annually constituted 
less than one-fifth of the Board of Trustees. The remaining board 
members are citizens of S City from a variety of professions and 
occupations who represent the interests and views of the people of S 
City in the activities carried on by the organization rather than the 
personal or private interests of the founding family. O solicits 
contributions from the general public and, for the current taxable year 
and each of the four taxable years immediately preceding the current 
taxable year, O has received total contributions (in small sums of less 
than $100, none of which exceeds two percent of O's total support for 
such period) in excess of $10,000. These contributions from the general 
public (as defined in paragraph (f)(6) of this section) represent 25 
percent of the organization's total support for such five-year period. 
For this same period, investment income from several large endowment 
funds has constituted 75 percent of O's total support. O expends 
substantially all of its annual income for its exempt purposes and thus 
depends upon the funds it annually solicits from the public as well as 
its investment income in order to carry out its activities on a normal 
and continuing basis and to acquire new works of art. O has, for the 
entire period of its existence, been open to the public and more than 
300,000 people (from S City and elsewhere) have visited the museum in 
each of the current taxable year and the four immediately preceding 
taxable years.
    (ii) Under these circumstances, O does not meet the 33\1/3\ percent 
support test for its current year because it has received only 25 
percent of its total support for the applicable five-year period from 
the general public. However, under the facts set forth above, O meets 
the 10 percent support limitation under paragraph (f)(3)(i) of this 
section, as well as the requirements of paragraph (f)(3)(ii) of this 
section. Under all of the facts set forth in this example, O is 
considered as meeting the requirements of the facts and circumstances 
test on the basis of satisfying paragraphs (f)(3)(i) and (f)(3)(ii) of 
this section and the factors set forth in paragraphs (f)(3)(iii)(A) 
through (f)(3)(iii)(D) of this section. O is therefore publicly 
supported for its current taxable year and the immediately succeeding 
taxable year.
    Example 4. (i) In 1960, the P Philharmonic Orchestra was organized 
in T City through the combined efforts of a local music society and a 
local women's club to present to the public a wide variety of musical 
programs intended to foster music appreciation in the community. P is 
recognized as an organization described in section 501(c)(3). The 
orchestra is composed of professional musicians who are paid by the 
association. Twelve performances open to the public are scheduled each 
year. A small admission fee is charged for each of these performances. 
In addition, several performances are staged annually without charge. 
During the current taxable year and the four taxable years immediately 
preceding the current taxable year, P has received separate 
contributions of $200,000 each from A and B (not members of a single 
family) and support of $120,000 from the T Community Chest, a public 
federated fundraising organization operating in T City. P depends on 
these funds in order to carry out its activities and will continue to

[[Page 96]]

depend on contributions of this type to be made in the future. P has 
also begun a fundraising campaign in an attempt to expand its activities 
for the coming years. P is governed by a Board of Directors comprised of 
five individuals. A faculty member of a local college, the president of 
a local music society, the head of a local banking institution, a 
prominent doctor, and a member of the governing body of the local 
chamber of commerce currently serve on P's Board and represent the 
interests and views of the community in the activities carried on by P.
    (ii) With respect to P's current taxable year, P's sources of 
support are computed on the basis of the current taxable year and the 
four taxable years immediately preceding the current taxable year, as 
follows:

Contributions................................................   $520,000
Receipts from performances...................................    100,000
                                                              ----------
    Total support............................................    620,000
Less:
Receipts from performances (excluded under paragraph             100,000
 (f)(7)(i)(A) of this section)...............................
                                                              ----------
    Total support for purposes of paragraphs (f)(2) and          520,000
     (f)(3)(i) of this section...............................
 

    (iii) For purposes of paragraphs (f)(2) and (f)(3)(i) of this 
section, P's public support is computed as follows:

T Community Chest (indirect support from the general public).    120,000
Two contributions from A & B (each in excess of $10,400--2        20,800
 percent of total support) 2 x $10,400.......................
                                                              ----------
    Total....................................................    140,800
 

    (iv) Under these circumstances, P does not meet the 33\1/3\ percent 
support test for its current year because it has received only 27 
percent of its total support ($140,800/$520,000) for the applicable 
five-year period from the general public. However, under the facts set 
forth above, P meets the 10 percent support limitation under paragraph 
(f)(3)(i) of this section, as well as the requirements of paragraph 
(f)(3)(ii) of this section. Under all of the facts set forth in this 
example, P is considered as meeting the requirements of the facts and 
circumstances test on the basis of satisfying paragraphs (f)(3)(i) and 
(f)(3)(ii) of this section and the factors set forth in paragraphs 
(f)(3)(iii)(A) through (f)(3)(iii)(D) of this section. P is therefore 
publicly supported for its current taxable year and the immediately 
succeeding taxable year.
    Example 5. (i) Q is recognized as an organization described in 
section 501(c)(3). It is a philanthropic organization founded in 1965 by 
C for the purpose of making annual contributions to worthy charities. C 
created Q as a charitable trust by the transfer of appreciated 
securities worth $500,000 to Q. Pursuant to the trust agreement, C and 
two other members of his family are the sole trustees of Q and are 
vested with the right to appoint successor trustees. In each of the 
current taxable year and the four taxable years immediately preceding 
the current taxable year, Q received $12,000 in investment income from 
its original endowment. Each year Q makes a solicitation for funds by 
operating a charity ball at C's residence. Guests are invited and 
requested to make contributions of $100 per couple. During the five-year 
period at issue, $15,000 was received from the proceeds of these events. 
C and his family have also made contributions to Q of $25,000 over the 
five-year period at issue. Q makes disbursements each year of 
substantially all of its net income to the public charities chosen by 
the trustees.
    (ii) Q's sources of support for the current taxable year and the 
four taxable years immediately preceding the current taxable year as 
follows:

Investment income............................................    $60,000
Contributions................................................     40,000
                                                              ----------
    Total support............................................    100,000
 


[[Page 97]]

    (iii) For purposes of paragraphs (f)(2) and (f)(3)(i) of this 
section, Q's public support is computed as follows:

Contributions from the general public........................   $ 15,000
C's contribution (in excess of $ 2,000--2 percent of total         2,000
 support) 1 x $2,000.........................................
                                                              ----------
    Total....................................................     17,000
 

    (iv) Under these circumstances, Q does not meet the 33\1/3\ percent 
support test for its current year because it has received only 17 
percent of its total support ($17,000/$100,000) for the applicable five-
year period from the general public. Thus, Q's classification as a 
``publicly supported'' organization depends on whether it meets the 
requirements of the facts and circumstances test. Even though it 
satisfies the 10 percent support limitation under paragraph (f)(3)(i) of 
this section, its method of solicitation makes it questionable whether Q 
satisfies the requirements of paragraph (f)(3)(ii) of this section. 
Because of its method of operating, Q also has a greater burden of 
establishing its publicly supported nature under paragraph 
(f)(3)(iii)(A) of this section. Based upon the foregoing facts and 
circumstances, including Q's failure to receive favorable consideration 
under the factors set forth in paragraphs (f)(3)(iii)(B), 
(f)(3)(iii)(C), and (f)(3)(iii)(D) of this section, Q does not satisfy 
the facts and circumstances test.

    (10) Community trust; introduction. Community trusts have often been 
established to attract large contributions of a capital or endowment 
nature for the benefit of a particular community or area, and often such 
contributions have come initially from a small number of donors. While 
the community trust generally has a governing body comprised of 
representatives of the particular community or area, its contributions 
are often received and maintained in the form of separate trusts or 
funds, which are subject to varying degrees of control by the governing 
body. To qualify as a ``publicly supported'' organization, a community 
trust must meet the 33\1/3\ percent support test, or, if it cannot meet 
that test, be organized and operated so as to attract new and additional 
public or governmental support on a continuous basis sufficient to meet 
the facts and circumstances test. Such facts and circumstances test 
includes a requirement of attraction of public support in paragraph 
(f)(3)(ii) of this section which, as applied to community trusts, 
generally will be satisfied if they seek gifts and bequests from a wide 
range of potential donors in the community or area served, through banks 
or trust companies, through attorneys or other professional persons, or 
in other appropriate ways that call attention to the community trust as 
a potential recipient of gifts and bequests made for the benefit of the 
community or area served. A community trust is not required to engage in 
periodic, community-wide, fundraising campaigns directed toward 
attracting a large number of small contributions in a manner similar to 
campaigns conducted by a community chest or united fund. Paragraph 
(f)(11) of this section provides rules for determining the extent to 
which separate trusts or funds may be treated as component parts of a 
community trust, fund, or foundation (herein collectively referred to as 
a ``community trust,'' and sometimes referred to as an ``organization'') 
for purposes of meeting the requirements of this paragraph for 
classification as a publicly supported organization. Paragraph (f)(12) 
of this section contains rules for trusts or funds that are prevented 
from qualifying as component parts of a community trust by paragraph 
(f)(11) of this section.
    (11) Community trusts; requirements for treatment as a single 
entity--(i) General rule. For purposes of sections 170, 501, 507, 508, 
509, and Chapter 42, any organization that meets the requirements 
contained in paragraphs (f)(11)(iii) through (f)(11)(vi) of this section 
will be treated as a single entity, rather than as an aggregation of 
separate funds, and except as otherwise provided, all funds associated 
with such organization (whether a trust, not-for-profit corporation, 
unincorporated association, or a combination thereof)

[[Page 98]]

which meet the requirements of paragraph (f)(11)(ii) of this section 
will be treated as component parts of such organization.
    (ii) Component part of a community trust. In order to be treated as 
a component part of a community trust referred to in this paragraph 
(f)(11) (rather than as a separate trust or not-for-profit corporation 
or association), a trust or fund:
    (A) Must be created by a gift, bequest, legacy, devise, or other 
transfer to a community trust which is treated as a single entity under 
this paragraph (f)(11); and
    (B) May not be directly or indirectly subjected by the transferor to 
any material restriction or condition (within the meaning of Sec. 
1.507-2(a)(7)) with respect to the transferred assets. For purposes of 
this paragraph (f)(11)(ii)(B), if the transferor is not a private 
foundation, the provisions of Sec. 1.507-2(a)(7) shall be applied to 
the trust or fund as if the transferor were a private foundation 
established and funded by the person establishing the trust or fund and 
such foundation transferred all its assets to the trust or fund. Any 
transfer made to a fund or trust which is treated as a component part of 
a community trust under this paragraph (f)(11)(ii) will be treated as a 
transfer made ``to'' a ``publicly supported'' community trust for 
purposes of sections 170(b)(1)(A) and 507(b)(1)(A) if such community 
trust meets the requirements of section 170(b)(1)(A)(vi) as a ``publicly 
supported'' organization at the time of the transfer, except as provided 
in paragraph (f)(5)(ii) of this section or Sec. Sec. 1.508-1(b)(4) and 
1.508-1(b)(6) (relating, generally, to reliance by grantors and 
contributors). See also paragraphs (f)(12)(ii) and (f)(12)(iii) of this 
section for special provisions relating to split-interest trusts and 
certain private foundations described in section 170(b)(1)(F)(iii).
    (iii) Name. The organization must be commonly known as a community 
trust, fund, foundation, or other similar name conveying the concept of 
a capital or endowment fund to support charitable activities (within the 
meaning of section 170(c)(1) or section 170(c)(2)(B)) in the community 
or area it serves.
    (iv) Common instrument. All funds of the organization must be 
subject to a common governing instrument or a master trust or agency 
agreement (herein referred to as the ``governing instrument''), which 
may be embodied in a single document or several documents containing 
common language. Language in an instrument of transfer to the community 
trust making a fund subject to the community trust's governing 
instrument or master trust or agency agreement will satisfy the 
requirements of this paragraph (f)(11)(iv). In addition, if a community 
trust adopts a new governing instrument (or creates a corporation) to 
put into effect new provisions (applying to future transfers to the 
community trust), the adoption of such new governing instrument (or 
creation of a corporation with a governing instrument) which contains 
common language with the existing governing instrument shall not 
preclude the community trust from meeting the requirements of this 
paragraph (f)(11)(iv).
    (v) Common governing body. (A) The organization must have a common 
governing body or distribution committee (herein referred to as the 
``governing body'') which either directs or, in the case of a fund 
designated for specified beneficiaries, monitors the distribution of all 
of the funds exclusively for charitable purposes (within the meaning of 
section 170(c)(1) or section 170(c)(2)(B)). For purposes of this 
paragraph (f)(11)(v), a fund is designated for specified beneficiaries 
only if no person is left with the discretion to direct the distribution 
of the fund.
    (B) Powers of modification and removal. The fact that the exercise 
of any power described in this paragraph (f)(11)(v)(B) is reviewable by 
an appropriate State authority will not preclude the community trust 
from meeting the requirements of this paragraph (f)(11)(v)(B). Except as 
provided in paragraph (f)(11)(v)(C) of this section, the governing body 
must have the power in the governing instrument, the instrument of 
transfer, the resolutions or by-laws of the governing body, a written 
agreement, or otherwise--
    (1) To modify any restriction or condition on the distribution of 
funds for any specified charitable purposes or to

[[Page 99]]

specified organizations if in the sole judgment of the governing body 
(without the necessity of the approval of any participating trustee, 
custodian, or agent), such restriction or condition becomes, in effect, 
unnecessary, incapable of fulfillment, or inconsistent with the 
charitable needs of the community or area served;
    (2) To replace any participating trustee, custodian, or agent for 
breach of fiduciary duty under State law; and
    (3) To replace any participating trustee, custodian, or agent for 
failure to produce a reasonable (as determined by the governing body) 
return of net income (within the meaning of paragraph (f)(11)(v)(F) of 
this section) over a reasonable period of time (as determined by the 
governing body).
    (C) Transitional rule--(1) Notwithstanding paragraph (f)(11)(v)(B) 
of this section, if a community trust meets the requirements of 
paragraph (f)(11)(v)(C)(3) of this section, then in the case of any 
instrument of transfer which is executed before July 19, 1977, and is 
not revoked or amended thereafter (with respect to any dispositive 
provision affecting the transfer to the community trust), and in the 
case of any instrument of transfer which is irrevocable on January 19, 
1982, the governing body must have the power to cause proceedings to be 
instituted (by request to the appropriate State authority)--
    (i) To modify any restriction or condition on the distribution of 
funds for any specified charitable purposes or to specified 
organizations if in the judgment of the governing body such restriction 
or condition becomes, in effect, unnecessary, incapable of fulfillment, 
or inconsistent with the charitable needs of the community or area 
served; and
    (ii) To remove any participating trustee, custodian, or agent for 
breach of fiduciary duty under State law.
    (2) The necessity for the governing body to obtain the approval of a 
participating trustee to exercise the powers described in paragraph 
(f)(11)(v)(C)(1) of this section shall be treated as not preventing the 
governing body from having such power, unless (and until) such approval 
has been (or is) requested by the governing body and has been (or is) 
denied.
    (3) Paragraph (f)(11)(v)(C)(1) of this section shall not apply 
unless the community trust meets the requirements of paragraph 
(f)(11)(v)(B) of this section, with respect to funds other than those 
under instruments of transfer described in the first sentence of such 
paragraph (f)(11)(v)(C)(1) of this section, by January 19, 1978, or such 
later date as the Commissioner may provide for such community trust, and 
unless the community trust does not, once it so complies, thereafter 
solicit for funds that will not qualify under the requirements of 
paragraph (f)(11)(v)(B) of this section.
    (D) Inconsistent State law--(1) For purposes of paragraphs 
(f)(11)(v)(B)(1), (f)(11)(v)(B)(2), (f)(11)(v)(B)(3), 
(f)(11)(v)(C)(1)(i), (f)(11)(v)(C)(1)(ii), and (f)(11)(v)(E) of this 
section, if a power described in such a provision is inconsistent with 
State law even if such power were expressly granted to the governing 
body by the governing instrument and were accepted without limitation 
under an instrument of transfer, then the community trust will be 
treated as meeting the requirements of such a provision if it meets such 
requirements to the fullest extent possible consistent with State law 
(if such power is or had been so expressly granted).
    (2) For example, if, under the conditions of paragraph 
(f)(11)(v)(D)(1) of this section, the power to modify is inconsistent 
with State law, but the power to institute proceedings to modify, if so 
expressly granted, would be consistent with State law, the community 
trust will be treated as meeting such requirements to the fullest extent 
possible if the governing body has the power (in the governing 
instrument or otherwise) to institute proceedings to modify a condition 
or restriction. On the other hand, if in such a case the community trust 
has only the power to cause proceedings to be instituted to modify a 
condition or restriction, it will not be treated as meeting such 
requirements to the fullest extent possible.
    (3) In addition, if, for example, under the conditions of paragraph 
(f)(11)(v)(D)(1) of this section, the

[[Page 100]]

power to modify and the power to institute proceedings to modify a 
condition or restriction is inconsistent with State law, but the power 
to cause such proceedings to be instituted would be consistent with 
State law, if it were expressly granted in the governing instrument and 
if the approval of the State Attorney General were obtained, then the 
community trust will be treated as meeting such requirements to the 
fullest extent possible if it has the power (in the governing instrument 
or otherwise) to cause such proceedings to be instituted, even if such 
proceedings can be instituted only with the approval of the State 
Attorney General.
    (E) Exercise of powers. The governing body shall (by resolution or 
otherwise) commit itself to exercise the powers described in paragraphs 
(f)(11)(v)(B), (f)(11)(v)(C), and (f)(11)(v)(D) of this section in the 
best interests of the community trust. The governing body will be 
considered not to be so committed where it has grounds to exercise such 
a power and fails to exercise it by taking appropriate action. Such 
appropriate action may include, for example, consulting with the 
appropriate State authority prior to taking action to replace a 
participating trustee.
    (F) Reasonable return. In addition to the requirements of paragraphs 
(f)(11)(v)(B), (f)(11)(v)(C), (f)(11)(v)(D), or (f)(11)(v)(E) of this 
section, the governing body shall (by resolution or otherwise) commit 
itself to obtain information and take other appropriate steps with the 
view to seeing that each participating trustee, custodian, or agent, 
with respect to each restricted trust or fund that is, and with respect 
to the aggregate of the unrestricted trusts or funds that are, a 
component part of the community trust, administers such trust or fund in 
accordance with the terms of its governing instrument and accepted 
standards of fiduciary conduct to produce a reasonable return of net 
income (or appreciation where not inconsistent with the community 
trust's need for current income), with due regard to safety of 
principal, in furtherance of the exempt purposes of the community trust 
(except for assets held for the active conduct of the community trust's 
exempt activities). In the case of a low return of net income (and, 
where appropriate, appreciation), the IRS will examine carefully whether 
the governing body has, in fact, committed itself to take the 
appropriate steps. For purposes of this paragraph (f)(11)(v)(F), any 
income that has been designated by the donor of the gift or bequest to 
which such income is attributable as being available only for the use or 
benefit of a broad charitable purpose, such as the encouragement of 
higher education or the promotion of better health care in the 
community, will be treated as unrestricted. However, any income that has 
been designated for the use or benefit of a named charitable 
organization or agency or for the use or benefit of a particular class 
of charitable organizations or agencies, the members of which are 
readily ascertainable and are less than five in number, will be treated 
as restricted.
    (vi) Common reports. The organization must prepare periodic 
financial reports treating all of the funds which are held by the 
community trust, either directly or in component parts, as funds of the 
organization.
    (12) Community trusts; treatment of trusts and not-for-profit 
corporations and associations not included as components. (i) For 
purposes of sections 170, 501, 507, 508, 509, and Chapter 42, any trust 
or not-for-profit corporation or association that is alleged to be a 
component part of a community trust, but that fails to meet the 
requirements of paragraph (f)(11)(ii) of this section, shall not be 
treated as a component part of a community trust and, if a trust, shall 
be treated as a separate trust and be subject to the provisions of 
section 501, section 4947(a)(1), or section 4947(a)(2), as the case may 
be. If such organization is a not-for-profit corporation or association, 
it will be treated as a separate entity, and, if it is described in 
section 501(c)(3), it will be treated as a private foundation unless it 
is described in section 509(a)(1), section 509(a)(2), section 509(a)(3), 
or section 509(a)(4). In the case of a fund that is ultimately treated 
as not being a component part of a community trust pursuant to this 
paragraph (f)(12), if the

[[Page 101]]

Forms 990 filed annually by the community trust included financial 
information with respect to such fund and treated such fund in the same 
manner as other component parts thereof, such returns filed by the 
community trust prior to the taxable year in which the Commissioner 
notifies such fund that it will not be treated as a component part will 
be treated as its separate return for purpose of Subchapter A of Chapter 
61 of Subtitle F, and the first such return filed by the community trust 
will be treated as the notification required of the separate entity for 
purposes of section 508(a).
    (ii) If a transfer is made in trust to a community trust to make 
income or other payments for a period of a life or lives in being or a 
term of years to any individual or for any noncharitable purpose, 
followed by payments to or for the use of the community trust (such as 
in the case of a charitable remainder annuity trust or a charitable 
remainder unitrust described in section 664 or a pooled income fund 
described in section 642(c)(5)), such trust will be treated as a 
component part of the community trust upon the termination of all 
intervening noncharitable interests and rights to the actual possession 
or enjoyment of the property if such trust satisfies the requirements of 
paragraph (f)(11) of this section at such time. Until such time, the 
trust will be treated as a separate trust. If a transfer is made in 
trust to a community trust to make income or other payments to or for 
the use of the community trust, followed by payments to any individual 
or for any noncharitable purpose, such trust will be treated as a 
separate trust rather than as a component part of the community trust. 
See section 4947(a)(2) and the related regulations for the treatment of 
such split-interest trusts. The provisions of this paragraph (f)(12)(ii) 
provide rules only for determining when a charitable remainder trust or 
pooled income fund may be treated as a component part of a community 
trust and are not intended to preclude a community trust from 
maintaining a charitable remainder trust or pooled income fund. For 
purposes of grantors and contributors, a pooled income fund of a 
publicly supported community trust shall be treated no differently than 
a pooled income fund of any other publicly supported organization.
    (iii) An organization described in section 170(b)(1)(F)(iii) will 
not ordinarily satisfy the requirements of paragraph (f)(11)(ii) of this 
section because of the unqualified right of the donor to designate the 
recipients of the income and principal of the trust. Such organization 
will therefore ordinarily be treated as other than a component part of a 
community trust under paragraph (f)(12)(i) of this section. However, see 
section 170(b)(1)(F)(iii) and the related regulations with respect to 
the treatment of contributions to such organizations.
    (13) Method of accounting. For purposes of section 170(b)(1)(A)(vi), 
an organization's support will be determined under the method of 
accounting on the basis of which the organization regularly computes its 
income in keeping its books under section 446. For example, if a grantor 
makes a grant to an organization payable over a term of years, such 
grant will be includible in the support fraction of the grantee 
organization under the method of accounting on the basis of which the 
grantee organization regularly computes its income in keeping its books 
under section 446.
    (14) Transition rules. (i) An organization that received an advance 
ruling, that expires on or after June 9, 2008, that it will be treated 
as an organization described in sections 170(b)(1)(A)(vi) and 509(a)(1) 
will be treated as meeting the requirements of paragraph (f)(2) or 
paragraph (f)(3) of this section for the first five taxable years of its 
existence as a section 501(c)(3) organization unless the IRS issued to 
the organization a proposed determination prior to September 9, 2008, 
that the organization is not described in sections 170(b)(1)(A)(vi) and 
509(a)(1) or in section 509(a)(2).
    (ii) Paragraph (f)(4)(v) of this section shall not apply with 
respect to an organization that received an advance ruling that expired 
prior to June 9, 2008, and that did not timely file with the Internal 
Revenue Service the required information to establish that it is an 
organization described in sections

[[Page 102]]

170(b)(1)(A)(vi) and 509(a)(1) or in section 509(a)(2).
    (iii) An organization that fails to meet a public support test for 
its first taxable year beginning on or after January 1, 2008, under the 
regulations in this section may use the prior tests set forth in Sec. 
1.170A-9(e)(2) or Sec. 1.170A-9(e)(3), or in Sec. Sec. 1.509(a)-
3(a)(2) and 1.509(a)-3(a)(3), as in effect before September 9, 2008 (as 
contained in 26 CFR part 1 revised April 1, 2008), to determine whether 
the organization was publicly supported for its 2008 taxable year based 
on its satisfaction of a public support test for taxable year 2007, 
computed over the period 2003 through 2006.
    (iv) Examples. The application of this paragraph (f)(14) may be 
illustrated by the following examples:

    Example 1. (i) Organization X was formed in January 2004 and uses a 
taxable year ending June 30. Organization X received an advance ruling 
letter that it is recognized as an organization described in section 
501(c)(3) effective as of the date of its formation and that it is 
treated as a publicly supported organization under sections 
170(b)(1)(A)(vi) and 509(a)(1) during the five-year advance ruling 
period that will end on June 30, 2008. This date is on or after June 9, 
2008.
    (ii) Under the transition rule, Organization X is a publicly 
supported organization described in sections 170(b)(1)(A)(vi) and 
509(a)(1) for the taxable years ending June 30, 2004, through June 30, 
2008. Organization X does not need to establish within 90 days after 
June 30, 2008, that it met a public support test under Sec. 1.170A-9(e) 
or Sec. 1.509(a)-3, as in effect prior to September 9, 2008, (as 
contained in 26 CFR part 1 revised April 1, 2008), for its advance 
ruling period.
    (iii) Organization X can qualify as a publicly supported 
organization for the taxable year ending June 30, 2009, if Organization 
X can meet the requirements of paragraph (f)(2) or (f)(3) of this 
section or Sec. Sec. 1.509(a)-3(a)(2) and 1.509(a)-3(a)(3) for the 
taxable years ending June 30, 2005, through June 30, 2009, or for the 
taxable years ending June 30, 2004, through June 30, 2008. In addition, 
for its taxable year ending June 30, 2009, Organization X may qualify as 
a publicly supported organization by availing itself of the transition 
rule contained in paragraph (f)(14)(iii) of this section, which looks to 
support received by X in the taxable years ending June 30, 2004, through 
June 30, 2007.
    Example 2. (i) Organization Y was formed in January 2000, and uses a 
taxable year ending December 31. Organization Y received a final 
determination that it was recognized as tax-exempt under section 
501(c)(3) and as a publicly supported organization prior to September 9, 
2008.
    (ii) For taxable year 2008, Organization Y will qualify as publicly 
supported if it meets the requirements under either paragraph (f)(2) or 
(f)(3) of this section or Sec. Sec. 1.509(a)-3(a)(2) or 1.509(a)-
3(a)(3) for the five-year period January 1, 2004, through December 31, 
2008. Organization Y will also qualify as publicly supported for taxable 
year 2008 if it meets the requirements under Sec. 1.170A-9(e)(2) or 
Sec. 1.170A-9(e)(3), or under Sec. Sec. 1.509(a)-3(a)(2) and 1.509(a)-
3(a)(3), as in effect prior to September 9, 2008, (as contained in 26 
CFR part 1 revised April 1, 2008) for taxable year 2007, using the four-
year period from January 1, 2003, through December 31, 2006.

    (g) Private operating foundation. An organization is described in 
section 170(b)(1) (A)(vii) and (E)(i) if it is a private ``operating 
foundation'' as defined in section 4942(j)(3) and the regulations 
thereunder.
    (h) Private nonoperating foundation distributing amount equal to all 
contributions received--(1) In general. (i) An organization is described 
in section 170(b)(1) (A)(vii) and (E)(ii) if it is a private foundation 
which, not later than the 15th day of the third month after the close of 
its taxable year in which any contributions are received, distributes an 
amount equal in value to 100 percent of all contributions received in 
such year. Such distributions must be qualifying distributions (as 
defined in section 4942(g) without regard to paragraph (3) thereof) 
which are treated, after the application of section 4942(g)(3), as 
distributions out of corpus in accordance with section 4942(h). 
Qualifying distributions, as defined in section 4942(g) without regard 
to paragraph (3) thereof, cannot be made to (i) an organization 
controlled directly or indirectly by the foundation or by one or more 
disqualified persons (as defined in section 4946) with respect to the 
foundation or (ii) a private foundation which is not an operating 
foundation (as defined in section 4942(j)(3)). The phrase ``after the 
application of section 4942(g)(3)'' means that every contribution 
described in section 4942(g)(3) received by a private foundation 
described in this subparagraph in a particular taxable year must be 
distributed (within the meaning of section 4942(g)(3)(A)) by such 
foundation not later than the 15th day of the third

[[Page 103]]

month after the close of such taxable year in order for any other 
distribution by such foundation to be counted toward the 100-percent 
requirement described in this subparagraph.
    (ii) In order for an organization to meet the distribution 
requirements of subdivision (i) of this subparagraph, it must, not later 
than the 15th day of the third month after the close of its taxable year 
in which any contributions are received, distribute (within the meaning 
of subdivision (i) of this subparagraph) an amount equal in value to 100 
percent of all contributions received in such year and have no remaining 
undistributed income for such year.
    (iii) The provisions of this subparagraph may be illustrated by the 
following examples:

    Example 1. X is a private foundation on a calendar year basis. As of 
January 1, 1971, X had no undistributed income for 1970. X's 
distributable amount for 1971 was $600,000. In July 1971, A, an 
individual, contributed $500,000 (fair market value determined at the 
time of the contribution) of appreciated property to X (which, if sold, 
would give rise to long-term capital gain). X did not receive any other 
contribution in either 1970 or 1971. During 1971, X made qualifying 
distributions of $700,000 which were treated as made out of the 
undistributed income for 1971 and $100,000 out of corpus. X will meet 
the requirements of section 170(b)(1)(E)(ii) for 1971 if it makes 
additional qualifying distributions of $400,000 out of corpus by March 
15, 1972.
    Example 2. Assume the facts as stated in Example 1, except that as 
of January 1, 1971, X had $100,000 of undistributed income for 1970. 
Under these circumstances, the $700,000 distributed by X in 1971 would 
be treated as made out of the undistributed income for 1970 and 1971. X 
would therefore have to make additional qualifying distributions of 
$500,000 out of corpus between January 1, 1972, and March 15, 1972, in 
order to meet the requirements of section 170(b)(1)(E)(ii) for 1971.

    (2) Special rules. In applying subparagraph (1) of this paragraph:
    (i) For purposes of section 170(b)(1)(A)(vii), an organization 
described in section 170(b)(1)(E)(ii) must distribute all contributions 
received in any year, whether of cash or property. However, solely for 
purposes of section 170(e)(1)(B)(ii), an organization described in 
section 170(b)(1)(E)(ii) is required to distribute all contributions of 
property only received in any year. Contributions for purposes of this 
paragraph do not include bequests, legacies, devises, or transfers 
within the meaning of section 2055 or 2106(a)(2) with respect to which a 
deduction was not allowed under section 170.
    (ii) Any distributions made by a private foundation pursuant to 
subparagraph (1) of this paragraph with respect to a particular taxable 
year shall be treated as made first out of contributions of property and 
then out of contributions of cash received by such foundation in such 
year.
    (iii) A private foundation is not required to trace specific 
contributions of property, or amounts into which such contributions are 
converted, to specific distributions.
    (iv) For purposes of satisfying the requirements of section 
170(b)(1)(D)(ii), except as provided to the contrary in this subdivision 
(iv), the fair market value of contributed property, determined on the 
date of contribution, is required to be used for purposes of determining 
whether an amount equal in value to 100 percent of the contribution 
received has been distributed. However, reasonable selling expenses, if 
any, incurred by the foundation in the sale of the contributed property 
may be deducted from the fair market value of the contributed property 
on the date of contribution, and distribution of the balance of the fair 
market value will satisfy the 100 percent distribution requirement. If a 
private foundation receives a contribution of property and, within 30 
days thereafter, either sells the property or makes an in kind 
distribution of the property to a public charity, then at the choice of 
the private foundation the gross amount received on the sale (less 
reasonable selling expenses incurred) or the fair market value of the 
contributed property at the date of its distribution to the public 
charity, and not the fair market value of the contributed property on 
the sale of contribution (less reasonable selling expenses, if any), is 
considered to be the amount of the fair market value of the contributed 
property for purposes of the requirements of section 170(b)(1)(D)(ii).
    (v) A private foundation may satisfy the requirements of 
subparagraph (1) of

[[Page 104]]

this paragraph for a particular taxable year by electing (pursuant to 
section 4942(h)(2) and the regulations thereunder) to treat a portion or 
all of one or more distributions, made not later than the 15th day of 
the third month after the close of such year, as made out of corpus.
    (3) Transitional rules--(i) Taxable years beginning before January 
1, 1970, and ending after December 31, 1969. In order for an 
organization to meet the distribution requirements of subparagraph 
(1)(i) of this paragraph for a taxable year which begins before January 
1, 1970, and ends after December 31, 1969, it must, not later than the 
15th day of the third month after the close of such taxable year, 
distribute (within the meaning of subparagraph (1)(i) of this paragraph) 
an amount equal in value to 100 percent of all contributions (other than 
contributions described in section 4942(g)(3)) which were received 
between January 1, 1970, and the last day of such taxable year. Because 
the organization is not subject to the provisions of section 4942 for 
such year, the organization need not satisfy subparagraph (1)(ii) of 
this paragraph or the phrase ``after the application of section 
4942(g)(3)'' for such year.
    (ii) Extension of period. For purposes of section 170(b)(1)(A)(vii) 
and 170(e)(1)(B)(ii), in the case of a taxable year ending in either 
1970, 1971 or 1972, the period referred to in section 170(b)(1)(E)(ii) 
for making distributions shall not expire before April 2, 1973.
    (4) Adequate records required. A taxpayer claiming a deduction under 
section 170 for a charitable contribution to a foundation described in 
subparagraph (1) of this paragraph must obtain adequate records or other 
sufficient evidence from such foundation showing that the foundation 
made the required qualifying distributions within the time prescribed. 
Such records or other evidence must be attached to the taxpayer's return 
for the taxable year for which the charitable contribution deduction is 
claimed. If necessary, an amended income tax return or claim for refund 
may be filed in accordance with Sec. 301.6402-2 and Sec. 301.6402-3 of 
this chapter (procedure and administration regulations).
    (i) Private foundation maintaining a common fund--(1) Designation by 
substantial contributors. An organization is described in section 
170(b)(1) (A)(vii) and (E)(iii) if it is a private foundation all of the 
contributions to which are pooled in a common fund and which would be 
described in section 509(a)(3) but for the right of any donor who is a 
substantial contributor or his spouse to designate annually the 
recipients, from among public charities, of the income attributable to 
the donor's contribution to the fund and to direct (by deed or by will) 
the payment, to public charities, of the corpus in the common fund 
attributable to the donor's contribution. For purposes of this 
paragraph, the private foundation is to be treated as meeting the 
requirements of section 509(a)(3) (A) and (B) even though donors to the 
foundation, or their spouses, retain the right to, and in fact do, 
designate public charities to receive income or corpus from the fund.
    (2) Distribution requirements. To qualify under subparagraph (1) of 
this paragraph, the private foundation described therein must be 
required by its governing instrument to distribute, and it must in fact 
distribute (including administrative expenses):
    (i) All of the adjusted net income (as defined in section 4942(f)) 
of the common fund to one or more public charities not later than the 
15th day of the third month after the close of the taxable year in which 
such income is realized by the fund, and
    (ii) All the corpus attributable to any donor's contribution to the 
fund to one or more public charities not later than 1 year after the 
donor's death or after the death of the donor's surviving spouse if such 
surviving spouse has the right to designate the recipients of such 
corpus.
    (3) Failure to designate. A private foundation will not fail to 
qualify under this paragraph merely because a substantial contributor or 
his spouse fails to exercise his right to designate the recipients of 
income or corpus of the fund, provided that the income and corpus 
attributable to his contribution are distributed as required by 
subparagraph (2) of this paragraph.

[[Page 105]]

    (4) Definitions. For purposes of this paragraph:
    (i) The term substantial contributor is as defined in section 
507(d)(2) and the regulations thereunder.
    (ii) The term public charity means an organization described in 
section 170(b)(1)(A) (i) through (vi). If an organization is described 
in section 170(b)(1)(A) (i) through (vi), and is also described in 
section 170(b)(1)(A)(viii), it shall be treated as a public charity for 
purposes of this paragraph.
    (iii) The term income attributable to means the income earned by the 
fund which is properly allocable to the contributed amount by any 
reasonable and consistently applied method. See, for example, Sec. 
1.642(c)-5(c).
    (iv) The term corpus attributable to means the portion of the corpus 
of the fund attributable to the contributed amount. Such portion may be 
determined by any reasonable and consistently applied method.
    (v) The term donor means any individual who makes a contribution 
(whether of cash or property) to the private foundation, whether or not 
such individual is a substantial contributor.
    (j) Section 509(a) (2) or (3) organization. An organization is 
described in section 170(b)(1)(A)(viii) if it is described in section 
509(a) (2) or (3) and the regulations thereunder.
    (k) Effective/applicability date--(1) In general. These regulations 
shall apply to taxable years beginning after December 31, 1969.
    (2) Applicability date. The regulations in paragraph (f) of this 
section shall apply to taxable years beginning on or after January 1, 
2008. For tax years beginning after December 31, 1969, and beginning 
before January 1, 2008, see Sec. 1.170A-9(e) (as contained in 26 CFR 
part 1 revised April 1, 2008).

[T.D. 7242, 38 FR 12, Jan. 3, 1973; 38 FR 3598, Feb. 8, 1973, as amended 
by T.D. 7406, 41 FR 7096, Feb. 17, 1976; T.D. 7440, 41 FR 50650, Nov. 
17, 1976; T.D. 7456, 42 FR 4436, Jan. 25, 1977; T.D. 7679, 45 FR 13452, 
Feb. 29, 1980; T.D. 8100, 51 FR 31614, Sept. 4, 1986; T.D. 8991, 67 FR 
20437, Apr. 25, 2002; T.D. 9423, 73 FR 52533, Sept. 9, 2008; T.D. 9549, 
76 FR 55750, Sept. 8, 2011]



Sec. 1.170A-10  Charitable contributions carryovers of individuals.

    (a) In general. (1) Section 170(d)(1), relating to carryover of 
charitable contributions in excess of 50 percent of contribution base, 
and section 170(b)(1)(D)(ii), relating to carryover of charitable 
contributions in excess of 30 percent of contribution base, provide for 
excess charitable contributions carryovers by individuals of charitable 
contributions to section 170(b)(1)(A) organizations described in Sec. 
1.170A-9. These carryovers shall be determined as provided in paragraphs 
(b) and (c) of this section. No excess charitable contributions 
carryover shall be allowed with respect to contributions ``for the use 
of,'' rather than ``to,'' section 170(b)(1)(A) organizations or with 
respect to contributions ``to'' or ``for the use of'' organizations 
which are not section 170(b)(1)(A) organizations. See Sec. 1.170A-
8(a)(2) for definitions of ``to'' or ``for the use of'' a charitable 
organization.
    (2) The carryover provisions apply with respect to contributions 
made during a taxable year in excess of the applicable percentage 
limitation even though the taxpayer elects under section 144 to take the 
standard deduction in that year instead of itemizing the deduction 
allowable in computing taxable income for that year.
    (3) For provisions requiring a reduction of the excess charitable 
contribution computed under paragraph (b)(1) or (c)(1) of this section 
when there is a net operating loss carryover to the taxable year, see 
paragraph (d)(1) of this section.
    (4) The provisions of section 170 (b)(1)(D)(ii) and (d)(1) and this 
section do not apply to contributions by an estate; nor do they apply to 
a trust unless the trust is a private foundation which, pursuant to 
Sec. 1.642(c)-4, is allowed a deduction under section 170 subject to 
the provisions applicable to individuals.
    (b) 50-percent charitable contributions carryover of individuals--
(1) Computation of excess of charitable contributions made in a 
contribution year. Under section 170(d)(1), subject to certain 
conditions and limitations, the excess of:
    (i) The amount of the charitable contributions made by an individual 
in a

[[Page 106]]

taxable year (hereinafter) in this paragraph referred to as the 
``contribution year'') to section 170(b)(1)(A) organizations described 
in Sec. 1.170A-9, over
    (ii) 50 percent of his contribution base, as defined in section 
170(b)(1)(F), for such contribution year, shall be treated as a 
charitable contribution paid by him to a section 170(b)(1)(A) 
organization in each of the 5 taxable years immediately succeeding the 
contribution year in order of time. However, such excess to the extent 
it consists of contributions of 30-percent capital gain property, as 
defined in Sec. 1.170A-8(d)(3), shall be subject to the rules of 
section 170(b)(1)(D)(ii) and paragraph (c) of this section in the years 
to which it is carried over. A charitable contribution made in a taxable 
year beginning before January 1, 1970, to a section 170(b)(1)(A) 
organization and carried over to a taxable year beginning after December 
31, 1969, under section 170(b)(5) (before its amendment by the Tax 
Reform Act of 1969) shall be treated in such taxable year beginning 
after December 31, 1969, as a charitable contribution of cash subject to 
the limitations of this paragraph, whether or not such carryover 
consists of contributions of 30-percent capital gain property or of 
ordinary income property described in Sec. 1.170A-4(b)(1). For purposes 
of applying this paragraph and paragraph (c) of this section, such a 
carryover from a taxable year beginning before January 1, 1970, which is 
so treated as paid to a section 170(b)(1)(A) organization in a taxable 
year beginning after December 31, 1969, shall be treated as paid to such 
an organization under section 170(d)(1) and this section. The provisions 
of this subparagraph may be illustrated by the following examples:

    Example 1. Assume that H and W (husband and wife) have a 
contribution base for 1970 of $50,000 and for 1971 of $40,000 and file a 
joint return for each year. Assume further that in 1970 they make a 
charitable contribution in cash of $26,500 to a church and $1,000 to X 
(not a section 170(b)(1)(A) organization) and in 1971 they make a 
charitable contribution in cash of $19,000 to a church and $600 to X. 
They may claim a charitable contributions deduction of $25,000 in 1970, 
and the excess of $26,500 (contribution to the church) over $25,000 (50 
percent of contribution base), or $1,500, constitutes a charitable 
contributions carryover which shall be treated as a charitable 
contribution paid by them to a section 170(b)(1)(A) organization in each 
of the 5 succeeding taxable years in order of time. No carryover is 
allowed with respect to the $1,000 contribution made to X in 1970. Since 
50 percent of their contribution base for 1971 ($20,000) exceeds the 
charitable contributions of $19,000 made by them in 1971 to section 
170(b)(1)(A) organizations (computed without regard to section 170 
(b)(1)(D)(ii) and (d)(1) and this section), the portion of the 1970 
carryover equal to such excess of $1,000 ($20,000 minus $19,000) is 
treated, pursuant to the provisions of subparagraph (2) of this 
paragraph, as paid to a section 170(b)(1)(A) organization in 1971; the 
remaining $500 constitutes an unused charitable contributions carryover. 
No deduction for 1971, and no carryover, are allowed with respect to the 
$600 contribution made to X in 1971.
    Example 2. Assume the same facts as in Example 1 except that H and W 
have a contribution base for 1971 of $42,000. Since 50 percent of their 
contribution base for 1971 ($21,000) exceeds by $2,000 the charitable 
contribution of $19,000 made by them in 1971 to the section 170(b)(1)(A) 
organization (computed without regard to section 170 (b)(1)(D)(ii) and 
(d)(1) and this section), the full amount of the 1970 carryover of 
$1,500 is treated, pursuant to the provisions of subparagraph (2) of 
this paragraph, as paid to a section 170(b)(1)(A) organization in 1971. 
They may also claim a charitable contribution of $500 ($21,000 -
$20,500[$19,000+$1,500]) with respect to the gift to X in 1971. No 
carryover is allowed with respect to the $100 ($600-$500) of the 
contribution to X which is not deductible in 1971.

    (2) Determination of amount treated as paid in taxable years 
succeeding contribution year. In applying the provisions of subparagraph 
(1) of this paragraph, the amount of the excess computed in accordance 
with the provisions of such subparagraph and paragraph (d)(1) of this 
section which is to be treated as paid in any one of the 5 taxable years 
immediately succeeding the contribution year to a section 170(b)(1)(A) 
organization shall not exceed the lesser of the amounts computed under 
subdivisions (i) to (iii), inclusive, of this subparagraph:
    (i) The amount by which 50 percent of the taxpayer's contribution 
base for such succeeding taxable year exceeds the sum of:
    (a) The charitable contributions actually made (computed without 
regard to the provisions of section 170 (b)(1)(D)(ii) and (d)(1) and 
this section)

[[Page 107]]

by the taxpayer in such succeeding taxable year to section 170(b)(1)(A) 
organizations, and
    (b) The charitable contributions, other than contributions of 30-
percent capital gain property, made to section 170(b)(1)(A) 
organizations in taxable years preceding the contribution year which, 
pursuant to the provisions of section 170(d)(1) and this section, are 
treated as having been paid to a section 170(b)(1)(A) organization in 
such succeeding year.
    (ii) In the case of the first taxable year succeeding the 
contribution year, the amount of the excess charitable contribution in 
the contribution year, computed under subparagraph (1) of this paragraph 
and paragraph (d)(1) of this section.
    (iii) In the case of the second, third, fourth, and fifth taxable 
years succeeding the contribution year, the portion of the excess 
charitable contribution in the contribution year, computed under 
subparagraph (1) of this paragraph and paragraph (d)(1) of this section, 
which has not been treated as paid to a section 170(b)(1)(A) 
organization in a year intervening between the contribution year and 
such succeeding taxable year.

For purposes of applying subdivision (i)(a) of this subparagraph, the 
amount of charitable contributions of 30-percent capital gain property 
actually made in a taxable year succeeding the contribution year shall 
be determined by first applying the 30-percent limitation of section 
170(b)(1)(D)(i) and paragraph (d) of Sec. 1.170A-8. If a taxpayer, in 
any one of the 4 taxable years succeeding a contribution year, elects 
under section 144 to take the standard deduction instead of itemizing 
the deductions allowable in computing taxable income, there shall be 
treated as paid (but not allowable as a deduction) in such standard 
deduction year the lesser of the amounts determined under subdivisions 
(i) to (iii), inclusive, of this subparagraph. The provisions of this 
subparagraph may be illustrated by the following examples:

    Example 1. Assume that B has a contribution base for 1970 of $20,000 
and for 1971 of $30,000. Assume further that in 1970 B contributed 
$12,000 in cash to a church and in 1971 he contributed $13,500 in cash 
to the church. B may claim a charitable contributions deduction of 
$10,000 in 1970, and the excess of $12,000 (contribution to the church) 
over $10,000 (50 percent of B's contribution base), or $2,000, 
constitutes a charitable contributions carryover which shall be treated 
as a charitable contribution paid by B to a section 170(b)(1)(A) 
organization in the 5 taxable years succeeding 1970 in order of time. B 
may claim a charitable contributions deduction of $15,000 in 1971. Such 
$15,000 consists of the $13,500 contribution to the church in 1971 and 
$1,500 carried over from 1970 and treated as a charitable contribution 
paid to a section 170(b)(1)(A) organization in 1971. The $1,500 
contribution treated as paid in 1971 is computed as follows:

1970 excess contributions....................................     $2,000
                                                              ==========
50 percent of B's contribution base for 1971.................    15,000
Less:
  Contributions actually made in 1971 to section      $13,500
   170(b)(1)(A) organizations.....................
  Contributions made to section 170(b)(1)(A)                0     13,500
   organizations in taxable years prior to 1970
   treated as having been paid in 1971............
                                                   ---------------------
      Balance.....................................  .........      1,500
                                                              ==========
Amount of 1970 excess treated as paid in 1971--the lesser of       1,500
 $2,000 (1970 excess contributions) or $1,500 (excess of 50
 percent of contribution base for 1971 ($15,000) over the sum
 of the section 170(b)(1)(A) contributions actually made in
 1971 ($13,500) and the section 170(b)(1)(A) contributions
 made in years prior to 1970 treated as having been paid in
 1971 ($0))..................................................
                                                              ==========
 


If the excess contributions made by B in 1970 had been $1,000 instead of 
$2,000, then, for purposes of this example, the amount of the 1970 
excess treated as paid in 1971 would be $1,000 rather than $1,500.
    Example 2. Assume the same facts as in Example 1, and, in addition, 
that B has a contribution base for 1972 of $10,000 and for 1973 of 
$20,000. Assume further with respect to 1972 that B elects under section 
144 to take the standard deduction in computing taxable income and that 
his actual contributions to section 170(b)(1)(A) organizations in that 
year are $300 in cash. Assume further with respect to 1973 that R 
itemizes his deductions, which include a $5,000 cash contribution to a 
church. B's deductions for 1972 are not increased by reason of the $500 
available as a charitable contributions carryover from 1970 (excess 
contributions made in 1970 ($2,000) less the amount of such excess 
treated as paid in 1971 ($1,500)), since B elected to take the standard 
deduction in 1972. However, for purposes of determining the amount of 
the excess charitable contributions made in 1970 which is available as a 
carryover to 1973, B is required to treat such $500 as a

[[Page 108]]

charitable contribution paid in 1972--the lesser of $500 or $4,700 (50 
percent of contribution base ($5,000) over contributions actually made 
in 1972 to section 170(b)(1)(A) organizations ($300)). Therefore, even 
though the $5,000 contribution made by B in 1973 to a church does not 
amount to 50 percent of B's contribution base for 1973 (50 percent of 
$20,000), B may claim a charitable contributions deduction of only the 
$5,000 actually paid in 1973 since the entire excess charitable 
contribution made in 1970 ($2,000) has been treated as paid in 1971 
($1,500) and 1972 ($500).
    Example 3. Assume the following factual situation for C who itemizes 
his deductions in computing taxable income for each of the years set 
forth in the example:

----------------------------------------------------------------------------------------------------------------
                                                                  1970      1971      1972      1973      1974
----------------------------------------------------------------------------------------------------------------
Contribution base.............................................   $10,000    $7,000   $15,000   $10,000    $9,000
                                                               =================================================
Contributions of cash to section 170(b)(1)(A) organizations        6,000     4,400     8,000     3,000     1,500
 (no other contributions).....................................
Allowable charitable contributions deductions computed without     5,000     3,500     7,500     3,000     1,500
 regard to carryover of contributions.........................
                                                               -------------------------------------------------
Excess contributions for taxable year to be treated as paid in     1,000       900       500         0         0
 5 succeeding taxable years...................................
----------------------------------------------------------------------------------------------------------------


Since C's contributions in 1973 and 1974 to section 170(b)(1)(A) 
organizations are less than 50 percent of his contribution base for such 
years, the excess contributions for 1970, 1971, and 1972 are treated as 
having been paid to section 170(b)(1)(A) organizations in 1973 and 1974 
as follows:

                                  1973
------------------------------------------------------------------------
                                                  Less:
                                                  Amount
                                                 treated     Available
         Contribution year             Total     as paid     charitable
                                       excess    in year   contributions
                                                 prior to    carryovers
                                                   1973
------------------------------------------------------------------------
1970...............................     $1,000          0       $1,000
1971...............................        900          0          900
1972...............................        500          0          500
                                    ------------------------------------
  Total............................  .........  .........        2,400
50 percent of B's contribution base for 1973.............       $5,000
Less: Charitable contributions made in 1973 to section           3,000
 170(b)(1)(A) organizations..............................
                                                          --------------
                                                                 2,000
                                                          ==============
Amount of excess contributions treated as paid in 1973--         2,000
 lesser of $2,400 (available carryovers to 1973) or
 $2,000 (excess of 50 percent of contribution base
 ($5,000) over contributions actually made in 1973 to
 section 170(b)(1)(A) organizations ($3,000))............
                                                          ==============
------------------------------------------------------------------------


                                  1974
------------------------------------------------------------------------
                                                  Less:
                                                  Amount
                                                 treated     Available
         Contribution year             Total     as paid     charitable
                                       excess    in year   contributions
                                                 prior to    carryovers
                                                   1974
------------------------------------------------------------------------
1970...............................     $1,000     $1,000
1971...............................        900        900
1972...............................        500        100          $40
1973...............................          0          0
                                    ------------------------------------
  Total............................  .........  .........          400
50 percent of B's contribution base for 1974.............       $4,500
Less: Charitable contributions made in 1974 to section           1,500
 170(b)(1)(A) organizations..............................
                                                          --------------
                                                                 3,000
                                                          ==============
Amount of excess contributions treated as paid in 1974--           400
 the lesser of $400 (available carryovers to 1974) or
 $3,000 (excess of 50 percent of contribution base
 ($4,500) over contributions actually made in 1974 to
 section 170(b)(1)(A) organizations ($1,500))............
                                                          ==============
------------------------------------------------------------------------

    (c) 30-percent charitable contributions carryover of individuals--
(1) Computation of excess of charitable contributions made in a 
contribution year. Under section 170(b)(1)(D)(ii), subject to certain 
conditions and limitations, the excess of:
    (i) The amount of the charitable contributions of 30-percent capital 
gain property, as defined in Sec. 1.170A-8(d)(3), made by an individual 
in a taxable year (hereinafter in this paragraph referred to as the 
``contribution year'') to section 170(b)(1)(A) organizations described 
in Sec. 1.170A-9, over
    (ii) 30 percent of his contribution base for such contribution year, 
shall, subject to section 170(b)(1)(A) and paragraph (b) of Sec. 
1.170A-8, be treated as a charitable contribution of 30-percent capital 
gain property paid by him to a section 170(b)(1)(A) organization in each 
of the 5 taxable years immediately succeeding the contribution

[[Page 109]]

year in order of time. In addition, any charitable contribution of 30-
percent capital gain property which is carried over to such years under 
section 170(d)(1) and paragraph (b) of this section shall also be 
treated as though it were a carryover of 30-percent capital gain 
property under section 170(b)(1)(D)(ii) and this paragraph. The 
provisions of this subparagraph may be illustrated by the following 
examples:

    Example 1. Assume that H and W (husband and wife) have a 
contribution base for 1970 of $50,000 and for 1971 of $40,000 and file a 
joint return for each year. Assume further that in 1970 they contribute 
$20,000 cash and $13,000 of 30-percent capital gain property to a 
church, and that in 1971 they contribute $5,000 cash and $10,000 of 30-
percent capital gain property to a church. They may claim a charitable 
contributions deduction of $25,000 in 1970 and the excess of $33,000 
(contributed to the church) over $25,000 (50 percent of contribution 
base), or $8,000, constitutes a charitable contributions carryover which 
shall be treated as a charitable contribution of 30-percent capital gain 
property paid by them to a section 170(b)(1)(A) organization in each of 
the 5 succeeding taxable years in order of time. Since 30 percent of 
their contribution base for 1971 ($12,000) exceeds the charitable 
contributions of 30-percent capital gain property ($10,000) made by them 
in 1971 to section 170(b)(1)(A) organizations (computed without regard 
to section 170 (b)(1)(D)(ii) and (d)(1) and this section), the portion 
of the 1970 carryover equal to such excess of $2,000 ($12,000--$10,000) 
is treated, pursuant to the provisions of subparagraph (2) of this 
paragraph, as paid to a section 170(b)(1)(A) organization in 1971; the 
remaining $6,000 constitutes an unused charitable contributions 
carryover in respect of 30-percent capital gain property from 1970.
    Example 2. Assume the same facts as in Example 1 except the $33,000 
of charitable contributions in 1970 are all 30-percent capital gain 
property. Since their charitable contributions in 1970 exceed 30 percent 
of their contribution base ($15,000) by $18,000 ($33,000--$15,000), they 
may claim a charitable contributions deduction of $15,000 in 1970, and 
the excess of $33,000 over $15,000, or $18,000, constitutes a charitable 
contributions carryover which shall be treated as a charitable 
contribution of 30-percent capital gain property paid by them to a 
section 170(b)(1)(A) organization in each of the 5 succeeding taxable 
years in order of time. Since they are allowed to treat only $2,000 of 
their 1970 contribution as paid in 1971, they have a remaining unused 
charitable contributions carryover of $16,000 in respect of 30-percent 
capital gain property from 1970.

    (2) Determination of amount treated as paid in taxable years 
succeeding contribution year. In applying the provisions of subparagraph 
(1) of this paragraph, the amount of the excess computed in accordance 
with the provisions of such subparagraph and paragraph (d)(1) of this 
section which is to be treated as paid in any one of the 5 taxable years 
immediately succeeding the contribution year to a section 170(b)(1)(A) 
organization shall not exceed the least of the amounts computed under 
subdivisions (i) to (iv), inclusive, of this subparagraph:
    (i) The amount by which 30 percent of the taxpayer's contribution 
base for such succeeding taxable year exceeds the sum of:
    (a) The charitable contributions of 30-percent capital gain property 
actually made (computed without regard to the provisions of section 170 
(b)(1)(D)(ii) and (d)(1) and this section) by the taxpayer in such 
succeeding taxable year to section 170(b)(1)(A) organizations, and
    (b) The charitable contributions of 30-percent capital gain property 
made to section 170(b)(1)(A) organizations in taxable years preceding 
the contribution year, which, pursuant to the provisions of section 170 
(b)(1)(D)(ii) and (d)(1) and this section, are treated as having been 
paid to a section 170(b)(1)(A) organization in such succeeding year.
    (ii) The amount by which 50 percent of the taxpayer's contribution 
base for such succeeding taxable year exceeds the sum of:
    (a) The charitable contributions actually made (computed without 
regard to the provisions of section 170 (b)(1)(D)(ii) and (d)(1) and 
this section) by the taxpayer in such succeeding taxable year to section 
170(b)(1)(A) organizations,
    (b) The charitable contributions of 30-percent capital gain property 
made to section 170(b)(1)(A) organizations in taxable years preceding 
the contribution year which, pursuant to the provisions of section 170 
(b)(1)(D)(ii) and (d)(1) and this section, are treated as having been 
paid to a section 170(b)(1)(A) organization in such succeeding year, and

[[Page 110]]

    (c) The charitable contributions, other than contributions of 30-
percent capital gain property, made to section 170(b)(1)(A) 
organizations which, pursuant to the provisions of section 170(d)(1) and 
paragraph (b) of this section, are treated as having been paid to a 
section 170(b)(1)(A) organization in such succeeding year.
    (iii) In the case of the first taxable year succeeding the 
contribution year, the amount of the excess charitable contribution of 
30-percent capital gain property in the contribution year, computed 
under subparagraph (1) of this paragraph and paragraph (d)(1) of this 
section.
    (iv) In the case of the second, third, fourth, and fifth succeeding 
taxable years succeeding the contribution year, the portion of the 
excess charitable contribution of 30-percent capital gain property in 
the contribution year (computed under subparagraph (1) of this paragraph 
and paragraph (d)(1) of this section) which has not been treated as paid 
to a section 170(b)(1)(A) organization in a year intervening between the 
contribution year and such succeeding taxable year.

For purposes of applying subdivisions (i) and (ii) of this subparagraph, 
the amount of charitable contributions of 30-percent capital gain 
property actually made in a taxable year succeeding the contribution 
year shall be determined by first applying the 30-percent limitation of 
section 170(b)(1)(D)(i) and paragraph (d) of Sec. 1.170A-8. If a 
taxpayer, in any one of the four taxable years succeeding a contribution 
year, elects under section 144 to take the standard deduction instead of 
itemizing the deductions allowable in computing taxable income, there 
shall be treated as paid (but not allowable as a deduction) in the 
standard deduction year the least of the amounts determined under 
subdivisions (i) to (iv), inclusive, of this subparagraph. The 
provisions of this subparagraph may be illustrated by the following 
example:

    Example. Assume the following factual situation for C who itemizes 
his deductions in computing taxable income for each of the years set 
forth in the example:

----------------------------------------------------------------------------------------------------------------
                                                         1970        1971        1972        1973        1974
----------------------------------------------------------------------------------------------------------------
Contribution base...................................     $10,000     $15,000     $20,000     $15,000     $33,000
                                                     -----------------------------------------------------------
Contributions of cash to section 170(b)(1)(A)              2,000       8,500           0      14,000         700
 organizations......................................
                                                     -----------------------------------------------------------
Contributions of 30-percent capital gain property to       5,000           0       7,800           0       6,400
 section 170(b)(1)(A) organizations.................
                                                     -----------------------------------------------------------
Allowable charitable contributions deductions
 (computed without regard to carryover of
 contributions) subject to limitations of:
  50 percent........................................       2,000       7,500           0       7,500         700
  30 percent........................................       3,000           0       6,000           0       6,400
                                                     -----------------------------------------------------------
    Total...........................................       5,000       7,500       6,000       7,500       7,100
----------------------------------------------------------------------------------------------------------------
Excess of contributions for taxable year to be
 treated as paid in 5 succeeding taxable years:
  Carryover of contributions of property other than            0       1,000           0       6,500
   30-percent capital gain property.................
  Carryover of contributions of 30-percent capital         2,000           0       1,800          0
   gain property....................................
----------------------------------------------------------------------------------------------------------------
C's excess contributions for 1970, 1971, 1972, and 1973 which are treated as having been paid to section
  170(b)(1)(A) organizations in 1972, 1973, and 1974 are indicated below. The portion of the excess charitable
  contribution for 1972 of 30-percent capital gain property which is not treated as paid in 1974 ($1,800-$900)
  is available as a carryover to 1975.


                                                      1971
----------------------------------------------------------------------------------------------------------------
                                                           Total excess          Less:     Available charitable
                                                     ------------------------   Amount         contributions
                                                                              treated as        carryovers
                    Contribution                                                paid in  -----------------------
                                                          50%         30%        years
                                                                               prior to       50%         30%
                                                                                 1971
----------------------------------------------------------------------------------------------------------------
1970................................................           0      $2,000           0           0      $2,000
                                                                                         =======================
50 percent of C's contribution base for 1971............................................      $7,500
30 percent of C's contribution base for 1971............................................  ..........       4,500

[[Page 111]]

 
Less: Charitable contributions actually made in 1971 to section 170(b)(1)(A)                   7,500           0
 organizations ($8,500, but not to exceed 50% of contribution base).....................
                                                                                         -----------------------
    Excess..............................................................................           0       4,500
                                                                                         =======================
The amount of excess contributions for 1970 of 30-percent capital gain property which is
 treated as paid in 1971 is the least of:
  (i) Available carryover from 1970 to 1971 of contributions of 30-percent capital gain        2,000
   property.............................................................................
  (ii) Excess of 50 percent of contribution base for 1971 ($7,500) over sum of                     0
   contributions actually made in 1971 to section 170(b)(1)(A) organizations ($7,500)...
  (iii) Excess of 30 percent of contribution base for 1971 ($4,500) over contributions         4,500  ..........
   of 30 percent capital gain property actually made in 1971 to section 170(b)(1)(A)
   organizations ($0)...................................................................
                                                                                         -----------------------
    Amount treated as paid..............................................................  ..........           0
----------------------------------------------------------------------------------------------------------------


                                                      1972
----------------------------------------------------------------------------------------------------------------
                                                           Total excess          Less:     Available charitable
                                                     ------------------------   Amount         contributions
                                                                              treated as        carryovers
                  Contribution year                                             paid in  -----------------------
                                                          50%         30%        years
                                                                               prior to       50%         30%
                                                                                 1972
----------------------------------------------------------------------------------------------------------------
1970................................................           0      $2,000           0           0      $2,000
1971................................................      $1,000           0           0      $1,000           0
                                                                                         -----------------------
                                                                                               1,000       2,000
                                                                                         =======================
50 percent of C's contribution base for 1972............................................      10,000  ..........
30 percent of C's contribution base for 1972............................................  ..........       6,000
Less: Charitable contributions actually made in 1972 to section 170(b)(1)(A)                       0       6,000
 organizations ($7,800, but not to exceed 30% of contribution base).....................
                                                                                         =======================
    Excess..............................................................................      10,000           0
                                                                                         =======================
(1) The amount of excess contributions for 1971 of property other than 30-percent
 capital gain property which is treated as paid in 1972 is the lesser of:
  (i) Available carryover from 1971 to 1972 of contributions of property other than 30-        1,000  ..........
   percent capital gain property........................................................
  (ii) Excess of 50 percent of contribution base for 1972 ($10,000) over contributions         4,000  ..........
   actually made in 1972 to section 170(b)(1)(A) organizations ($6,000).................
                                                                                         -----------------------
    Amount treated as paid..............................................................  ..........       1,000
                                                                                         =======================
(2) The amount of excess contributions for 1970 of 30-percent capital gain property
 which is treated as paid in 1972 is the least of:
  (i) Available carryover from 1970 to 1972 of contributions of 30-percent capital gain        2,000  ..........
   property.............................................................................
  (ii) Excess of 50 percent of contribution base for 1972 ($10,000) over sum of                3,000  ..........
   contributions actually made in 1972 to section 170(b)(1)(A) organizations ($6,000)
   and excess contributions for 1971 treated under item (1) above as paid in 1972
   ($1,000).............................................................................
  (iii) Excess of 30 percent of contribution base for 1972 ($6,000) over contributions             0  ..........
   of 30-percent capital gain property actually made in 1972 to section 170(b)(1)(A)
   organizations ($6,000)...............................................................
                                                                                         -----------------------
    Amount treated as paid..............................................................  ..........           0
----------------------------------------------------------------------------------------------------------------


                                                      1973
----------------------------------------------------------------------------------------------------------------
                                                           Total excess          Less:     Available charitable
                                                     ------------------------   Amount         contributions
                                                                              treated as        carryovers
                  Contribution year                                             paid in  -----------------------
                                                          50%         30%        years
                                                                               prior to       50%         30%
                                                                                 1973
----------------------------------------------------------------------------------------------------------------
1970................................................           0      $2,000           0           0      $2,000
1971................................................      $1,000           0      $1,000           0           0
1972................................................           0       1,800           0           0       1,800
                                                                                         -----------------------

[[Page 112]]

 
                                                                                                   0       3,800
                                                                                         =======================
50 percent of C's contribution base for 1973............................................      $7,500
30 percent of C's contribution base for 1973............................................  ..........       4,500
Less: Charitable contributions actually made in 1973 to section 170(b)(1)(A)                   7,500           0
 organizations ($14,000, but not to exceed 50% of contribution base)....................
                                                                                         -----------------------
    Excess..............................................................................           0       4,500
                                                                                         =======================
(1) The amount of excess contributions for 1970 of 30-percent capital gain property
 which is treated as paid in 1973 is the least of:
  (i) Available carryover from 1970 to 1973 of contributions of 30-percent capital gain        2,000  ..........
   property.............................................................................
  (ii) Excess of 50 percent of contribution base for 1973 ($7,500) over contributions              0  ..........
   actually made in 1973 to section 170(b)(1)(A) organizations ($7,500).................
  (iii) Excess of 30 percent of contribution base for 1973 ($4,500) over contributions         4,500  ..........
   of 30-percent capital gain property actually made in 1973 to section 170(b)(1)(A)
   organizations ($0)...................................................................
                                                                                         -----------------------
    Amount treated as paid..............................................................           0
                                                                                         =======================
(2) The amount of excess contributions for 1972 of 30-percent capital gain property
 which is treated as paid in 1973 is the least of:
  (i) Available carryover from 1972 to 1973 of contributions of 30-percent capital gain        1,800  ..........
   property.............................................................................
  (ii) Excess of 50 percent of contribution base for 1973 ($7,500) over contributions              0  ..........
   actually made in 1973 to section 170(b)(1)(A) organizations ($7,500).................
  (iii) Excess of 30 percent of contribution base for 1973 ($4,500) over sum of                4,500  ..........
   contributions of 30-percent capital gain property actually made in 1973 to section
   170(b)(1)(A) organizations ($0) and excess contributions for 1970 treated under item
   (1) above as paid in 1973 ($0).......................................................
                                                                                         -----------------------
    Amount treated as paid..............................................................           0  ..........
----------------------------------------------------------------------------------------------------------------


                                                      1974
----------------------------------------------------------------------------------------------------------------
                                                           Total excess          Less:     Available charitable
                                                     ------------------------   Amount         contributions
                                                                              treated as        carryovers
                  Contribution year                                             paid in  -----------------------
                                                          50%         30%        years
                                                                               prior to       50%         30%
                                                                                 1974
----------------------------------------------------------------------------------------------------------------
1970................................................           0      $2,000           0           0      $2,000
1971................................................      $1,000           0      $1,000           0           0
1972................................................           0       1,800           0           0       1,800
1973................................................       6,500           0           0      $6,500           0
                                                                                         -----------------------
                                                                                               6,500       3,800
                                                                                         =======================
50 percent of C's contribution base for 1974............................................      16,500  ..........
30 percent of C's contribution base for 1974............................................  ..........       9,900
Less: Charitable contributions actually made in 1974 to section 170(b)(1)(A)                     700       6,400
 organizations..........................................................................
                                                                                         -----------------------
    Excess..............................................................................      15,800       3,500
                                                                                         =======================
(1) The amount of excess contributions for 1973 of property other than 30-percent
 capital gain property which is treated as paid in 1974 is the lesser of:
  (i) Available carryover from 1973 to 1974 of contributions of property other than 30-        6,500  ..........
   percent capital gain property........................................................
  (ii) Excess of 50 percent of contribution base for 1974 ($16,500) over contributions         9,400  ..........
   actually made in 1974 to section 170(b)(1)(A) organizations ($7,100).................
                                                                                         -----------------------
    Amount treated as paid..............................................................  ..........       6,500
                                                                                         =======================
(2) The amount of excess contributions for 1970 of 30-percent capital gain property
 which is treated as paid in 1974 is the least of:
  (i) Available carryover from 1970 to 1974 of contributions of 30-percent capital gain       $2,000
   property.............................................................................
  (ii) Excess of 50 percent of contribution base for 1974 ($16,500) over sum of                2,900
   contributions actually made in 1974 to section 170(b)(1)(A) organizations ($7,100)
   and excess contributions for 1973 of property other than 30-percent capital gain
   property treated under item (1) above as paid in 1974 ($6,500).......................

[[Page 113]]

 
  (iii) Excess of 30 percent of contribution base for 1974 ($9,900) over contributions         3,500  ..........
   of 30-percent capital gain property actually made in 1974 to section 170(b)(1)(A)
   organizations ($6,400)...............................................................
                                                                                         -----------------------
    Amount treated as paid..............................................................  ..........      $2,000
                                                                                         =======================
(3) The amount of excess contributions for 1972 of 30-percent capital gain property
 which is treated as paid in 1974 is the least of:
  (i) Available carryover from 1972 to 1974 of contributions of 30-percent capital gain        1,800
   property.............................................................................
  (ii) Excess of 50 percent of contribution base for 1974 ($16,500) over sum of                  900
   contributions actually made in 1974 to section 170(b)(1)(A) organizations ($7,100)
   and excess contributions for 1973 and 1970 treated under items (1) and (2) above as
   paid in 1974 ($8,500)................................................................
  (iii) Excess of 30 percent of contribution base for 1974 ($9,900) over sum of                1,500  ..........
   contributions of 30-percent capital gain property actually made in 1974 to section
   170(b)(1)(A) organizations ($6,400) and excess contributions for 1970 of 30-percent
   capital gain property treated under item (2) above as paid in 1974 ($2,000)..........
                                                                                         -----------------------
    Amount treated as paid..............................................................  ..........         900
----------------------------------------------------------------------------------------------------------------

    (d) Adjustments--(1) Effect of net operating loss carryovers on 
carryover of excess contributions. An individual having a net operating 
loss carryover from a prior taxable year which is available as a 
deduction in a contribution year must apply the special rule of section 
170(d)(1)(B) and this subparagraph in computing the excess described in 
paragraph (b)(1) or (c)(1) of this section for such contribution year. 
In determining the amount of excess charitable contributions that shall 
be treated as paid in each of the 5 taxable years succeeding the 
contribution year, the excess charitable contributions described in 
paragraph (b)(1) or (c)(1) of this section must be reduced by the amount 
by which such excess reduces taxable income (for purposes of determining 
the portion of a net operating loss which shall be carried to taxable 
years succeeding the contribution year under the second sentence of 
section 172(b)(2)) and increases the net operating loss which is carried 
to a succeeding taxable year. In reducing taxable income under the 
second sentence of section 172(b)(2), an individual who has made 
charitable contributions in the contribution year to both section 
170(b)(1)(A) organizations, as defined in Sec. 1.170A-9, and to 
organizations which are not section 170(b)(1)(A) organizations must 
first deduct contributions made to the section 170(b)(1)(A) 
organizations from his adjusted gross income computed without regard to 
his net operating loss deduction before any of the contributions made to 
organizations which are not section 170(b)(1)(A) organizations may be 
deducted from such adjusted gross income. Thus, if the excess of the 
contributions made in the contribution year to section 170(b)(1)(A) 
organizations over the amount deductible in such contribution year is 
utilized to reduce taxable income (under the provisions of section 
172(b)(2)) for such year, thereby serving to increase the amount of the 
net operating loss carryover to a succeeding year or years, no part of 
the excess charitable contributions made in such contribution year shall 
be treated as paid in any of the 5 immediately succeeding taxable years. 
If only a portion of the excess charitable contributions is so used, the 
excess charitable contributions shall be reduced only to that extent. 
The provisions of this subparagraph may be illustrated by the following 
examples:

    Example 1. B, an individual, reports his income on the calendar year 
basis and for the year 1970 has adjusted gross income (computed without 
regard to any net operating loss deduction) of $50,000. During 1970 he 
made charitable contributions of cash in the amount of $30,000 all of 
which were to section 170(b)(1)(A) organizations. B has a net operating 
loss carryover from 1969 of $50,000. In the absence of the net operating 
loss deduction B would have been allowed a deduction for charitable 
contributions of $25,000. After

[[Page 114]]

the application of the net operating loss deduction, B is allowed no 
deduction for charitable contributions, and there is (before applying 
the special rule of section 170(d)(1)(B) and this subparagraph) a 
tentative excess charitable contribution of $30,000. For purposes of 
determining the net operating loss which remains to be carried over to 
1971, B computes his taxable income for 1970 under section 172(b)(2) by 
deducting the $25,000 charitable contribution. After the $50,000 net 
operating loss carryover is applied against the $25,000 of taxable 
income for 1970 (computed in accordance with section 172(b)(2), assuming 
no deductions other than the charitable contributions deduction are 
applicable in making such computation), there remains a $25,000 net 
operating loss carryover to 1971. Since the application of the net 
operating loss carryover of $50,000 from 1969 reduces the 1970 adjusted 
gross income (for purposes of determining 1970 tax liability) to zero, 
no part of the $25,000 of charitable contributions in that year is 
deductible under section 170(b)(1). However, in determining the amount 
of the excess charitable contributions which shall be treated as paid in 
taxable years 1971, 1972, 1973, 1974, and 1975, the $30,000 must be 
reduced to $5,000 by the portion of the excess charitable contributions 
($25,000) which was used to reduce taxable income for 1970 (as computed 
for purposes of the second sentence of section 172(b)(2)) and which 
thereby served to increase the net operating loss carryover to 1971 from 
zero to $25,000.
    Example 2. Assume the same facts as in Example 1, except that B's 
total charitable contributions of $30,000 in cash made during 1970 
consisted of $25,000 to section 170(b)(1)(A) organizations and $5,000 to 
organizations other than section 170(b)(1)(A) organizations. Under these 
facts there is a tentative excess charitable contribution of $25,000, 
rather than $30,000 as in Example 1. For purposes of determining the net 
operating loss which remains to be carried over to 1971, B computes his 
taxable income for 1970 under section 172(b)(2) by deducting the $25,000 
of charitable contributions made to section 170(b)(1)(A) organizations. 
Since the excess charitable contribution of $25,000 determined in 
accordance with paragraph (b)(1) of this section was used to reduce 
taxable income for 1970 (as computed for purposes of the second sentence 
of section 172(b)(2)) and thereby served to increase the net operating 
loss carryover to 1971 from zero to $25,000, no part of such excess 
charitable contributions made in the contribution year shall be treated 
as paid in any of the five immediately succeeding taxable years. No 
carryover is allowed with respect to the $5,000 of charitable 
contributions made in 1970 to organizations other than section 
170(b)(1)(A) organizations.
    Example 3. Assume the same facts as in Example 1, except that B's 
total contributions of $30,000 made during 1970 were of 30-percent 
capital gain property. Under these facts there is a tentative excess 
charitable contribution of $30,000. For purposes of determining the net 
operating loss which remains to be carried over to 1971, B computes his 
taxable income for 1970 under section 172(b)(2)(B) by deducting the 
$15,000 (30% of $50,000) contribution of 30-percent capital gain 
property which would have been deductible in 1970 absent the net 
operating loss deduction. Since $15,000 of the excess charitable 
contribution of $30,000 determined in accordance with paragraph (c)(1) 
of this section was used to reduce taxable income for 1970 (as computed 
for purposes of the second sentence of section 172(b)(2)) and thereby 
served to increase the net operating loss carryover to 1971 from zero to 
$15,000, only $15,000 ($30,000--$15,000) of such excess shall be treated 
as paid in taxable years 1971, 1972, 1973, 1974, and 1975.

    (2) Effect of net operating loss carryback to contribution year. The 
amount of the excess contribution for a contribution year computed as 
provided in paragraph (b)(1) or (c)(1) of this section and subparagraph 
(1) of this paragraph shall not be increased because a net operating 
loss carryback is available as a deduction in the contribution year. 
Thus, for example, assuming that in 1970 there is an excess contribution 
of $50,000 (determined as provided in paragraph (b)(1) of this section) 
which is to be carried to the 5 succeeding taxable years and that in 
1973 the taxpayer has a net operating loss which may be carried back to 
1970, the excess contribution of $50,000 for 1970 is not increased by 
reason of the fact that the adjusted gross income for 1970 (on which 
such excess contribution was based) is subsequently decreased by the 
carryback of the net operating loss from 1973. In addition, in 
determining under the provisions of section 172(b)(2) the amount of the 
net operating loss for any year subsequent to the contribution year 
which is a carryback or carryover to taxable years succeeding the 
contribution year, the amount of contributions made to section 
170(b)(1)(A) organizations shall be limited to the amount of such 
contributions which did not exceed 50 percent or, in the case of 30-
percent capital gain property, 30 percent of the donor's contribution 
base, computed without regard to any of the modifications referred to in 
section 172(d), for

[[Page 115]]

the contribution year. Thus, for example, assume that the taxpayer has a 
net operating loss in 1973 which is carried back to 1970 and in turn to 
1971 and that he has made charitable contributions in 1970 to section 
170(b)(1)(A) organizations. In determining the maximum amount of such 
charitable contributions which may be deducted in 1970 for purposes of 
determining the taxable income for 1970 which is deducted under section 
172(b)(2) from the 1973 loss in order to ascertain the amount of such 
loss which is carried back to 1971, the 50-percent limitation of section 
170(b)(1)(A) is based upon the adjusted gross income for 1970 computed 
without taking into account the net operating loss carryback from 1973 
and without making any of the modifications specified in section 172(d).
    (3) Effect of net operating loss carryback to taxable years 
succeeding the contribution year. The amount of the charitable 
contribution from a preceding taxable year which is treated as paid, as 
provided in paragraph (b)(2) or (c)(2) of this section, in a current 
taxable year (hereinafter referred to in this subparagraph as the 
``deduction year'') shall not be reduced because a net operating loss 
carryback is available as a deduction in the deduction year. In 
addition, in determining under the provisions of section 172(b)(2) the 
amount of the net operating loss for any taxable year subsequent to the 
deduction year which is a carryback or carryover to taxable years 
succeeding the deduction year, the amount of contributions made to 
section 170(b)(1)(A) organizations in the deduction year shall be 
limited to the amount of such contributions, which were actually made in 
such year and those which were treated as paid in such year, which did 
not exceed 50 percent or, in the case of 30-percent capital gain 
property, 30 percent of the donor's contribution base, computed without 
regard to any of the modifications referred to in section 172(d), for 
the deduction year.
    (4) Husband and wife filing joint returns--(i) Change from joint 
return to separate returns. If a husband and wife:
    (a) Make a joint return for a contribution year and compute an 
excess charitable contribution for such year in accordance with the 
provisions of paragraph (b)(1) or (c)(1) of this section and 
subparagraph (1) of this paragraph, and
    (b) Make separate returns for one or more of the 5 taxable years 
immediately succeeding such contribution year, any excess charitable 
contribution for the contribution year which is unused at the beginning 
of the first such taxable year for which separate returns are filed 
shall be allocated between the husband and wife. For purposes of the 
allocation, a computation shall be made of the amount of any excess 
charitable contribution which each spouse would have computed in 
accordance with paragraph (b)(1) or (c)(1) of this section and 
subparagraph (1) of this paragraph if separate returns (rather than a 
joint return) had been filed for the contribution year. The portion of 
the total unused excess charitable contribution for the contribution 
year allocated to each spouse shall be an amount which bears the same 
ratio to such unused excess charitable contribution as such spouse's 
excess contribution, based on the separate return computation, bears to 
the total excess contributions of both spouses, based on the separate 
return computation. To the extent that a portion of the amount allocated 
to either spouse in accordance with the foregoing provisions of this 
subdivision is not treated in accordance with the provisions of 
paragraph (b)(2) or (c)(2) of this section as a charitable contribution 
paid to a section 170(b)(1)(A) organization in the taxable year in which 
a separate return or separate returns are filed, each spouse shall for 
purposes of paragraph (b)(2) or (c)(2) of this section treat his 
respective unused portion as the available charitable contributions 
carryover to the next succeeding taxable year in which the joint excess 
charitable contribution may be treated as paid in accordance with 
paragraph (b)(1) or (c)(1) of this section. If such husband and wife 
make a joint return in one of the 5 taxable years immediately succeeding 
the contribution year with respect to which a joint excess charitable 
contribution is computed and following such first taxable year for which 
such husband and wife filed a separate return, the amounts allocated to 
each

[[Page 116]]

spouse in accordance with this subdivision for such first year reduced 
by the portion of such amounts treated as paid to a section 170(b)(1)(A) 
organization in such first year and in any taxable year intervening 
between such first year and the succeeding taxable year in which the 
joint return is filed shall be aggregated for purposes of determining 
the amount of the available charitable contributions carryover to such 
succeeding taxable year. The provisions of this subdivision may be 
illustrated by the following example:

    Example. (a) H and W file joint returns for 1970, 1971, and 1972, 
and in 1973 they file separate returns. In each such year H and W 
itemize their deductions in computing taxable income. Assume the 
following factual situation with respect to H and W for 1970:

                                  1970
------------------------------------------------------------------------
                                                                  Joint
                                                H         W      return
------------------------------------------------------------------------
Contribution base.........................   $50,000   $40,000   $90,000
                                           =============================
Contributions of cash to section              37,000    28,000    65,000
 170(b)(1)(A) organizations (no other
 contributions)...........................
Allowable charitable contributions            25,000    20,000    45,000
 deductions...............................
                                           -----------------------------
Excess contributions for taxable year to      12,000     8,000    20,000
 be treated as paid in 5 succeeding
 taxable years............................
------------------------------------------------------------------------

    (b) The joint excess charitable contribution of $20,000 is to be 
treated as having been paid to a section 170(b)(1)(A) organization in 
the 5 succeeding taxable years. Assume that in 1971 the portion of such 
excess treated as paid by H and W is $3,000, and that in 1972 the 
portion of such excess treated as paid is $7,000. Thus, the unused 
portion of the excess charitable contribution made in the contribution 
year is $10,000 ($20,000 less $3,000 [amount treated as paid in 1971] 
and $7,000 [amount treated as paid in 1972]). Since H and W file 
separate returns in 1973, $6,000 of such $10,000 is allocable to H, and 
$4,000 is allocable to W. Such allocation is computed as follows:

$12,000 (excess charitable contributions made by H (based on separate 
          return computation) in 1970)/$20,000 (total excess charitable 
          contributions made by H and W (based on separate return 
          computation) in 1970)x$10,000=$6,000
$8,000 (excess charitable contributions made by W (based on separate 
          return computation) in 1970)/$20,000 (total excess charitable 
          contributions made by H and W (based on separate return 
          computation) in 1970)x$10,000=$4,000

    (c) In 1973 H has a contribution base of $70,000, and he contributes 
$14,000 in cash to a section 170(b)(1)(A) organization. In 1973 W has a 
contribution base of $50,000, and she contributes $10,000 in cash to a 
section 170(b)(1)(A) organization. Accordingly, H may claim a charitable 
contributions deduction of $20,000 in 1973, and W may claim a charitable 
contributions deduction of $14,000 in 1973. H's $20,000 deduction 
consists of the $14,000 contribution made to the section 170(b)(1)(A) 
organization in 1973 and the $6,000 carried over from 1970 and treated 
as a charitable contribution paid by him to a section 170(b)(1)(A) 
organization in 1973. W's $14,000 deduction consists of the $10,000 
contribution made to a section 170(b)(1)(A) organization in 1973 and the 
$4,000 carried over from 1970 and treated as a charitable contribution 
paid by her to a section 170(b)(1)(A) organization in 1973.
    (d) The $6,000 contribution treated as paid in 1973 by H, and the 
$4,000 contribution treated as paid in 1973 by W, are computed as 
follows:

------------------------------------------------------------------------
                                                          H         W
------------------------------------------------------------------------
Available charitable contribution carryover (see        $6,000    $4,000
 computations in (b))...............................
                                                     ===================
50 percent of contribution base.....................    35,000    25,000
Contributions of cash made in 1973 to section           14,000    10,000
 170(b)(1)(A) organizations (no other contributions)
                                                     -------------------
                                                        21,000    15,000
Amount of excess contributions treated as paid in       $6,000  ........
 1973: The lesser of $6,000 (available carryover of
 H to 1973) or $21,000 (excess of 50 percent of
 contribution base ($35,000) over contributions
 actually made in 1973 to section 170(b)(1)(A)
 organizations ($14,000))...........................
                                                     ==========
  The lesser of $4,000 (available carryover of W to   ........    $4,000
   1973) or $15,000 (excess of 50 percent of
   contribution base ($25,000) over contributions
   actually made in 1973 to section 170(b)(1)(A)
   organizations ($10,000)).........................
------------------------------------------------------------------------

    (e) It is assumed that H and W made no contributions of 30-percent 
capital gain property during these years. If they had made such 
contributions, there would have been similar adjustments based on 30 
percent of the contribution base.

    (ii) Change from separate returns to joint return. If in the case of 
a husband and wife:

[[Page 117]]

    (a) Either or both of the spouses make a separate return for a 
contribution year and compute an excess charitable contribution for such 
year in accordance with the provisions of paragraph (b)(1) or (c)(1) of 
this section and subparagraph (1) of this paragraph, and
    (b) Such husband and wife make a joint return for one or more of the 
taxable years succeeding such contribution year, the excess charitable 
contribution of the husband and wife for the contribution year which is 
unused at the beginning of the first taxable year for which a joint 
return is filed shall be aggregated for purposes of determining the 
portion of such unused charitable contribution which shall be treated in 
accordance with paragraph (b)(2) or (c)(2) of this section as a 
charitable contribution paid to a section 170(b)(1)(A) organization. The 
provisions of this subdivision also apply in the case of two single 
individuals who are subsequently married and file a joint return. A 
remarried taxpayer who filed a joint return with a former spouse in a 
contribution year with respect to which an excess charitable 
contribution was computed and who in any one of the 5 taxable years 
succeeding such contribution year files a joint return with his or her 
present spouse shall treat the unused portion of such excess charitable 
contribution allocated to him or her in accordance with subdivision (i) 
of this subparagraph in the same manner as the unused portion of an 
excess charitable contribution computed in a contribution year in which 
he filed a separate return, for purposes of determining the amount which 
in accordance with paragraph (b)(2) or (c)(2) of this section shall be 
treated as paid to an organization specified in section 170(b)(1)(A) in 
such succeeding year.
    (iii) Unused excess charitable contribution of deceased spouse. In 
case of the death of one spouse, any unused portion of an excess 
charitable contribution which is allocable in accordance with 
subdivision (i) of this subparagraph to such spouse shall not be treated 
as paid in the taxable year in which such death occurs or in any 
subsequent taxable year except on a separate return made for the 
deceased spouse by a fiduciary for the taxable year which ends with the 
date of death or on a joint return for the taxable year in which such 
death occurs. The application of this subdivision may be illustrated by 
the following example:

    Example. Assume the same facts as in the example in subdivision (i) 
of this subparagraph except that H dies in 1972 and W files a separate 
return for 1973. W made a joint return for herself and H for 1972. In 
the example, the unused excess charitable contribution as of January 1, 
1973, was $10,000, $6,000 of which was allocable to H and $4,000 to W. 
No portion of the $6,000 allocable to H may be treated as paid by W or 
any other person in 1973 or any subsequent year.

    (e) Information required in support of a deduction of an amount 
carried over and treated as paid. If, in a taxable year, a deduction is 
claimed in respect of an excess charitable contribution which, in 
accordance with the provisions of paragraph (b)(2) or (c)(2) of this 
section, is treated (in whole or in part) as paid in such taxable year, 
the taxpayer shall attach to his return a statement showing:
    (1) The contribution year (or years) in which the excess charitable 
contributions were made,
    (2) The excess charitable contributions made in each contribution 
year, and the amount of such excess charitable contributions consisting 
of 30-percent capital gain property,
    (3) The portion of such excess, or of each such excess, treated as 
paid in accordance with paragraph (b)(2) or (c)(2) of this section in 
any taxable year intervening between the contribution year and the 
taxable year for which the return is made, and the portion of such 
excess which consists of 30-percent capital gain property.
    (4) Whether or not an election under section 170(b)(1)(D)(iii) has 
been made which affects any of such excess contributions of 30-percent 
capital gain property, and
    (5) Such other information as the return or the instructions 
relating thereto may require.
    (f) Effective date. This section applies only to contributions paid 
in taxable years beginning after December 31, 1969. For purposes of 
applying section 170(d)(1) with respect to contributions paid in a 
taxable year beginning before January 1, 1970, subsection (b)(1)(D),

[[Page 118]]

subsection (e), and paragraphs (1), (2), (3), and (4) of subsection (f) 
of section 170 shall not apply. See section 201(g)(1)(D) of the Tax 
Reform Act of 1969 (83 Stat. 564).

[T.D. 7207, 37 FR 20787, Oct. 4, 1972; 37 FR 22982, Oct. 27, 1972, as 
amended by T.D. 7340, 40 FR 1240, Jan. 7, 1975]



Sec. 1.170A-11  Limitation on, and carryover of, contributions by 
corporations.

    (a) In general. The deduction by a corporation in any taxable year 
for charitable contributions, as defined in section 170(c), is limited 
to 5 percent of its taxable income for the year, computed without regard 
to:
    (1) The deduction under section 170 for charitable contributions,
    (2) The special deductions for corporations allowed under Part VIII 
(except section 248), Subchapter B, Chapter 1 of the Code,
    (3) Any net operating loss carryback to the taxable year under 
section 172, and
    (4) Any capital loss carryback to the taxable year under section 
1212(a)(1).

A charitable contribution by a corporation to a trust, chest, fund, or 
foundation described in section 170(c)(2) is deductible under section 
170 only if the contribution is to be used in the United States or its 
possessions exclusively for religious, charitable, scientific, literary, 
or educational purposes or for the prevention of cruelty to children or 
animals. For the purposes of section 170, amounts excluded from the 
gross income of a corporation under section 114, relating to sports 
programs conducted for the American National Red Cross, are not to be 
considered contributions or gifts.
    (b) Election by corporations on an accrual method. (1) A corporation 
reporting its taxable income on an accrual method may elect to have a 
charitable contribution treated as paid during the taxable year, if 
payment is actually made on or before the 15th day of the third month 
following the close of such year and if, during such year, its board of 
directors authorizes the charitable contribution. If by reason of such 
an election a charitable contribution (other than a contribution of a 
letter, memorandum, or property similar to a letter or memorandum) paid 
in a taxable year beginning after December 31, 1969, is treated as paid 
during a taxable year beginning before January 1, 1970, the provisions 
of Sec. 1.170A-4 shall not be applied to reduce the amount of such 
contribution. However, see section 170(e) before its amendment by the 
Tax Reform Act of 1969.
    (2) The election must be made at the time the return for the taxable 
year is filed, by reporting the contribution on the return. There shall 
be attached to the return when filed a written declaration stating that 
the resolution authorizing the contribution was adopted by the board of 
directors during the taxable year. For taxable years beginning before 
January 1, 2003, the declaration shall be verified by a statement signed 
by an officer authorized to sign the return that it is made under 
penalties of perjury, and there shall also be attached to the return 
when filed a copy of the resolution of the board of directors 
authorizing the contribution. For taxable years beginning after December 
31, 2002, the declaration must also include the date of the resolution, 
the declaration shall be verified by signing the return, and a copy of 
the resolution of the board of directors authorizing the contribution is 
a record that the taxpayer must retain and keep available for inspection 
in the manner required by Sec. 1.6001-1(e).
    (c) Charitable contributions carryover of corporations--(1) In 
general. Subject to the reduction provided in subparagraph (2) of this 
paragraph, any charitable contributions made by a corporation in a 
taxable year (hereinafter in this paragraph referred to as the 
``contribution year'') in excess of the amount deductible in such 
contribution year under the 5-percent limitation of section 170(b)(2) 
are deductible in each of the five succeeding taxable years in order of 
time, but only to the extent of the lesser of the following amounts:
    (i) The excess of the maximum amount deductible for such succeeding 
taxable year under the 5-percent limitation of section 170(b)(2) over 
the sum of the charitable contributions made in that year plus the 
aggregate of the excess contributions which were made in taxable years 
before the contribution

[[Page 119]]

year and which are deductible under this paragraph in such succeeding 
taxable year; or
    (ii) In the case of the first taxable year succeeding the 
contribution year, the amount of the excess charitable contributions, 
and in the case of the second, third, fourth, and fifth taxable years 
succeeding the contribution year, the portion of the excess charitable 
contributions not deductible under this subparagraph for any taxable 
year intervening between the contribution year and such succeeding 
taxable year.

This paragraph applies to excess charitable contributions by a 
corporation, whether or not such contributions are made to, or for the 
use of, the donee organization and whether or not such organization is a 
section 170(b)(1)(A) organization, as defined in Sec. 1.170A-9. For 
purposes of applying this paragraph, a charitable contribution made in a 
taxable year beginning before January 1, 1970, which is carried over to 
taxable year beginning after December 31, 1969, under section 170(b)(2) 
(before its amendment by the Tax Reform Act of 1969) and is deductible 
in such taxable year beginning after December 31, 1969, shall be treated 
as deductible under section 170(d)(1) and this paragraph. The 
application of this subparagraph may be illustrated by the following 
example:

    Example. A corporation which reports its income on the calendar year 
basis makes a charitable contribution of $20,000 in 1970. Its taxable 
income (determined without regard to any deduction for charitable 
contributions) for 1970 is $100,000. Accordingly, the charitable 
contributions deduction for that year is limited to $5,000 (5 percent of 
$100,000). The excess charitable contribution not deductible in 1970 
($15,000) is a carryover to 1971. The corporation has taxable income 
(determined without regard to any deduction for charitable 
contributions) of $150,000 in 1971 and makes a charitable contribution 
of $5,000 in that year. For 1971 the corporation may deduct as a 
charitable contribution the amount of $7,500 (5 percent of $150,000). 
This amount consists of the $5,000 contribution made in 1971 and of the 
$2,500 carried over from 1970. The remaining $12,500 carried over from 
1970 and not allowable as a deduction for 1971 because of the 5-percent 
limitation may be carried over to 1972. The corporation has taxable 
income (determined without regard to any deduction for charitable 
contributions) of $200,000 in 1972 and makes a charitable contribution 
of $5,000 in that year. For 1972 the corporation may deduct the amount 
of $10,000 (5 percent of $200,000). This amount consists of the $5,000 
contributed in 1972, and $5,000 of the $12,500 carried over from 1970 to 
1972. The remaining $7,500 of the carryover from 1970 is available for 
purposes of computing the charitable contributions carryover from 1970 
to 1973, 1974, and 1975.

    (2) Effect of net operating loss carryovers on carryover of excess 
contributions. A corporation having a net operating loss carryover from 
any taxable year must apply the special rule of section 170(d)(2)(B) and 
this subparagraph before computing under subparagraph (1) of this 
paragraph the excess charitable contributions carryover from any taxable 
year. In determining the amount of excess charitable contributions that 
may be deducted in accordance with subparagraph (1) of this paragraph in 
taxable years succeeding the contribution year, the excess of the 
charitable contributions made by a corporation in the contributions year 
over the amount deductible in such year must be reduced by the amount by 
which such excess reduces taxable income for purposes of determining the 
net operating loss carryover under the second sentence of section 
172(b)(2)) and increases a net operating loss carryover to a succeeding 
taxable year. Thus, if the excess of the contributions made in a taxable 
year over the amount deductible in the taxable year is utilized to 
reduce taxable income (under the provisions of section 172(b)(2)) for 
such year, thereby serving to increase the amount of the net operating 
loss carryover to a succeeding taxable year or years, no charitable 
contributions carryover will be allowed. If only a portion of the excess 
charitable contributions is so used, the charitable contributions 
carryover will be reduced only to that extent. The application of this 
subparagraph may be illustrated by the following example:

    Example. A corporation, which reports its income on the calendar 
year basis, makes a charitable contribution of $10,000 during 1971. Its 
taxable income for 1971 is $80,000 (computed without regard to any net 
operating loss deduction and computed in accordance with section 
170(b)(2) without regard to any deduction for charitable contributions). 
The corporation has a net operating loss carryover from 1970 of $80,000. 
In the absence of

[[Page 120]]

the net operating loss deduction the corporation would have been allowed 
a deduction for charitable contributions of $4,000 (5 percent of 
$80,000). After the application of the net operating loss deduction the 
corporation is allowed no deduction for charitable contributions, and 
there is a tentative charitable contribution carryover from 1971 of 
$10,000. For purposes of determining the net operating loss carryover to 
1972 the corporation computes its taxable income for 1971 under section 
172(b)(2) by deducting the $4,000 charitable contribution. Thus, after 
the $80,000 net operating loss carryover is applied against the $76,000 
of taxable income for 1971 (computed in accordance with section 
172(b)(2)), there remains a $4,000 net operating loss carryover to 1972. 
Since the application of the net operating loss carryover of $80,000 
from 1970 reduces the taxable income for 1971 to zero, no part of the 
$10,000 of charitable contributions in that year is deductible under 
section 170(b)(2). However, in determining the amount of the allowable 
charitable contributions carryover from 1971 to 1972, 1973, 1974, 1975, 
and 1976, the $10,000 must be reduced by the portion thereof ($4,000) 
which was used to reduce taxable income for 1971 (as computed for 
purposes of the second sentence of section 172(b)(2)) and which thereby 
served to increase the net operating loss carryover from 1970 to 1972 
from zero to $4,000.

    (3) Effect of net operating loss carryback to contribution year. The 
amount of the excess contribution for a contribution year computed as 
provided in subparagraph (1) of this paragraph shall not be increased 
because a net operating loss carryback is available as a deduction in 
the contribution year. In addition, in determining under the provisions 
of section 172(b)(2) the amount of the net operating loss for any year 
subsequent to the contribution year which is a carryback or carryover to 
taxable years succeeding the contribution year, the amount of any 
charitable contributions shall be limited to the amount of such 
contributions which did not exceed 5 percent of the donor's taxable 
income, computed as provided in paragraph (a) of this section and 
without regard to any of the modifications referred to in section 
172(d), for the contribution year. For illustrations see paragraph 
(d)(2) of Sec. 1.170A-10.
    (4) Effect of net operating loss carryback to taxable year 
succeeding the contribution year. The amount of the charitable 
contribution from a preceding taxable year which is deductible (as 
provided in this paragraph) in a current taxable year (hereinafter 
referred to in this subparagraph as the ``deduction year'') shall not be 
reduced because a net operating loss carryback is available as a 
deduction in the deduction year. In addition, in determining under the 
provisions of section 172(b)(2) the amount of the net operating loss for 
any taxable year subsequent to the deduction year which is a carryback 
or a carryover to taxable years succeeding the deduction year, the 
amount of contributions made in the deduction year shall be limited to 
the amount of such contributions, which were actually made in such year 
and those which were deductible in such year under section 170(d)(2), 
which did not exceed 5 percent of the donor's taxable income, computed 
as provided in paragraph (a) of this section and without regard to any 
of the modifications referred to in section 172(d), for the deduction 
year.
    (5) Year contribution is made. For purposes of this paragraph, 
contributions made by a corporation in a contribution year include 
contributions which, in accordance with the provisions of section 
170(a)(2) and paragraph (b) of this section, are considered as paid 
during such contribution year.
    (d) Effective date. This section applies only to contributions paid 
in taxable years beginning after December 31, 1969. For purposes of 
applying section 170(d)(2) with respect to contributions paid, or 
treated under section 170(a)(2) as paid, in a taxable year beginning 
before January 1, 1970, subsection (e), and paragraphs (1), (2), (3), 
and (4) of subsection (f) of section 170 shall not apply. See section 
201(g)(1)(D) of the Tax Reform Act of 1969 (83 Stat. 564).

[T.D. 7207, 37 FR 20793, Oct. 4, 1972, as amended by T.D. 7807, 47 FR 
4512, Feb. 1, 1982; T.D. 9100, 68 FR 70704, Dec. 19, 2003; T.D. 9300, 71 
FR 71041, Dec. 8, 2006]



Sec. 1.170A-12  Valuation of a remainder interest in real property 
for contributions made after July 31, 1969.

    (a) In general. (1) Section 170(f)(4) provides that, in determining 
the value of a remainder interest in real property for purposes of 
section 170, depreciation and depletion of such property shall be

[[Page 121]]

taken into account. Depreciation shall be computed by the straight line 
method and depletion shall be computed by the cost depletion method. 
Section 170(f)(4) and this section apply only in the case of a 
contribution, not made in trust, of a remainder interest in real 
property made after July 31, 1969, for which a deduction is otherwise 
allowable under section 170.
    (2) In the case of the contribution of a remainder interest in real 
property consisting of a combination of both depreciable and 
nondepreciable property, or of both depletable and nondepletable 
property, and allocation of the fair market value of the property at the 
time of the contribution shall be made between the depreciable and 
nondepreciable property, or the depletable and nondepletable property, 
and depreciation or depletion shall be taken into account only with 
respect to the depreciable or depletable property. The expected value at 
the end of its ``estimated useful life'' (as defined in paragraph (d) of 
this section) of that part of the remainder interest consisting of 
depreciable property shall be considered to be nondepreciable property 
for purposes of the required allocation. In the case of the contribution 
of a remainder interest in stock in a cooperative housing corporation 
(as defined in section 216(b)(1)), an allocation of the fair market 
value of the stock at the time of the contribution shall be made to 
reflect the respective values of the depreciable and nondepreciable 
property underlying such stock, and depreciation on the depreciable part 
shall be taken into account for purposes of valuing the remainder 
interest in such stock.
    (3) If the remainder interest that has been contributed follows only 
one life, the value of the remainder interest shall be computed under 
the rules contained in paragraph (b) of this section. If the remainder 
interest that has been contributed follows a term for years, the value 
of the remainder interest shall be computed under the rules contained in 
paragraph (c) of this section. If the remainder interest that has been 
contributed is dependent upon the continuation or the termination of 
more than one life or upon a term certain concurrent with one or more 
lives, the provisions of paragraph (e) of this section shall apply. In 
every case where it is provided in this section that the rules contained 
in Sec. 25.2512-5 (or, for certain prior periods, Sec. 25.2512-5A) of 
this chapter (Gift Tax Regulations) apply, such rules shall apply 
notwithstanding the general effective date for such rules contained in 
paragraph (a) of such section. Except as provided in Sec. 1.7520-3(b) 
of this chapter, for transfers of remainder interests after April 30, 
1989, the present value of the remainder interest is determined under 
Sec. 25.2512-5 of this chapter by use of the interest rate component on 
the date the interest is transferred unless an election is made under 
section 7520 and Sec. 1.7520-2 of this chapter to compute the present 
value of the interest transferred by use of the interest rate component 
for either of the 2 months preceding the month in which the interest is 
transferred. In some cases, a reduction in the amount of a charitable 
contribution of a remainder interest, after the computation of its value 
under section 170(f)(4) and this section, may be required. See section 
170(e) and Sec. 1.170A-4.
    (b) Valuation of a remainder interest following only one life--(1) 
General rule. The value of a remainder interest in real property 
following only one life is determined under the rules provided in Sec. 
20.2031-7 (or for certain prior periods, Sec. 20.2031-7A) of this 
chapter (Estate Tax Regulations), using the interest rate and life 
contingencies prescribed for the date of the gift. See, however, Sec. 
1.7520-3(b) (relating to exceptions to the use of prescribed tables 
under certain circumstances). However, if any part of the real property 
is subject to exhaustion, wear and tear, or obsolescence, the special 
factor determined under paragraph (b)(2) of this section shall be used 
in valuing the remainder interest in that part. Further, if any part of 
the property is subject to depletion of its natural resources, such 
depletion is taken into account in determining the value of the 
remainder interest.
    (2) Computation of depreciation factor. If the valuation of the 
remainder interest in depreciable property is dependent upon the 
continuation of one life, a special factor must be used. The factor 
determined under this paragraph (b)(2)

[[Page 122]]

is carried to the fifth decimal place. The special factor is to be 
computed on the basis of the interest rate and life contingencies 
prescribed in Sec. 20.2031-7 of this chapter (or for periods before May 
1, 2009, Sec. 20.2031-7A) and on the assumption that the property 
depreciates on a straight-line basis over its estimated useful life. For 
transfers for which the valuation date is on or after May 1, 2009, 
special factors for determining the present value of a remainder 
interest following one life and an example describing the computation 
are contained in Internal Revenue Service Publication 1459, ``Actuarial 
Valuations Version 3C'' (2009). This publication is available, at no 
charge, electronically via the IRS Internet site at http://www.irs.gov. 
For transfers for which the valuation date is after April 30, 1999, and 
before May 1, 2009, special factors for determining the present value of 
a remainder interest following one life and an example describing the 
computation are contained in Internal Revenue Service Publication 1459, 
``Actuarial Values, Book Gimel,'' (7-99). For transfers for which the 
valuation date is after April 30, 1989, and before May 1, 1999, special 
factors for determining the present value of a remainder interest 
following one life and an example describing the computation are 
contained in Internal Revenue Service Publication 1459, ``Actuarial 
Values, Gamma Volume,'' (8-89). These publications are no longer 
available for purchase from the Superintendent of Documents, United 
States Government Printing Office. However, they may be obtained by 
requesting a copy from: CC:PA:LPD:PR (IRS Publication 1459), room 5205, 
Internal Revenue Service, P.O.Box 7604, Ben Franklin Station, 
Washington, DC 20044. See, however, Sec. 1.7520-3(b) (relating to 
exceptions to the use of prescribed tables under certain circumstances). 
Otherwise, in the case of the valuation of a remainder interest 
following one life, the special factor may be obtained through use of 
the following formula:
[GRAPHIC] [TIFF OMITTED] TR10AU11.000

Where:

n = the estimated number of years of useful life,
i = the applicable interest rate under section 7520 of the Internal 
          Revenue Code,
v = 1 divided by the sum of 1 plus the applicable interest rate under 
          section 7520 of the Internal Revenue Code,
x = the age of the life tenant, and
lx = number of persons living at age x as set forth in Table 2000CM of 
          Sec. 20.2031-7 of this chapter (or, for periods before May 1, 
          2009, the tables set forth under Sec. 20.2031-7A).
    (3) The following example illustrates the provisions of this 
paragraph (b):

    Example. A, who is 62, donates to Y University a remainder interest 
in a personal residence, consisting of a house and land, subject to a 
reserved life estate in A. At the time of the gift, the land has a value 
of $30,000 and the house has a value of $100,000 with an estimated 
useful life of 45 years, at the end of which period the value of the 
house is expected to be $20,000. The portion of the property considered 
to be depreciable is $80,000 (the value of the house ($100,000) less its 
expected value at the end of 45 years ($20,000)). The portion of the 
property considered to be nondepreciable is $50,000 (the value of the 
land at the time of the gift ($30,000) plus the expected value of the 
house at the end of 45 years ($20,000)). At the time of the gift, the 
interest rate prescribed under section 7520 is 8.4 percent. Based on an 
interest rate of 8.4 percent, the remainder factor for $1.00 prescribed 
in Sec. 20.2031-7(d) for a person age 62 is 0.26534. The value of the 
nondepreciable remainder interest is $13,267.00 (0.26534 times $50,000). 
The value of the depreciable remainder interest is $15,053.60 (0.18817, 
computed under the formula described in paragraph (b)(2) of this 
section, times $80,000). Therefore, the value of the remainder interest 
is $28,320.60.

    (c) Valuation of a remainder interest following a term for years. 
The value of a remainder interest in real property

[[Page 123]]

following a term for years shall be determined under the rules provided 
in Sec. 25.2512-5 (or, for certain prior periods, Sec. 25.2512-5A) of 
this chapter (Gift Tax Regulations) using Table B provided in Sec. 
20.2031-7(d)(6) of this chapter. However, if any part of the real 
property is subject to exhaustion, wear and tear, or obsolescence, in 
valuing the remainder interest in that part the value of such part is 
adjusted by subtracting from the value of such part the amount 
determined by multiplying such value by a fraction, the numerator of 
which is the number of years in the term or, if less, the estimated 
useful life of the property, and the denominator of which is the 
estimated useful life of the property. The resultant figure is the value 
of the property to be used in Sec. 25.2512-5 (or, for certain prior 
periods, Sec. 25.2512-5A) of this chapter (Gift Tax Regulations). 
Further, if any part of the property is subject to depletion of its 
natural resources, such depletion shall be taken into account in 
determining the value of the remainder interest. The provisions of this 
paragraph as it relates to depreciation are illustrated by the following 
example:

    Example. In 1972, B donates to Z University a remainder interest in 
his personal residence, consisting of a house and land, subject to a 20 
year term interest provided for his sister. At such time the house has a 
value of $60,000, and an expected useful life of 45 years, at the end of 
which time it is expected to have a value of $10,000, and the land has a 
value of $8,000. The value of the portion of the property considered to 
be depreciable is $50,000 (the value of the house ($60,000) less its 
expected value at the end of 45 years ($10,000)), and this is multiplied 
by the fraction 20/45. The product, $22,222.22, is subtracted from 
$68,000, the value of the entire property, and the balance, $45,777.78, 
is multiplied by the factor .311805 (see Sec. 25.2512-5A(c)). The 
result, $14,273.74, is the value of the remainder interest in the 
property.

    (d) Definition of estimated useful life. For the purposes of this 
section, the determination of the estimated useful life of depreciable 
property shall take account of the expected use of such property during 
the period of the life estate or term for years. The term ``estimated 
useful life'' means the estimated period (beginning with the date of the 
contribution) over which such property may reasonably be expected to be 
useful for such expected use. This period shall be determined by 
reference to the experience based on any prior use of the property for 
such purposes if such prior experience is adequate. If such prior 
experience is inadequate or if the property has not been previously used 
for such purposes, the estimated useful life shall be determined by 
reference to the general experience of persons normally holding similar 
property for such expected use, taking into account present conditions 
and probable future developments. The estimated useful life of such 
depreciable property is not limited to the period of the life estate or 
term for years preceding the remainder interest. In determining the 
expected use and the estimated useful life of the property, 
consideration is to be given to the provisions of the governing 
instrument creating the life estate or term for years or applicable 
local law, if any, relating to use, preservation, and maintenance of the 
property during the life estate or term for years. In arriving at the 
estimated useful life of the property, estimates, if available, of 
engineers or other persons skilled in estimating the useful life of 
similar property may be taken into account. At the option of the 
taxpayer, the estimated useful life of property contributed after 
December 31, 1970, for purposes of this section, shall be an asset 
depreciation period selected by the taxpayer that is within the 
permissible asset depreciation range for the relevant asset guideline 
class established pursuant to Sec. 1.167(a)-11(b) (4)(ii). For purposes 
of the preceding sentence, such period, range, and class shall be those 
which are in effect at the time that the contribution of the remainder 
interest was made. At the option of the taxpayer, in the case of 
property contributed before January 1, 1971, the estimated useful life, 
for purposes of this section, shall be the guideline life provided in 
Revenue Procedure 62-21 for the relevant asset guideline class.
    (e) Valuation of a remainder interest following more than one life 
or a term certain concurrent with one or more lives. (1)(i) If the 
valuation of the remainder interest in the real property is dependent 
upon the continuation or the termination of more than one life or upon a 
term certain concurrent with one or

[[Page 124]]

more lives, a special factor must be used.
    (ii) The special factor is to be computed on the basis of--
    (A) Interest at the rate prescribed under Sec. 25.2512-5 (or, for 
certain prior periods, Sec. 25.2512-5A) of this chapter, compounded 
annually;
    (B) Life contingencies determined from the values that are set forth 
in the mortality table in Sec. 20.2031-7 (or, for certain prior 
periods, Sec. 20.2031-7A) of this chapter; and
    (C) If depreciation is involved, the assumption that the property 
depreciates on a straight-line basis over its estimated useful life.
    (iii) If any part of the property is subject to depletion of its 
natural resources, such depletion must be taken into account in 
determining the value of the remainder interest.
    (2) In the case of the valuation of a remainder interest following 
two lives, the special factor may be obtained through use of the 
following formula:
[GRAPHIC] [TIFF OMITTED] TR10JN94.001

Where:

n=the estimated number of years of useful life,
i=the applicable interest rate under section 7520 of the Internal 
          Revenue Code,
v=1 divided by the sum of 1 plus the applicable interest rate under 
          section 7520 of the Internal Revenue Code,
x and y=the ages of the life tenants, and
lx and ly=the number of persons living at ages x and y as set forth in 
          Table 2000CM in Sec. 20.2031-7 (or, for prior periods, in 
          Sec. 20.2031-7A) of this chapter.

    (3) Notwithstanding that the taxpayer may be able to compute the 
special factor in certain cases under paragraph (2), if a special factor 
is required in the case of an actual contribution, the Commissioner will 
furnish the factor to the donor upon request. The request must be 
accompanied by a statement of the sex and date of birth of each person 
the duration of whose life may affect the value of the remainder 
interest, copies of the relevant instruments, and, if depreciation is 
involved, a statement of the estimated useful life of the depreciable 
property. However, since remainder interests in that part of any 
property which is depletable cannot be valued on a purely actuarial 
basis, special factors will not be furnished with respect to such part. 
Requests should be forwarded to the Commissioner of Internal Revenue, 
Attention: OP:E:EP:A:1, Washington, DC 20224.
    (f) Effective/applicability date. This section applies to 
contributions made after July 31, 1969, except that paragraphs (b)(2) 
and (b)(3) apply to all contributions made on or after May 1, 2009.

[T.D. 7370, 40 FR 34337, Aug. 15, 1975, as amended by T.D. 7955, 49 FR 
19975, May 11, 1984; T.D. 8540, 59 FR 30102, 30104, June 10, 1994; T.D. 
8819, 64 FR 23228, Apr. 30, 1999; T.D. 8886, 65 FR 36909, 36943, June 
12, 2000; T.D. 9448, 74 FR 21439, 21518, May 7, 2009; 74 FR 27079, June 
8, 2009; T.D. 9540, 76 FR 49571, 49612, Aug. 10, 2011]



Sec. 1.170A-13  Recordkeeping and return requirements for deductions 
for charitable contributions.

    (a) Charitable contributions of money made in taxable years 
beginning after December 31, 1982--(1) In general. If a taxpayer makes a 
charitable contribution of money in a taxable year beginning after 
December 31, 1982, the taxpayer shall maintain for each contribution one 
of the following:
    (i) A cancelled check.
    (ii) A receipt from the donee charitable organization showing the 
name of the donee, the date of the contribution, and the amount of the 
contribution. A letter or other communication from the donee charitable 
organization acknowledging receipt of a contribution and showing the 
date and amount of the contribution constitutes a receipt for purposes 
of this paragraph (a).

[[Page 125]]

    (iii) In the absence of a canceled check or receipt from the donee 
charitable organization, other reliable written records showing the name 
of the donee, the date of the contribution, and the amount of the 
contribution.
    (2) Special rules--(i) Reliability of records. The reliability of 
the written records described in paragraph (a)(1)(iii) of this section 
is to be determined on the basis of all of the facts and circumstances 
of a particular case. In all events, however, the burden shall be on the 
taxpayer to establish reliability. Factors indicating that the written 
records are reliable include, but are not limited to:
    (A) The contemporaneous nature of the writing evidencing the 
contribution.
    (B) The regularity of the taxpayer's recordkeeping procedures. For 
example, a contemporaneous diary entry stating the amount and date of 
the donation and the name of the donee charitable organization made by a 
taxpayer who regularly makes such diary entries would generally be 
considered reliable.
    (C) In the case of a contribution of a small amount, the existence 
of any written or other evidence from the donee charitable organization 
evidencing receipt of a donation that would not otherwise constitute a 
receipt under paragraph (a)(1)(ii) of this section (including an emblem, 
button, or other token traditionally associated with a charitable 
organization and regularly given by the organization to persons making 
cash donations).
    (ii) Information stated in income tax return. The information 
required by paragraph (a)(1)(iii) of this section shall be stated in the 
taxpayer's income tax return if required by the return form or its 
instructions.
    (3) Taxpayer option to apply paragraph (d)(1) to pre-1985 
contribution. See paragraph (d)(1) of this section with regard to 
contributions of money made on or before December 31, 1984.
    (b) Charitable contributions of property other than money made in 
taxable years beginning after December 31, 1982--(1) In general. Except 
in the case of certain charitable contributions of property made after 
December 31, 1984, to which paragraph (c) of this section applies, any 
taxpayer who makes a charitable contribution of property other than 
money in a taxable year beginning after December 31, 1982, shall 
maintain for each contribution a receipt from the donee showing the 
following information:
    (i) The name of the donee.
    (ii) The date and location of the contribution.
    (iii) A description of the property in detail reasonably sufficient 
under the circumstances. Although the fair market value of the property 
is one of the circumstances to be taken into account in determining the 
amount of detail to be included on the receipt, such value need not be 
stated on the receipt.

A letter or other written communication from the donee acknowledging 
receipt of the contribution, showing the date of the contribution, and 
containing the required description of the property contributed 
constitutes a receipt for purposes of this paragraph. A receipt is not 
required if the contribution is made in circumstances where it is 
impractical to obtain a receipt (e.g., by depositing property at a 
charity's unattended drop site). In such cases, however, the taxpayer 
shall maintain reliable written records with respect to each item of 
donated property that include the information required by paragraph 
(b)(2)(ii) of this section.
    (2) Special rules--(i) Reliability of records. The rules described 
in paragraph (a)(2)(i) of this section also apply to this paragraph (b) 
for determining the reliability of the written records described in 
paragraph (b)(1) of this section
    (ii) Content of records. The written records described in paragraph 
(b)(1) of this section shall include the following information and such 
information shall be stated in the taxpayers income tax return if 
required by the return form or its instructions:
    (A) The name and address of the donee organization to which the 
contribution was made.
    (B) The date and location of the contribution.
    (C) A description of the property in detail reasonable under the 
circumstances (including the value of the property), and, in the case of 
securities, the name of the issuer, the type of

[[Page 126]]

security, and whether or not such security is regularly traded on a 
stock exchange or in an over-the-counter market.
    (D) The fair market value of the property at the time the 
contribution was made, the method utilized in determining the fair 
market value, and, if the valuation was determined by appraisal, a copy 
of the signed report of the appraiser.
    (E) In the case of property to which section 170(e) applies, the 
cost or other basis, adjusted as provided by section 1016, the reduction 
by reason of section 170(e)(1) in the amount of the charitable 
contribution otherwise taken into account, and the manner in which such 
reduction was determined. A taxpayer who elects under paragraph (d)(2) 
of Sec. 1.170A-8 to apply section 170(e)(1) to contributions and 
carryovers of 30 percent capital gain property shall maintain a written 
record indicating the years for which the election was made and showing 
the contributions in the current year and carryovers from preceding 
years to which it applies. For the definition of the term ``30-percent 
capital gain property,'' see paragraph (d)(3) of Sec. 1.170A-8.
    (F) If less than the entire interest in the property is contributed 
during the taxable year, the total amount claimed as a deduction for the 
taxable year due to the contribution of the property, and the amount 
claimed as a deduction in any prior year or years for contributions of 
other interests in such property, the name and address of each 
organization to which any such contribution was made, the place where 
any such property which is tangible property is located or kept, and the 
name of any person, other than the organization to which the property 
giving rise to the deduction was contributed, having actual possession 
of the property.
    (G) The terms of any agreement or understanding entered into by or 
on behalf of the taxpayer which relates to the use, sale, or other 
disposition of the property contributed, including for example, the 
terms of any agreement or understanding which:
    (1) Restricts temporarily or permanently the donee's right to use or 
dispose of the donated property,
    (2) Reserves to, or confers upon, anyone (other than the donee 
organization or an organization participating with the donee 
organization in cooperative fundraising) any right to the income from 
the donated property or to the possession of the property, including the 
right to vote donated securities, to acquire the property by purchase or 
otherwise, or to designate the person having such income, possession, or 
right to acquire, or
    (3) Earmarks donated property for a particular use.
    (3) Deductions in excess of $500 claimed for a charitable 
contribution of property other than money--(i) In general. In addition 
to the information required under paragraph (b)(2)(ii) of this section, 
if a taxpayer makes a charitable contribution of property other than 
money in a taxable year beginning after December 31, 1982, and claims a 
deduction in excess of $500 in respect of the contribution of such item, 
the taxpayer shall maintain written records that include the following 
information with respect to such item of donated property, and shall 
state such information in his or her income tax return if required by 
the return form or its instructions:
    (A) The manner of acquisition, as for example by purchase, gift 
bequest, inheritance, or exchange, and the approximate date of 
acquisition of the property by the taxpayer or, if the property was 
created, produced, or manufactured by or for the taxpayer, the 
approximate date the property was substantially completed.
    (B) The cost or other basis, adjusted as provided by section 1016, 
of property, other than publicly traded securities, held by the taxpayer 
for a period of less than 12 months (6 months for property contributed 
in taxable years beginning after December 31, 1982, and on or before 
June 6, 1988, immediately preceding the date on which the contribution 
was made and, when the information is available, of property, other than 
publicly traded securities, held for a period of 12 months or more (6 
months or more for property contributed in taxable years beginning after 
December 31, 1982, and on or before June 6, 1988, preceding the date on 
which the contribution was made.

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    (ii) Information on acquisition date or cost basis not available. If 
the return form or its instructions require the taxpayer to provide 
information on either the acquisition date of the property or the cost 
basis as described in paragraph (b)(3)(i) (A) and (B), respectively, of 
this section, and the taxpayer has reasonable cause for not being able 
to provide such information, the taxpayer shall attach an explanatory 
statement to the return. If a taxpayer has reasonable cause for not 
being able to provide such information, the taxpayer shall not be 
disallowed a charitable contribution deduction under section 170 for 
failure to comply with paragraph (b)(3)(i) (A) and (B) of the section.
    (4) Taxpayer option to apply paragraph (d) (1) and (2) to pre-1985 
contributions. See paragraph (d) (1) and (2) of this section with regard 
to contributions of property made on or before December 31, 1984.
    (c) Deductions in excess of $5,000 for certain charitable 
contributions of property made after December 31, 1984--(1) General 
Rule--(i) In general. This paragraph applies to any charitable 
contribution made after December 31, 1984, by an individual, closely 
held corporation, personal service corporation, partnership, or S 
corporation of an item of property (other than money and publicly traded 
securities to which Sec. 1.170A-13(c)(7)(xi)(B) does not apply if the 
amount claimed or reported as a deduction under section 170 with respect 
to such item exceeds $5,000. This paragraph also applies to charitable 
contributions by C corporations (as defined in section 1361(a)(2) of the 
Code) to the extent described in paragraph (c)(2)(ii) of this section. 
No deduction under section 170 shall be allowed with respect to a 
charitable contribution to which this paragraph applies unless the 
substantiation requirements described in paragraph (c)(2) of this 
section are met. For purposes of this paragraph (c), the amount claimed 
or reported as a deduction for an item of property is the aggregate 
amount claimed or reported as a deduction for a charitable contribution 
under section 170 for such items of property and all similar items of 
property (as defined in paragraph (c)(7)(iii) of this section) by the 
same donor for the same taxable year (whether or not donated to the same 
donee).
    (ii) Special rule for property to which section 170(e) (3) or (4) 
applies. For purposes of this paragraph (c), in computing the amount 
claimed or reported as a deduction for donated property to which section 
170(e) (3) or (4) applies (pertaining to certain contributions of 
inventory and scientific equipment) there shall be taken into account 
only the amount claimed or reported as a deduction in excess of the 
amount which would have been taken into account for tax purposes by the 
donor as costs of goods sold if the donor had sold the contributed 
property to the donee. For example, assume that a donor makes a 
contribution from inventory of clothing for the care of the needy to 
which section 170(e)(3) applies. The cost of the property to the donor 
was $5,000, and, pursuant to section 170(e)(3)(B), the donor claims a 
charitable contribution deduction of $8,000 with respect to the 
property. Therefore, $3,000 ($8,000-$5,000) is the amount taken into 
account for purposes of determining whether the $5,000 threshold of this 
paragraph (c)(1) is met.
    (2) Substantiation requirements--(i) In general. Except as provided 
in paragraph (c)(2)(ii) of this section, a donor who claims or reports a 
deduction with respect to a charitable contribution to which this 
paragraph (c) applies must comply with the following three requirements:
    (A) Obtain a qualified appraisal (as defined in paragraph (c) (3) of 
this section) for such property contributed. If the contributed property 
is a partial interest, the appraisal shall be of the partial interest.
    (B) Attach a fully completed appraisal summary (as defined in 
paragraph (c) (4) of this section) to the tax return (or, in the case of 
a donor that is a partnership or S corporation, the information return) 
on which the deduction for the contribution is first claimed (or 
reported) by the donor.
    (C) Maintain records containing the information required by 
paragraph (b) (2) (ii) of this section.

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    (ii) Special rules for certain nonpublicly traded stock, certain 
publicly traded securities, and contributions by certain C corporations. 
(A) In cases described in paragraph (c)(2)(ii)(B) of this section, a 
qualified appraisal is not required, and only a partially completed 
appraisal summary form (as described in paragraph (c)(4)(iv)(A) of this 
section) is required to be attached to the tax or information return 
specified in paragraph (c)(2)(i)(B) of this section. However, in all 
cases donors must maintain records containing the information required 
by paragraph (b)(2)(ii) of this section.
    (B) This paragraph (c)(2)(ii) applies in each of the following 
cases:
    (1) The contribution of nonpublicly traded stock, if the amount 
claimed or reported as a deduction for the charitable contribution of 
such stock is greater than $5,000 but does not exceed $10,000;
    (2) The contribution of a security to which paragraph (c)(7)(xi)(B) 
of this section applies; and
    (3) The contribution of an item of property or of similar items of 
property described in paragraph (c)(1) of this section made after June 
6, 1988, by a C corporation (as defined in section 1361(a)(2) of the 
Code), other than a closely held corporation or a personal service 
corporation.
    (3) Qualified appraisal--(i) In general. For purposes of this 
paragraph (c), the term ``qualified appraisal'' means an appraisal 
document that--
    (A) Relates to an appraisal that is made not earlier than 60 days 
prior to the date of contribution of the appraised property nor later 
than the date specified in paragraph (c)(3)(iv)(B) of this section;
    (B) Is prepared, signed, and dated by a qualified appraiser (within 
the meaning of paragraph (c)(5) of this section);
    (C) Includes the information required by paragraph (c)(3)(ii) of 
this section; and
    (D) Does not involve an appraisal fee prohibited by paragraph (c)(6) 
of this section.
    (ii) Information included in qualified appraisal. A qualified 
appraisal shall include the following information:
    (A) A description of the property in sufficient detail for a person 
who is not generally familiar with the type of property to ascertain 
that the property that was appraised is the property that was (or will 
be) contributed;
    (B) In the case of tangible property, the physical condition of the 
property;
    (C) The date (or expected date) of contribution to the donee;
    (D) The terms of any agreement or understanding entered into (or 
expected to be entered into) by or on behalf of the donor or donee that 
relates to the use, sale, or other disposition of the property 
contributed, including, for example, the terms of any agreement or 
understanding that--
    (1) Restricts temporarily or permanently a donee's right to use or 
dispose of the donated property,
    (2) Reserves to, or confers upon, anyone (other than a donee 
organization or an organization participating with a donee organization 
in cooperative fundraising) any right to the income from the contributed 
property or to the possession of the property, including the right to 
vote donated securities, to acquire the property by purchase or 
otherwise, or to designate the person having such income, possession, or 
right to acquire, or
    (3) Earmarks donated property for a particular use;
    (E) The name, address, and (if a taxpayer identification number is 
otherwise required by section 6109 and the regulations thereunder) the 
identifying number of the qualified appraiser; and, if the qualified 
appraiser is acting in his or her capacity as a partner in a 
partnership, an employee of any person (whether an individual, 
corporation, or partnerships), or an independent contractor engaged by a 
person other than the donor, the name, address, and taxpayer 
identification number (if a number is otherwise required by section 6109 
and the regulations thereunder) of the partnership or the person who 
employs or engages the qualified appraiser;
    (F) The qualifications of the qualified appraiser who signs the 
appraisal, including the appraiser's background, experience, education, 
and membership, if any, in professional appraisal associations;
    (G) A statement that the appraisal was prepared for income tax 
purposes;

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    (H) The date (or dates) on which the property was appraised;
    (I) The appraised fair market value (within the meaning of Sec. 
1.170A-1 (c)(2)) of the property on the date (or expected date) of 
contribution;
    (J) The method of valuation used to determine the fair market value, 
such as the income approach, the market-data approach, and the 
replacement-cost-less-depreciation approach; and
    (K) The specific basis for the valuation, such as specific 
comparable sales transactions or statistical sampling, including a 
justification for using sampling and an explanation of the sampling 
procedure employed.
    (iii) Effect of signature of the qualified appraiser. Any appraiser 
who falsely or fraudulently overstates the value of the contributed 
property referred to in a qualified appraisal or appraisal summary (as 
defined in paragraphs (c) (3) and (4), respectively, of this section) 
that the appraiser has signed may be subject to a civil penalty under 
section 6701 for aiding and abetting an understatement of tax liability 
and, moreover, may have appraisals disregarded pursuant to 31 U.S.C. 
330(c).
    (iv) Special rules--(A) Number of qualified appraisals. For purposes 
of paragraph (c)(2)(i)(A) of this section, a separate qualified 
appraisal is required for each item of property that is not included in 
a group of similar items of property. See paragraph (c)(7)(iii) of this 
section for the definition of similar items of property. Only one 
qualified appraisal is required for a group of similar items of property 
contributed in the same taxable year of the donor, although a donor may 
obtain separate qualified appraisals for each item of property. A 
qualified appraisal prepared with respect to a group of similar items of 
property shall provide all the information required by paragraph 
(c)(3)(ii) of this section for each item of similar property, except 
that the appraiser may select any items whose aggregate value is 
appraised at $100 or less and provide a group description of such items.
    (B) Time of receipt of qualified appraisal. The qualified appraisal 
must be received by the donor before the due date (including extensions) 
of the return on which a deduction is first claimed (or reported in the 
case of a donor that is a partnership or S corporation) under section 
170 with respect to the donated property, or, in the case of a deduction 
first claimed (or reported) on an amended return, the date on which the 
return is filed.
    (C) Retention of qualified appraisal. The donor must retain the 
qualified appraisal in the donor's records for so long as it may be 
relevant in the administration of any internal revenue law.
    (D) Appraisal disregarded pursuant to 31 U.S.C. 330(c). If an 
appraisal is disregarded pursuant to 31 U.S.C. 330(c) it shall have no 
probative effect as to the value of the appraised property. Such 
appraisal will, however, otherwise constitute a ``qualified appraisal'' 
for purposes of this paragraph (c) if the appraisal summary includes the 
declaration described in paragraph (c)(4)(ii)(L)(2) and the taxpayer had 
no knowledge that such declaration was false as of the time described in 
paragraph (c)(4)(i)(B) of this section.
    (4) Appraisal summary--(i) In general. For purposes of this 
paragraph (c), except as provided in paragraph (c)(4)(iv)(A) of this 
section, the term appraisal summary means a summary of a qualified 
appraisal that--
    (A) Is made on the form prescribed by the Internal Revenue Service;
    (B) Is signed and dated (as described in paragraph (c)(4)(iii) of 
this section) by the donee (or presented to the donee for signature in 
cases described in paragraph (c)(4)(iv)(C)(2) of this section);
    (C) Is signed and dated by the qualified appraiser (within the 
meaning of paragraph (c)(5) of this section) who prepared the qualified 
appraisal (within the meaning of paragraph (c)(3) of this section); and
    (D) Includes the information required by paragraph (c)(4)(ii) of 
this section.
    (ii) Information included in an appraisal summary. An appraisal 
summary shall include the following information:
    (A) The name and taxpayer identification number of the donor (social 
security number if the donor is an individual or employer identification 
number if the donor is a partnership or corporation);

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    (B) A description of the property in sufficient detail for a person 
who is not generally familiar with the type of property to ascertain 
that the property that was appraised is the property that was 
contributed;
    (C) In the case of tangible property, a brief summary of the overall 
physical condition of the property at the time of the contribution;
    (D) The manner of acquisition (e.g., purchase, exchange, gift, or 
bequest) and the date of acquisition of the property by the donor, or, 
if the property was created, produced, or manufactured by or for the 
donor, a statment to that effect and the approximate date the property 
was substantially completed;
    (E) The cost or other basis of the property adjusted as provided by 
section 1016;
    (F) The name, address, and taxpayer identification number of the 
donee;
    (G) The date the donee received the property;
    (H) For charitable contributions made after June 6, 1988, a 
statement explaining whether or not the charitable contribution was made 
by means of a bargain sale and the amount of any consideration received 
from the donee for the contribution;
    (I) The name, address, and (if a taxpayer identification number is 
otherwise required by section 6109 and the regulations thereunder) the 
identifying number of the qualified appraiser who signs the appraisal 
summary and of other persons as required by paragraph (c)(3)(ii)(E) of 
this section;
    (J) The appraised fair market value of the property on the date of 
contribution;
    (K) The declaration by the appraiser described in paragraph 
(c)(5)(i) of this section;
    (L) A declaration by the appraiser stating that--
    (1) The fee charged for the appraisal is not of a type prohibited by 
paragraph (c)(6) of this section; and
    (2) Appraisals prepared by the appraiser are not being disregarded 
pursuant to 31 U.S.C. 330(c) on the date the appraisal summary is signed 
by the appraiser; and
    (M) Such other information as may be specified by the form.
    (iii) Signature of the original donee. The person who signs the 
appraisal summary for the donee shall be an official authorized to sign 
the tax or information returns of the donee, or a person specifically 
authorized to sign appraisal summaries by an official authorized to sign 
the tax or information returns of such done. In the case of a donee that 
is a governmental unit, the person who signs the appraisal summary for 
such donee shall be the official authorized by such donee to sign 
appraisal summaries. The signature of the donee on the appraisal summary 
does not represent concurrence in the appraised value of the contributed 
property. Rather, it represents acknowledgment of receipt of the 
property described in the appraisal summary on the date specified in the 
appraisal summary and that the donee understands the information 
reporting requirements imposed by section 6050L and Sec. 1.6050L-1. In 
general, Sec. 1.6050L-1 requires the donee to file an information 
return with the Internal Revenue Service in the event the donee sells, 
exchanges, consumes, or otherwise disposes of the property (or any 
portion thereof) described in the appraisal summary within 2 years after 
the date of the donor's contribution of such property.
    (iv) Special rules--(A) Content of appraisal summary required in 
certain cases. With respect to contributions of nonpublicly traded stock 
described in paragraph (c)(2)(ii)(B)(1) of this section, contributions 
of securities described in paragraph (c)(7)(xi)(B) of this section, and 
contributions by C corporations described in paragraph (c)(2)(ii)(B)(3) 
of this section, the term appraisal summary means a document that--
    (1) Complies with the requirements of paragraph (c)(4)(i) (A) and 
(B) of this section,
    (2) Includes the information required by paragraph (c)(4)(ii) (A) 
through (H) of this section,
    (3) Includes the amount claimed or reported as a charitable 
contribution deduction, and

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    (4) In the case of securities described in paragraph (c)(7)(xi)(B) 
of this section, also includes the pertinent average trading price (as 
described in paragraph (c)(7)(xi)(B)(2)(iii) of this section).
    (B) Number of appraisal summaries. A separate appraisal summary for 
each item of property described in paragraph (c)(1) of this section must 
be attached to the donor's return. If, during the donor's taxable year, 
the donor contributes similar items of property described in paragraph 
(c)(1) of this section to more than one donee, the donor shall attach to 
the donor's return a separate appraisal summary for each donee. See 
paragraph (c)(7)(iii) of this section for the definition of similar 
items of property. If, however, during the donor's taxable year, a donor 
contributes similar items of property described in paragraph (c)(1) of 
this section to the same donee, the donor may attach to the donor's 
return a single appraisal summary with respect to all similar items of 
property contributed to the same donee. Such an appraisal summary shall 
provide all the information required by paragraph (c)(4)(ii) of this 
section for each item of property, except that the appraiser may select 
any items whose aggregate value is appraised at $100 or less and provide 
a group description for such items.
    (C) Manner of acquisition, cost basis and donee's signature. (1) If 
a taxpayer has reasonable cause for being unable to provide the 
information required by paragraph (c)(4)(ii) (D) and (E) of this section 
(relating to the manner of acquisition and basis of the contributed 
property), an appropriate explanation should be attached to the 
appraisal summary. The taxpayer's deduction will not be disallowed 
simply because of the inability (for reasonable cause) to provide these 
items of information.
    (2) In rare and unusual circumstances in which it is impossible for 
the taxpayer to obtain the signature of the donee on the appraisal 
summary as required by paragraph (c)(4)(i)(B) of this section, the 
taxpayer's deduction will not be disallowed for that reason provided 
that the taxpayer attaches a statement to the appraisal summary 
explaining, in detail, why it was not possible to obtain the donee's 
signature. For example, if the donee ceases to exist as an entity 
subsequent to the date of the contribution and prior to the date when 
the appraisal summary must be signed, and the donor acted reasonably in 
not obtaining the donee's signature at the time of the contribution, 
relief under this paragraph (c)(4)(iv)(C)(2) would generally be 
appropriate.
    (D) Information excluded from certain appraisal summaries. The 
information required by paragraph (c)(4)(i)(C), paragraph (c)(4)(ii) 
(D), (E), (H) through (M), and paragraph (c)(4)(iv)(A)(3), and the 
average trading price referred to in paragraph (c)(4)(iv)(A)(4) of this 
section do not have to be included on the appraisal summary at the time 
it is signed by the donee or a copy is provided to the donee pursuant to 
paragraph (c)(4)(iv)(E) of this section.
    (E) Statement to be furnished by donors to donees. Every donor who 
presents an appraisal summary to a donee for signature after June 6, 
1988, in order to comply with paragraph (c)(4)(i)(B) of this section 
shall furnish a copy of the appraisal summary to such donee.
    (F) Appraisal summary required to be provided to partners and S 
corporation shareholders. If the donor is a partnership or S 
corporation, the donor shall provide a copy of the appraisal summary to 
every partner or shareholder, respectively, who receives an allocation 
of a charitable contribution deduction under section 170 with respect to 
the property described in the appraisal summary.
    (G) Partners and S corporation shareholders. A partner of a 
partnership or shareholder of an S corporation who receives an 
allocation of a deduction under section 170 for a charitable 
contribution of property to which this paragraph (c) applies must attach 
a copy of the partnership's or S corporation's appraisal summary to the 
tax return on which the deduction for the contribution is first claimed. 
If such appraisal summary is not attached, the partner's or 
shareholder's deduction shall not be allowed except as provided for in 
paragraph (c)(4)(iv)(H) of this section.
    (H) Failure to attach appraisal summary. In the event that a donor 
fails to

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attach to the donor's return an appraisal summary as required by 
paragraph (c)(2)(i)(B) of this section, the Internal Revenue Service may 
request that the donor submit the appraisal summary within 90 days of 
the request. If such a request is made and the donor complies with the 
request within the 90-day period, the deduction under section 170 shall 
not be disallowed for failure to attach the appraisal summary, provided 
that the donor's failure to attach the appraisal summary was a good 
faith omission and the requirements of paragraph (c) (3) and (4) of this 
section are met (including the completion of the qualified appraisal 
prior to the date specified in paragraph (c)(3)(iv)(B) of this section).
    (5) Qualified appraiser--(i) In general. The term qualified 
appraiser means an individual (other than a person described in 
paragraph (c)(5)(iv) of this section) who includes on the appraisal 
summary (described in paragraph (c)(4) of this section), a declaration 
that--
    (A) The individual either holds himself or herself out to the public 
as an appraiser or performs appraisals on a regular basis;
    (B) Because of the appraiser's qualifications as described in the 
appraisal (pursuant to paragraph (c)(3)(ii)(F) of this section), the 
appraiser is qualified to make appraisals of the type of property being 
valued;
    (C) The appraiser is not one of the persons described in paragraph 
(c)(5)(iv) of this section; and
    (D) The appraiser understands that an intentionally false or 
fraudulent overstatement of the value of the property described in the 
qualified appraisal or appraisal summary may subject the appraiser to a 
civil penalty under section 6701 for aiding and abetting an 
understatement of tax liability, and, moreover, the appraiser may have 
appraisals disregarded pursuant to 31 U.S.C. 330(c) (see paragraph 
(c)(3)(iii) of this section).
    (ii) Exception. An individual is not a qualified appraiser with 
respect to a particular donation, even if the declaration specified in 
paragraph (c)(5)(i) of this section is provided in the appraisal 
summary, if the donor had knowledge of facts that would cause a 
reasonable person to expect the appraiser falsely to overstate the value 
of the donated property (e.g., the donor and the appraiser make an 
agreement concerning the amount at which the property will be valued and 
the donor knows that such amount exceeds the fair market value of the 
property).
    (iii) Numbers of appraisers. More than one appraiser may appraise 
the donated property. If more than one appraiser appraises the property, 
the donor does not have to use each appraiser's appraisal for purposes 
of substantiating the charitable contribution deduction pursuant to this 
paragraph (c). If the donor uses the appraisal of more than one 
appraiser, or if two or more appraisers contribute to a single 
appraisal, each appraiser shall comply with the requirements of this 
paragraph (c), including signing the qualified appraisal and appraisal 
summary as required by paragraphs (c)(3)(i)(B) and (c)(4)(i)(C) of this 
section, respectively.
    (iv) Qualified appraiser exclusions. The following persons cannot be 
qualified appraisers with respect to particular property:
    (A) The donor or the taxpayer who claims or reports a deductions 
under section 170 for the contribution of the property that is being 
appraised.
    (B) A party to the transaction in which the donor acquired the 
property being appraised (i.e., the person who sold, exchanged, or gave 
the property to the donor, or any person who acted as an agent for the 
transferor or for the donor with respect to such sale, exchange, or 
gift), unless the property is donated within 2 months of the date of 
acquisition and its appraised value does not exceed its acquisition 
price.
    (C) The donee of the property.
    (D) Any person employed by any of the foregoing persons (e.g., if 
the donor acquired a painting from an art dealer, neither the art dealer 
nor persons employed by the dealer can be qualified appraisers with 
respect to that painting).
    (E) Any person related to any of the foregoing persons under section 
267(b), or, with respect to appraisals made after June 6, 1988, married 
to a person who is in a relationship described in section 267(b) with 
any of the foregoing persons.

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    (F) An appraiser who is regularly used by any person described in 
paragraph (c)(5)(iv) (A), (B), or (C) of this section and who does not 
perform a majority of his or her appraisals made during his or her 
taxable year for other persons.
    (6) Appraisal fees--(i) In general. Except as otherwise provided in 
paragraph (c)(6)(ii) of this section, no part of the fee arrangement for 
a qualified appraisal can be based, in effect, on a percentage (or set 
of percentages) of the appraised value of the property. If a fee 
arrangement for an appraisal is based in whole or in part on the amount 
of the appraised value of the property, if any, that is allowed as a 
deduction under section 170, after Internal Revenue Service examination 
or otherwise, it shall be treated as a fee based on a percentage of the 
appraised value of the property. For example, an appraiser's fee that is 
subject to reduction by the same percentage as the appraised value may 
be reduced by the Internal Revenue Service would be treated as a fee 
that violates this paragraph (c)(6).
    (ii) Exception. Paragraph (c)(6)(i) of this section does not apply 
to a fee paid to a generally recognized association that regulates 
appraisers provided all of the following requirements are met:
    (A) The association is not organized for profit and no part of the 
net earnings of the association inures to the benefit of any private 
shareholder or individual (these terms have the same meaning as in 
section 501(c)),
    (B) The appraiser does not receive any compensation from the 
association or any other persons for making the appraisal, and
    (C) The fee arrangement is not based in whole or in part on the 
amount of the appraised value of the donated property, if any, that is 
allowed as a deduction under section 170 after Internal Revenue Service 
examination or otherwise.
    (7) Meaning of terms. For purposes of this paragraph (c)--
    (i) Closely held corporation. The term closely held corporation 
means any corporation (other than an S corporation) with respect to 
which the stock ownership requirement of paragraph (2) of section 542(a) 
of the Code is met.
    (ii) Personal service corporation. The term personal service 
corporation means any corporation (other than an S corporation) which is 
a service organization (within the meaning of section 414(m)(3) of the 
Code).
    (iii) Similar items of property. The phrase similar items of 
property means property of the same generic category or type, such as 
stamp collections (including philatelic supplies and books on stamp 
collecting), coin collections (including numismatic supplies and books 
on coin collecting), lithographs, paintings, photographs, books, 
nonpublicly traded stock, nonpublicly traded securities other than 
nonpublicly trade stock, land, buildings, clothing, jewelry, funiture, 
electronic equipment, household appliances, toys, everyday kitchenware, 
china, crystal, or silver. For example, if a donor claims on her return 
for the year deductions of $2,000 for books given by her to College A, 
$2,500 for books given by her to College B, and $900 for books given by 
her to College C, the $5,000 threshold of paragraph (c)(1) of this 
section is exceeded. Therefore, the donor must obtain a qualified 
appraisal for the books and attach to her return three appraisal 
summaries for the books donated to A, B, and C. For rules regarding the 
number of qualified appraisals and appraisal summaries required when 
similar items of property are contributed, see paragraphs (c)(3)(iv)(A) 
and (c)(4)(iv)(B), respectively, of this section.
    (iv) Donor. The term donor means a person or entity (other than an 
organization described in section 170(c) to which the donated property 
was previously contributed) that makes a charitable contribution of 
property.
    (v) Donee. The term donee means--
    (A) Except as provided in paragraph (c)(7)(v) (B) and (C) of this 
section, an organization described in section 170(c) to which property 
is contributed,
    (B) Except as provided in paragraph (c)(7)(v)(C) of this section, in 
the case of a charitable contribution of property placed in trust for 
the benefit of an organization described in section 170(c), the trust, 
or
    (C) In the case of a charitable contribution of property placed in 
trust

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for the benefit of an organization described in section 170(c) made on 
or before June 6, 1988, the beneficiary that is an organization 
described in section 170(c), or if the trust has assumed the duties of a 
donee by signing the appraisal summary pursuant to paragraph 
(c)(4)(i)(B) of this section, the trust.

In general, the term, refers only to the original donee. However, with 
respect to paragraph (c)(3)(ii)(D), the last sentence of paragraph 
(c)(4)(iii), and paragraph (c)(5)(iv)(C) of this section, the term donee 
means the original donee and all successor donees in cases where the 
original donee transfers the contributed property to a successor donee 
after July 5, 1988.
    (vi) Original donee. The term original donee means the donee to or 
for which property is initially donated by a donor.
    (vii) Successor donee. The term successor donee means any donee of 
property other than its original donee (i.e., a transferee of property 
for less than fair market value from an original donee or another 
successor donee).
    (viii) Fair market value. For the meaning of the term fair market 
value, see section 1.170A-1(c)(2).
    (ix) Nonpublicly traded securities. The term nonpublicly traded 
securities means securities (within the meaning of section 165(g)(2) of 
the Code) which are not publicly traded securities as defined in 
paragraph (c)(7)(xi) of this section.
    (x) Nonpublicly traded stock. The term nonpublicly traded stock 
means any stock of a corporation (evidence by a stock certificate) which 
is not a publicly traded security. The term stock does not include a 
debenture or any other evidence of indebtedness.
    (xi) Publicly traded securities--(A) In general. Except as provided 
in paragraph (c)(7)(xi)(C) of this section, the term publicly traded 
securities means securities (within the meaning of section 165(g)(2) of 
the Code) for which (as of the date of the contribution) market 
quotations are readily available on an established securities market. 
For purposes of this section, market quotations are readily available on 
an established securities market with respect to a security if:
    (1) The security is listed on the New York Stock Exchange, the 
American Stock Exchange, or any city or regional exchange in which 
quotations are published on a daily basis, including foreign securities 
listed on a recognized foreign, national, or regional exchange in which 
quotations are published on a daily basis;
    (2) The security is regularly traded in the national or regional 
over-the-counter market, for which published quotations are available; 
or
    (3) The security is a share of an open-end investment company 
(commonly known as a mutual fund) registered under the Investment 
Company Act of 1940, as amended (15 U.S.C. 80a-1 to 80b-2), for which 
quotations are published on a daily basis in a newspaper of general 
circulation throughout the United States.

(If the market value of an issue of a security is reflected only on an 
interdealer quotation system, the issue shall not be considered to be 
publicly traded unless the special rule described in paragraph 
(c)(7)(xi)(B) of this section is satisfied.)
    (B) Special rule--(1) In General. An issue of a security that does 
not satisfy the requirements of paragraph (c)(7)(xi)(A) (1), (2), or (3) 
of this section shall nonetheless be considered to have market 
quotations readily available on an established securities market for 
purposes of paragraph (c)(7)(xi)(A) of this section if all of the 
following five requirements are met:
    (i) The issue is regularly traded during the computational period 
(as defined in paragraph (c)(7)(xi)(B)(2)(iv) of this section) in a 
market that is reflected by the existence of an interdealer quotation 
system for the issue,
    (ii) The issuer or an agent of the issuer computes the average 
trading price (as defined in paragraph (c)(7)(xi)(B)(2)(iii) of this 
section) for the issue for the computational period,
    (iii) The average trading price and total volume of the issue during 
the computational period are published in a newspaper of general 
circulation throughout the United States not later than the last day of 
the month following the end of the calendar quarter in which the 
computational period ends,

[[Page 135]]

    (iv) The issuer or its agent keeps books and records that list for 
each transaction during the computational period involving each issue 
covered by this procedure the date of the settlement of the transaction, 
the name and address of the broker or dealer making the market in which 
the transaction occurred, and the trading price and volume, and
    (v) The issuer or its agent permits the Internal Revenue Service to 
review the books and records described in paragraph (c)(7)(xi)(B)(1)(iv) 
of this section with respect to transactions during the computational 
period upon giving reasonable notice to the issuer or agent.
    (2) Definitions. For purposes of this paragraph (c)(7)(xi)(B)--
    (i) Issue of a security. The term issue of a security means a class 
of debt securities with the same obligor and identical terms except as 
to their relative denominations (amounts) or a class of stock having 
identical rights.
    (ii) Interdealer quotation system. The term interdealer quotation 
system means any system of general circulation to brokers and dealers 
that regularly disseminates quotations of obligations by two or more 
identified brokers or dealers, who are not related to either the issuer 
of the security or to the issuer's agent, who compute the average 
trading price of the security. A quotation sheet prepared and 
distributed by a broker or dealer in the regular course of its business 
and containing only quotations of such broker or dealer is not an 
interdealer quotation system.
    (iii) Average trading price. The term average trading price means 
the mean price of all transactions (weighted by volume), other than 
original issue or redemption transactions, conducted through a United 
States office of a broker or dealer who maintains a market in the issue 
of the security during the computational period. For this purpose, bid 
and asked quotations are not taken into account.
    (iv) Computational period. For calendar quarters beginning on or 
after June 6, 1988, the term computational period means weekly during 
October through December (beginning with the first Monday in October and 
ending with the first Sunday following the last Monday in December) and 
monthly during January through September (beginning January 1). For 
calendar quarters beginning before June 6, 1988, the term computational 
period means weekly during October through December and monthly during 
January through September.
    (C) Exception. Securities described in paragraph (c)(7)(xi) (A) or 
(B) of this section shall not be considered publicly traded securities 
if--
    (1) The securities are subject to any restrictions that materially 
affect the value of the securities to the donor or prevent the 
securities from being freely traded, or
    (2) If the amount claimed or reported as a deduction with respect to 
the contribution of the securities is different than the amount listed 
in the market quotations that are readily available on an established 
securities market pursuant to paragraph (c)(7)(xi) (A) or (B) of this 
section.
    (D) Market quotations and fair market value. The fair market value 
of a publicly traded security, as defined in this paragraph (c)(7)(xi), 
is not necessarily equal to its market quotation, its average trading 
price (as defined in paragraph (c)(7)(xi)(B)(2)(iii) of this section), 
or its face value, if any. See section 1.170A-1(c)(2) for the definition 
of fair market value.
    (d) Charitable contributions; information required in support of 
deductions for taxable years beginning before January 1, 1983--(1) In 
general. This paragraph (d)(1) shall apply to deductions for charitable 
contributions made in taxable years beginning before January 1, 1983. At 
the option of the taxpayer the requirements of this paragraph (d)(1) 
shall also apply to all charitable contributions made on or before 
December 31, 1984 (in lieu of the requirements of paragraphs (a) and (b) 
of this section). In connection with claims for deductions for 
charitable contributions, taxpayers shall state in their income tax 
returns the name of each organization to which a contribution was made 
and the amount and date of the actual payment of each contribution. If a 
contribution is made in property other than money, the taxpayer shall 
state the kind of property contributed, for example, used clothing, 
paintings, or

[[Page 136]]

securities, the method utilized in determining the fair market value of 
the property at the time the contribution was made, and whether or not 
the amount of the contribution was reduced under section 170(e). If a 
taxpayer makes more than one cash contribution to an organization during 
the taxable year, then in lieu of listing each cash contribution and the 
date of payment the taxpayer may state the total cash payments made to 
such organization during the taxable year. A taxpayer who elects under 
paragraph (d)(2) of Sec. 1.170A-8 to apply section 170(e)(1) to his 
contributions and carryovers of 30-percent capital gain property must 
file a statement with his return indicating that he has made the 
election and showing the contributions in the current year and 
carryovers from preceding years to which it applies. For the definition 
of the term 30-percent capital gain property, see paragraph (d)(3) of 
Sec. 1.170A-8.
    (2) Contribution by individual of property other than money. This 
paragraph (d)(2) shall apply to deductions for charitable contributions 
made in taxable years beginning before January 1, 1983. At the option of 
the taxpayer, the requirements of this paragraph (d)(2) shall also apply 
to contributions of property made on or before December 31, 1984 (in 
lieu of the requirements of paragraph (b) of this section). If an 
individual taxpayer makes a charitable contribution of an item of 
property other than money and claims a deduction in excess of $200 in 
respect of his contribution of such item, he shall attach to his income 
tax return the following information with respect to such item:
    (i) The name and address of the organization to which the 
contribution was made.
    (ii) The date of the actual contribution.
    (iii) A description of the property in sufficient detail to identify 
the particular property contributed, including in the case of tangible 
property the physical condition of the property at the time of 
contribution, and, in the case of securities, the name of the issuer, 
the type of security, and whether or not such security is regularly 
traded on a stock exchange or in an over-the-counter market.
    (iv) The manner of acquisition, as, for example, by purchase, gift, 
bequest, inheritance, or exchange, and the approximate date of 
acquisition of the property by the taxpayer or, if the property was 
created, produced, or manufactured by or for the taxpayer, the 
approximate date the property was substantially completed.
    (v) The fair market value of the property at the time the 
contribution was made, the method utilized in determining the fair 
market value, and, if the valuation was determined by appraisal, a copy 
of the signed report of the appraiser.
    (vi) The cost or other basis, adjusted as provided by section 1016, 
of property, other than securities, held by the taxpayer for a period of 
less than 5 years immediately preceding the date on which the 
contribution was made and, when the information is available, of 
property, other than securities, held for a period of 5 years or more 
preceding the date on which the contribution was made.
    (vii) In the case of property to which section 170(e) applies, the 
cost or other basis, adjusted as provided by section 1016, the reduction 
by reason of section 170(e)(1) in the amount of the charitable 
contribution otherwise taken into account, and the manner in which such 
reduction was determined.
    (viii) The terms of any agreement or understanding entered into by 
or on behalf of the taxpayer which relates to the use, sale, or 
disposition of the property contributed, as, for example, the terms of 
any agreement or understanding which:
    (A) Restricts temporarily or permanently the donee's right to 
dispose of the donated property,
    (B) Reserves to, or confers upon, anyone other than the donee 
organization or other than an organization participating with such 
organization in cooperative fundraising, any right to the income from 
such property, to the possession of the property, including the right to 
vote securities, to acquire such property by purchase or otherwise, or 
to designate the person to have such income, possession, or right to 
acquire, or

[[Page 137]]

    (C) Earmarks contributed property for a particular charitable use, 
such as the use of donated furniture in the reading room of the donee 
organization's library.
    (ix) The total amount claimed as a deduction for the taxable year 
due to the contribution of the property and, if less than the entire 
interest in the property is contributed during the taxable year, the 
amount claimed as a deduction in any prior year or years for 
contributions of other interests in such property, the name and address 
of each organization to which any such contribution was made, the place 
where any such property which is tangible property is located or kept, 
and the name of any person, other than the organization to which the 
property giving rise to the deduction was contributed, having actual 
possession of the property.
    (3) Statement from donee organization. Any deduction for a 
charitable contribution must be substantiated, when required by the 
district director, by a statement from the organization to which the 
contribution was made indicating whether the organization is a domestic 
organization, the name and address of the contributor, the amount of the 
contribution, the date of actual receipt of the contribution, and such 
other information as the district director may deem necessary. If the 
contribution includes an item of property, other than money or 
securities which are regularly traded on a stock exchange or in an over-
the-counter market, which the donee deems to have a fair market value in 
excess of $500 ($200 in the case of a charitable contribution made in a 
taxable year beginning before January 1, 1983) at the time of receipt, 
such statement shall also indicate for each such item its location if it 
is retained by the organization, the amount received by the organization 
on any sale of the property and the date of sale or, in case of any 
other disposition of the property, the method of disposition. In the 
case of any contribution of tangible personal property, the statement 
shall indicate the use of the property by the organization and whether 
or not it is used for a purpose or function constituting the basis for 
the donee organization's exemption from income tax under section 501 or, 
in the case of a governmental unit, whether or not it is used for 
exclusively public purposes.
    (e) [Reserved]
    (f) Substantiation of charitable contributions of $250 or more--(1) 
In general. No deduction is allowed under section 170(a) for all or part 
of any contribution of $250 or more unless the taxpayer substantiates 
the contribution with a contemporaneous written acknowledgment from the 
donee organization. A taxpayer who makes more than one contribution of 
$250 or more to a donee organization in a taxable year may substantiate 
the contributions with one or more contemporaneous written 
acknowledgments. Section 170(f)(8) does not apply to a payment of $250 
or more if the amount contributed (as determined under Sec. 1.170A-
1(h)) is less than $250. Separate contributions of less than $250 are 
not subject to the requirements of section 170(f)(8), regardless of 
whether the sum of the contributions made by a taxpayer to a donee 
organization during a taxable year equals $250 or more.
    (2) Written acknowledgment. Except as otherwise provided in 
paragraphs (f)(8) through (f)(11) and (f)(13) of this section, a written 
acknowledgment from a donee organization must provide the following 
information--
    (i) The amount of any cash the taxpayer paid and a description (but 
not necessarily the value) of any property other than cash the taxpayer 
transferred to the donee organization;
    (ii) A statement of whether or not the donee organization provides 
any goods or services in consideration, in whole or in part, for any of 
the cash or other property transferred to the donee organization;
    (iii) If the donee organization provides any goods or services other 
than intangible religious benefits (as described in section 170(f)(8)), 
a description and good faith estimate of the value of those goods or 
services; and
    (iv) If the donee organization provides any intangible religious 
benefits, a statement to that effect.
    (3) Contemporaneous. A written acknowledgment is contemporaneous if 
it is obtained by the taxpayer on or before the earlier of--

[[Page 138]]

    (i) The date the taxpayer files the original return for the taxable 
year in which the contribution was made; or
    (ii) The due date (including extensions) for filing the taxpayer's 
original return for that year.
    (4) Donee organization. For purposes of this paragraph (f), a donee 
organization is an organization described in section 170(c).
    (5) Goods or services. Goods or services means cash, property, 
services, benefits, and privileges.
    (6) In consideration for. A donee organization provides goods or 
services in consideration for a taxpayer's payment if, at the time the 
taxpayer makes the payment to the donee organization, the taxpayer 
receives or expects to receive goods or services in exchange for that 
payment. Goods or services a donee organization provides in 
consideration for a payment by a taxpayer include goods or services 
provided in a year other than the year in which the taxpayer makes the 
payment to the donee organization.
    (7) Good faith estimate. For purposes of this section, good faith 
estimate means a donee organization's estimate of the fair market value 
of any goods or services, without regard to the manner in which the 
organization in fact made that estimate. See Sec. 1.170A-1(h)(4) for 
rules regarding when a taxpayer may treat a donee organization's 
estimate of the value of goods or services as the fair market value.
    (8) Certain goods or services disregarded--(i) In general. For 
purposes of section 170(f)(8), the following goods or services are 
disregarded--
    (A) Goods or services that have insubstantial value under the 
guidelines provided in Revenue Procedures 90-12, 1990-1 C.B. 471, 92-49, 
1992-1 C.B. 987, and any successor documents. (See Sec. 
601.601(d)(2)(ii) of the Statement of Procedural Rules, 26 CFR part 
601.); and
    (B) Annual membership benefits offered to a taxpayer in exchange for 
a payment of $75 or less per year that consist of--
    (1) Any rights or privileges, other than those described in section 
170(l), that the taxpayer can exercise frequently during the membership 
period. Examples of such rights and privileges may include, but are not 
limited to, free or discounted admission to the organization's 
facilities or events, free or discounted parking, preferred access to 
goods or services, and discounts on the purchase of goods or services; 
and
    (2) Admission to events during the membership period that are open 
only to members of a donee organization and for which the donee 
organization reasonably projects that the cost per person (excluding any 
allocable overhead) attending each such event is within the limits 
established for ``low cost articles'' under section 513(h)(2). The 
projected cost to the donee organization is determined at the time the 
organization first offers its membership package for the year (using 
section 3.07 of Revenue Procedure 90-12, or any successor documents, to 
determine the cost of any items or services that are donated).
    (ii) Examples. The following examples illustrate the rules of this 
paragraph (f)(8).

    Example 1. Membership benefits disregarded. Performing Arts Center E 
is an organization described in section 170(c). In return for a payment 
of $75, E offers a package of basic membership benefits that includes 
the right to purchase tickets to performances one week before they go on 
sale to the general public, free parking in E's garage during evening 
and weekend performances, and a 10% discount on merchandise sold in E's 
gift shop. In return for a payment of $150, E offers a package of 
preferred membership benefits that includes all of the benefits in the 
$75 package as well as a poster that is sold in E's gift shop for $20. 
The basic membership and the preferred membership are each valid for 
twelve months, and there are approximately 50 performances of various 
productions at E during a twelve-month period. E's gift shop is open for 
several hours each week and at performance times. F, a patron of the 
arts, is solicited by E to make a contribution. E offers F the preferred 
membership benefits in return for a payment of $150 or more. F makes a 
payment of $300 to E. F can satisfy the substantiation requirement of 
section 170(f)(8) by obtaining a contemporaneous written acknowledgment 
from E that includes a description of the poster and a good faith 
estimate of its fair market value ($20) and disregards the remaining 
membership benefits.
    Example 2. Contemporaneous written acknowledgment need not mention 
rights or privileges that can be disregarded. The facts are the same as 
in Example 1, except that F made a payment of $300 and received only a 
basic

[[Page 139]]

membership. F can satisfy the section 170(f)(8) substantiation 
requirement with a contemporaneous written acknowledgment stating that 
no goods or services were provided.
    Example 3. Rights or privileges that cannot be exercised frequently. 
Community Theater Group G is an organization described in section 
170(c). Every summer, G performs four different plays. Each play is 
performed two times. In return for a membership fee of $60, G offers its 
members free admission to any of its performances. Non-members may 
purchase tickets on a performance by performance basis for $15 a ticket. 
H, an individual who is a sponsor of the theater, is solicited by G to 
make a contribution. G tells H that the membership benefit will be 
provided in return for any payment of $60 or more. H chooses to make a 
payment of $350 to G and receives in return the membership benefit. G's 
membership benefit of free admission is not described in paragraph 
(f)(8)(i)(B) of this section because it is not a privilege that can be 
exercised frequently (due to the limited number of performances offered 
by G). Therefore, to meet the requirements of section 170(f)(8), a 
contemporaneous written acknowledgment of H's $350 payment must include 
a description of the free admission benefit and a good faith estimate of 
its value.
    Example 4. Multiple memberships. In December of each year, K, an 
individual, gives each of her six grandchildren a junior membership in 
Dinosaur Museum, an organization described in section 170(c). Each 
junior membership costs $50, and K makes a single payment of $300 for 
all six memberships. A junior member is entitled to free admission to 
the museum and to weekly films, slide shows, and lectures about 
dinosaurs. In addition, each junior member receives a bi-monthly, non-
commercial quality newsletter with information about dinosaurs and 
upcoming events. K's contemporaneous written acknowledgment from 
Dinosaur Museum may state that no goods or services were provided in 
exchange for K's payment.

    (9) Goods or services provided to employees or partners of donors--
(i) Certain goods or services disregarded. For purposes of section 
170(f)(8), goods or services provided by a donee organization to 
employees of a donor, or to partners of a partnership that is a donor, 
in return for a payment to the organization may be disregarded to the 
extent that the goods or services provided to each employee or partner 
are the same as those described in paragraph (f)(8)(i) of this section.
    (ii) No good faith estimate required for other goods or services. If 
a taxpayer makes a contribution of $250 or more to a donee organization 
and, in return, the donee organization offers the taxpayer's employees 
or partners goods or services other than those described in paragraph 
(f)(9)(i) of this section, the contemporaneous written acknowledgment of 
the taxpayer's contribution is not required to include a good faith 
estimate of the value of such goods or services but must include a 
description of those goods or services.
    (iii) Example. The following example illustrates the rules of this 
paragraph (f)(9).

    Example. Museum J is an organization described in section 170(c). 
For a payment of $40, J offers a package of basic membership benefits 
that includes free admission and a 10% discount on merchandise sold in 
J's gift shop. J's other membership categories are for supporters who 
contribute $100 or more. Corporation K makes a payment of $50,000 to J 
and, in return, J offers K's employees free admission for one year, a 
tee-shirt with J's logo that costs J $4.50, and a gift shop discount of 
25% for one year. The free admission for K's employees is the same as 
the benefit made available to holders of the $40 membership and is 
otherwise described in paragraph (f)(8)(i)(B) of this section. The tee-
shirt given to each of K's employees is described in paragraph 
(f)(8)(i)(A) of this section. Therefore, the contemporaneous written 
acknowledgment of K's payment is not required to include a description 
or good faith estimate of the value of the free admission or the tee-
shirts. However, because the gift shop discount offered to K's employees 
is different than that offered to those who purchase the $40 membership, 
the discount is not described in paragraph (f)(8)(i) of this section. 
Therefore, the contemporaneous written acknowledgment of K's payment is 
required to include a description of the 25% discount offered to K's 
employees.

    (10) Substantiation of out-of-pocket expenses. A taxpayer who incurs 
unreimbursed expenditures incident to the rendition of services, within 
the meaning of Sec. 1.170A-1(g), is treated as having obtained a 
contemporaneous written acknowledgment of those expenditures if the 
taxpayer--
    (i) Has adequate records under paragraph (a) of this section to 
substantiate the amount of the expenditures; and
    (ii) Obtains by the date prescribed in paragraph (f)(3) of this 
section a statement prepared by the donee organization containing--

[[Page 140]]

    (A) A description of the services provided by the taxpayer;
    (B) A statement of whether or not the donee organization provides 
any goods or services in consideration, in whole or in part, for the 
unreimbursed expenditures; and
    (C) The information required by paragraphs (f)(2) (iii) and (iv) of 
this section.
    (11) Contributions made by payroll deduction--(i) Form of 
substantiation. A contribution made by means of withholding from a 
taxpayer's wages and payment by the taxpayer's employer to a donee 
organization may be substantiated, for purposes of section 170(f)(8), by 
both--
    (A) A pay stub, Form W-2, or other document furnished by the 
employer that sets forth the amount withheld by the employer for the 
purpose of payment to a donee organization; and
    (B) A pledge card or other document prepared by or at the direction 
of the donee organization that includes a statement to the effect that 
the organization does not provide goods or services in whole or partial 
consideration for any contributions made to the organization by payroll 
deduction.
    (ii) Application of $250 threshold. For the purpose of applying the 
$250 threshold provided in section 170(f)(8)(A) to contributions made by 
the means described in paragraph (f)(11)(i) of this section, the amount 
withheld from each payment of wages to a taxpayer is treated as a 
separate contribution.
    (12) Distributing organizations as donees. An organization described 
in section 170(c), or an organization described in 5 CFR 950.105 (a 
Principal Combined Fund Organization for purposes of the Combined 
Federal Campaign) and acting in that capacity, that receives a payment 
made as a contribution is treated as a donee organization solely for 
purposes of section 170(f)(8), even if the organization (pursuant to the 
donor's instructions or otherwise) distributes the amount received to 
one or more organizations described in section 170(c). This paragraph 
(f)(12) does not apply, however, to a case in which the distributee 
organization provides goods or services as part of a transaction 
structured with a view to avoid taking the goods or services into 
account in determining the amount of the deduction to which the donor is 
entitled under section 170.
    (13) Transfers to certain trusts. Section 170(f)(8) does not apply 
to a transfer of property to a trust described in section 170(f)(2)(B), 
a charitable remainder annuity trust (as defined in section 664(d)(1)), 
or a charitable remainder unitrust (as defined in section 664(d)(2) or 
(d)(3) or Sec. 1.664(3)(a)(1)(i)(b)). Section 170(f)(8) does apply, 
however, to a transfer to a pooled income fund (as defined in section 
642(c)(5)); for such a transfer, the contemporaneous written 
acknowledgment must state that the contribution was transferred to the 
donee organization's pooled income fund and indicate whether any goods 
or services (in addition to an income interest in the fund) were 
provided in exchange for the transfer. The contemporaneous written 
acknowledgment is not required to include a good faith estimate of the 
income interest.
    (14) Substantiation of payments to a college or university for the 
right to purchase tickets to athletic events. For purposes of paragraph 
(f)(2)(iii) of this section, the right to purchase tickets for seating 
at an athletic event in exchange for a payment described in section 
170(l) is treated as having a value equal to twenty percent of such 
payment. For example, when a taxpayer makes a payment of $312.50 for the 
right to purchase tickets for seating at an athletic event, the right to 
purchase tickets is treated as having a value of $62.50. The remaining 
$250 is treated as a charitable contribution, which the taxpayer must 
substantiate in accordance with the requirements of this section.
    (15) Substantiation of charitable contributions made by a 
partnership or an S corporation. If a partnership or an S corporation 
makes a charitable contribution of $250 or more, the partnership or S 
corporation will be treated as the taxpayer for purposes of section 
170(f)(8). Therefore, the partnership or S corporation must substantiate 
the contribution with a contemporaneous written acknowledgment from the 
donee organization before reporting the contribution on its income tax 
return for the year in which the contribution

[[Page 141]]

was made and must maintain the contemporaneous written acknowledgment in 
its records. A partner of a partnership or a shareholder of an S 
corporation is not required to obtain any additional substantiation for 
his or her share of the partnership's or S corporation's charitable 
contribution.
    (16) Purchase of an annuity. If a taxpayer purchases an annuity from 
a charitable organization and claims a charitable contribution deduction 
of $250 or more for the excess of the amount paid over the value of the 
annuity, the contemporaneous written acknowledgment must state whether 
any goods or services in addition to the annuity were provided to the 
taxpayer. The contemporaneous written acknowledgment is not required to 
include a good faith estimate of the value of the annuity. See Sec. 
1.170A-1(d)(2) for guidance in determining the value of the annuity.
    (17) Substantiation of matched payments--(i) In general. For 
purposes of section 170, if a taxpayer's payment to a donee organization 
is matched, in whole or in part, by another payor, and the taxpayer 
receives goods or services in consideration for its payment and some or 
all of the matching payment, those goods or services will be treated as 
provided in consideration for the taxpayer's payment and not in 
consideration for the matching payment.
    (ii) Example. The following example illustrates the rules of this 
paragraph (f)(17).

    Example. Taxpayer makes a $400 payment to Charity L, a donee 
organization. Pursuant to a matching payment plan, Taxpayer's employer 
matches Taxpayer's $400 payment with an additional payment of $400. In 
consideration for the combined payments of $800, L gives Taxpayer an 
item that it estimates has a fair market value of $100. L does not give 
the employer any goods or services in consideration for its 
contribution. The contemporaneous written acknowledgment provided to the 
employer must include a statement that no goods or services were 
provided in consideration for the employer's $400 payment. The 
contemporaneous written acknowledgment provided to Taxpayer must include 
a statement of the amount of Taxpayer's payment, a description of the 
item received by Taxpayer, and a statement that L's good faith estimate 
of the value of the item received by Taxpayer is $100.

    (18) Effective date. This paragraph (f) applies to contributions 
made on or after December 16, 1996. However, taxpayers may rely on the 
rules of this paragraph (f) for contributions made on or after January 
1, 1994.

[T.D. 8002, 49 FR 50664, 50666, Dec. 31, 1984, as amended by T.D. 8003, 
49 FR 50659, Dec. 31, 1984; T.D. 8199, 53 FR 16080, May 5, 1988; 53 FR 
18372, May 23, 1988; T.D. 8623, 60 FR 53128, Oct. 12, 1995; T.D. 8690, 
61 FR 65952, Dec. 16, 1996]



Sec. 1.170A-14  Qualified conservation contributions.

    (a) Qualified conservation contributions. A deduction under section 
170 is generally not allowed for a charitable contribution of any 
interest in property that consists of less than the donor's entire 
interest in the property other than certain transfers in trust (see 
Sec. 1.170A-6 relating to charitable contributions in trust and Sec. 
1.170A-7 relating to contributions not in trust of partial interests in 
property). However, a deduction may be allowed under section 
170(f)(3)(B)(iii) for the value of a qualified conservation contribution 
if the requirements of this section are met. A qualified conservation 
contribution is the contribution of a qualified real property interest 
to a qualified organization exclusively for conservation purposes. To be 
eligible for a deduction under this section, the conservation purpose 
must be protected in perpetuity.
    (b) Qualified real property interest--(1) Entire interest of donor 
other than qualified mineral interest. (i) The entire interest of the 
donor other than a qualified mineral interest is a qualified real 
property interest. A qualified mineral interest is the donor's interest 
in subsurface oil, gas, or other minerals and the right of access to 
such minerals.
    (ii) A real property interest shall not be treated as an entire 
interest other than a qualified mineral interest by reason of section 
170(h)(2)(A) and this paragraph (b)(1) if the property in which the 
donor's interest exists was divided prior to the contribution in order 
to enable the donor to retain control of more than a qualified mineral 
interest or to reduce the real property interest donated. See Treasury 
regulations Sec. 1.170A-7(a)(2)(i). An entire interest in real property 
may consist of an

[[Page 142]]

undivided interest in the property. But see section 170(h)(5)(A) and the 
regulations thereunder (relating to the requirement that the 
conservation purpose which is the subject of the donation must be 
protected in perpetuity). Minor interests, such as rights-of-way, that 
will not interfere with the conservation purposes of the donation, may 
be transferred prior to the conservation contribution without affecting 
the treatment of a property interest as a qualified real property 
interest under this paragraph (b)(1).
    (2) Perpetual conservation restriction. A ``perpetual conservation 
restriction'' is a qualified real property interest. A ``perpetual 
conservation restriction'' is a restriction granted in perpetuity on the 
use which may be made of real property--including, an easement or other 
interest in real property that under state law has attributes similar to 
an easement (e.g., a restrictive covenant or equitable servitude). For 
purposes of this section, the terms easement, conservation restriction, 
and perpetual conservation restriction have the same meaning. The 
definition of perpetual conservation restriction under this paragraph 
(b)(2) is not intended to preclude the deductibility of a donation of 
affirmative rights to use a land or water area under Sec. 1.170A-
13(d)(2). Any rights reserved by the donor in the donation of a 
perpetual conservation restriction must conform to the requirements of 
this section. See e.g., paragraph (d)(4)(ii), (d)(5)(i), (e)(3), and 
(g)(4) of this section.
    (c) Qualified organization--(1) Eligible donee. To be considered an 
eligible donee under this section, an organization must be a qualified 
organization, have a commitment to protect the conservation purposes of 
the donation, and have the resources to enforce the restrictions. A 
conservation group organized or operated primarily or substantially for 
one of the conservation purposes specified in section 170(h)(4)(A) will 
be considered to have the commitment required by the preceding sentence. 
A qualified organization need not set aside funds to enforce the 
restrictions that are the subject of the contribution. For purposes of 
this section, the term qualified organization means:
    (i) A governmental unit described in section 170(b)(1)(A)(v);
    (ii) An organization described in section 170(b)(1)(A)(vi);
    (iii) A charitable organization described in section 501(c)(3) that 
meets the public support test of section 509(a)(2);
    (iv) A charitable organization described in section 501(c)(3) that 
meets the requirements of section 509(a)(3) and is controlled by an 
organization described in paragraphs (c)(1) (i), (ii), or (iii) of this 
section.
    (2) Transfers by donee. A deduction shall be allowed for a 
contribution under this section only if in the instrument of conveyance 
the donor prohibits the donee from subsequently transferring the 
easement (or, in the case of a remainder interest or the reservation of 
a qualified mineral interest, the property), whether or not for 
consideration, unless the donee organization, as a condition of the 
subsequent transfer, requires that the conservation purposes which the 
contribution was originally intended to advance continue to be carried 
out. Moreover, subsequent transfers must be restricted to organizations 
qualifying, at the time of the subsequent transfer, as an eligible donee 
under paragraph (c)(1) of this section. When a later unexpected change 
in the conditions surrounding the property that is the subject of a 
donation under paragraph (b)(1), (2), or (3) of this section makes 
impossible or impractical the continued use of the property for 
conservation purposes, the requirement of this paragraph will be met if 
the property is sold or exchanged and any proceeds are used by the donee 
organization in a manner consistent with the conservation purposes of 
the original contribution. In the case of a donation under paragraph 
(b)(3) of this section to which the preceding sentence applies, see also 
paragraph (g)(5)(ii) of this section.
    (d) Conservation purposes--(1) In general. For purposes of section 
170(h) and this section, the term conservation purposes means--
    (i) The preservation of land areas for outdoor recreation by, or the 
education of, the general public, within the meaning of paragraph (d)(2) 
of this section,

[[Page 143]]

    (ii) The protection of a relatively natural habitat of fish, 
wildlife, or plants, or similar ecosystem, within the meaning of 
paragraph (d)(3) of this section,
    (iii) The preservation of certain open space (including farmland and 
forest land) within the meaning of paragraph (d)(4) of this section, or
    (iv) The preservation of a historically important land area or a 
certified historic structure, within the meaning of paragraph (d)(5) of 
this section.
    (2) Recreation or education--(i) In general. The donation of a 
qualified real property interest to preserve land areas for the outdoor 
recreation of the general public or for the education of the general 
public will meet the conservation purposes test of this section. Thus, 
conservation purposes would include, for example, the preservation of a 
water area for the use of the public for boating or fishing, or a nature 
or hiking trail for the use of the public.
    (ii) Access. The preservation of land areas for recreation or 
education will not meet the test of this section unless the recreation 
or education is for the substantial and regular use of the general 
public.
    (3) Protection of environmental system--(i) In general. The donation 
of a qualified real property interest to protect a significant 
relatively natural habitat in which a fish, wildlife, or plant 
community, or similar ecosystem normally lives will meet the 
conservation purposes test of this section. The fact that the habitat or 
environment has been altered to some extent by human activity will not 
result in a deduction being denied under this section if the fish, 
wildlife, or plants continue to exist there in a relatively natural 
state. For example, the preservation of a lake formed by a man-made dam 
or a salt pond formed by a man-made dike would meet the conservation 
purposes test if the lake or pond were a nature feeding area for a 
wildlife community that included rare, endangered, or threatened native 
species.
    (ii) Significant habitat or ecosystem. Significant habitats and 
ecosystems include, but are not limited to, habitats for rare, 
endangered, or threatened species of animal, fish, or plants; natural 
areas that represent high quality examples of a terrestrial community or 
aquatic community, such as islands that are undeveloped or not intensely 
developed where the coastal ecosystem is relatively intact; and natural 
areas which are included in, or which contribute to, the ecological 
viability of a local, state, or national park, nature preserve, wildlife 
refuge, wilderness area, or other similar conservation area.
    (iii) Access. Limitations on public access to property that is the 
subject of a donation under this paragraph (d)(3) shall not render the 
donation nondeductible. For example, a restriction on all public access 
to the habitat of a threatened native animal species protected by a 
donation under this paragraph (d)(3) would not cause the donation to be 
nondeductible.
    (4) Preservation of open space--(i) In general. The donation of a 
qualified real property interest to preserve open space (including 
farmland and forest land) will meet the conservation purposes test of 
this section if such preservation is--
    (A) Pursuant to a clearly delineated Federal, state, or local 
governmental conservation policy and will yield a significant public 
benefit, or
    (B) For the scenic enjoyment of the general public and will yield a 
significant public benefit.

An open space easement donated on or after December 18, 1980, must meet 
the requirements of section 170(h) in order to be deductible.
    (ii) Scenic enjoyment--(A) Factors. A contribution made for the 
preservation of open space may be for the scenic enjoyment of the 
general public. Preservation of land may be for the scenic enjoyment of 
the general public if development of the property would impair the 
scenic character of the local rural or urban landscape or would 
interfere with a scenic panorama that can be enjoyed from a park, nature 
preserve, road, waterbody, trail, or historic structure or land area, 
and such area or transportation way is open to, or utilized by, the 
public. ``Scenic enjoyment'' will be evaluated by considering all 
pertinent facts and circumstances germane to the contribution. Regional

[[Page 144]]

variations in topography, geology, biology, and cultural and economic 
conditions require flexibility in the application of this test, but do 
not lessen the burden on the taxpayer to demonstrate the scenic 
characteristics of a donation under this paragraph. The application of a 
particular objective factor to help define a view as scenic in one 
setting may in fact be entirely inappropriate in another setting. Among 
the factors to be considered are:
    (1) The compatibility of the land use with other land in the 
vicinity;
    (2) The degree of contrast and variety provided by the visual scene;
    (3) The openness of the land (which would be a more significant 
factor in an urban or densely populated setting or in a heavily wooded 
area);
    (4) Relief from urban closeness;
    (5) The harmonious variety of shapes and textures;
    (6) The degree to which the land use maintains the scale and 
character of the urban landscape to preserve open space, visual 
enjoyment, and sunlight for the surrounding area;
    (7) The consistency of the proposed scenic view with a methodical 
state scenic identification program, such as a state landscape 
inventory; and
    (8) The consistency of the proposed scenic view with a regional or 
local landscape inventory made pursuant to a sufficiently rigorous 
review process, especially if the donation is endorsed by an appropriate 
state or local governmental agency.
    (B) Access. To satisfy the requirement of scenic enjoyment by the 
general public, visual (rather than physical) access to or across the 
property by the general public is sufficient. Under the terms of an open 
space easement on scenic property, the entire property need not be 
visible to the public for a donation to qualify under this section, 
although the public benefit from the donation may be insufficient to 
qualify for a deduction if only a small portion of the property is 
visible to the public.
    (iii) Governmental conservation policy--(A) In general. The 
requirement that the preservation of open space be pursuant to a clearly 
delineated Federal, state, or local governmental policy is intended to 
protect the types of property identified by representatives of the 
general public as worthy of preservation or conservation. A general 
declaration of conservation goals by a single official or legislative 
body is not sufficient. However, a governmental conservation policy need 
not be a certification program that identifies particular lots or small 
parcels of individually owned property. This requirement will be met by 
donations that further a specific, identified conservation project, such 
as the preservation of land within a state or local landmark district 
that is locally recognized as being significant to that district; the 
preservation of a wild or scenic river, the preservation of farmland 
pursuant to a state program for flood prevention and control; or the 
protection of the scenic, ecological, or historic character of land that 
is contiguous to, or an integral part of, the surroundings of existing 
recreation or conservation sites. For example, the donation of a 
perpetual conservation restriction to a qualified organization pursuant 
to a formal resolution or certification by a local governmental agency 
established under state law specifically identifying the subject 
property as worthy of protection for conservation purposes will meet the 
requirement of this paragraph. A program need not be funded to satisfy 
this requirement, but the program must involve a significant commitment 
by the government with respect to the conservation project. For example, 
a governmental program according preferential tax assessment or 
preferential zoning for certain property deemed worthy of protection for 
conservation purposes would constitute a significant commitment by the 
government.
    (B) Effect of acceptance by governmental agency. Acceptance of an 
easement by an agency of the Federal Government or by an agency of a 
state or local government (or by a commission, authority, or similar 
body duly constituted by the state or local government and acting on 
behalf of the state or local government) tends to establish the 
requisite clearly delineated governmental policy, although such 
acceptance, without more, is not sufficient. The more rigorous the 
review process by the governmental agency, the more the acceptance of 
the easement tends

[[Page 145]]

to establish the requisite clearly delineated governmental policy. For 
example, in a state where the legislature has established an 
Environmental Trust to accept gifts to the state which meet certain 
conservation purposes and to submit the gifts to a review that requires 
the approval of the state's highest officials, acceptance of a gift by 
the Trust tends to establish the requisite clearly delineated 
governmental policy. However, if the Trust merely accepts such gifts 
without a review process, the requisite clearly delineated governmental 
policy is not established.
    (C) Access. A limitation on public access to property subject to a 
donation under this paragraph (d)(4)(iii) shall not render the deduction 
nondeductible unless the conservation purpose of the donation would be 
undermined or frustrated without public access. For example, a donation 
pursuant to a governmental policy to protect the scenic character of 
land near a river requires visual access to the same extent as would a 
donation under paragraph (d)(4)(ii) of this section.
    (iv) Significant public benefit--(A) Factors. All contributions made 
for the preservation of open space must yield a significant public 
benefit. Public benefit will be evaluated by considering all pertinent 
facts and circumstances germane to the contribution. Factors germane to 
the evaluation of public benefit from one contribution may be irrelevant 
in determining public benefit from another contribution. No single 
factor will necessarily be determinative. Among the factors to be 
considered are:
    (1) The uniqueness of the property to the area;
    (2) The intensity of land development in the vicinity of the 
property (both existing development and foreseeable trends of 
development);
    (3) The consistency of the proposed open space use with public 
programs (whether Federal, state or local) for conservation in the 
region, including programs for outdoor recreation, irrigation or water 
supply protection, water quality maintenance or enhancement, flood 
prevention and control, erosion control, shoreline protection, and 
protection of land areas included in, or related to, a government 
approved master plan or land management area;
    (4) The consistency of the proposed open space use with existing 
private conservation programs in the area, as evidenced by other land, 
protected by easement or fee ownership by organizations referred to in 
Sec. 1.170A-14(c)(1), in close proximity to the property;
    (5) The likelihood that development of the property would lead to or 
contribute to degradation of the scenic, natural, or historic character 
of the area;
    (6) The opportunity for the general public to use the property or to 
appreciate its scenic values;
    (7) The importance of the property in preserving a local or regional 
landscape or resource that attracts tourism or commerce to the area;
    (8) The likelihood that the donee will acquire equally desirable and 
valuable substitute property or property rights;
    (9) The cost to the donee of enforcing the terms of the conservation 
restriction;
    (10) The population density in the area of the property; and
    (11) The consistency of the proposed open space use with a 
legislatively mandated program identifying particular parcels of land 
for future protection.
    (B) Illustrations. The preservation of an ordinary tract of land 
would not in and of itself yield a significant public benefit, but the 
preservation of ordinary land areas in conjunction with other factors 
that demonstrate significant public benefit or the preservation of a 
unique land area for public employment would yield a significant public 
benefit. For example, the preservation of a vacant downtown lot would 
not by itself yield a significant public benefit, but the preservation 
of the downtown lot as a public garden would, absent countervailing 
factors, yield a significant public benefit. The following are other 
examples of contributions which would, absent countervailing factors, 
yield a significant public benefit: The preservation of farmland 
pursuant to a state program for

[[Page 146]]

flood prevention and control; the preservation of a unique natural land 
formation for the enjoyment of the general public; the preservation of 
woodland along a public highway pursuant to a government program to 
preserve the appearance of the area so as to maintain the scenic view 
from the highway; and the preservation of a stretch of undeveloped 
property located between a public highway and the ocean in order to 
maintain the scenic ocean view from the highway.
    (v) Limitation. A deduction will not be allowed for the preservation 
of open space under section 170(h)(4)(A)(iii), if the terms of the 
easement permit a degree of intrusion or future development that would 
interfere with the essential scenic quality of the land or with the 
governmental conservation policy that is being furthered by the 
donation. See Sec. 1.170A-14(e)(2) for rules relating to inconsistent 
use.
    (vi) Relationship of requirements--(A) Clearly delineated 
governmental policy and significant public benefit. Although the 
requirements of ``clearly delineated governmental policy'' and 
``significant public benefit'' must be met independently, for purposes 
of this section the two requirements may also be related. The more 
specific the governmental policy with respect to the particular site to 
be protected, the more likely the governmental decision, by itself, will 
tend to establish the significant public benefit associated with the 
donation. For example, while a statute in State X permitting 
preferential assessment for farmland is, by definition, governmental 
policy, it is distinguishable from a state statute, accompanied by 
appropriations, naming the X River as a valuable resource and 
articulating the legislative policy that the X River and the relatively 
natural quality of its surrounding be protected. On these facts, an open 
space easement on farmland in State X would have to demonstrate 
additional factors to establish ``significant public benefit.'' The 
specificity of the legislative mandate to protect the X River, however, 
would by itself tend to establish the significant public benefit 
associated with an open space easement on land fronting the X River.
    (B) Scenic enjoyment and significant public benefit. With respect to 
the relationship between the requirements of ``scenic enjoyment'' and 
``significant public benefit,'' since the degrees of scenic enjoyment 
offered by a variety of open space easements are subjective and not as 
easily delineated as are increasingly specific levels of governmental 
policy, the significant public benefit of preserving a scenic view must 
be independently established in all cases.
    (C) Donations may satisfy more than one test. In some cases, open 
space easements may be both for scenic enjoyment and pursuant to a 
clearly delineated governmental policy. For example, the preservation of 
a particular scenic view identified as part of a scenic landscape 
inventory by a rigorous governmental review process will meet the tests 
of both paragraphs (d)(4)(i)(A) and (d)(4)(i)(B) of this section.
    (5) Historic preservation--(i) In general. The donation of a 
qualified real property interest to preserve an historically important 
land area or a certified historic structure will meet the conservation 
purposes test of this section. When restrictions to preserve a building 
or land area within a registered historic district permit future 
development on the site, a deduction will be allowed under this section 
only if the terms of the restrictions require that such development 
conform with appropriate local, state, or Federal standards for 
construction or rehabilitation within the district. See also, Sec. 
1.170A-14(h)(3)(ii).
    (ii) Historically important land area. The term historically 
important land area includes:
    (A) An independently significant land area including any related 
historic resources (for example, an archaeological site or a Civil War 
battlefield with related monuments, bridges, cannons, or houses) that 
meets the National Register Criteria for Evaluation in 36 CFR 60.4 (Pub. 
L. 89-665, 80 Stat. 915);
    (B) Any land area within a registered historic district including 
any buildings on the land area that can reasonably be considered as 
contributing to the significance of the district; and

[[Page 147]]

    (C) Any land area (including related historic resources) adjacent to 
a property listed individually in the National Register of Historic 
Places (but not within a registered historic district) in a case where 
the physical or environmental features of the land area contribute to 
the historic or cultural integrity of the property.
    (iii) Certified historic structure. The term certified historic 
structure, for purposes of this section, means any building, structure 
or land area which is--
    (A) Listed in the National Register, or
    (B) Located in a registered historic district (as defined in section 
48(g)(3)(B)) and is certified by the Secretary of the Interior (pursuant 
to 36 CFR 67.4) to the Secretary of the Treasury as being of historic 
significance to the district.

A structure for purposes of this section means any structure, whether or 
not it is depreciable. Accordingly easements on private residences may 
qualify under this section. In addition, a structure would be considered 
to be a certified historic structure if it were certified either at the 
time the transfer was made or at the due date (including extensions) for 
filing the donor's return for the taxable year in which the contribution 
was made.
    (iv) Access. (A) In order for a conservation contribution described 
in section 170(h)(4)(A)(iv) and this paragraph (d)(5) to be deductible, 
some visual public access to the donated property is required. In the 
case of an historically important land area, the entire property need 
not be visible to the public for a donation to qualify under this 
section. However, the public benefit from the donation may be 
insufficient to qualify for a deduction if only a small portion of the 
property is so visible. Where the historic land area or certified 
historic structure which is the subject of the donation is not visible 
from a public way (e.g., the structure is hidden from view by a wall or 
shrubbery, the structure is too far from the public way, or interior 
characteristics and features of the structure are the subject of the 
easement), the terms of the easement must be such that the general 
public is given the opportunity on a regular basis to view the 
characteristics and features of the property which are preserved by the 
easement to the extent consistent with the nature and condition of the 
property.
    (B) Factors to be considered in determining the type and amount of 
public access required under paragraph (d)(5)(iv)(A) of this section 
include the historical significance of the donated property, the nature 
of the features that are the subject of the easement, the remoteness or 
accessibility of the site of the donated property, the possibility of 
physical hazards to the public visiting the property (for example, an 
unoccupied structure in a dilapidated condition), the extent to which 
public access would be an unreasonable intrusion on any privacy 
interests of individuals living on the property, the degree to which 
public access would impair the preservation interests which are the 
subject of the donation, and the availability of opportunities for the 
public to view the property by means other than visits to the site.
    (C) The amount of access afforded the public by the donation of an 
easement shall be determined with reference to the amount of access 
permitted by the terms of the easement which are established by the 
donor, rather than the amount of access actually provided by the donee 
organization. However, if the donor is aware of any facts indicating 
that the amount of access that the donee organization will provide is 
significantly less than the amount of access permitted under the terms 
of the easement, then the amount of access afforded the public shall be 
determined with reference to this lesser amount.
    (v) Examples. The provisions of paragraph (d)(5)(iv) of this section 
may be illustrated by the following examples:

    Example 1. A and his family live in a house in a certified historic 
district in the State of X. The entire house, including its interior, 
has architectural features representing classic Victorian period 
architecture. A donates an exterior and interior easement on the 
property to a qualified organization but continues to live in the house 
with his family. A's house is surrounded by a high stone wall which 
obscures the public's view of it from the street. Pursuant to the terms 
of the easement, the house may be opened to the public from 10:00 a.m. 
to 4:00 p.m. on one Sunday in May and one Sunday in November each year 
for house and garden tours. These tours are

[[Page 148]]

to be under the supervision of the donee and open to members of the 
general public upon payment of a small fee. In addition, under the terms 
of the easement, the donee organization is given the right to photograph 
the interior and exterior of the house and distribute such photographs 
to magazines, newsletters, or other publicly available publications. The 
terms of the easement also permit persons affiliated with educational 
organizations, professional architectural associations, and historical 
societies to make an appointment through the donee organization to study 
the property. The donor is not aware of any facts indicating that the 
public access to be provided by the donee organization will be 
significantly less than that permitted by the terms of the easement. The 
2 opportunities for public visits per year, when combined with the 
ability of the general public to view the architectural characteristics 
and features that are the subject of the easement through photographs, 
the opportunity for scholarly study of the property, and the fact that 
the house is used as an occupied residence, will enable the donation to 
satisfy the requirement of public access.
    Example 2. B owns an unoccupied farmhouse built in the 1840's and 
located on a property that is adjacent to a Civil War battlefield. 
During the Civil War the farmhouse was used as quarters for Union 
troops. The battlefield is visited year round by the general public. The 
condition of the farmhouse is such that the safety of visitors will not 
be jeopardized and opening it to the public will not result in 
significant deterioration. The farmhouse is not visible from the 
battlefield or any public way. It is accessible only by way of a private 
road owned by B. B donates a conservation easement on the farmhouse to a 
qualified organization. The terms of the easement provide that the donee 
organization may open the property (via B's road) to the general public 
on four weekends each year from 8:30 a.m. to 4:00 p.m. The donation does 
not meet the public access requirement because the farmhouse is safe, 
unoccupied, and easily accessible to the general public who have come to 
the site to visit Civil War historic land areas (and related resources), 
but will only be open to the public on four weekends each year. However, 
the donation would meet the public access requirement if the terms of 
the easement permitted the donee organization to open the property to 
the public every other weekend during the year and the donor is not 
aware of any facts indicating that the donee organization will provide 
significantly less access than that permitted.

    (e) Exclusively for conservation purposes--(1) In general. To meet 
the requirements of this section, a donation must be exclusively for 
conservation purposes. See paragraphs (c)(1) and (g)(1) through 
(g)(6)(ii) of this section. A deduction will not be denied under this 
section when incidental benefit inures to the donor merely as a result 
of conservation restrictions limiting the uses to which the donor's 
property may be put.
    (2) Inconsistent use. Except as provided in paragraph (e)(4) of this 
section, a deduction will not be allowed if the contribution would 
accomplish one of the enumerated conservation purposes but would permit 
destruction of other significant conservation interests. For example, 
the preservation of farmland pursuant to a State program for flood 
prevention and control would not qualify under paragraph (d)(4) of this 
section if under the terms of the contribution a significant naturally 
occurring ecosystem could be injured or destroyed by the use of 
pesticides in the operation of the farm. However, this requirement is 
not intended to prohibit uses of the property, such as selective timber 
harvesting or selective farming if, under the circumstances, those uses 
do not impair significant conservation interests.
    (3) Inconsistent use permitted. A use that is destructive of 
conservation interests will be permitted only if such use is necessary 
for the protection of the conservation interests that are the subject of 
the contribution. For example, a deduction for the donation of an 
easement to preserve an archaeological site that is listed on the 
National Register of Historic Places will not be disallowed if site 
excavation consistent with sound archaeological practices may impair a 
scenic view of which the land is a part. A donor may continue a pre-
existing use of the property that does not conflict with the 
conservation purposes of the gift.
    (f) Examples. The provisions of this section relating to 
conservation purposes may be illustrated by the following examples.

    Example 1. State S contains many large tract forests that are 
desirable recreation and scenic areas for the general public. The 
forests' scenic values attract millions of people to the State. However, 
due to the increasing intensity of land development in State S, the 
continued existence of forestland parcels greater than 45 acres is 
threatened. J grants a perpetual easement on a 100-acre parcel of 
forestland that is part

[[Page 149]]

of one of the State's scenic areas to a qualifying organization. The 
easement imposes restrictions on the use of the parcel for the purpose 
of maintaining its scenic values. The restrictions include a requirement 
that the parcel be maintained forever as open space devoted exclusively 
to conservation purposes and wildlife protection, and that there be no 
commercial, industrial, residential, or other development use of such 
parcel. The law of State S recognizes a limited public right to enter 
private land, particularly for recreational pursuits, unless such land 
is posted or the landowner objects. The easement specifically restricts 
the landowner from posting the parcel, or from objecting, thereby 
maintaining public access to the parcel according to the custom of the 
State. J's parcel provides the opportunity for the public to enjoy the 
use of the property and appreciate its scenic values. Accordingly, J's 
donation qualifies for a deduction under this section.
    Example 2. A qualified conservation organization owns Greenacre in 
fee as a nature preserve. Greenacre contains a high quality example of a 
tall grass prairie ecosystem. Farmacre, an operating farm, adjoins 
Greenacre and is a compatible buffer to the nature preserve. Conversion 
of Farmacre to a more intense use, such as a housing development, would 
adversely affect the continued use of Greenacre as a nature preserve 
because of human traffic generated by the development. The owner of 
Farmacre donates an easement preventing any future development on 
Farmacre to the qualified conservation organization for conservation 
purposes. Normal agricultural uses will be allowed on Farmacre. 
Accordingly, the donation qualifies for a deduction under this section.
    Example 3. H owns Greenacre, a 900-acre parcel of woodland, rolling 
pasture, and orchards on the crest of a mountain. All of Greenacre is 
clearly visible from a nearby national park. Because of the strict 
enforcement of an applicable zoning plan, the highest and best use of 
Greenacre is as a subdivision of 40-acre tracts. H wishes to donate a 
scenic easement on Greenacre to a qualifying conservation organization, 
but H would like to reserve the right to subdivide Greenacre into 90-
acre parcels with no more than one single-family home allowable on each 
parcel. Random building on the property, even as little as one home for 
each 90 acres, would destroy the scenic character of the view. 
Accordingly, no deduction would be allowable under this section.
    Example 4. Assume the same facts as in example (3), except that not 
all of Greenacre is visible from the park and the deed of easement 
allows for limited cluster development of no more than five nine-acre 
clusters (with four houses on each cluster) located in areas generally 
not visible from the national park and subject to site and building plan 
approval by the donee organization in order to preserve the scenic view 
from the park. The donor and the donee have already identified sites 
where limited cluster development would not be visible from the park or 
would not impair the view. Owners of homes in the clusters will not have 
any rights with respect to the surrounding Greenacre property that are 
not also available to the general public. Accordingly, the donation 
qualifies for a deduction under this section.
    Example 5. In order to protect State S's declining open space that 
is suited for agricultural use from increasing development pressure that 
has led to a marked decline in such open space, the Legislature of State 
S passed a statute authorizing the purchase of ``agricultural land 
development rights'' on open acreage. Agricultural land development 
rights allow the State to place agricultural preservation restrictions 
on land designated as worthy of protection in order to preserve open 
space and farm resources. Agricultural preservation restrictions 
prohibit or limit construction or placement of buildings except those 
used for agricultural purposes or dwellings used for family living by 
the farmer and his family and employees; removal of mineral substances 
in any manner that adversely affects the land's agricultural potential; 
or other uses detrimental to retention of the land for agricultural use. 
Money has been appropriated for this program and some landowners have in 
fact sold their ``agricultural land development rights'' to State S. K 
owns and operates a small dairy farm in State S located in an area 
designated by the Legislature as worthy of protection. K desires to 
preserve his farm for agricultural purposes in perpetuity. Rather than 
selling the development rights to State S, K grants to a qualified 
organization an agricultural preservation restriction on his property in 
the form of a conservation easement. K reserves to himself, his heirs 
and assigns the right to manage the farm consistent with sound 
agricultural and management practices. The preservation of K's land is 
pursuant to a clearly delineated governmental policy of preserving open 
space available for agricultural use, and will yield a significant 
public benefit by preserving open space against increasing development 
pressures.

    (g) Enforceable in perpetuity--(1) In general. In the case of any 
donation under this section, any interest in the property retained by 
the donor (and the donor's successors in interest) must be subject to 
legally enforceable restrictions (for example, by recordation in the 
land records of the jurisdiction in which the property is located) that 
will prevent uses of the retained interest inconsistent with the 
conservation purposes of the donation. In

[[Page 150]]

the case of a contribution of a remainder interest, the contribution 
will not qualify if the tenants, whether they are tenants for life or a 
term of years, can use the property in a manner that diminishes the 
conservation values which are intended to be protected by the 
contribution.
    (2) Protection of a conservation purpose in case of donation of 
property subject to a mortgage. In the case of conservation 
contributions made after February 13, 1986, no deducion will be 
permitted under this section for an interest in property which is 
subject to a mortgage unless the mortgagee subordinates its rights in 
the property to the right of the qualified organization to enforce the 
conservation purposes of the gift in perpetuity. For conservation 
contributions made prior to February 14, 1986, the requirement of 
section 170 (h)(5)(A) is satisfied in the case of mortgaged property 
(with respect to which the mortgagee has not subordinated its rights) 
only if the donor can demonstrate that the conservation purpose is 
protected in perpetuity without subordination of the mortgagee's rights.
    (3) Remote future event. A deduction shall not be disallowed under 
section 170(f)(3)(B)(iii) and this section merely because the interest 
which passes to, or is vested in, the donee organization may be defeated 
by the performance of some act or the happening of some event, if on the 
date of the gift it appears that the possibility that such act or event 
will occur is so remote as to be negligible. See paragraph (e) of Sec. 
1.170A-1. For example, a state's statutory requirement that use 
restrictions must be rerecorded every 30 years to remain enforceable 
shall not, by itself, render an easement nonperpetual.
    (4) Retention of qualified mineral interest--(i) In general. Except 
as otherwise provided in paragraph (g)(4)(ii) of this section, the 
requirements of this section are not met and no deduction shall be 
allowed in the case of a contribution of any interest when there is a 
retention by any person of a qualified mineral interest (as defined in 
paragraph (b)(1)(i) of this section) if at any time there may be 
extractions or removal of minerals by any surface mining method. 
Moreover, in the case of a qualified mineral interest gift, the 
requirement that the conservation purposes be protected in perpetuity is 
not satisfied if any method of mining that is inconsistent with the 
particular conservation purposes of a contribution is permitted at any 
time. See also Sec. 1.170A-14(e)(2). However, a deduction under this 
section will not be denied in the case of certain methods of mining that 
may have limited, localized impact on the real property but that are not 
irremediably destructive of significant conservation interests. For 
example, a deduction will not be denied in a case where production 
facilities are concealed or compatible with existing topography and 
landscape and when surface alteration is to be restored to its original 
state.
    (ii) Exception for qualified conservation contributions after July 
1984. (A) A contribution made after July 18, 1984, of a qualified real 
property interest described in section 170(h)(2)(A) shall not be 
disqualified under the first sentence of paragraph (g)(4)(i) of this 
section if the following requirements are satisfied.
    (1) The ownership of the surface estate and mineral interest were 
separated before June 13, 1976, and remain so separated up to and 
including the time of the contribution.
    (2) The present owner of the mineral interest is not a person whose 
relationship to the owner of the surface estate is described at the time 
of the contribution in section 267(b) or section 707(b), and
    (3) The probability of extraction or removal of minerals by any 
surface mining method is so remote as to be negligible.

Whether the probability of extraction or removal of minerals by surface 
mining is so remote as to be negligible is a question of fact and is to 
be made on a case by case basis. Relevant factors to be considered in 
determining if the probability of extraction or removal of minerals by 
surface mining is so remote as to be negligible include: Geological, 
geophysical or economic data showing the absence of mineral reserves on 
the property, or the lack of commercial feasibility at the time of the 
contribution of surface mining the mineral interest.

[[Page 151]]

    (B) If the ownership of the surface estate and mineral interest 
first became separated after June 12, 1976, no deduction is permitted 
for a contribution under this section unless surface mining on the 
property is completely prohibited.
    (iii) Examples. The provisions of paragraph (g)(4)(i) and (ii) of 
this section may be illustrated by the following examples:

    Example 1. K owns 5,000 acres of bottomland hardwood property along 
a major watershed system in the southern part of the United States. 
Agencies within the Department of the Interior have determined that 
southern bottomland hardwoods are a rapidly diminishing resource and a 
critical ecosystem in the south because of the intense pressure to cut 
the trees and convert the land to agricultural use. These agencies have 
further determined (and have indicated in correspondence with K) that 
bottomland hardwoods provide a superb habitat for numerous species and 
play an important role in controlling floods and purifying rivers. K 
donates to a qualified organization his entire interest in this property 
other than his interest in the gas and oil deposits that have been 
identified under K's property. K covenants and can ensure that, although 
drilling for gas and oil on the property may have some temporary 
localized impact on the real property, the drilling will not interfere 
with the overall conservation purpose of the gift, which is to protect 
the unique bottomland hardwood ecosystem. Accordingly, the donation 
qualifies for a deduction under this section.
    Example 2. Assume the same facts as in Example 1, except that in 
1979, K sells the mineral interest to A, an unrelated person, in an 
arm's-length transaction, subject to a recorded prohibition on the 
removal of any minerals by any surface mining method and a recorded 
prohibition against any mining technique that will harm the bottomland 
hardwood ecosystem. After the sale to A, K donates a qualified real 
property interest to a qualified organization to protect the bottomland 
hardwood ecosystem. Since at the time of the transfer, surface mining 
and any mining technique that will harm the bottomland hardwood 
ecosystem are completely prohibited, the donation qualifies for a 
deduction under this section.

    (5) Protection of conservation purpose where taxpayer reserves 
certain rights--(i) Documentation. In the case of a donation made after 
February 13, 1986, of any qualified real property interest when the 
donor reserves rights the exercise of which may impair the conservation 
interests associated with the property, for a deduction to be allowable 
under this section the donor must make available to the donee, prior to 
the time the donation is made, documentation sufficient to establish the 
condition of the property at the time of the gift. Such documentation is 
designed to protect the conservation interests associated with the 
property, which although protected in perpetuity by the easement, could 
be adversely affected by the exercise of the reserved rights. Such 
documentation may include:
    (A) The appropriate survey maps from the United States Geological 
Survey, showing the property line and other contiguous or nearby 
protected areas;
    (B) A map of the area drawn to scale showing all existing man-made 
improvements or incursions (such as roads, buildings, fences, or gravel 
pits), vegetation and identification of flora and fauna (including, for 
example, rare species locations, animal breeding and roosting areas, and 
migration routes), land use history (including present uses and recent 
past disturbances), and distinct natural features (such as large trees 
and aquatic areas);
    (C) An aerial photograph of the property at an appropriate scale 
taken as close as possible to the date the donation is made; and
    (D) On-site photographs taken at appropriate locations on the 
property. If the terms of the donation contain restrictions with regard 
to a particular natural resource to be protected, such as water quality 
or air quality, the condition of the resource at or near the time of the 
gift must be established. The documentation, including the maps and 
photographs, must be accompanied by a statement signed by the donor and 
a representative of the donee clearly referencing the documentation and 
in substance saying ``This natural resources inventory is an accurate 
representation of [the protected property] at the time of the 
transfer.''.
    (ii) Donee's right to inspection and legal remedies. In the case of 
any donation referred to in paragraph (g)(5)(i) of this section, the 
donor must agree to notify the donee, in writing, before exercising any 
reserved right, e.g. the right to extract certain minerals which

[[Page 152]]

may have an adverse impact on the conservation interests associated with 
the qualified real property interest. The terms of the donation must 
provide a right of the donee to enter the property at reasonable times 
for the purpose of inspecting the property to determine if there is 
compliance with the terms of the donation. Additionally, the terms of 
the donation must provide a right of the donee to enforce the 
conservation restrictions by appropriate legal proceedings, including 
but not limited to, the right to require the restoration of the property 
to its condition at the time of the donation.
    (6) Extinguishment. (i) In general. If a subsequent unexpected 
change in the conditions surrounding the property that is the subject of 
a donation under this paragraph can make impossible or impractical the 
continued use of the property for conservation purposes, the 
conservation purpose can nonetheless be treated as protected in 
perpetuity if the restrictions are extinguished by judicial proceeding 
and all of the donee's proceeds (determined under paragraph (g)(6)(ii) 
of this section) from a subsequent sale or exchange of the property are 
used by the donee organization in a manner consistent with the 
conservation purposes of the original contribution.
    (ii) Proceeds. In case of a donation made after February 13, 1986, 
for a deduction to be allowed under this section, at the time of the 
gift the donor must agree that the donation of the perpetual 
conservation restriction gives rise to a property right, immediately 
vested in the donee organization, with a fair market value that is at 
least equal to the proportionate value that the perpetual conservation 
restriction at the time of the gift, bears to the value of the property 
as a whole at that time. See Sec. 1.170A-14(h)(3)(iii) relating to the 
allocation of basis. For purposes of this paragraph (g)(6)(ii), that 
proportionate value of the donee's property rights shall remain 
constant. Accordingly, when a change in conditions give rise to the 
extinguishment of a perpetual conservation restriction under paragraph 
(g)(6)(i) of this section, the donee organization, on a subsequent sale, 
exchange, or involuntary conversion of the subject property, must be 
entitled to a portion of the proceeds at least equal to that 
proportionate value of the perpetual conservation restriction, unless 
state law provides that the donor is entitled to the full proceeds from 
the conversion without regard to the terms of the prior perpetual 
conservation restriction.
    (h) Valuation--(1) Entire interest of donor other than qualified 
mineral interest. The value of the contribution under section 170 in the 
case of a contribution of a taxpayer's entire interest in property other 
than a qualified mineral interest is the fair market value of the 
surface rights in the property contributed. The value of the 
contribution shall be computed without regard to the mineral rights. See 
paragraph (h)(4), example (1), of this section.
    (2) Remainder interest in real property. In the case of a 
contribution of any remainder interest in real property, section 
170(f)(4) provides that in determining the value of such interest for 
purposes of section 170, depreciation and depletion of such property 
shall be taken into account. See Sec. 1.170A-12. In the case of the 
contribution of a remainder interest for conservation purposes, the 
current fair market value of the property (against which the limitations 
of Sec. 1.170A-12 are applied) must take into account any pre-existing 
or contemporaneously recorded rights limiting, for conservation 
purposes, the use to which the subject property may be put.
    (3) Perpetual conservation restriction--(i) In general. The value of 
the contribution under section 170 in the case of a charitable 
contribution of a perpetual conservation restriction is the fair market 
value of the perpetual conservation restriction at the time of the 
contribution. See Sec. 1.170A-7(c). If there is a substantial record of 
sales of easements comparable to the donated easement (such as purchases 
pursuant to a governmental program), the fair market value of the 
donated easement is based on the sales prices of such comparable 
easements. If no substantial record of market-place sales is available 
to use as a meaningful or valid comparison, as a general rule (but not 
necessarily in all cases) the fair market value of a perpetual 
conservation

[[Page 153]]

restriction is equal to the difference between the fair market value of 
the property it encumbers before the granting of the restriction and the 
fair market value of the encumbered property after the granting of the 
restriction. The amount of the deduction in the case of a charitable 
contribution of a perpetual conservation restriction covering a portion 
of the contiguous property owned by a donor and the donor's family (as 
defined in section 267(c)(4)) is the difference between the fair market 
value of the entire contiguous parcel of property before and after the 
granting of the restriction. If the granting of a perpetual conservation 
restriction after January 14, 1986, has the effect of increasing the 
value of any other property owned by the donor or a related person, the 
amount of the deduction for the conservation contribution shall be 
reduced by the amount of the increase in the value of the other 
property, whether or not such property is contiguous. If, as a result of 
the donation of a perpetual conservation restriction, the donor or a 
related person receives, or can reasonably expect to receive, financial 
or economic benefits that are greater than those that will inure to the 
general public from the transfer, no deduction is allowable under this 
section. However, if the donor or a related person receives, or can 
reasonably expect to receive, a financial or economic benefit that is 
substantial, but it is clearly shown that the benefit is less than the 
amount of the transfer, then a deduction under this section is allowable 
for the excess of the amount transferred over the amount of the 
financial or economic benefit received or reasonably expected to be 
received by the donor or the related person. For purposes of this 
paragraph (h)(3)(i), related person shall have the same meaning as in 
either section 267(b) or section 707(b). (See Example 10 of paragraph 
(h)(4) of this section.)
    (ii) Fair market value of property before and after restriction. If 
before and after valuation is used, the fair market value of the 
property before contribution of the conservation restriction must take 
into account not only the current use of the property but also an 
objective assessment of how immediate or remote the likelihood is that 
the property, absent the restriction, would in fact be developed, as 
well as any effect from zoning, conservation, or historic preservation 
laws that already restrict the property's potential highest and best 
use. Further, there may be instances where the grant of a conservation 
restriction may have no material effect on the value of the property or 
may in fact serve to enhance, rather than reduce, the value of property. 
In such instances no deduction would be allowable. In the case of a 
conservation restriction that allows for any development, however 
limited, on the property to be protected, the fair maket value of the 
property after contribution of the restriction must take into account 
the effect of the development. In the case of a conservation easement 
such as an easement on a certified historic structure, the fair market 
value of the property after contribution of the restriction must take 
into account the amount of access permitted by the terms of the 
easement. Additionally, if before and after valuation is used, an 
appraisal of the property after contribution of the restriction must 
take into account the effect of restrictions that will result in a 
reduction of the potential fair market value represented by highest and 
best use but will, nevertheless, permit uses of the property that will 
increase its fair market value above that represented by the property's 
current use. The value of a perpetual conservation restriction shall not 
be reduced by reason of the existence of restrictions on transfer 
designed solely to ensure that the conservation restriction will be 
dedicated to conservation purposes. See Sec. 1.170A-14 (c)(3).
    (iii) Allocation of basis. In the case of the donation of a 
qualified real property interest for conservation purposes, the basis of 
the property retained by the donor must be adjusted by the elimination 
of that part of the total basis of the property that is properly 
allocable to the qualified real property interest granted. The amount of 
the basis that is allocable to the qualified real property interest 
shall bear the same ratio to the total basis of the property as the fair 
market value of the qualified real property interest

[[Page 154]]

bears to the fair market value of the property before the granting of 
the qualified real property interest. When a taxpayer donates to a 
qualifying conservation organization an easement on a structure with 
respect to which deductions are taken for depreciation, the reduction 
required by this paragraph (h)(3)(ii) in the basis of the property 
retained by the taxpayer must be allocated between the structure and the 
underlying land.
    (4) Examples. The provisions of this section may be illustrated by 
the following examples. In examples illustrating the value or 
deductibility of donations, the applicable restrictions and limitations 
of Sec. 1.170A-4, with respect to reduction in amount of charitable 
contributions of certain appreciated property, and Sec. 1.170A-8, with 
respect to limitations on charitable deductions by individuals. must 
also be taken into account.

    Example 1. A owns Goldacre, a property adjacent to a state park. A 
wants to donate Goldacre to the state to be used as part of the park, 
but A wants to reserve a qualified mineral interest in the property, to 
exploit currently and to devise at death. The fair market value of the 
surface rights in Goldacre is $200,000 and the fair market value of the 
mineral rights in $100.000. In order to ensure that the quality of the 
park will not be degraded, restrictions must be imposed on the right to 
extract the minerals that reduce the fair market value of the mineral 
rights to $80,000. Under this section, the value of the contribution is 
$200,000 (the value of the surface rights).
    Example 2. In 1984 B, who is 62, donates a remainder interest in 
Greenacre to a qualifying organization for conservation purposes. 
Greenacre is a tract of 200 acres of undeveloped woodland that is valued 
at $200,000 at its highest and best use. Under Sec. 1.170A-12(b), the 
value of a remainder interest in real property following one life is 
determined under Sec. 25.2512-5 of this chapter (Gift Tax Regulations). 
(See Sec. 25.2512-5A of this chapter with respect to the valuation of 
annuities, interests for life or term of years, and remainder or 
reversionary interests transferred before May 1, 2009.) Accordingly, the 
value of the remainder interest, and thus the amount eligible for an 
income tax deduction under section 170(f), is $55,996 ($200,000x.27998).
    Example 3. Assume the same facts as in Example 2, except that 
Greenacre is B's 200-acre estate with a home built during the colonial 
period. Some of the acreage around the home is cleared; the balance of 
Greenacre, except for access roads, is wooded and undeveloped. See 
section 170(f)(3)(B)(i). However, B would like Greenacre to be 
maintained in its current state after his death, so he donates a 
remainder interest in Greenacre to a qualifying organization for 
conservation purposes pursunt to section 170 (f)(3)(B)(iii) and 
(h)(2)(B). At the time of the gift the land has a value of $200,000 and 
the house has a value of $100,000. The value of the remainder interest, 
and thus the amount eligible for an income tax deduction under section 
170(f), is computed pursuant to Sec. 1.170A-12. See Sec. 1.170A-
12(b)(3).
    Example 4. Assume the same facts as in Example 2, except that at age 
62 instead of donating a remainder interest B donates an easement in 
Greenacre to a qualifying organization for conservation purposes. The 
fair market value of Greenacre after the donation is reduced to 
$110,000. Accordingly, the value of the easement, and thus the amount 
eligible for a deduction under section 170(f), is $90,000 ($200,000 less 
$110,000).
    Example 5. Assume the same facts as in Example 4, and assume that 
three years later, at age 65, B decides to donate a remainder interest 
in Greenacre to a qualifying organization for conservation purposes. 
Increasing real estate values in the area have raised the fair market 
value of Greenacre (subject to the easement) to $130,000. Accordingly, 
the value of the remainder interest, and thus the amount eligible for a 
deduction under section 170(f), is $41,639 ($130,000x.32030).
    Example 6. Assume the same facts as in Example 2, except that at the 
time of the donation of a remainder interest in Greenacre, B also 
donates an easement to a different qualifying organization for 
conservation purposes. Based on all the facts and circumstances, the 
value of the easement is determined to be $100,000. Therefore, the value 
of the property after the easement is $100,000 and the value of the 
remainder interest, and thus the amount eligible for deduction under 
section 170(f), is $27,998 ($100,000x.27998).
    Example 7. C owns Greenacre, a 200-acre estate containing a house 
built during the colonial period. At its highest and best use, for home 
development, the fair market value of Greenacre is $300,000. C donates 
an easement (to maintain the house and Green acre in their current 
state) to a qualifying organization for conservation purposes. The fair 
market value of Greenacre after the donation is reduced to $125,000. 
Accordingly, the value of the easement and the amount eligible for a 
deduction under section 170(f) is $175.000 ($300,000 less $125,000).
    Example 8. Assume the same facts as in Example 7 and assume that 
three years later, C decides to donate a remainder interest in Greenacre 
to a qualifying organization for conservation purposes. Increasing real 
estate values in the area have raised the fair market value of Greenacre 
to $180.000. Assume

[[Page 155]]

that because of the perpetual easement prohibiting any development of 
the land, the value of the house is $120,000 and the value of the land 
is $60,000. The value of the remainder interest, and thus the amount 
eligible for an income tax deduction under section 170(f), is computed 
pursuant to Sec. 1.170A-12. See Sec. 1.170A-12(b)(3).
    Example 9. D owns property with a basis of $20,000 and a fair market 
value of $80,000. D donates to a qualifying organization an easement for 
conservation purposes that is determined under this section to have a 
fair market value of $60,000. The amount of basis allocable to the 
easement is $15,000 ($60,000/$80,000=$15,000/$20,000). Accordingly, the 
basis of the property is reduced to $5,000 ($20,000 minus $15,000).
    Example 10. E owns 10 one-acre lots that are currently woods and 
parkland. The fair market value of each of E's lots is $15,000 and the 
basis of each lot is $3,000. E grants to the county a perpetual easement 
for conservation purposes to use and maintain eight of the acres as a 
public park and to restrict any future development on those eight acres. 
As a result of the restrictions, the value of the eight acres is reduced 
to $1,000 an acre. However, by perpetually restricting development on 
this portion of the land, E has ensured that the two remaining acres 
will always be bordered by parkland, thus increasing their fair market 
value to $22,500 each. If the eight acres represented all of E's land, 
the fair market value of the easement would be $112,000, an amount equal 
to the fair market value of the land before the granting of the easement 
(8x$15,000=$120,000) minus the fair market value of the encumbered land 
after the granting of the easement (8x$1,000=$8,000). However, because 
the easement only covered a portion of the taxpayer's contiguous land, 
the amount of the deduction under section 170 is reduced to $97,000 
($150,000-$53,000), that is, the difference between the fair market 
value of the entire tract of land before ($150,000) and after 
((8x$1,000)+(2x $22,500)) the granting of the easement.
    Example 11. Assume the same facts as in example (10). Since the 
easement covers a portion of E's land, only the basis of that portion is 
adjusted. Therefore, the amount of basis allocable to the easement is 
$22,400 ((8x$3,000)x($112,000/$120,000)). Accordingly, the basis of the 
eight acres encumbered by the easement is reduced to $1,600 ($24,000-
$22,400), or $200 for each acre. The basis of the two remaining acres is 
not affected by the donation.
    Example 12. F owns and uses as professional offices a two-story 
building that lies within a registered historic district. F's building 
is an outstanding example of period architecture with a fair market 
value of $125,000. Restricted to its current use, which is the highest 
and best use of the property without making changes to the facade, the 
building and lot would have a fair market value of $100,000, of which 
$80,000 would be allocable to the building and $20,000 woud be allocable 
to the lot. F's basis in the property is $50,000, of which $40,000 is 
allocable to the building and $10,000 is allocable to the lot. F's 
neighborhood is a mix of residential and commercial uses, and it is 
possible that F (or another owner) could enlarge the building for more 
extensive commercial use, which is its highest and best use. However, 
this would require changes to the facade. F would like to donate to a 
qualifying preservation organization an easement restricting any changes 
to the facade and promising to maintain the facade in perpetuity. The 
donation would qualify for a deduction under this section. The fair 
market value of the easement is $25,000 (the fair market value of the 
property before the easement, $125,000, minus the fair market value of 
the property after the easement, $100,000). Pursuant to Sec. 1.170A-
14(h)(3)(iii), the basis allocable to the easement is $10,000 and the 
basis of the underlying property (building and lot) is reduced to 
$40,000.

    (i) Substantiation requirement. If a taxpayer makes a qualified 
conservation contribution and claims a deduction, the taxpayer must 
maintain written records of the fair market value of the underlying 
property before and after the donation and the conservation purpose 
furthered by the donation and such information shall be stated in the 
taxpayer's income tax return if required by the return or its 
instructions. See also Sec. 1.170A-13(c) (relating to substantiation 
requirements for deductions in excess of $5,000 for charitable 
contributions made after 1984), and section 6659 (relating to additions 
to tax in the case of valuation overstatements).
    (j) Effective date. Except as otherwise provided in Sec. 1.170A-
14(g)(4)(ii), this section applies only to contributions made on or 
after December 18, 1980.

[T.D. 8069, 51 FR 1499, Jan. 14, 1986; 51 FR 5322, Feb. 13, 1986; 51 FR 
6219, Feb. 21, 1986, as amended by T.D. 8199, 53 FR 16085, May 5, 1988; 
T.D. 8540, 59 FR 30105, June 10, 1994; T.D. 8819, 64 FR 23228, Apr. 30, 
1999; T.D. 9448, 74 FR 21518, May 7, 2009]



Sec. 1.171-1  Bond premium.

    (a) Overview--(1) In general. This section and Sec. Sec. 1.171-2 
through 1.171-5 provide rules for the determination and amortization of 
bond premium by a holder. In general, a holder amortizes

[[Page 156]]

bond premium by offsetting the interest allocable to an accrual period 
with the premium allocable to that period. Bond premium is allocable to 
an accrual period based on a constant yield. The use of a constant yield 
to amortize bond premium is intended to generally conform the treatment 
of bond premium to the treatment of original issue discount under 
sections 1271 through 1275. Unless otherwise provided, the terms used in 
this section and Sec. Sec. 1.171-2 through 1.171-5 have the same 
meaning as those terms in sections 1271 through 1275 and the 
corresponding regulations. Moreover, unless otherwise provided, the 
provisions of this section and Sec. Sec. 1.171-2 through 1.171-5 apply 
in a manner consistent with those of sections 1271 through 1275 and the 
corresponding regulations. In addition, the anti-abuse rule in Sec. 
1.1275-2(g) applies for purposes of this section and Sec. Sec. 1.171-2 
through 1.171-5.
    (2) Cross-references. For rules dealing with the adjustments to a 
holder's basis to reflect the amortization of bond premium, see Sec. 
1.1016-5(b). For rules dealing with the treatment of bond issuance 
premium by an issuer, see Sec. 1.163-13.
    (b) Scope--(1) In general. Except as provided in paragraph (b)(2) of 
this section and Sec. 1.171-5, this section and Sec. Sec. 1.171-2 
through 1.171-4 apply to any bond that, upon its acquisition by the 
holder, is held with bond premium. For purposes of this section and 
Sec. Sec. 1.171-2 through 1.171-5, the term bond has the same meaning 
as the term debt instrument in Sec. 1.1275-1(d).
    (2) Exceptions. This section and Sec. Sec. 1.171-2 through 1.171-5 
do not apply to--
    (i) A bond described in section 1272(a)(6)(C) (regular interests in 
a REMIC, qualified mortgages held by a REMIC, and certain other debt 
instruments, or pools of debt instruments, with payments subject to 
acceleration);
    (ii) A bond to which Sec. 1.1275-4 applies (relating to certain 
debt instruments that provide for contingent payments);
    (iii) A bond held by a holder that has made a Sec. 1.1272-3 
election with respect to the bond;
    (iv) A bond that is stock in trade of the holder, a bond of a kind 
that would properly be included in the inventory of the holder if on 
hand at the close of the taxable year, or a bond held primarily for sale 
to customers in the ordinary course of the holder's trade or business; 
or
    (v) A bond issued before September 28, 1985, unless the bond bears 
interest and was issued by a corporation or by a government or political 
subdivision thereof.
    (c) General rule--(1) Tax-exempt obligations. A holder must amortize 
bond premium on a bond that is a tax-exempt obligation. See Sec. 1.171-
2(c) Example 4.
    (2) Taxable bonds. A holder may elect to amortize bond premium on a 
taxable bond. Except as provided in paragraph (c)(3) of this section, a 
taxable bond is any bond other than a tax-exempt obligation. See Sec. 
1.171-4 for rules relating to the election to amortize bond premium on a 
taxable bond.
    (3) Bonds the interest on which is partially excludable. For 
purposes of this section and Sec. Sec. 1.171-2 through 1.171-5, a bond 
the interest on which is partially excludable from gross income is 
treated as two instruments, a tax-exempt obligation and a taxable bond. 
The holder's basis in the bond and each payment on the bond are 
allocated between the two instruments based on a reasonable method.
    (d) Determination of bond premium--(1) In general. A holder acquires 
a bond at a premium if the holder's basis in the bond immediately after 
its acquisition by the holder exceeds the sum of all amounts payable on 
the bond after the acquisition date (other than payments of qualified 
stated interest). This excess is bond premium, which is amortizable 
under Sec. 1.171-2.
    (2) Additional rules for amounts payable on certain bonds. 
Additional rules apply to determine the amounts payable on a variable 
rate debt instrument, an inflation-indexed debt instrument, a bond that 
provides for certain alternative payment schedules, and a bond that 
provides for remote or incidental contingencies. See Sec. 1.171-3.
    (e) Basis. A holder determines its basis in a bond under this 
paragraph (e). This determination of basis applies only for purposes of 
this section and Sec. Sec. 1.171-2 through 1.171-5. Because of the 
application of this paragraph (e), the

[[Page 157]]

holder's basis in the bond for purposes of these sections may differ 
from the holder's basis for determining gain or loss on the sale or 
exchange of the bond.
    (1) Determination of basis--(i) In general. In general, the holder's 
basis in the bond is the holder's basis for determining loss on the sale 
or exchange of the bond.
    (ii) Bonds acquired in certain exchanges. If the holder acquired the 
bond in exchange for other property (other than in a reorganization 
defined in section 368) and the holder's basis in the bond is determined 
in whole or in part by reference to the holder's basis in the other 
property, the holder's basis in the bond may not exceed its fair market 
value immediately after the exchange. See paragraph (f) Example 1 of 
this section. If the bond is acquired in a reorganization, see section 
171(b)(4)(B).
    (iii) Convertible bonds--(A) General rule. If the bond is a 
convertible bond, the holder's basis in the bond is reduced by an amount 
equal to the value of the conversion option. The value of the conversion 
option may be determined under any reasonable method. For example, the 
holder may determine the value of the conversion option by comparing the 
market price of the convertible bond to the market prices of similar 
bonds that do not have conversion options. See paragraph (f) Example 2 
of this section.
    (B) Convertible bonds acquired in certain exchanges. If the bond is 
a convertible bond acquired in a transaction described in paragraph 
(e)(1)(ii) of this section, the holder's basis in the bond may not 
exceed its fair market value immediately after the exchange reduced by 
the value of the conversion option.
    (C) Definition of convertible bond. A convertible bond is a bond 
that provides the holder with an option to convert the bond into stock 
of the issuer, stock or debt of a related party (within the meaning of 
section 267(b) or 707(b)(1)), or into cash or other property in an 
amount equal to the approximate value of such stock or debt. For bonds 
issued on or after February 5, 2013, the term stock in the preceding 
sentence means an equity interest in any entity that is classified, for 
Federal tax purposes, as either a partnership or a corporation.
    (2) Basis in bonds held by certain transferees. Notwithstanding 
paragraph (e)(1) of this section, if the bond is transferred basis 
property (as defined in section 7701(a)(43)) and the transferor had 
acquired the bond at a premium, the holder's basis in the bond is--
    (i) The holder's basis for determining loss on the sale or exchange 
of the bond; reduced by
    (ii) Any amounts that the transferor could not have amortized under 
this paragraph (e) or under Sec. 1.171-4(c), except to the extent that 
the holder's basis already reflects a reduction attributable to such 
nonamortizable amounts.
    (f) Examples. The following examples illustrate the rules of this 
section:

    Example 1. Bond received in liquidation of a partnership interest--
(i) Facts. PR is a partner in partnership PRS. PRS does not have any 
unrealized receivables or inventory items as defined in section 751. On 
January 1, 1998, PRS distributes to PR a taxable bond, issued by an 
unrelated corporation, in liquidation of PR's partnership interest. At 
that time, the fair market value of PR's partnership interest is $40,000 
and the basis is $100,000. The fair market value of the bond is $40,000.
    (ii) Determination of basis. Under section 732(b), PR's basis in the 
bond is equal to PR's basis in the partnership interest. Therefore, PR's 
basis for determining loss on the sale or exchange of the bond is 
$100,000. However, because the distribution is treated as an exchange 
for purposes of section 171(b)(4), PR's basis in the bond is $40,000 for 
purposes of this section and Sec. Sec. 1.171-2 through 1.171-5. See 
paragraph (e)(1)(ii) of this section.
    Example 2. [Reserved] For further guidance, see Sec. 1.171-1T(f) 
Example 2.

[T.D. 8746, 62 FR 68177, Dec. 31, 1997, as amended by T.D. 9533, 76 FR 
39280, July 6, 2011; T.D. 9612, 78 FR 8005, Feb. 5, 2013]



Sec. 1.171-1T  Bond premium (temporary).

    (a) through (f) Example 1 [Reserved] For further guidance, see Sec. 
1.171-1(a) through (f) Example 1.

    Example 2. Convertible bond--(i) Facts. On January 1, 2012, A 
purchases for $1,100 B corporation's bond maturing on January 1, 2015, 
with a stated principal amount of $1,000, payable at maturity. The bond 
provides for unconditional payments of interest of $30 on

[[Page 158]]

January 1 and July 1 of each year. In addition, the bond is convertible 
into 15 shares of B corporation stock at the option of the holder. On 
January 1, 2012, B corporation's nonconvertible, publicly-traded, three-
year debt of comparable credit quality trades at a price that reflects a 
yield of 6.75 percent, compounded semiannually.
    (ii) Determination of basis. A's basis for determining loss on the 
sale or exchange of the bond is $1,100. As of January 1, 2012, 
discounting the remaining payments on the bond at the yield at which B's 
similar nonconvertible bonds trade (6.75 percent, compounded 
semiannually) results in a present value of $980. Thus, the value of the 
conversion option is $120. Under Sec. 1.171-1(e)(1)(iii)(A), A's basis 
is $980 ($1,100 -$120) for purposes of Sec. Sec. 1.171-1 through 1.171-
5. The sum of all amounts payable on the bond other than qualified 
stated interest is $1,000. Because A's basis (as determined under Sec. 
1.171-1(e)(1)(iii)(A)) does not exceed $1,000, A does not acquire the 
bond at a premium.

    (iii) Effective/applicability date. This Example 2 applies to bonds 
acquired on or after July 6, 2011.
    (g) Expiration date. The applicability of this section expires on or 
before July 1, 2014.

[T.D. 9533, 76 FR 39280, July 6, 2011]



Sec. 1.171-2  Amortization of bond premium.

    (a) Offsetting qualified stated interest with premium--(1) In 
general. A holder amortizes bond premium by offsetting the qualified 
stated interest allocable to an accrual period with the bond premium 
allocable to the accrual period. This offset occurs when the holder 
takes the qualified stated interest into account under the holder's 
regular method of accounting.
    (2) Qualified stated interest allocable to an accrual period. See 
Sec. 1.446-2(b) to determine the accrual period to which qualified 
stated interest is allocable and to determine the accrual of qualified 
stated interest within an accrual period.
    (3) Bond premium allocable to an accrual period. The bond premium 
allocable to an accrual period is determined under this paragraph 
(a)(3). Within an accrual period, the bond premium allocable to the 
period accrues ratably.
    (i) Step one: Determine the holder's yield. The holder's yield is 
the discount rate that, when used in computing the present value of all 
remaining payments to be made on the bond (including payments of 
qualified stated interest), produces an amount equal to the holder's 
basis in the bond as determined under Sec. 1.171-1(e). For this 
purpose, the remaining payments include only payments to be made after 
the date the holder acquires the bond. The yield is calculated as of the 
date the holder acquires the bond, must be constant over the term of the 
bond, and must be calculated to at least two decimal places when 
expressed as a percentage.
    (ii) Step two: Determine the accrual periods. A holder determines 
the accrual periods for the bond under the rules of Sec. 1.1272-
1(b)(1)(ii).
    (iii) Step three: Determine the bond premium allocable to the 
accrual period. The bond premium allocable to an accrual period is the 
excess of the qualified stated interest allocable to the accrual period 
over the product of the holder's adjusted acquisition price (as defined 
in paragraph (b) of this section) at the beginning of the accrual period 
and the holder's yield. In performing this calculation, the yield must 
be stated appropriately taking into account the length of the particular 
accrual period. Principles similar to those in Sec. 1.1272-1(b)(4) 
apply in determining the bond premium allocable to an accrual period.
    (4) Bond premium in excess of qualified stated interest--(i) Taxable 
bonds--(A) Bond premium deduction. In the case of a taxable bond, if the 
bond premium allocable to an accrual period exceeds the qualified stated 
interest allocable to the accrual period, the excess is treated by the 
holder as a bond premium deduction under section 171(a)(1) for the 
accrual period. However, the amount treated as a bond premium deduction 
is limited to the amount by which the holder's total interest inclusions 
on the bond in prior accrual periods exceed the total amount treated by 
the holder as a bond premium deduction on the bond in prior accrual 
periods. A deduction determined under this paragraph (a)(4)(i)(A) is not 
subject to section 67 (the 2-percent floor on miscellaneous itemized 
deductions). See Example 1 of Sec. 1.171-3(e).

[[Page 159]]

    (B) Carryforward. If the bond premium allocable to an accrual period 
exceeds the sum of the qualified stated interest allocable to the 
accrual period and the amount treated as a deduction for the accrual 
period under paragraph (a)(4)(i)(A) of this section, the excess is 
carried forward to the next accrual period and is treated as bond 
premium allocable to that period.
    (ii) Tax-exempt obligations. In the case of a tax-exempt obligation, 
if the bond premium allocable to an accrual period exceeds the qualified 
stated interest allocable to the accrual period, the excess is a 
nondeductible loss. If a regulated investment company (RIC) within the 
meaning of section 851 has excess bond premium for an accrual period 
that would be a nondeductible loss under the prior sentence, the RIC 
must use this excess bond premium to reduce its tax-exempt interest 
income on other tax-exempt obligations held during the accrual period.
    (5) Additional rules for certain bonds. Additional rules apply to 
determine the amortization of bond premium on a variable rate debt 
instrument, an inflation-indexed debt instrument, a bond that provides 
for certain alternative payment schedules, and a bond that provides for 
remote or incidental contingencies. See Sec. 1.171-3.
    (b) Adjusted acquisition price. The adjusted acquisition price of a 
bond at the beginning of the first accrual period is the holder's basis 
as determined under Sec. 1.171-1(e). Thereafter, the adjusted 
acquisition price is the holder's basis in the bond decreased by--
    (1) The amount of bond premium previously allocable under paragraph 
(a)(3) of this section; and
    (2) The amount of any payment previously made on the bond other than 
a payment of qualified stated interest.
    (c) Examples. The following examples illustrate the rules of this 
section. Each example assumes the holder uses the calendar year as its 
taxable year and has elected to amortize bond premium, effective for all 
relevant taxable years. In addition, each example assumes a 30-day month 
and 360-day year. Although, for purposes of simplicity, the yield as 
stated is rounded to two decimal places, the computations do not reflect 
this rounding convention. The examples are as follows:

    Example 1. Taxable bond--(i) Facts. On February 1, 1999, A purchases 
for $110,000 a taxable bond maturing on February 1, 2006, with a stated 
principal amount of $100,000, payable at maturity. The bond provides for 
unconditional payments of interest of $10,000, payable on February 1 of 
each year. A uses the cash receipts and disbursements method of 
accounting, and A decides to use annual accrual periods ending on 
February 1 of each year.
    (ii) Amount of bond premium. The interest payments on the bond are 
qualified stated interest. Therefore, the sum of all amounts payable on 
the bond (other than the interest payments) is $100,000. Under Sec. 
1.171-1, the amount of bond premium is $10,000 ($110,000-$100,000).
    (iii) Bond premium allocable to the first accrual period. Based on 
the remaining payment schedule of the bond and A's basis in the bond, 
A's yield is 8.07 percent, compounded annually. The bond premium 
allocable to the accrual period ending on February 1, 2000, is the 
excess of the qualified stated interest allocable to the period 
($10,000) over the product of the adjusted acquisition price at the 
beginning of the period ($110,000) and A's yield (8.07 percent, 
compounded annually). Therefore, the bond premium allocable to the 
accrual period is $1,118.17 ($10,000-$8,881.83).
    (iv) Premium used to offset interest. Although A receives an 
interest payment of $10,000 on February 1, 2000, A only includes in 
income $8,881.83, the qualified stated interest allocable to the period 
($10,000) offset with bond premium allocable to the period ($1,118.17). 
Under Sec. 1.1016-5(b), A's basis in the bond is reduced by $1,118.17 
on February 1, 2000.
    Example 2. Alternative accrual periods--(i) Facts. The facts are the 
same as in Example 1 of this paragraph (c) except that A decides to use 
semiannual accrual periods ending on February 1 and August 1 of each 
year.
    (ii) Bond premium allocable to the first accrual period. Based on 
the remaining payment schedule of the bond and A's basis in the bond, 
A's yield is 7.92 percent, compounded semiannually. The bond premium 
allocable to the accrual period ending on August 1, 1999, is the excess 
of the qualified stated interest allocable to the period ($5,000) over 
the product of the adjusted acquisition price at the beginning of the 
period ($110,000) and A's yield, stated appropriately taking into 
account the length of the accrual period (7.92 percent/2). Therefore, 
the bond premium allocable to the accrual period is $645.29 ($5,000-
$4,354.71). Although the accrual period ends on August 1, 1999, the 
qualified stated interest of $5,000 is not taken into income until 
February 1, 2000, the date it is received. Likewise, the bond premium of

[[Page 160]]

$645.29 is not taken into account until February 1, 2000. The adjusted 
acquisition price of the bond on August 1, 1999, is $109,354.71 (the 
adjusted acquisition price at the beginning of the period ($110,000) 
less the bond premium allocable to the period ($645.29)).
    (iii) Bond premium allocable to the second accrual period. Because 
the interval between payments of qualified stated interest contains more 
than one accrual period, the adjusted acquisition price at the beginning 
of the second accrual period must be adjusted for the accrued but unpaid 
qualified stated interest. See paragraph (a)(3)(iii) of this section and 
Sec. 1.1272-1(b)(4)(i)(B). Therefore, the adjusted acquisition price on 
August 1, 1999, is $114,354.71 ($109,354.71 + $5,000). The bond premium 
allocable to the accrual period ending on February 1, 2000, is the 
excess of the qualified stated interest allocable to the period ($5,000) 
over the product of the adjusted acquisition price at the beginning of 
the period ($114,354.71) and A's yield, stated appropriately taking into 
account the length of the accrual period (7.92 percent/2). Therefore, 
the bond premium allocable to the accrual period is $472.88 ($5,000-
$4,527.12).
    (iv) Premium used to offset interest. Although A receives an 
interest payment of $10,000 on February 1, 2000, A only includes in 
income $8,881.83, the qualified stated interest of $10,000 ($5,000 
allocable to the accrual period ending on August 1, 1999, and $5,000 
allocable to the accrual period ending on February 1, 2000) offset with 
bond premium of $1,118.17 ($645.29 allocable to the accrual period 
ending on August 1, 1999, and $472.88 allocable to the accrual period 
ending on February 1, 2000). As indicated in Example 1 of this paragraph 
(c), this same amount would be taken into income at the same time had A 
used annual accrual periods.
    Example 3. Holder uses accrual method of accounting--(i) Facts. The 
facts are the same as in Example 1 of this paragraph (c) except that A 
uses an accrual method of accounting. Thus, for the accrual period 
ending on February 1, 2000, the qualified stated interest allocable to 
the period is $10,000, and the bond premium allocable to the period is 
$1,118.17. Because the accrual period extends beyond the end of A's 
taxable year, A must allocate these amounts between the two taxable 
years.
    (ii) Amounts allocable to the first taxable year. The qualified 
stated interest allocable to the first taxable year is $9,166.67 
($10,000 x \11/12\). The bond premium allocable to the first taxable 
year is $1,024.99 ($1,118.17 x \11/12\).
    (iii) Premium used to offset interest. For 1999, A includes in 
income $8,141.68, the qualified stated interest allocable to the period 
($9,166.67) offset with bond premium allocable to the period 
($1,024.99). Under Sec. 1.1016-5(b), A's basis in the bond is reduced 
by $1,024.99 in 1999.
    (iv) Amounts allocable to the next taxable year. The remaining 
amounts of qualified stated interest and bond premium allocable to the 
accrual period ending on February 1, 2000, are taken into account for 
the taxable year ending on December 31, 2000.
    Example 4. Tax-exempt obligation--(i) Facts. On January 15, 1999, C 
purchases for $120,000 a tax-exempt obligation maturing on January 15, 
2006, with a stated principal amount of $100,000, payable at maturity. 
The obligation provides for unconditional payments of interest of 
$9,000, payable on January 15 of each year. C uses the cash receipts and 
disbursements method of accounting, and C decides to use annual accrual 
periods ending on January 15 of each year.
    (ii) Amount of bond premium. The interest payments on the obligation 
are qualified stated interest. Therefore, the sum of all amounts payable 
on the obligation (other than the interest payments) is $100,000. Under 
Sec. 1.171-1, the amount of bond premium is $20,000 ($120,000--
$100,000).
    (iii) Bond premium allocable to the first accrual period. Based on 
the remaining payment schedule of the obligation and C's basis in the 
obligation, C's yield is 5.48 percent, compounded annually. The bond 
premium allocable to the accrual period ending on January 15, 2000, is 
the excess of the qualified stated interest allocable to the period 
($9,000) over the product of the adjusted acquisition price at the 
beginning of the period ($120,000) and C's yield (5.48 percent, 
compounded annually). Therefore, the bond premium allocable to the 
accrual period is $2,420.55 ($9,000-$6,579.45).
    (iv) Premium used to offset interest. Although C receives an 
interest payment of $9,000 on January 15, 2000, C only receives tax-
exempt interest income of $6,579.45, the qualified stated interest 
allocable to the period ($9,000) offset with bond premium allocable to 
the period ($2,420.55). Under Sec. 1.1016-5(b), C's basis in the 
obligation is reduced by $2,420.55 on January 15, 2000.

[T.D. 8746, 62 FR 68178, Dec. 31, 1997]



Sec. 1.171-2T  Amortization of bond premium (temporary).

    (a)(1) through (a)(4)(i)(B) [Reserved] For further guidance, see 
Sec. 1.171-2(a)(1) through (a)(4)(i)(B).
    (C) Carryforward in holder's final accrual period--(1) If there is a 
bond premium carryforward determined under Sec. 1.171-2(a)(4)(i)(B) as 
of the end of the holder's accrual period in which the bond is sold, 
retired, or otherwise disposed of, the holder treats the amount of the 
carryforward as a bond premium deduction under section 171(a)(1) for the 
holder's taxable year in which the

[[Page 161]]

sale, retirement, or other disposition occurs. For purposes of Sec. 
1.1016-5(b), the holder's basis in the bond is reduced by the amount of 
bond premium allowed as a deduction under this paragraph 
(a)(4)(i)(C)(1).
    (2) Effective/applicability date. Notwithstanding Sec. 1.171-
5(a)(1), paragraph (a)(4)(i)(C)(1) of this section applies to a bond 
acquired on or after January 4, 2013. A taxpayer, however, may rely on 
paragraph (a)(4)(i)(C)(1) of this section for a bond acquired before 
that date.
    (ii) through (c) [Reserved] For further guidance, see Sec. 1.171-
2(a)(4)(ii) through (c).
    (d) Expiration date. The applicability of this section expires on or 
before December 31, 2015.

[T.D. 9609, 78 FR 667, Jan. 4, 2013]



Sec. 1.171-3  Special rules for certain bonds.

    (a) Variable rate debt instruments. A holder determines bond premium 
on a variable rate debt instrument by reference to the stated redemption 
price at maturity of the equivalent fixed rate debt instrument 
constructed for the variable rate debt instrument. The holder also 
allocates any bond premium among the accrual periods by reference to the 
equivalent fixed rate debt instrument. The holder constructs the 
equivalent fixed rate debt instrument, as of the date the holder 
acquires the variable rate debt instrument, by using the principles of 
Sec. 1.1275-5(e). See paragraph (e) Example 1 of this section.
    (b) Inflation-indexed debt instruments. A holder determines bond 
premium on an inflation-indexed debt instrument by assuming that there 
will be no inflation or deflation over the remaining term of the 
instrument. The holder also allocates any bond premium among the accrual 
periods by assuming that there will be no inflation or deflation over 
the remaining term of the instrument. The bond premium allocable to an 
accrual period offsets qualified stated interest allocable to the 
period. Notwithstanding Sec. 1.171-2(a)(4), if the bond premium 
allocable to an accrual period exceeds the qualified stated interest 
allocable to the period, the excess is treated as a deflation adjustment 
under Sec. 1.1275-7(f)(1)(i). However, the rules in Sec. 1.171-
2T(a)(4)(i)(C) apply to any remaining deflation adjustment attributable 
to bond premium as of the end of the holder's accrual period in which 
the bond is sold, retired, or otherwise disposed of. See Sec. 1.1275-7 
for other rules relating to inflation-indexed debt instruments.
    (c) Yield and remaining payment schedule of certain bonds subject to 
contingencies--(1) Applicability. This paragraph (c) provides rules that 
apply in determining the yield and remaining payment schedule of certain 
bonds that provide for an alternative payment schedule (or schedules) 
applicable upon the occurrence of a contingency (or contingencies). This 
paragraph (c) applies, however, only if the timing and amounts of the 
payments that comprise each payment schedule are known as of the date 
the holder acquires the bond (the acquisition date) and the bond is 
subject to paragraph (c)(2), (3), or (4) of this section. A bond does 
not provide for an alternative payment schedule merely because there is 
a possibility of impairment of a payment (or payments) by insolvency, 
default, or similar circumstances. See Sec. 1.1275-4 for the treatment 
of a bond that provides for a contingency that is not described in this 
paragraph (c).
    (2) Remaining payment schedule that is significantly more likely 
than not to occur. If, based on all the facts and circumstances as of 
the acquisition date, a single remaining payment schedule for a bond is 
significantly more likely than not to occur, this remaining payment 
schedule is used to determine and amortize bond premium under Sec. Sec. 
1.171-1 and 1.171-2.
    (3) Mandatory sinking fund provision. Notwithstanding paragraph 
(c)(2) of this section, if a bond is subject to a mandatory sinking fund 
provision described in Sec. 1.1272-1(c)(3), the provision is ignored 
for purposes of determining and amortizing bond premium under Sec. Sec. 
1.171-1 and 1.171-2.
    (4) Treatment of certain options--(i) Applicability. Notwithstanding 
paragraphs (c)(2) and (3) of this section, the rules of this paragraph 
(c)(4) determine the remaining payment schedule of a bond that provides 
the holder or issuer with an unconditional option or options, 
exercisable on one or more dates

[[Page 162]]

during the remaining term of the bond, to alter the bond's remaining 
payment schedule.
    (ii) Operating rules. A holder determines the remaining payment 
schedule of a bond by assuming that each option will (or will not) be 
exercised under the following rules:
    (A) Issuer options. In general, the issuer is deemed to exercise or 
not exercise an option or combination of options in the manner that 
minimizes the holder's yield on the obligation. However, the issuer of a 
taxable bond is deemed to exercise or not exercise a call option or 
combination of call options in the manner that maximizes the holder's 
yield on the bond.
    (B) Holder options. A holder is deemed to exercise or not exercise 
an option or combination of options in the manner that maximizes the 
holder's yield on the bond.
    (C) Multiple options. If both the issuer and the holder have 
options, the rules of paragraphs (c)(4)(ii)(A) and (B) of this section 
are applied to the options in the order that they may be exercised. 
Thus, the deemed exercise of one option may eliminate other options that 
are later in time.
    (5) Subsequent adjustments--(i) In general. Except as provided in 
paragraph (c)(5)(ii) of this section, if a contingency described in this 
paragraph (c) (including the exercise of an option described in 
paragraph (c)(4) of this section) actually occurs or does not occur, 
contrary to the assumption made pursuant to paragraph (c) of this 
section (a change in circumstances), then solely for purposes of section 
171, the bond is treated as retired and reacquired by the holder on the 
date of the change in circumstances for an amount equal to the adjusted 
acquisition price of the bond as of that date. If, however, the change 
in circumstances results in a substantially contemporaneous pro-rata 
prepayment as defined in Sec. 1.1275-2(f)(2), the pro-rata prepayment 
is treated as a payment in retirement of a portion of the bond. See 
paragraph (e) Example 2 of this section.
    (ii) Bond premium deduction on the issuer's call of a taxable bond. 
If a change in circumstances results from an issuer's call of a taxable 
bond or a partial call that is a pro-rata prepayment, the holder may 
deduct as bond premium an amount equal to the excess, if any, of the 
holder's adjusted acquisition price of the bond over the greater of--
    (A) The amount received on redemption; and
    (B) The amounts that would have been payable under the bond (other 
than payments of qualified stated interest) if no change in 
circumstances had occurred.
    (d) Remote and incidental contingencies. For purposes of determining 
and amortizing bond premium, if a bond provides for a contingency that 
is remote or incidental (within the meaning of Sec. 1.1275-2(h)), the 
holder takes the contingency into account under the rules for remote and 
incidental contingencies in Sec. 1.1275-2(h).
    (e) Examples. The following examples illustrate the rules of this 
section. Each example assumes the holder uses the calendar year as its 
taxable year and has elected to amortize bond premium, effective for all 
relevant taxable years. In addition, each example assumes a 30-day month 
and 360-day year. Although, for purposes of simplicity, the yield as 
stated is rounded to two decimal places, the computations do not reflect 
this rounding convention. The examples are as follows:

    Example 1. Variable rate debt instrument--(i) Facts. On March 1, 
1999, E purchases for $110,000 a taxable bond maturing on March 1, 2007, 
with a stated principal amount of $100,000, payable at maturity. The 
bond provides for unconditional payments of interest on March 1 of each 
year based on the percentage appreciation of a nationally-known 
commodity index. On March 1, 1999, it is reasonably expected that the 
bond will yield 12 percent, compounded annually. E uses the cash 
receipts and disbursements method of accounting, and E decides to use 
annual accrual periods ending on March 1 of each year. Assume that the 
bond is a variable rate debt instrument under Sec. 1.1275-5.
    (ii) Amount of bond premium. Because the bond is a variable rate 
debt instrument, E determines and amortizes its bond premium by 
reference to the equivalent fixed rate debt instrument constructed for 
the bond as of March 1, 1999. Because the bond provides for interest at 
a single objective rate that is reasonably expected to yield 12 percent, 
compounded annually, the equivalent fixed rate debt instrument for the 
bond is an eight-year bond with a principal amount of $100,000, payable 
at maturity. It provides for annual

[[Page 163]]

payments of interest of $12,000. E's basis in the equivalent fixed rate 
debt instrument is $110,000. The sum of all amounts payable on the 
equivalent fixed rate debt instrument (other than payments of qualified 
stated interest) is $100,000. Under Sec. 1.171-1, the amount of bond 
premium is $10,000 ($110,000 -$100,000).
    (iii) Bond premium allocable to each accrual period. E allocates 
bond premium to the remaining accrual periods by reference to the 
payment schedule on the equivalent fixed rate debt instrument. Based on 
the payment schedule of the equivalent fixed rate debt instrument and 
E's basis in the bond, E's yield is 10.12 percent, compounded annually. 
The bond premium allocable to the accrual period ending on March 1, 
2000, is the excess of the qualified stated interest allocable to the 
period for the equivalent fixed rate debt instrument ($12,000) over the 
product of the adjusted acquisition price at the beginning of the period 
($110,000) and E's yield (10.12 percent, compounded annually). 
Therefore, the bond premium allocable to the accrual period is $870.71 
($12,000-$11,129.29). The bond premium allocable to all the accrual 
periods is listed in the following schedule:

------------------------------------------------------------------------
                                                Adjusted
                                               acquisition     Premium
           Accrual period ending                price at      allocable
                                              beginning of    to accrual
                                             accrual period     period
------------------------------------------------------------------------
3/1/00.....................................     $110,000.00      $870.71
3/1/01.....................................      109,129.29       958.81
3/1/02.....................................      108,170.48     1,055.82
3/1/03.....................................      107,114.66     1,162.64
3/1/04.....................................      105,952.02     1,280.27
3/1/05.....................................      104,671.75     1,409.80
3/1/06.....................................      103,261.95     1,552.44
3/1/07.....................................      101,709.51     1,709.51
                                            ----------------------------
                                             ..............    10,000.00
------------------------------------------------------------------------

    (iv) Qualified stated interest for each accrual period. Assume the 
bond actually pays the following amounts of qualified stated interest:

------------------------------------------------------------------------
                                                              Qualified
                   Accrual period ending                        stated
                                                               interest
------------------------------------------------------------------------
3/1/00.....................................................    $2,000.00
3/1/01.....................................................         0.00
3/1/02.....................................................         0.00
3/1/03.....................................................    10,000.00
3/1/04.....................................................     8,000.00
3/1/05.....................................................    12,000.00
3/1/06.....................................................    15,000.00
3/1/07.....................................................     8,500.00
------------------------------------------------------------------------

    (v) Premium used to offset interest. E's interest income for each 
accrual period is determined by offsetting the qualified stated interest 
allocable to the period with the bond premium allocable to the period. 
For the accrual period ending on March 1, 2000, E includes in income 
$1,129.29, the qualified stated interest allocable to the period 
($2,000) offset with the bond premium allocable to the period ($870.71). 
For the accrual period ending on March 1, 2001, the bond premium 
allocable to the accrual period ($958.81) exceeds the qualified stated 
interest allocable to the period ($0) and, therefore, E does not have 
interest income for this accrual period. However, under Sec. 1.171-
2(a)(4)(i)(A), E may deduct as bond premium $958.81, the excess of the 
bond premium allocable to the accrual period ($958.81) over the 
qualified stated interest allocable to the accrual period ($0). For the 
accrual period ending on March 1, 2002, the bond premium allocable to 
the accrual period ($1,055.82) exceeds the qualified stated interest 
allocable to the accrual period ($0) and, therefore, E does not have 
interest income for the accrual period. Under Sec. 1.171-2(a)(4)(i)(A), 
E's deduction for bond premium for the accrual period is limited to 
$170.48, the excess of E's total interest inclusions on the bond in 
prior accrual periods ($1,129.29) over the total amount treated by E as 
a bond premium deduction in prior accrual periods ($958.81). Under Sec. 
1.171-2(a)(4)(i)(B), E must carry forward the remaining $885.34 of bond 
premium allocable to the period ending March 1, 2002, and treat it as 
bond premium allocable to the period ending March 1, 2003. The amount E 
includes in income for each accrual period is shown in the following 
schedule:

----------------------------------------------------------------------------------------------------------------
                                                               Premium
                                                 Qualified    allocable     Interest     Premium       Premium
             Accrual period ending                 stated     to accrual     income     deduction   carryforward
                                                  interest      period
----------------------------------------------------------------------------------------------------------------
3/1/00........................................    $2,000.00      $870.71    $1,129.29  ...........  ............
3/1/01........................................         0.00       958.81         0.00      $958.81  ............
3/1/02........................................         0.00     1,055.82         0.00       170.48       $885.34
3/1/03........................................    10,000.00     1,162.64     7,951.93  ...........  ............
3/1/04........................................     8,000.00     1,280.27     6,719.73  ...........  ............
3/1/05........................................    12,000.00     1,409.80    10,590.20  ...........  ............
3/1/06........................................    15,000.00     1,552.44    13,447.56  ...........  ............
3/1/07........................................     8,500.00     1,709.51     6,790.49
                                                            -------------
                                                ...........    10,000.00  ...........  ...........  ............
----------------------------------------------------------------------------------------------------------------


[[Page 164]]

    Example 2. Partial call that results in a pro-rata prepayment--(i) 
Facts. On April 1, 1999, M purchases for $110,000 N's taxable bond 
maturing on April 1, 2006, with a stated principal amount of $100,000, 
payable at maturity. The bond provides for unconditional payments of 
interest of $10,000, payable on April 1 of each year. N has the option 
to call all or part of the bond on April 1, 2001, at a 5 percent premium 
over the principal amount. M uses the cash receipts and disbursements 
method of accounting.
    (ii) Determination of yield and the remaining payment schedule. M's 
yield determined without regard to the call option is 8.07 percent, 
compounded annually. M's yield determined by assuming N exercises its 
call option is 6.89 percent, compounded annually. Under paragraph 
(c)(4)(ii)(A) of this section, it is assumed N will not exercise the 
call option because exercising the option would minimize M's yield. 
Thus, for purposes of determining and amortizing bond premium, the bond 
is assumed to be a seven-year bond with a single principal payment at 
maturity of $100,000.
    (iii) Amount of bond premium. The interest payments on the bond are 
qualified stated interest. Therefore, the sum of all amounts payable on 
the bond (other than the interest payments) is $100,000. Under Sec. 
1.171-1, the amount of bond premium is $10,000 ($110,000-$100,000).
    (iv) Bond premium allocable to the first two accrual periods. For 
the accrual period ending on April 1, 2000, M includes in income 
$8,881.83, the qualified stated interest allocable to the period 
($10,000) offset with bond premium allocable to the period ($1,118.17). 
The adjusted acquisition price on April 1, 2000, is $108,881.83 
($110,000-$1,118.17). For the accrual period ending on April 1, 2001, M 
includes in income $8,791.54, the qualified stated interest allocable to 
the period ($10,000) offset with bond premium allocable to the period 
($1,208.46). The adjusted acquisition price on April 1, 2001, is 
$107,673.37 ($108,881.83-$1,208.46).
    (v) Partial call. Assume N calls one-half of M's bond for $52,500 on 
April 1, 2001. Because it was assumed the call would not be exercised, 
the call is a change in circumstances. However, the partial call is also 
a pro-rata prepayment within the meaning of Sec. 1.1275-2(f)(2). As a 
result, the call is treated as a retirement of one-half of the bond. 
Under paragraph (c)(5)(ii) of this section, M may deduct $1,336.68, the 
excess of its adjusted acquisition price in the retired portion of the 
bond ($107,673.37/2, or $53,836.68) over the amount received on 
redemption ($52,500). M's adjusted basis in the portion of the bond that 
remains outstanding is $53,836.68 ($107,673.37-$53,836.68).

[T.D. 8746, 62 FR 68180, Dec. 31, 1997, as amended by T.D. 8838, 64 FR 
48547, Sept. 7, 1999; T.D. 9609, 78 FR 668, Jan. 4, 2013]



Sec. 1.171-4  Election to amortize bond premium on taxable bonds.

    (a) Time and manner of making the election--(1) In general. A holder 
makes the election to amortize bond premium by offsetting interest 
income with bond premium in the holder's timely filed federal income tax 
return for the first taxable year to which the holder desires the 
election to apply. The holder should attach to the return a statement 
that the holder is making the election under this section.
    (2) Coordination with OID election. If a holder makes an election 
under Sec. 1.1272-3 for a bond with bond premium, the holder is deemed 
to have made the election under this section.
    (b) Scope of election. The election under this section applies to 
all taxable bonds held during or after the taxable year for which the 
election is made.
    (c) Election to amortize made in a subsequent taxable year--(1) In 
general. If a holder elects to amortize bond premium and holds a taxable 
bond acquired before the taxable year for which the election is made, 
the holder may not amortize amounts that would have been amortized in 
prior taxable years had an election been in effect for those prior 
years.
    (2) Example. The following example illustrates the rule of this 
paragraph (c):

    Example. (i) Facts. On May 1, 1999, C purchases for $130,000 a 
taxable bond maturing on May 1, 2006, with a stated principal amount of 
$100,000, payable at maturity. The bond provides for unconditional 
payments of interest of $15,000, payable on May 1 of each year. C uses 
the cash receipts and disbursements method of accounting and the 
calendar year as its taxable year. C has not previously elected to 
amortize bond premium, but does so for 2002.
    (ii) Amount to amortize. C's basis for determining loss on the sale 
or exchange of the bond is $130,000. Thus, under Sec. 1.171-1, the 
amount of bond premium is $30,000. Under Sec. 1.171-2, if a bond 
premium election were in effect for the prior taxable years, C would 
have amortized $3,257.44 of bond premium on May 1, 2000, and $3,551.68 
of bond premium on May 1, 2001, based on annual accrual periods ending 
on May 1. Thus, for 2002 and future

[[Page 165]]

years to which the election applies, C may amortize only $23,190.88 
($30,000-$3,257.44-$3,551.68).

    (d) Revocation of election. The election under this section may not 
be revoked unless approved by the Commissioner. Because a revocation of 
the election is a change in accounting method, a taxpayer must follow 
the rules under Sec. 1.446-1(e)(3)(i) to request the Commissioner's 
consent to revoke the election. A revocation of the election applies to 
all taxable bonds held during or after the taxable year for which the 
revocation is effective. The holder may not amortize any remaining bond 
premium on bonds held at the beginning of the taxable year for which the 
revocation is effective. Therefore, no adjustment under section 481 is 
allowed upon the revocation of the election because no items of income 
or deduction are omitted or duplicated.

[T.D. 8746, 62 FR 68182, Dec. 31, 1997]



Sec. 1.171-5  Effective date and transition rules.

    (a) Effective date--(1) In general. Sections 1.171-1 through 1.171-4 
apply to bonds acquired on or after March 2, 1998. However, if a holder 
makes the election under Sec. 1.171-4 for the taxable year containing 
March 2, 1998, or any subsequent taxable year, Sec. Sec. 1.171-1 
through 1.171-4 apply to bonds held on or after the first day of the 
taxable year in which the election is made.
    (2) Transition rule for use of constant yield. Notwithstanding 
paragraph (a)(1) of this section, Sec. 1.171-2(a)(3) (providing that 
the bond premium allocable to an accrual period is determined with 
reference to a constant yield) does not apply to a bond issued before 
September 28, 1985.
    (b) Coordination with existing election. A holder is deemed to have 
made the election under Sec. 1.171-4 for the taxable year containing 
March 2, 1998, if the holder elected to amortize bond premium under 
section 171 and that election is effective on March 2, 1998. If the 
holder is deemed to have made the election under Sec. 1.171-4 for the 
taxable year containing March 2, 1998, Sec. Sec. 1.171-1 through 1.171-
4 apply to bonds acquired on or after the first day of that taxable 
year. See Sec. 1.171-4(d) for rules relating to a revocation of an 
election under section 171.
    (c) Accounting method changes--(1) Consent to change. A holder 
required to change its method of accounting for bond premium to comply 
with Sec. Sec. 1.171-1 through 1.171-3 must secure the consent of the 
Commissioner in accordance with the requirements of Sec. 1.446-1(e). 
Paragraph (c)(2) of this section provides the Commissioner's automatic 
consent for certain changes. A holder making the election under Sec. 
1.171-4 does not need the Commissioner's consent to make the election.
    (2) Automatic consent. The Commissioner grants consent for a holder 
to change its method of accounting for bond premium with respect to 
taxable bonds to which Sec. Sec. 1.171-1 through 1.171-3 apply. Because 
this change is made on a cut-off basis, no items of income or deduction 
are omitted or duplicated and, therefore, no adjustment under section 
481 is allowed. The consent granted by this paragraph (c)(2) applies 
provided--
    (i) The holder elected to amortize bond premium under section 171 
for a taxable year prior to the taxable year containing March 2, 1998, 
and that election has not been revoked;
    (ii) The change is made for the first taxable year for which the 
holder must account for a bond under Sec. Sec. 1.171-1 through 1.171-3; 
and
    (iii) The holder attaches to its return for the taxable year 
containing the change a statement that it has changed its method of 
accounting under this section.

[T.D. 8746, 62 FR 68182, Dec. 31, 1997]



Sec. 1.172-1  Net operating loss deduction.

    (a) Allowance of deduction. Section 172(a) allows as a deduction in 
computing taxable income for any taxable year subject to the Code the 
aggregate of the net operating loss carryovers and net operating loss 
carrybacks to such taxable year. This deduction is referred to as the 
net operating loss deduction. The net operating loss is the basis for 
the computation of the net operating loss carryovers and net operating 
loss carrybacks and ultimately for the net operating loss deduction 
itself. The net operating loss deduction shall not be disallowed for any 
taxable

[[Page 166]]

year merely because the taxpayer has no income from a trade or business 
for the taxable year.
    (b) Steps in computation of net operating loss deduction. The three 
steps to be taken in the ascertainment of the net operating loss 
deduction for any taxable year subject to the Code are as follows:
    (1) Compute the net operating loss for any preceding or succeeding 
taxable year from which a net operating loss may be carried over or 
carried back to such taxable year.
    (2) Compute the net operating loss carryovers to such taxable year 
from such preceding taxable years and the net operating loss carrybacks 
to such taxable year from such succeeding taxable years.
    (3) Add such net operating loss carryovers and carrybacks in order 
to determine the net operating loss deduction for such taxable year.
    (c) Statement with tax return. Every taxpayer claiming a net 
operating loss deduction for any taxable year shall file with his return 
for such year a concise statement setting forth the amount of the net 
operating loss deduction claimed and all material and pertinent facts 
relative thereto, including a detailed schedule showing the computation 
of the net operating loss deduction.
    (d) Ascertainment of deduction dependent upon net operating loss 
carryback. If the taxpayer is entitled in computing his net operating 
loss deduction to a carryback which he is not able to ascertain at the 
time his return is due, he shall compute the net operating loss 
deduction on his return without regard to such net operating loss 
carryback. When the taxpayer ascertains the net operating loss 
carryback, he may within the applicable period of limitations file a 
claim for credit or refund of the overpayment, if any, resulting from 
the failure to compute the net operating loss deduction for the taxable 
year with the inclusion of such carryback; or he may file an application 
under the provisions of section 6411 for a tentative carryback 
adjustment.
    (e) Law applicable to computations. (1) In determining the amount of 
any net operating loss carryback or carryover to any taxable year, the 
necessary computations involving any other taxable year shall be made 
under the law applicable to such other taxable year.
    (2) The net operating loss for any taxable year shall be determined 
under the law applicable to that year without regard to the year to 
which it is to be carried and in which, in effect, it is to be deducted 
as part of the net operating loss deduction.
    (3) The amount of the net operating loss deduction which shall be 
allowed for any taxable year shall be determined under the law 
applicable to that year.
    (f) Electing small business corporations. In determining the amount 
of the net operating loss deduction of any corporation, there shall be 
disregarded the net operating loss of such corporation for any taxable 
year for which such corporation was an electing small business 
corporation under subchapter S (section 1371 and following), chapter 1 
of the Code. In applying section 172(b)(1) and (2) to a net operating 
loss sustained in a taxable year in which the corporation was not an 
electing small business corporation, a taxable year in which the 
corporation was an electing small business corporation is counted as a 
taxable year to which such net operating loss is carried back or over. 
However, the taxable income for such year as determined under section 
172(b)(2) is treated as if it were zero for purposes of computing the 
balance of the loss available to the corporation as a carryback or 
carryover to other taxable years in which the corporation is not an 
electing small business corporation. See section 1374 and the 
regulations thereunder for allowance of a deduction to shareholders for 
a net operating loss sustained by an electing small business 
corporation.
    (g) Husband and wife. The net operating loss deduction of a husband 
and wife shall be determined in accordance with this section, but 
subject also to the provisions of Sec. 1.172-7.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 8107, 51 FR 
43345, Dec. 2, 1986]

[[Page 167]]



Sec. 1.172-2  Net operating loss in case of a corporation.

    (a) Modification of deductions. A net operating loss is sustained by 
a corporation in any taxable year if and to the extent that, for such 
year, there is an excess of deductions allowed by chapter 1 of the Code 
over gross income computed thereunder. In determining the excess of 
deductions over gross income for such purpose--
    (1) Items not deductible. No deduction shall be allowed under--
    (i) Section 172 for the net operating loss deduction, and
    (ii) Section 922 in respect of Western Hemisphere trade 
corporations;
    (2) Dividends received. The 85-percent limitation provided by 
section 246(b) shall not apply to the deductions otherwise allowed 
under--
    (i) Section 243(a) in respect of dividends received from domestic 
corporations.
    (ii) Section 244 in respect of dividends received on preferred stock 
of public utilities, and
    (iii) Section 245 in respect of dividends received from foreign 
corporations; and
    (3) Dividends paid. The deduction granted by section 247 in respect 
of dividends paid on the preferred stock of public utilities shall be 
computed without regard to subsection (a)(1)(B) of Section 247.
    (b) Example. The following example illustrates the application of 
paragraph (a):

    Example. For the calendar year 1981, the X corporation has a gross 
income of $400,000 and total deductions allowed by chapter 1 of the Code 
of $375,000 exclusive of any net operating loss deduction and exclusive 
of any deduction for dividends received or paid. Corporation X in 1981 
received $100,000 of dividends entitled to the benefits of section 
243(a). These dividends are included in Corporation X's $400,000 gross 
income. Corporation X has no other deductions to which section 172(d) 
applies. On the basis of these facts, Corporation X has a net operating 
loss for the year 1981 of $60,000, computed as follows:

Deductions for 1981..........................................   $375,000
Plus: Deduction for dividends received, computed without          85,000
 regard to the limitation provided in section 246(b) (85% of
 $100,000)...................................................
                                                              ----------
      Total..................................................    460,000
Less: Gross income for 1981 (including $100,000 dividends)...    400,000
                                                              ----------
      Net operating loss for 1981............................     60,000
 

    (c) Qualified real estate investment trusts. For taxable years 
ending after October 4, 1976, the net operating loss of a qualified real 
estate investment trust (as defined in Sec. 1.172-10(b)) is computed by 
taking into account the adjustments described in section 857(b)(2) 
(other than the deduction for dividends paid, as defined in section 
561), as well as the modifications required by paragraph (a)(1) of this 
section. Thus, for example, the special deductions for dividends 
received, etc., provided in part VIII of subchapter B (other than 
section 248), as well as the net operating loss deduction under section 
172, are not allowed in computing the net operating loss of a qualified 
real estate investment trust.

[T.D. 8107, 51 FR 43345, Dec. 2, 1986]



Sec. 1.172-3  Net operating loss in case of a taxpayer other than a 
corporation.

    (a) Modification of deductions. A net operating loss is sustained by 
a taxpayer other than a corporation in any taxable year if and to the 
extent that, for such year there is an excess of deductions allowed by 
chapter 1 of the Internal Revenue Code over gross income computed 
thereunder. In determining the excess of deductions over gross income 
for such purpose:
    (1) Items not deductible. No deduction shall be allowed under:
    (i) Section 151 for the personal exemptions or under any other 
section which grants a deduction in lieu of the deductions allowed by 
section 151,
    (ii) Section 172 for the net operating loss deduction, and
    (iii) Section 1202 in respect of the net long-term capital gain.
    (2) Capital losses. (i) The amount deductible on account of business 
capital losses shall not exceed the sum of the amount includible on 
account of business capital gains and that portion of nonbusiness 
capital gains which is computed in accordance with paragraph (c) of this 
section.
    (ii) The amount deductible on account of nonbusiness capital losses 
shall not exceed the amount includible

[[Page 168]]

on account of nonbusiness capital gains.
    (3) Nonbusiness deductions--(i) Ordinary deductions. Ordinary 
nonbusiness deductions shall be taken into account without regard to the 
amount of business deductions and shall be allowed in full to the 
extent, but not in excess, of that amount which is the sum of the 
ordinary nonbusiness gross income and the excess of nonbusiness capital 
gains over nonbusiness capital losses. See paragraph (c) of this 
section. For purposes of section 172, nonbusiness deductions and income 
are those deductions and that income which are not attributable to, or 
derived from, a taxpayer's trade or business. Wages and salary 
constitute income attributable to the taxpayer's trade or business for 
such purposes.
    (ii) Sale of business property. Any gain or loss on the sale or 
other disposition of property which is used in the taxpayer's trade or 
business and which is of a character that is subject to the allowance 
for depreciation provided in section 167, or of real property used in 
the taxpayer's trade or business, shall be considered, for purposes of 
section 172(d)(4), as attributable to, or derived from, the taxpayer's 
trade or business. Such gains and losses are to be taken into account 
fully in computing a net operating loss without regard to the limitation 
on nonbusiness deductions. Thus, a farmer who sells at a loss land used 
in the business of farming may, in computing a net operating loss, 
include in full the deduction otherwise allowable with respect to such 
loss, without regard to the amount of his nonbusiness income and without 
regard to whether he is engaged in the trade or business of selling 
farms. Similarly, an individual who sells at a loss machinery which is 
used in his trade or business and which is of a character that is 
subject to the allowance for depreciation may, in computing the net 
operating loss, include in full the deduction otherwise allowable with 
respect to such loss.
    (iii) Casualty losses. Any deduction allowable under section 
165(c)(3) for losses of property not connected with a trade or business 
shall not be considered, for purposes of section 172(d)(4), to be a 
nonbusiness deduction but shall be treated as a deduction attributable 
to the taxpayer's trade or business.
    (iv) Self-employed retirement plans. Any deduction allowed under 
section 404, relating to contributions of an employer to an employees' 
trust or annuity plan, or under section 405(c), relating to 
contributions to a bond purchase plan, to the extent attributable to 
contributions made on behalf of an individual while he is an employee 
within the meaning of section 401(c)(1), shall not be treated, for 
purposes of section 172(d)(4), as attributable to, or derived from, the 
taxpayer's trade or business, but shall be treated as a nonbusiness 
deduction.
    (v) Limitation. The provisions of this subparagraph shall not be 
construed to permit the deduction of items disallowed by subparagraph 
(1) of this paragraph.
    (b) Treatment of capital loss carryovers. Because of the distinction 
between business and nonbusiness capital gains and losses, a taxpayer 
who has a capital loss carryover from a preceding taxable year, 
includible by virtue of section 1212 among the capital losses for the 
taxable year in issue, is required to determine how much of such capital 
loss carryover is a business capital loss and how much is a nonbusiness 
capital loss. In order to make this determination, the taxpayer shall 
first ascertain what proportion of the net capital loss for such 
preceding taxable year was attributable to an excess of business capital 
losses over business capital gains for such year, and what proportion 
was attributable to an excess of nonbusiness capital losses over 
nonbusiness capital gains. The same proportion of the capital loss 
carryover from such preceding taxable year shall be treated as a 
business capital loss and a nonbusiness capital loss, respectively. In 
order to determine the composition (business--nonbusiness) of a net 
capital loss for a taxable year, for purposes of this paragraph, if such 
net capital loss is computed under paragraph (b) of Sec. 1.1212-1 and 
takes into account a capital loss carryover from a preceding taxable 
year, the composition (business--nonbusiness) of the net capital loss 
for such preceding taxable

[[Page 169]]

year must also be determined. For purposes of this paragraph, the term 
capital loss carryover means the sum of the short-term and long-term 
capital loss carryovers from such year. This paragraph may be 
illustrated by the following examples:

    Example 1. (i) A, an individual, has $5,000 ordinary taxable income 
(computed without regard to the deductions for personal exemptions) for 
the calendar year 1954 and also has the following capital gains and 
losses for such year: Business capital gains of $2,000; business capital 
losses of $3,200; nonbusiness capital gains of $1,000; and nonbusiness 
capital losses of $1,200.
    (ii) A's net capital loss for the taxable year 1954 is $400, 
computed as follows:

Capital losses...............................................     $4,400
Capital gains................................................      3,000
                                                              ----------
Excess of capital losses over capital gains..................      1,400
Less: $1,000 of such ordinary taxable income.................      1,000
                                                              ----------
    Net capital loss for 1954................................        400
 

    (iii) A's capital losses for 1954 exceeded his capital gains for 
such year by $1,400. Since A's business capital losses for 1954 exceeded 
his business capital gains for such year by $1,200, 6/7ths ($1,200/
$1,400) of A's net capital loss for 1954 is attributable to an excess of 
his business capital losses over his business capital gains for such 
year. Similarly, 1/7th of the net capital loss is attributable to the 
excess of nonbusiness capital losses over nonbusiness capital gains. 
Since the capital loss carryover for 1954 to 1955 is $400, 6/7ths of 
$400, or $342.86, shall be treated as a business capital loss in 1955; 
and 1/7th of $400, or $57.14, as a nonbusiness capital loss.
    Example 2. (i) A, an individual who is computing a net operating 
loss for the calendar year 1966, has a capital loss carryover from 1965 
of $8,000. In order to apply the provisions of this paragraph, A must 
determine what portion of the $8,000 carryover is attributable to the 
excess of business capital losses over business capital gains and what 
portion thereof is attributable to the excess of nonbusiness capital 
losses over nonbusiness capital gains. For 1965, A had $10,000 ordinary 
taxable income (computed without regard to the deductions for personal 
exemptions), and a short-term capital loss carryover of $6,000 from 
1964. In order to determine the composition (business--nonbusiness) of 
the $8,000 carryover from 1965, A first determines that of the $6,000 
carryover from 1964, $5,000 is a business capital loss and $1,000 is a 
nonbusiness capital loss. This must be done since, under paragraph (b) 
of Sec. 1.1212-1, the net capital loss for 1965 is computed by taking 
into account the capital loss carryover from 1964. A's capital gains and 
losses for 1965 are as follows:

------------------------------------------------------------------------
                                                           Carried over
                                                  1965       from 1964
------------------------------------------------------------------------
Business capital gains........................    $2,000               0
Business capital losses.......................     3,000          $5,000
Nonbusiness capital gains.....................     4,000               0
Nonbusiness capital losses....................     6,000           1,000
------------------------------------------------------------------------

    (ii) A's net capital loss for the taxable year 1965 is $8,000, 
computed as follows:

Capital losses (including carryovers)........................    $15,000
Capital gains................................................      6,000
                                                              ----------
Excess of capital losses over capital gains..................      9,000
Less: $1,000 of such ordinary taxable income.................      1,000
                                                              ----------
    Net capital loss for 1965................................      8,000
 

    (iii) A's capital losses, including carryovers, for 1965 exceeded 
his capital gains for such year by $9,000. Since A's business capital 
losses for 1965 exceeded his business capital gains for such year by 
$6,000, 2/3rds ($6,000/$9,000) of A's net capital loss for 1965 is 
attributable to an excess of his business capital losses over his 
business capital gains for such year. Similarly, 1/3rd of the net 
capital loss is attributable to the excess of nonbusiness capital losses 
over nonbusiness capital gains. Since the total capital loss carryover 
from 1965 to 1966 is $8,000, 2/3rds of $8,000, or $5,333.33, shall be 
treated as a business capital loss in 1966; and 1/3rd of $8,000, or 
$2,666.67, as a nonbusiness capital loss.

    (c) Determination of portion of nonbusiness capital gains available 
for the deduction of business capital losses. In the computation of a 
net operating loss a taxpayer other than a corporation must use his 
nonbusiness capital gains for the deduction of his nonbusiness capital 
losses. Any amount not necessary for this purpose shall then be used for 
the deduction of any excess of ordinary nonbusiness deductions over 
ordinary nonbusiness gross income. The remainder, computed by applying 
the excess ordinary nonbusiness deductions against the excess 
nonbusiness capital gains, shall be treated as nonbusiness capital gains 
and used for the purpose of determining the deductibility of business 
capital losses under paragraph (a)(2)(i) of this section. This principle 
may be illustrated by the following example:

    Example. (1) A, an individual, has a total nonbusiness gross income 
of $20,500, computed as follows:

Ordinary gross income........................................     $7,500
Capital gains................................................     13,000
                                                   ------------
    Total gross income.......................................     20,500
 


[[Page 170]]

    (2) A also has total nonbusiness deductions of $16,000, computed as 
follows:

Ordinary deductions..........................................     $9,000
Capital loss.................................................      7,000
                                                              ----------
    Total deductions.........................................     16,000
 

    (3) The portion of nonbusiness capital gains to be used for the 
purpose of determining the deductibility of business capital losses is 
$4,500, computed as follows:

Nonbusiness capital gains....................................    $13,000
Less: Nonbusiness capital loss...............................      7,000
                                                   ------------
Excess to be taken into account for purposes of paragraph         6,000
 (a)(3)(i) of this section...................................
Ordinary nonbusiness deductions...................     $9,000
Less: Ordinary nonbusiness gross income...........      7,500
                                                     --------      1,500
                                                              ----------
Portion of nonbusiness capital gains to be used for purposes       4,500
 of paragraph (a)(2)(i) of this section......................
 

    (d) Joint net operating loss of husband and wife. In the case of a 
husband and wife, the joint net operating loss for any taxable year for 
which a joint return is filed is to be computed on the basis of the 
combined income and deductions of both spouses, and the modifications 
prescribed in paragraph (a) of this section are to be computed as if the 
combined income and deductions of both spouses were the income and 
deductions of one individual.
    (e) Illustration of computation of net operating loss of a taxpayer 
other than a corporation--(1) Facts. For the calendar year 1954 A, an 
individual, has gross income of $483,000 and allowable deductions of 
$540,000. The latter amount does not include the net operating loss 
deduction or any deduction on account of the sale or exchange of capital 
assets. Included in gross income are business capital gains of $50,000 
and ordinary nonbusiness income of $10,000. Included among the 
deductions are ordinary nonbusiness deductions of $12,000 and a 
deduction of $600 for his personal exemption. A has a business capital 
loss of $60,000 in 1954. A has no other items of income or deductions to 
which section 172(d) applies.
    (2) Computation. On the basis of these facts, A has a net operating 
loss for 1954 of $104,400, computed as follows:

Deductions for 1954 (as specified in first sentence of          $540,000
 subparagraph (1))...........................................
Plus: Amount of business capital loss ($60,000) to extent         50,000
 such amount does not exceed business capital gains ($50,000)
                                                   ------------
    Total....................................................    590,000
Less: Excess of ordinary nonbusiness deductions        $2,000
 over ordinary nonbusiness gross income ($12,000
 minus $10,000)...................................
Deduction for personal exemption..................        600
                                                     --------     $2,600
                                                              ----------
Deductions for 1954 adjusted as required by section 172(d)...   587,400
Gross income for 1954.............................    483,000
                                                   ------------
    Net operating loss for 1954...................    104,400
 


[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6828, 30 FR 
7805, June 17, 1965; T.D. 6862, 30 FR 14427, Nov. 18, 1965; T.D. 8107, 
51 FR 43345, Dec. 2, 1986]



Sec. 1.172-4  Net operating loss carrybacks and net operating loss 
carryovers.

    (a) General provisions--(1) Years to which loss may be carried--(i) 
In general. In order to compute the net operating loss deduction the 
taxpayer must first determine the part of any net operating losses for 
any preceding or succeeding taxable years which are carrybacks or 
carryovers to the taxable year in issue.
    (ii) General rule for carrybacks and carryovers. Except as provided 
in section 172 (b)(1)(C), (D), (E), (F), (G), (H), (I), and (J), 
paragraphs (a)(1)(iii), (iv), (v), and (vi) of this section, and Sec. 
1.172-10(a), a net operating loss shall be carried back to the 3 
preceding taxable years and carried over to the 15 succeeding taxable 
years (5 succeeding taxable years for a loss sustained in a taxable year 
ending before January 1, 1976).
    (iii) Loss of a regulated transportation corporation. Except as 
provided in subdivision (iv) of this subparagraph and Sec. 1.172-10(a), 
a net operating loss sustained by a taxpayer which is a regulated 
transportation corporation (as defined in section 172(g)(1)) in a 
taxable year ending before January 1, 1976, shall, subject to the 
provisions of section 172(g) and Sec. 1.172-8, be carried back to the 
taxable years specified in paragraph (a)(1)(ii) of this section and 
shall be carried over to the 7 succeeding taxable years.
    (iv) Loss attributable to foreign expropriation. If the provisions 
of section 172(b)(3)(A) and Sec. 1.172-9 are satisfied, the portion of 
a net operating loss attributable to a foreign expropriation loss (as 
defined in section 172(h)) shall not be a net operating loss carryback

[[Page 171]]

to any taxable year preceding the taxable year of such loss and shall be 
a net operating loss carryover to each of the 10 taxable years following 
the taxable year of such loss.
    (v) Loss of a financial institution. A net operating loss sustained 
in a taxable year beginning after December 31, 1975, by a taxpayer to 
which section 585, 586, or 593 applies shall be carried back (except as 
provided in Sec. 1.172-10(a)) to the 10 preceding taxable years and 
shall be carried over to the 5 succeeding taxable years.
    (vi) Loss of a Bank for Cooperatives. A net operating loss sustained 
by a taxpayer which is a Bank for Cooperatives (organized and chartered 
pursuant to section 2 of the Farm Credit Act of 1933 (12 U.S.C. 1134)) 
shall be carried back (except as provided in Sec. 1.172-10(a)) to the 
10 preceding taxable years and shall be carried over to the 5 succeeding 
taxable years.
    (2) Periods of less than 12 months. A fractional part of a year 
which is a taxable year under sections 441(b) and 7701(a)(23) is a 
preceding or a succeeding taxable year for the purpose of determining 
under section 172 the first, second, etc., preceding or succeeding 
taxable year.
    (3) Amount of loss to be carried. The amount which is carried back 
or carried over to any taxable year is the net operating loss to the 
extent it was not absorbed in the computation of the taxable (or net) 
income for other taxable years, preceding such taxable year, to which it 
may be carried back or carried over. For the purpose of determining the 
taxable (or net) income for any such preceding taxable year, the various 
net operating loss carryovers and carrybacks to such taxable year are 
considered to be applied in reduction of the taxable (or net) income in 
the order of the taxable years from which such losses are carried over 
or carried back, beginning with the loss for the earliest taxable year.
    (4) Husband and wife. The net operating loss carryovers and 
carrybacks of a husband and wife shall be determined in accordance with 
this section, but subject also to the provisions of Sec. 1.172-7.
    (5) Corporate acquisitions. For the computation of the net operating 
loss carryovers in the case of certain acquisitions of the assets of a 
corporation by another corporation, see section 381 and the regulations 
thereunder.
    (6) Special limitations. For special limitations on the net 
operating loss carryovers in certain cases of change in both the 
ownership and the trade or business of a corporation and in certain 
cases of corporate reorganization lacking specified continuity of 
ownership, see section 382 and the regulations thereunder.
    (7) Electing small business corporations. For special rule 
applicable to corporations which were electing small business 
corporations under Subchapter S (section 1361 and following), chapter 1 
of the Code, during one or more of the taxable years described in 
section 172 (b)(1), see paragraph (f) of Sec. 1.172-1.
    (b) Portion of net operating loss which is a carryback or a 
carryover to the taxable year in issue. (1) A net operating loss shall 
first be carried to the earliest of the several taxable years for which 
such loss is allowable as a carryback or a carryover, and shall then be 
carried to the next earliest of such several taxable years, etc. Except 
as provided in Sec. 1.172-9, the entire net operating loss shall be 
carried back to such earliest year.
    (2) The portion of the loss which shall be carried to any of such 
several taxable years subsequent to the earliest taxable year is the 
excess of such net operating loss over the sum of the taxable incomes 
(computed as provided in Sec. 1.172-5) for all of such several taxable 
years preceding such subsequent taxable year.
    (3) If a portion of the net operating loss for a taxable year is 
attributable to a foreign expropriation loss (as defined in section 
172(h)) and if an election under paragraph (c) of Sec. 1.172-9 is made 
with respect to such portion of the net operating loss, then see Sec. 
1.172-9 for the separate treatment of such portion of the net operating 
loss.
    (c) Illustration. The principles of this section are illustrated in 
Sec. 1.172-6.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 8107, 51 FR 
43345, Dec. 2, 1986]

[[Page 172]]



Sec. 1.172-5  Taxable income which is subtracted from net operating 
loss to determine carryback or carryover.

    (a) Taxable year subject to the Internal Revenue Code of 1954. The 
taxable income for any taxable year subject to the Internal Revenue Code 
of 1954 which is subtracted from the net operating loss for any other 
taxable year to determine the portion of such net operating loss which 
is a carryback or a carryover to a particular taxable year is computed 
with the modifications prescribed in this paragraph. These modifications 
shall be made independently of, and without reference to, the 
modifications required by Sec. Sec. 1.172-2(a) and 1.172-3(a) for 
purposes of computing the net operating loss itself.
    (1) Modifications applicable to unincorporated taxpayers only. In 
the case of a taxpayer other than a corporation, in computing taxable 
income and adjusted gross income:
    (i) No deduction shall be allowed under section 151 for the personal 
exemptions (or under any other section which grants a deduction in lieu 
of the deductions allowed by section 151) and under section 1202 in 
respect of the net long-term capital gain.
    (ii) The amount deductible on account of losses from sales or 
exchanges of capital assets shall not exceed the amount includible on 
account of gains from sales or exchanges of capital assets.
    (2) Modifications applicable to all taxpayers. In the case either of 
a corporation or of a taxpayer other than a corporation:
    (i) Net operating loss deduction. The net operating loss deduction 
for such taxable year shall be computed by taking into account only such 
net operating losses otherwise allowable as carrybacks or carryovers to 
such taxable year as were sustained in taxable years preceding the 
taxable year in which the taxpayer sustained the net operating loss from 
which the taxable income is to be deducted. Thus, for such purposes, the 
net operating loss for the loss year or any taxable year thereafter 
shall not be taken into account.

    Example. The taxpayer's income tax returns are made on the basis of 
the calendar year. In computing the net operating loss deduction for 
1954, the taxpayer has a carryover from 1952 of $9,000, a carryover from 
1953 of $6,000, a carryback from 1955 of $18,000, and a carryback from 
1956 of $10,000, or an aggregate of $43,000 in carryovers and 
carrybacks. Thus, the net operating loss deduction for 1954, for 
purposes of determining the tax liability for 1954, is $43,000. However, 
in computing the taxable income for 1954 which is subtracted from the 
net operating loss for 1955 for the purpose of determining the portion 
of such loss which may be carried over to subsequent taxable years, the 
net operating loss deduction for 1954 is $15,000, that is, the aggregate 
of the $9,000 carryover from 1952 and the $6,000 carryover from 1953. In 
computing the net operating loss deduction for such purpose, the $18,000 
carryback from 1955 and the $10,000 carryback from 1956 are disregarded. 
In computing the taxable income for 1954, however, which is subtracted 
from the net operating loss for 1956 for the purpose of determining the 
portion of such loss which may be carried over to subsequent taxable 
years, the net operating loss deduction for 1954 is $33,000, that is, 
the aggregate of the $9,000 carryover from 1952, the $6,000 carryover 
from 1953, and the $18,000 carryback from 1955. In computing the net 
operating loss deduction for such purpose, the $10,000 carryback from 
1956 is disregarded.

    (ii) Recomputation of percentage limitations. Unless otherwise 
specifically provided in this subchapter, any deduction which is limited 
in amount to a percentage of the taxpayer's taxable income or adjusted 
gross income shall be recomputed upon the basis of the taxable income or 
adjusted gross income, as the case may be, determined with the 
modifications prescribed in this paragraph. Thus, in the case of an 
individual the deduction for medical expenses would be recomputed after 
making all the modifications prescribed in this paragraph, whereas the 
deduction for charitable contributions would be determined without 
regard to any net operating loss carryback but with regard to any other 
modifications so prescribed. See, however, the regulations under 
paragraph (g) of Sec. 1.170-2 (relating to charitable contributions 
carryover of individuals) and paragraph (c) of Sec. 1.170-3 (relating 
to charitable contributions carryover of corporations) for special rules 
regarding charitable contributions in excess of the percentage 
limitations which may be treated as paid in succeeding taxable years.


[[Page 173]]


    Example 1. For the calendar year 1954 the taxpayer, an individual, 
files a return showing taxable income of $4,800, computed as follows:

Salary.......................................................     $5,000
Net long-term capital gain...................................      4,000
                                                              ----------
    Total gross income.......................................      9,000
Less: Deduction allowed by section 1202 in respect of net          2,000
 long-term capital gain......................................
                                                              ----------
  Adjusted gross income......................................      7,000
Less:
  Deduction for personal exemption................       $600
  Deduction for medical expense ($410 actually            200
   paid but allowable only to extent in excess of
   3 percent of adjusted gross income)............
  Deduction for charitable contributions ($2,000       $1,400
   actually paid but allowable only to extent not
   in excess of 20 percent of adjusted gross
   income)........................................
                                                   -----------
                                                    .........     $2,200
                                                              ----------
    Taxable income...........................................      4,800
 


In 1955 the taxpayer undertakes the operation of a trade or business and 
sustains therein a net operating loss of $3,000. Under section 
172(b)(2), it is determined that the entire $3,000 is a carryback to 
1954. In 1956 he sustains a net operating loss of $10,000 in the 
operation of the business. In determining the amount of the carryover of 
the 1956 loss to 1957, the taxable income for 1954 as computed under 
this paragraph is $3,970, determined as follows:

Salary.......................................................     $5,000
Net long-term capital gain...................................      4,000
                                                              ----------
    Total gross income.......................................      9,000
Less: Deduction for carryback of 1955 net operating loss.....      3,000
                                                              ----------
    Adjusted gross income....................................      6,000
Less:
  Deduction for medical expense ($410 actually           $230  .........
   paid but allowable only to extent in excess of
   3 percent of adjusted gross income as modified
   under this paragraph)..........................
  Deduction for charitable contributions ($2,000        1,800  .........
   actually paid but allowable only to extent not
   in excess of 20 percent of adjusted gross
   income determined with all the modifications
   prescribed in this paragraph other than the net
   operating loss carryback)......................
                                                   -----------
                                                    .........      2,030
                                                              ----------
    Taxable income...........................................      3,970
 

    Example 2. For the calendar year 1959 the taxpayer, an individual, 
files a return showing taxable income of $5,700, computed as follows:

Salary.......................................................     $5,000
Net long-term capital gain...................................      4,000
                                                              ----------
    Total gross income.......................................      9,000
Less: Deduction allowed by section 1202 in respect of net          2,000
 long-term capital gain......................................
                                                              ----------
  Adjusted gross income......................................      7,000
Less:
  Deduction for personal exemption................       $600  .........
  Standard deduction allowed by section 141.......       $700  .........
                                                   -----------
                                                    .........     $1,300
                                                              ----------
    Taxable income................................  .........      5,700
 


In 1960 the taxpayer undertakes the operation of a trade or business and 
sustains therein a net operating loss of $4,700. In 1961 he sustains a 
net operating loss of $10,000 in the operation of the business. Under 
section 172(b)(2), it is determined that the entire amount of each loss, 
$4,700 and $10,000, is a carryback to 1959. In determining the amount of 
the carryover of the 1961 loss to 1962, the taxable income for 1959 as 
computed under this paragraph is $3,870, determined as follows:

Salary.......................................................     $5,000
Net long-term capital gain...................................      4,000
                                                              ----------
    Total gross income.......................................      9,000
Less: Deduction for carryback of 1960 net operating loss.....      4,700
                                                              ----------
    Adjusted gross income....................................      4,300
Less: Standard deduction.....................................        430
                                                              ----------
    Taxable income...........................................      3,870
 

    (iii) Minimum limitation. The taxable income, as modified under this 
paragraph, shall in no case be considered less than zero.
    (3) Electing small business corporations. For special rule 
applicable to corporations which were electing small business 
corporations under Subchapter S (section 1361 and following), Chapter 1 
of the Code, during one or more of the taxable years described in 
section 172(b)(1), see paragraph (f) of Sec. 1.172-1.
    (4) Qualified real estate investment trust. Where a net operating 
loss is carried over to a qualified taxable year (as defined in Sec. 
1.172-10(b)) ending after October 4, 1976, the real estate investment 
trust taxable income (as defined in section 857(b)(2)) shall be used as 
the ``taxable income'' for that taxable year to determine, under section 
172(b)(2), the balance of the net operating loss available as a 
carryover to a subsequent taxable year. The real estate investment trust 
taxable income, however, is computed by applying the rules

[[Page 174]]

applicable to corporations in paragraph (a)(2) of this section. Thus, in 
computing real estate investment trust taxable income for purposes of 
section 172(b)(2), the net operating loss deduction for the taxable year 
shall be computed in accordance with paragraph (a)(2)(i) of this 
section. The principles of this subparagraph may be illustrated by the 
following examples:

    Example 1. Corporation X, a calendar year taxpayer, is formed on 
January 1, 1977. X incurs a net operating loss of $100,000 for its 
taxable year 1977, which under section 172(b)(2), is a carryover to 
1978. For 1978 X is a qualified real estate investment trust (as defined 
in Sec. 1.172-10(b)) and has real estate investment trust taxable 
income (determined without regard to the deduction for dividends paid or 
the net operating loss deduction) of $150,000, all of which consists of 
ordinary income. X pays dividends in 1978 totaling $120,000 that qualify 
for the deduction for dividends paid under section 857(b)(2)(B). The 
portion of the 1977 net operating loss available as a carryover to 1979 
and subsequent years is $70,000 (i.e., the excess of the amount of the 
net operating loss ($100,000) over the amount of the real estate 
investment trust taxable income for 1978 ($30,000), determined by taking 
into account the deduction for dividends paid allowable under section 
857(b)(2)(B) and without taking into account the net operating loss of 
1977).
    Example 2. (i) Assume the same facts as in Example 1, except that 
the $150,000 of real estate investment trust taxable income (determined 
without the net operating loss deduction or the dividends paid 
deduction) consists of $80,000 of ordinary income and $70,000 of net 
capital gain. The amount of capital gain dividends which may be paid for 
1978 is limited to $50,000, that is, the amount of the real estate 
investment trust taxable income for 1978, determined by taking into 
account the net operating loss deduction for the taxable year, but not 
the deduction for dividends paid ($150,000 minus $100,000). See Sec. 
1.857-6(e)(1)(ii).
    (ii) X designated $50,000 of the $120,000 of dividends paid as 
capital gains dividends (as defined in section 857(b)(3)(C) and Sec. 
1.857-6(e)). Thus, $70,000 is an ordinary dividend. Since both ordinary 
dividends and capital gains dividends are taken into account in 
computing the deduction for dividends paid under section 857(b)(2)(B), 
the result will be the same as in Example 1; that is, the portion of the 
1977 net operating loss available as a carryover to 1979 and subsequent 
years is $70,000.

    (b) [Reserved]

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6862, 30 FR 
14428, Nov. 18, 1965; T.D. 6900, 31 FR 14641, Nov. 17, 1966; T.D. 7767, 
46 FR 11263, Feb. 6, 1981; T.D. 8107, 51 FR 43346, Dec. 2, 1986]



Sec. 1.172-6  Illustration of net operating loss carrybacks and 
carryovers.

    The application of Sec. 1.172-4 may be illustrated by the following 
example:
    (a) Facts. The books of the taxpayer, whose return is made on the 
basis of the calendar year, reveal the following facts:

------------------------------------------------------------------------
                                                                  Net
                   Taxable year                      Taxable   operating
                                                      income      loss
------------------------------------------------------------------------
1954..............................................    $15,000
1955..............................................     30,000
1956..............................................  .........  ($75,000)
1957..............................................     20,000
1958..............................................  .........  (150,000)
1959..............................................     30,000
1960..............................................     35,000
1961..............................................     75,000
1962..............................................     17,000
1963..............................................     53,000
------------------------------------------------------------------------


The taxable income thus shown is computed without any net operating loss 
deduction. The assumption is also made that none of the other 
modifications prescribed in Sec. 1.172-5 apply. There are no net 
operating losses for 1950, 1951, 1952, 1953, 1964, 1965, or 1966.
    (b) Loss sustained in 1956. The portions of the $75,000 net 
operating loss for 1956 which shall be used as carrybacks to 1954 and 
1955 and as carryovers to 1957, 1958, 1959, 1960, and 1961 are computed 
as follows:
    (1) Carryback to 1954. The carryback to this year is $75,000, that 
is, the amount of the net operating loss.
    (2) Carryback to 1955. The carryback to this year is $60,000, 
computed as follows:

Net operating loss...........................................    $75,000
Less:
  Taxable income for 1954 (computed without the deduction of      15,000
   the carryback from 1956)..................................
                                                              ----------
    Carryback................................................     60,000
 

    (3) Carryover to 1957. The carryover to this year is $30,000, 
computed as follows:

Net operating loss................................  .........    $75,000
Less:
  Taxable income for 1954 (computed without the       $15,000  .........
   deduction of the carryback from 1956)..........

[[Page 175]]

 
  Taxable income for 1955 (computed without the        30,000  .........
   deduction of the carryback from 1956 or the
   carryback from 1958)...........................
                                                   -----------
                                                    .........     45,000
                                                              ----------
    Carryover.....................................  .........     30,000
 

    (4) Carryover to 1958. The carryover to this year is $10,000, 
computed as follows:

Net operating loss................................  .........    $75,000
Less:
  Taxable income for 1954 (computed without the       $15,000  .........
   deduction of the carryback from 1956)..........
  Taxable income for 1955 (computed without the        30,000  .........
   deduction of the carryback from 1956 or the
   carryback from 1958)...........................
  Taxable income for 1957 (computed without the        20,000  .........
   deduction of the carryover from 1956 or the
   carryback from 1958)...........................
                                                   -----------
                                                    .........     65,000
                                                              ----------
    Carryover.....................................  .........     10,000
 

    (5) Carryover to 1959. The carryover to this year is $10,000, 
computed as follows:

Net operating loss................................  .........    $75,000
Less:
  Taxable income for 1954 (computed without the       $15,000
   deduction of the carryback from 1956)..........
  Taxable income for 1955 (computed without the        30,000
   deduction of the carryback from 1956 or the
   carryback from 1958)...........................
  Taxable income for 1957 (computed without the        20,000
   deduction of the carryover from 1956 or the
   carryback from 1958)...........................
  Taxable income for 1958 (a year in which a net            0
   operating loss was sustained)..................
                                                     --------     65,000
                                                              ----------
    Carryover.....................................  .........     10,000
 

    (6) Carryover to 1960. The carryover to this year is $0, computed as 
follows:

Net operating loss................................  .........    $75,000
Less:
  Taxable income for 1954 (computed without the       $15,000
   deduction of the carryback from 1956)..........
  Taxable income for 1955 (computed without the        30,000
   deduction of the carryback from 1956 or the
   carryback from 1958)...........................
  Taxable income for 1957 (computed without the        20,000
   deduction of the carryover from 1956 or the
   carryback from 1958)...........................
  Taxable income for 1958 (a year in which a net            0
   operating loss was sustained)..................
  Taxable income for 1959 (computed without the        30,000
   deduction of the carryover from 1956 or the
   carryover from 1958)...........................
                                                     --------     95,000
                                                              ----------
    Carryover.....................................  .........          0
 

    (7) Carryover to 1961. The carryover to this year is $0, computed as 
follows:

Net operating loss................................  .........    $75,000
Less:
  Taxable income for 1954 (computed without the       $15,000
   deduction of the carryback from 1956)..........
  Taxable income for 1955 (computed without the        30,000
   deduction of the carryback from 1956 or the
   carryback from 1958)...........................
  Taxable income for 1957 (computed without the        20,000
   deduction of the carryover from 1956 or the
   carryback from 1958)...........................
  Taxable income for 1958 (a year in which a net            0
   operating loss was sustained)..................
  Taxable income for 1959 (computed without the        30,000
   deduction of the carryover from 1956 or the
   carryover from 1958)...........................
  Taxable income for 1960 (computed without the        35,000
   deduction of the carryover from 1956 or the
   carryover from 1958)...........................
                                                     --------    130,000
                                                              ----------
    Carryover.....................................  .........          0
 

    (c) Loss sustained in 1958. The portions of the $150,000 net 
operating loss for 1958 which shall be used as carrybacks to 1955, 1956, 
and 1957 and as carryovers to 1959, 1960, 1961, 1962, and 1963 are 
computed as follows:
    (1) Carryback to 1955. The carryback to this year is $150,000, that 
is, the amount of the net operating loss.
    (2) Carryback to 1956. The carryback to this year is $150,000, 
computed as follows:

Net operating loss...........................................   $150,000
Less:
  Taxable income for 1955 (the $30,000 taxable income for              0
   such year reduced by the carryback to such year of $60,000
   from 1956, the carryback from 1958 to 1955 not being taken
   into account).............................................
                                                              ----------
    Carryback................................................    150,000
 

    (3) Carryback to 1957. The carryback to this year is $150,000, 
computed as follows:

Net operating loss................................  .........   $150,000
Less:
  Taxable income for 1955 (the $30,000 taxable              0
   income for such year reduced by the carryback
   to such year of $60,000 from 1956, the
   carryback from 1958 to 1955 not being taken
   into account)..................................
  Taxable income for 1956 (a year in which a net            0
   operating loss was sustained)..................

[[Page 176]]

 
                                                     --------          0
                                                              ----------
    Carryback.....................................  .........    150,000
 

    (4) Carryover to 1959. The carryover to this year is $150,000, 
computed as follows:

Net operating loss................................  .........   $150,000
Less:
  Taxable income for 1955 (the $30,000 taxable              0
   income for such year reduced by the carryback
   to such year of $60,000 from 1956, the
   carryback from 1958 to 1955 not being taken
   into account)..................................
  Taxable income for 1956 (a year in which a net            0
   operating loss was sustained)..................
  Taxable income for 1957 (the $20,000 taxable              0
   income for such year reduced by the carryover
   to such year of $30,000 from 1956, the
   carryback from 1958 to 1957 not being taken
   into account)..................................
                                                     --------          0
                                                              ----------
    Carryover.....................................  .........    150,000
 

    (5) Carryover to 1960. The carryover to this year is $130,000, 
computed as follows:

Net operating loss................................  .........   $150,000
Less:
  Taxable income for 1955 (the $30,000 taxable              0
   income for such year reduced by the carryback
   to such year of $60,000 from 1956, the
   carryback from 1958 to 1955 not being taken
   into account)..................................
  Taxable income for 1956 (a year in which a net            0
   operating loss was sustained)..................
  Taxable income for 1957 (the $20,000 taxable              0
   income for such year reduced by the carryover
   to such year of $30,000 from 1956, the
   carryback from 1958 to 1957 not being taken
   into account)..................................
  Taxable income for 1959 (the $30,000 taxable        $20,000
   income for such year reduced by the carryover
   to such year of $10,000 from 1956, the
   carryover from 1958 to 1959 not being taken
   into account)..................................
                                                     --------     20,000
                                                              ----------
    Carryover.....................................  .........    130,000
 

    (6) Carryover to 1961. The carryover to this year is $95,000, 
computed as follows:

Net operating loss................................  .........   $150,000
Less:
  Taxable income for 1955 (the $30,000 taxable              0
   income for such year reduced by the carryback
   to such year of $60,000 from 1956, the
   carryback from 1958 to 1955 not being taken
   into account)..................................
  Taxable income for 1956 (a year in which a net            0
   operating loss was sustained)..................
  Taxable income for 1957 (the $20,000 taxable              0
   income for such year reduced by the carryover
   to such year of $30,000 from 1956, the
   carryback from 1958 to 1957 not being taken
   into account)..................................
  Taxable income for 1959 (the $30,000 taxable        $20,000
   income for such year reduced by the carryover
   to such year of $10,000 from 1956, the
   carryover from 1958 to 1959 not being taken
   into account)..................................
  Taxable income for 1960 (the $35,000 taxable         35,000
   income for such year reduced by the carryover
   to such year of $0 from 1956, the carryover
   from 1958 to 1960 not being taken into account)
                                                     --------     55,000
                                                              ----------
    Carryover.....................................  .........     95,000
 

    (7) Carryover to 1962. The carryover to this year is $20,000, 
computed as follows:

Net operating loss................................  .........   $150,000
Less:
  Taxable income for 1955 (the $30,000 taxable              0
   income for such year reduced by the carryback
   to such year of $60,000 from 1956, the
   carryback from 1958 to 1955 not being taken
   into account)..................................
  Taxable income for 1956 (a year in which a net            0
   operating loss was sustained)..................
  Taxable income for 1957 (the $20,000 taxable              0
   income for such year reduced by the carryover
   to such year of $30,000 from 1956, the
   carryback from 1958 to 1957 not being taken
   into account)..................................
  Taxable income for 1959 (the $30,000 taxable        $20,000
   income for such year reduced by the carryover
   to such year of $10,000 from 1956, the
   carryover from 1958 to 1959 not being taken
   into account)..................................
  Taxable income for 1960 (the $35,000 taxable         35,000
   income for such year reduced by the carryover
   to such year of $0 from 1956, the carryover
   from 1958 to 1960 not being taken into account)

[[Page 177]]

 
  Taxable income for 1961 (the $75,000 taxable         75,000
   income for such year reduced by the carryover
   to such year of $0 from 1956, the carryover
   from 1958 to 1961 not being taken into account)
                                                     --------    130,000
                                                              ----------
    Carryover.....................................  .........     20,000
 

    (8) Carryover to 1963. The carryover to this year is $3,000, 
computed as follows:

Net operating loss................................  .........   $150,000
Less:
  Taxable income for 1955 (the $30,000 taxable              0
   income for such year reduced by the carryback
   to such year of $60,000 from 1956, the
   carryback from 1958 to 1955 not being taken
   into account)..................................
  Taxable income for 1956 (a year in which a net            0
   operating loss was sustained)..................
  Taxable income for 1957 (the $20,000 taxable              0
   income for such year reduced by the carryover
   to such year of $30,000 from 1956, the
   carryback from 1958 to 1957 not being taken
   into account)..................................
  Taxable income for 1959 (the $30,000 taxable        $20,000
   income for such year reduced by the carryover
   to such year of $10,000 from 1956, the
   carryover from 1958 to 1959 not being taken
   into account)..................................
  Taxable income for 1960 (the $35,000 taxable         35,000
   income for such year reduced by the carryover
   to such year of $0 from 1956, the carryover
   from 1958 to 1960 not being taken into account)
  Taxable income for 1961 (the $75,000 taxable         75,000  .........
   income for such year reduced by the carryover
   to such year of $0 from 1956, the carryover
   from 1958 to 1961 not being taken into account)
  Taxable income for 1962 (computed without the        17,000
   deduction of the carryover from 1958)..........
                                                     --------    147,000
                                                              ----------
    Carryover.....................................  .........      3,000
 

    (d) Determination of net operating loss deduction for each year. The 
carryovers and carrybacks computed under paragraphs (b) and (c) of this 
section are used as a basis for the computation of the net operating 
loss deduction in the following manner:

----------------------------------------------------------------------------------------------------------------
                                                                    Carryover           Carryback         Net
                                                              ---------------------------------------- operating
                         Taxable year                            From      From      From      From       loss
                                                                 1956      1958      1956      1958    deduction
----------------------------------------------------------------------------------------------------------------
1954.........................................................        $0        $0   $75,000        $0    $75,000
1955.........................................................         0         0    60,000   150,000    210,000
1957.........................................................    30,000         0         0   150,000    180,000
1959.........................................................    10,000   150,000         0         0    160,000
1960.........................................................         0   130,000         0         0    130,000
1961.........................................................         0    95,000         0         0     95,000
1962.........................................................         0    20,000         0         0     20,000
1963.........................................................         0     3,000         0         0      3,000
----------------------------------------------------------------------------------------------------------------



Sec. 1.172-7  Joint return by husband and wife.

    (a) In general. This section prescribes additional rules for 
computing the net operating loss carrybacks and carryovers of a husband 
and wife making a joint return for one or more of the taxable years 
involved in the computation of the net operating loss deduction.
    (b) From separate to joint return. If a husband and wife, making a 
joint return for any taxable year, did not make a joint return for any 
of the taxable years involved in the computation of a net operating loss 
carryover or a net operating loss carryback to the taxable year for 
which the joint return is made, such separate net operating loss 
carryover or separate net operating loss carryback is a joint net 
operating loss carryover or joint net operating loss carryback to such 
taxable year.
    (c) Continuous use of joint return. If a husband and wife making a 
joint return for a taxable year made a joint return for each of the 
taxable years involved in the computation of a net operating loss 
carryover or net operating loss carryback to such taxable year, the 
joint net operating loss carryover or joint net operating loss carryback 
to such taxable year is computed in the

[[Page 178]]

same manner as the net operating loss carryover or net operating loss 
carryback of an individual under Sec. 1.172-4 but upon the basis of the 
joint net operating losses and the combined taxable income of both 
spouses.
    (d) From joint to separate return. If a husband and wife making 
separate returns for a taxable year made a joint return for any, or all, 
of the taxable years involved in the computation of a net operating loss 
carryover or net operating loss carryback to such taxable year, the 
separate net operating loss carryover or separate net operating loss 
carryback of each spouse to the taxable year is computed in the manner 
set forth in Sec. 1.172-4 but with the following modifications:
    (1) Net operating loss. The net operating loss of each spouse for a 
taxable year for which a joint return was made shall be deemed to be 
that portion of the joint net operating loss (computed in accordance 
with paragraph (d) of Sec. 1.172-3) which is attributable to the gross 
income and deductions of such spouse, gross income and deductions being 
taken into account to the same extent that they are taken into account 
in computing the joint net operating loss.
    (2) Taxable income to be subtracted--(i) Net operating loss of other 
spouse. The taxable income of a particular spouse for any taxable year 
which is subtracted from the net operating loss of such spouse for 
another taxable year in order to determine the amount of such loss which 
may be carried back or carried over to still another taxable year is 
deemed to be, in a case in which such taxable income was reported in a 
joint return, the sum of the following:
    (a) That portion of the combined taxable income of both spouses for 
such year for which the joint return was made which is attributable to 
the gross income and deductions of the particular spouse, gross income 
and deductions being taken into account to the same extent that they are 
taken into account in computing such combined taxable income, and
    (b) That portion of such combined taxable income which is 
attributable to the other spouse; but, if such other spouse sustained a 
net operating loss in a taxable year beginning on the same date as the 
taxable year in which the particular spouse sustained the net operating 
loss from which the taxable income is subtracted, then such portion 
shall first be reduced by such net operating loss of such other spouse.
    (ii) Modifications. For purposes of this subparagraph, the combined 
taxable income shall be computed as though the combined income and 
deductions of both spouses were those of one individual. The provisions 
of Sec. 1.172-5 shall apply in computing the combined taxable income 
for such purposes except that the net operating loss deduction shall be 
determined without taking into account any separate net operating loss 
of either spouse, or any joint net operating loss of both spouses, which 
was sustained in a taxable year beginning on or after the date of the 
beginning of the taxable year in which the particular spouse sustained 
the net operating loss from which the taxable income is subtracted.
    (e) Recurrent use of joint return. If a husband and wife making a 
joint return for any taxable year made a joint return for one or more, 
but not all, of the taxable years involved in the computation of a net 
operating loss carryover or net operating loss carryback to such taxable 
year, such net operating loss carryover or net operating loss carryback 
to the taxable year is computed in the manner set forth in paragraph (d) 
of this section. Such net operating loss carryover or net operating loss 
carryback is considered a joint net operating loss carryover or joint 
net operating loss carryback to such taxable year.
    (f) Joint carryovers and carrybacks. The joint net operating loss 
carryovers and the joint net operating loss carrybacks to any taxable 
year for which a joint return is made are all the net operating loss 
carryovers and net operating loss carrybacks of both spouses to such 
taxable year. For example, a husband and wife file a joint return for 
the calendar year 1956, having a joint taxable income for such year. The 
wife filed a separate return for the calendar years 1954 and 1955, in 
which years she sustained net operating losses. The husband filed 
separate returns for his fiscal year ending

[[Page 179]]

June 30, 1955, and, having received permission to change his accounting 
period to a calendar year basis, for the 6-month period ending December 
31, 1955. The husband sustained net operating losses in both such 
taxable years. Since the husband and wife did not file a joint return 
for any taxable year involved in the computation of the net operating 
loss carryovers to 1956 from 1954 and 1955, the joint net operating loss 
carryovers to 1956 are the separate net operating loss carryovers of the 
wife from the calendar years 1954 and 1955 and the separate net 
operating loss carryovers of the husband from the fiscal year ending 
June 30, 1955, and from the short taxable year ending December 31, 1955. 
If the husband and wife also file joint returns for the calendar years 
1957, 1958, and 1959, having joint taxable income in 1957 and 1958 and a 
joint net operating loss in 1959, the joint net operating loss 
carrybacks to 1956, 1957, and 1958 from 1959 are computed on the basis 
of the joint net operating loss for 1959, since separate returns were 
not made for any taxable year involved in the computation of such 
carrybacks.
    (g) Illustration of principles. In the following examples, which 
illustrate the application of this section, it is assumed that there are 
no items of adjustment under section 172(b)(2)(A) and that the taxable 
income or loss in each case is the taxable income or loss determined 
without any net operating loss deduction. The taxpayers in each example, 
H, a husband, and W, his wife, report their income on the calendar-year 
basis.

    Example 1. H and W filed joint returns for 1954 and 1955. They 
sustained a joint net operating loss of $1,000 for 1954 and a joint net 
operating loss of $2,000 for 1955. For 1954 the deductions of H exceeded 
his gross income by $700, and the deductions of W exceeded her gross 
income by $300, the total of such amounts being $1,000. Therefore, $700 
of the $1,000 joint net operating loss for 1954 is considered the net 
operating loss of H for 1954, and $300 of such joint net operating loss 
is considered the net operating loss of W for 1954. For 1955 the gross 
income of H exceeded his deductions, so that his separate taxable income 
would be $1,500, and the deductions of W exceeded her gross income by 
$3,500. Therefore, all of the $2,000 joint net operating loss for 1955 
is considered the separate net operating loss of W for 1955.
    Example 2. (i) H and W filed joint returns for 1954 and 1956, and 
separate returns for 1955 and 1957. For the years 1954, 1955, 1956, and 
1957 they had taxable incomes and net operating losses as follows, 
losses being indicated in parentheses:

------------------------------------------------------------------------
                                    1954      1955      1956      1957
------------------------------------------------------------------------
H...............................  ($5,000)  ($2,500)    $6,500  ($4,000)
W...............................   (3,000)     2,000     3,000   (1,500)
                                 ---------------------------------------
  Total.........................   (8,000)  ........     9,500  ........
------------------------------------------------------------------------

    (ii) The net operating loss carryover of H from 1957 to 1958 is 
$4,000, that is, his $4,000 net operating loss for 1957 which is not 
reduced by any part of the taxable income for 1956, since none of such 
taxable income is attributable to H and the portion attributable to W is 
entirely offset by her separate net operating loss for her taxable year 
1957, which taxable year begins on the same date as H's taxable year 
1957. H's $4,000 net operating loss for 1957 likewise is not reduced by 
reference to 1955 since H sustained a loss in 1955. The $0 taxable 
income for 1956 which reduces H's net operating loss for 1957 is 
computed as follows:
    (iii) The combined taxable income of $9,500 for 1956 is reduced to 
$1,000 by the net operating loss deduction for such year of $8,500. This 
net operating loss deduction is computed without taking into account any 
net operating loss of either H or W sustained in a taxable year 
beginning on or after January 1, 1957, the date of the beginning of the 
taxable year in which H sustained the net operating loss from which the 
taxable income is subtracted. This $8,500 is composed of H's carryovers 
of $5,000 from 1954 and $2,500 from 1955, and of W's carryover of $1,000 
from 1954 (the excess of W's $3,000 loss for 1954 over her $2,000 income 
for 1955). None of the $1,000 combined taxable income for 1956 (computed 
with the net operating loss deduction described above) is attributable 
to H since it is caused by W's income (computed after deducting her 
separate carryover) offsetting H's loss (computed by deducting from his 
income his separate carryovers). No part of the $1,000 combined taxable 
income for 1956 which is attributable to W is used to reduce H's net 
operating loss for 1957 since such taxable income attributable to W must 
first be reduced by W's $1,500 net operating loss for 1957, her taxable 
year beginning on the same date as the taxable year of H in which he 
sustained the net operating loss from which the taxable income is 
subtracted.
    (iv) The net operating loss carryover of W from 1957 to 1958 is 
$500, her $1,500 loss reduced by the sum of her $0 taxable income for 
1955 (computed by taking into account her $3,000 carryover from 1954) 
and her $1,000 taxable income for 1956, that is, the portion of the 
combined taxable income for 1956 which is attributable to her.

[[Page 180]]

    Example 3. (i) Assume the same facts as in Example 2 except that for 
1957 the net operating loss of W is $200 instead of $1,500.
    (ii) The net operating loss carryover of H from 1957 to 1958 is 
$3,200, that is, his $4,000 net operating loss for 1957 reduced by the 
sum of his $0 taxable income for 1955 (a year in which he sustained a 
loss) and his $800 taxable income for 1956. Such $800 is computed as 
follows:
    (iii) The combined taxable income for 1956, computed with the net 
operating loss deduction in the manner described in Example 2, remains 
$1,000, no part of which is attributable to H. To the $0 taxable income 
attributable to H for 1956 there is added $800, the excess of the $1,000 
taxable income for such year attributable to W over her $200 net 
operating loss sustained in 1957, a taxable year beginning on the same 
date as the taxable year of H in which he sustained the $4,000 net 
operating loss from which the taxable income is subtracted.
    (iv) W has no net operating loss carryover from 1957 to 1958 since 
her net operating loss of $200 for 1957 does not exceed the $1,000 
taxable income for 1956 attributable to her.
    Example 4. (i) Assume the same facts as in Example 2, except that W 
changes her accounting period in 1957 to a fiscal year ending on January 
31, and has neither income nor losses for the taxable year January 1, 
1957, to January 31, 1957, or for the fiscal year February 1, 1957, to 
January 31, 1958, but has a net operating loss of $200 for the fiscal 
year February 1, 1958, to January 31, 1959.
    (ii) The net operating loss carryover of H from 1957 to 1958 is 
$3,000, that is, his net operating loss of $4,000 for 1957 reduced by 
the sum of his $0 taxable income for 1955 (a year in which he sustained 
a loss) and his $1,000 taxable income for 1956. Such $1,000 is computed 
as follows:
    (iii) The combined taxable income for 1956, computed with the net 
operating loss deduction in the manner described in Example 2, remains 
$1,000, no part of which is attributable to H. To the $0 taxable income 
attributable to H for 1956 there is added the $1,000 taxable income 
attributable to W for such year. The taxable income attributable to W is 
not reduced by any amount since she does not have a net operating loss 
for her taxable year beginning on January 1, 1957, the date of the 
beginning of the taxable year of H in which he sustained the $4,000 net 
operating loss from which his taxable income is subtracted.
    (iv) The net operating loss carryover of W from the fiscal year 
beginning February 1, 1958, to her next fiscal year is $200, that is, 
her net operating loss of $200 for the fiscal year beginning February 1, 
1958, reduced by the sum of her $0 taxable income for 1956, her $0 
taxable income for the taxable year January 1, 1957, to January 31, 1957 
(a year in which she had neither income nor loss), and her $0 taxable 
income for the fiscal year February 1, 1957, to January 31, 1958 (also a 
year in which she had neither income nor loss). The $0 taxable income 
for 1956 is computed as follows:
    (v) The combined taxable income of $9,500 for 1956 is reduced to $0 
amount by the net operating loss deduction for such year of $12,500. 
This net operating loss deduction is computed by taking into account the 
net operating loss of H for 1957 since it was sustained in a taxable 
year beginning before February 1, 1958, the date of the beginning of the 
taxable year of W in which she sustained the $200 net operating loss 
from which her taxable income is subtracted. This $12,500 is composed of 
H's carryovers of $5,000 from 1954 and $2,500 from 1955 and of his 
carryback of $4,000 from 1957, plus W's carryover of $1,000 from 1954 
(the excess of W's $3,000 loss for 1954 over her $2,000 income for 
1955). Since there is no combined taxable income for 1956, there is no 
taxable income attributable to W for such year.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 8107, 51 FR 
43346, Dec. 2, 1986]



Sec. 1.172-8  Net operating loss carryovers for regulated 
transportation corporations.

    (a) In general. A net operating loss sustained in a taxable year 
ending before January 1, 1976, shall be a carryover to the 7 succeeding 
taxable years if the taxpayer is a regulated transportation corporation 
(as defined in paragraph (b) of this section) for the loss year and for 
the 6th and 7th succeeding taxable years. If, however, the taxpayer is a 
regulated transportation corporation for the loss year and for the 6th 
succeeding taxable year, but not for the 7th succeeding taxable year, 
then the loss shall be a carryover to the 6 succeeding taxable years. If 
the taxpayer is not a regulated transportation corporation for the 6th 
succeeding taxable year then this section shall not apply. A net 
operating loss sustained in a taxable year ending after December 31, 
1975, shall be a carryover to the 15 succeeding taxable years.
    (b) Regulated transportation corporations. A corporation is a 
regulated transportation corporation for a taxable year if it is 
included within one or more of the following categories:
    (1) Eighty percent or more of the corporation's gross income 
(computed without regard to dividends and capital

[[Page 181]]

gains and losses) for such taxable year is income from transportation 
sources described in paragraph (c) of this section.
    (2) The corporation is a railroad corporation, subject to Part I of 
the Interstate Commerce Act, which is either a lessor railroad 
corporation described in section 7701(a)(33)(G) or a common parent 
railroad corporation described in section 7701(a)(33)(H).
    (3) The corporation is a member of a regulated transportation system 
for the taxable year. For purposes of this section, a member of a 
regulated transportation system for a taxable year means a member of an 
affiliated group of corporations making a consolidated return for such 
year, if 80 percent or more of the sum of the gross incomes of the 
members of the affiliated group for such year (computed without regard 
to dividends, capital gains and losses, or eliminations for intercompany 
transactions) is derived from transportation sources described in 
paragraph (c) of this section. For purposes of this subparagraph, income 
derived by a corporation described in subparagraph (2) of this paragraph 
from leases described in section 7701(a)(33)(G) shall be considered as 
income from transportation sources described in paragraph (c) of this 
section.
    (c) Transportation sources. For purposes of this section, income 
from ``transportation sources'' means income received directly in 
consideration for transportation services, and income from the 
furnishing or sale of essential facilities, products, and other services 
which are directly necessary and incidental to the furnishing of 
transportation services. For purposes of the preceding sentence, the 
term transportation services means:
    (1) Transportation by railroad as a common carrier subject to the 
jurisdiction of the Interstate Commerce Commission;
    (2)(i) Transportation, which is not included in subparagraph (1) of 
this paragraph:
    (a) On an intrastate, suburban, municipal, or interurban electric 
railroad,
    (b) On an intrastate, municipal, or suburban trackless trolley 
system,
    (c) On a municipal or suburban bus system, or
    (d) By motor vehicle not otherwise included in this subparagraph, if 
the rates for the furnishing or sale of such transportation are 
established or approved by a regulatory body described in section 
7701(a)(33)(A);
    (ii) In the case of a corporation which establishes to the 
satisfaction of the district director that:
    (a) Its revenue from regulated rates from transportation services 
described in subdivision (i) of this subparagraph and its revenue 
derived from unregulated rates are derived from its operation of a 
single interconnected and coordinated system or from the operation of 
more than one such system, and
    (b) The unregulated rates have been and are substantially as 
favorable to users and consumers as are the regulated rates, 
transportation, which is not included in subparagraph (1) of this 
paragraph, from which such revenue from unregulated rates is derived.
    (3) Transportation by air as a common carrier subject to the 
jurisdiction of the Civil Aeronautics Board; and
    (4) Transportation by water by common carrier subject to the 
jurisdiction of either the Interstate Commerce Commission under Part III 
of the Interstate Commerce Act (54 Stat. 929), or the Federal Maritime 
Board under the Intercoastal Shipping Act, 1933 (52 Stat. 965).
    (d) Corporate acquisitions. This section shall apply to a carryover 
of a net operating loss sustained by a regulated transportation 
corporation (as defined in paragraph (b) of this section) to which an 
acquiring corporation succeeds under section 381(a) only if the 
acquiring corporation is a regulated transportation corporation (as 
defined in paragraph (b) of this section):
    (1) For the sixth succeeding taxable year in the case of a carryover 
to the sixth succeeding taxable year, and
    (2) For the sixth and seventh succeeding taxable years in the case 
of a carryover to the seventh succeeding taxable year.

[T.D. 6862, 30 FR 14430, Nov. 18, 1965, as amended by T.D. 8107, 51 FR 
43346, Dec. 2, 1986]

[[Page 182]]



Sec. 1.172-9  Election with respect to portion of net operating loss 
attributable to foreign expropriation loss.

    (a) In general. If a taxpayer has a net operating loss for a taxable 
year ending after December 31, 1958, and if the foreign expropriation 
loss for such year (as defined in paragraph (b)(1) of this section) 
equals or exceeds 50 percent of the net operating loss for such year, 
then the taxpayer may elect (at the time and in the manner provided in 
paragraph (c) (1) or (2) of this section, whichever is applicable) to 
have the provisions of this section apply. If the taxpayer so elects, 
the portion of the net operating loss for such taxable year attributable 
(under paragraph (b)(2) of this section) to such foreign expropriation 
loss shall not be a net operating loss carryback to any taxable year 
preceding the taxable year of such loss and shall be a net operating 
loss carryover to each of the ten taxable years following the taxable 
year of such loss. In such case, the portion, if any, of the net 
operating loss not attributable to a foreign expropriation loss shall be 
carried back or carried over as provided in paragraph (a)(1)(ii) of 
Sec. 1.172-4.
    (b) Determination of ``foreign expropriation loss''--(1) Definition 
of ``foreign expropriation loss''. The term foreign expropriation loss 
means, for any taxable year, the sum of the losses allowable as 
deductions under section 165 (other than losses from, or which under 
section 165(g) or 1231(a) are treated or considered as losses from, 
sales or exchanges of capital assets and other than losses described in 
section 165(i)(1)) sustained by reason of the expropriation, 
intervention, seizure, or similar taking of property by the government 
or any foreign country, any political subdivision thereof, or any agency 
or instrumentality of the foregoing. For purposes of the preceding 
sentence, a debt which becomes worthless in whole or in part, shall, to 
the extent of any deduction allowed under section 166(a), be treated as 
a loss allowable as a deduction under section 165.
    (2) Portion of the net operating loss attributable to a foreign 
expropriation loss. (i) Except as provided in subdivision (ii) of this 
subparagraph, the portion of the net operating loss for any taxable year 
attributable to a foreign expropriation loss is the amount of the 
foreign expropriation loss for such taxable year (determined under 
subparagraph (1) of this paragraph).
    (ii) The portion of the net operating loss for a taxable year 
attributable to a foreign expropriation loss shall not exceed the amount 
of the net operating loss, computed under section 172(c), for such year.
    (3) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. M Corporation, a domestic calendar year corporation 
manufacturing cigars in the United States, owns, in country X, a tobacco 
plantation having an adjusted basis of $400,000 and farm equipment 
having an adjusted basis of $300,000. On January 15, 1961, country X 
expropriates the plantation and equipment without any allowance for 
compensation. For the taxable year 1961, M Corporation sustains a loss 
from the operation of its business (not including losses from the 
seizure of its plantation and equipment in country X) of $200,000, which 
loss would not have been sustained in the absence of the seizure. 
Accordingly, M has a net operating loss of $900,000 (the sum of 
$400,000, $300,000, and $200,000). For purposes of section 172(k)(1), M 
Corporation has a foreign expropriation loss for 1961 of $700,000 (the 
sum of $400,000 and $300,000, the losses directly sustained by reason of 
the seizure of its property by country X). Since the foreign 
expropriation loss for 1961, $700,000, equals or exceeds 50 percent of 
the net operating loss for such year, or $450,000 (i.e., 50 percent of 
$900,000), M Corporation may make the election under paragraph (c)(2) of 
this section with respect to $700,000, the portion of the net operating 
loss attributable to the foreign expropriation loss.
    Example 2. Assume the same facts as in Example 1 except that for 
1961, M Corporation has operating profits of $300,000 (not including 
losses from the seizure of its plantation and equipment in country X) so 
that its net operating loss (as defined in section 172(c)) is only 
$400,000. Under the provisions of section 172(k)(2) and paragraph (b)(2) 
of this section, the portion of the net operating loss for 1961 
attributable to a foreign expropriation loss is limited to $400,000, the 
amount of the net operating loss.

    (c) Time and manner of making election--(1) Taxable years ending 
after December 31, 1963. In the case of a taxpayer who has a foreign 
expropriation loss for a taxable year ending after December 31, 1963, 
the election referred to in paragraph (a) of this section shall be

[[Page 183]]

made by attaching to the taxpayer's income tax return (filed within the 
time prescribed by law, including extensions of time) for the taxable 
year of such foreign expropriation loss a statement containing the 
information required by subparagraph (3) of this paragraph. Such 
election shall be irrevocable after the due date (including extensions 
of time) of such return.
    (2) Information required. The statement referred to in subparagraph 
(1) of this paragraph shall contain the following information:
    (i) The name, address, and taxpayer account number of the taxpayer;
    (ii) A statement that the taxpayer elects under section 
172(b)(3)(A)(ii) or (iii), whichever is applicable, to have section 
172(b)(1)(D) of the Code apply;
    (iii) The amount of the net operating loss for the taxable year; and
    (iv) The amount of the foreign expropriation loss for the taxable 
year, including a schedule showing the computation of such foreign 
expropriation loss.
    (d) Amount of foreign expropriation loss which is a carryover to the 
taxable year in issue--(1) General. If a portion of a net operating loss 
for the taxable year is attributable to a foreign expropriation loss and 
if an election under paragraph (a) of this section has been made with 
respect to such portion of the net operating loss, then such portion 
shall be considered to be a separate net operating loss for such year, 
and, for the purpose of determining the amount of such separate loss 
which may be carried over to other taxable years, such portion shall be 
applied after the other portion (if any) of such net operating loss. 
Such separate loss shall be carried to the earliest of the several 
taxable years to which such separate loss is allowable as a carryover 
under the provisions of paragraph (a)(1)(iv) of Sec. 1.172-4, and the 
amount of such separate loss which shall be carried over to any taxable 
year subsequent to such earliest year is an amount (not exceeding such 
separate loss) equal to the excess of:
    (i) The sum of (a) such separate loss and (b) the other portion (if 
any) of the net operating loss (i.e., that portion not attributable to a 
foreign expropriation loss) to the extent such other portion is a 
carryover to such earliest taxable year, over
    (ii) The sum of the aggregate of the taxable incomes (computed as 
provided in Sec. 1.172-5) for all of such several taxable years 
preceding such subsequent taxable year.
    (2) Cross reference. The portion of a net operating loss which is 
not attributable to a foreign expropriation loss shall be carried back 
or carried over, in accordance with the rules provided in paragraph 
(b)(1) of Sec. 1.172-4, as if such portion were the only net operating 
loss for such year.
    (3) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. Corporation A, organized in 1960 and whose return is made 
on the basis of the calendar year, incurs for 1960 a net operating loss 
of $10,000, of which $7,500 is attributable to a foreign expropriation 
loss. With respect to such $7,500, A makes the election described in 
paragraph (a) of this section. In each of the years 1961, 1962, 1963, 
1964, and 1965, A has taxable income in the amount of $600 (computed 
without any net operating loss deduction). The assumption is made that 
none of the other modifications prescribed in Sec. 1.172-5 apply. The 
portion of the net operating loss attributable to the foreign 
expropriation loss which is a carryover to the year 1966 is $7,000, 
which is the sum of $7,500 (the portion of the net operating loss 
attributable to the foreign expropriation loss) and $2,500 (the other 
portion of the net operating loss available as a carryover to 1961), 
minus $3,000 (the aggregate of the taxable incomes for taxable years 
1961 through 1965).
    Example 2. Assume the same facts as in Example 1 except that taxable 
income for each of the years 1961 through 1965 is $400 (computed without 
any net operating loss deduction). The carryover to the year 1966 is 
$7,500, that is, the sum of $7,500 (the portion of the net operating 
loss attributable to the foreign expropriation loss) and $2,500 (the 
other portion of the net operating loss available as a carryover to 
1961), minus $2,000 (the aggregate of the taxable incomes for taxable 
years 1961 through 1965), but limited to $7,500 (the portion of the net 
operating loss attributable to the foreign expropriation loss).

    (e) Taxable income which is subtracted from net operating loss to 
determine carryback or carryover. In computing taxable income for a 
taxable year (hereinafter called a ``prior taxable year'') for the 
purpose of determining the portion of a net operating loss for another 
taxable year which shall be

[[Page 184]]

carried to each of the several taxable years subsequent to the earliest 
taxable year to which such loss may be carried, the net operating loss 
deduction for any such prior taxable year shall be determined without 
regard to that portion, if any, of a net operating loss for a taxable 
year attributable to a foreign expropriation loss, if such portion may 
not, under the provisions of section 172(b)(1)(D) and paragraph 
(a)(1)(iv) of Sec. 1.172-4, be carried back to such prior taxable year. 
Thus, if the taxpayer has a foreign expropriation loss for 1962 and 
elects the 10-year carryover with respect to the portion of his net 
operating loss for 1962 attributable to the foreign expropriation loss, 
then in computing taxable income for the year 1960 for the purpose of 
determining the portion of a net operating loss for 1963 which is 
carried to years subsequent to 1960, the net operating loss deduction 
for 1960 is determined without regard to the portion of the net 
operating loss for 1962 attributable to the foreign expropriation loss, 
since under the provisions of section 172(b)(1)(D) and paragraph 
(a)(1)(iv) of Sec. 1.172-4 such portion of the net operating loss for 
1962 may not be carried back to 1960.

[T.D. 6862, 30 FR 14431, Nov. 18, 1965, as amended by T.D. 8107, 51 FR 
43346, Dec. 2, 1986]



Sec. 1.172-10  Net operating losses of real estate investment trusts.

    (a) Taxable years to which a loss may be carried. (1) A net 
operating loss sustained by a qualified real estate investment trust (as 
defined in paragraph (b)(1) of this section) in a qualified taxable year 
(as defined in paragraph (b)(2) of this section) ending after October 4, 
1976, shall not be carried back to a preceding taxable year.
    (2) A net operating loss sustained by a qualified real estate 
investment trust in a qualified taxable year ending before October 5, 
1976, shall be carried back to the 3 preceding taxable years. However, 
see Sec. 1.857-2(a)(5), which does not allow the net operating loss 
deduction in computing real estate investment trust taxable income for 
taxable years ending before October 5, 1976.
    (3) A net operating loss sustained by a qualified real estate 
investment trust in a qualified taxable year ending after December 31, 
1972, shall be carried over to the 15 succeeding taxable years. However, 
see Sec. 1.857-2(a)(5).
    (4) A net operating loss sustained by a qualified real estate 
investment trust in a qualified taxable year ending before January 1, 
1973, shall be carried over to 8 succeeding taxable years. However, see 
Sec. 1.857-2(a)(5).
    (5) A net operating loss sustained in a taxable year for which the 
taxpayer is not a qualified real estate investment trust generally may 
be carried back to the 3 preceding taxable years; however, a net 
operating loss sustained in a taxable year ending after December 31, 
1975, shall not be carried back to any qualified taxable year. However, 
see Sec. 1.857-2(a)(5), with respect to a net operating loss sustained 
in a taxable year ending before January 1, 1976.
    (6) A net operating loss sustained in a taxable year ending after 
December 31, 1975, for which the taxpayer is not a qualified real estate 
investment trust generally may be carried over to the 15 succeeding 
taxable years.
    (7)(i) A net operating loss sustained in a taxable year ending 
before January 1, 1986, for which the taxpayer is not a qualified real 
estate investment trust generally may be a net operating loss carryover 
to each of the 5 succeeding taxable years. However, where the loss was a 
net operating loss carryback to one or more qualified taxable years, the 
net operating loss, in accordance with paragraph (a)(7)(ii) of this 
section shall be--
    (A) Carried over to the 15 succeeding taxable years if the loss 
could be a net operating loss carryover to a taxable year ending in 
1981, or
    (B) Carried over to the 5, 6, 7, or 8 succeeding taxable years if 
paragraph (a)(7)(i)(A) of this section does not apply.
    (ii) For purposes of determining whether a net operating loss could 
be a carryover to a taxable year ending in 1981 under paragraph 
(a)(7)(i)(A) of this section or, where paragraph (a)(7)(i)(A) of this 
section does not apply, to determine the actual carryover period under 
paragraph (a)(7)(i)(B) of this section, the net operating loss shall 
have a carryover period of 5 years, and such period shall be increased 
(to a number

[[Page 185]]

not greater than 8) by the number of qualified taxable years to which 
such loss was a net operating loss carryback; however, where the 
taxpayer acted so as to cause itself to cease to be a qualified real 
estate investment trust and the principal purpose for such action was to 
secure the benefit of the allowance of a net operating loss carryover 
under section 172(b)(1)(B), the net operating loss carryover period 
shall be limited to 5 years. However, see Sec. 1.857-2(a)(5).
    (8) A qualified taxable year is a taxable year preceding or 
following the taxable year of the net operating loss, for purposes of 
section 172(b)(1), even though the loss may not be carried to, or 
allowed as a deduction in, such qualified taxable year. Thus, a 
qualified taxable year ending before October 5, 1976 (for which no net 
operating loss deduction is allowable) is nevertheless a preceding or 
following taxable year for purposes of section 172(b)(1). Moreover, a 
qualified taxable year ending after October 4, 1976 (to which a net 
operating loss cannot be carried back because of section 172(b)(1)(E)) 
is nevertheless a preceding taxable year for purposes of section 
172(b)(1). For purposes of determining, under section 172(b)(2), the 
balance of the loss available as a carryback or carryover to other 
taxable years, however, the net operating loss is not reduced on account 
of such qualified taxable year being a preceding or following taxable 
year.
    (b) Definitions. For purposes of this section and Sec. Sec. 1.172-2 
and 1.172-5:
    (1) The term qualified real estate investment trust means, with 
respect to any taxable year, a real estate investment trust within the 
meaning of part II of subchapter M which is taxable for such year under 
that part as a real estate investment trust, and
    (2) The term qualified taxable year means a taxable year for which 
the taxpayer is a qualified real estate investment trust.
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. (i) Facts. X was a qualified real estate investment trust 
for the taxable years ending on December 31, 1972, and December 31, 
1973. X was not a qualified real estate investment trust for the taxable 
years ending on December 31, 1971, and December 31, 1974. X sustained a 
net operating loss for the taxable year ending on December 31, 1974.
    (ii) Applicable carryback and carryover periods. The net operating 
loss must be carried back to the 3 preceding taxable years. Under Sec. 
1.857-2 (a)(5) the net operating loss deduction shall not be allowed in 
computing real estate investment trust taxable income for the years 
ending December 31, 1972, and December 31, 1973. Where a net operating 
loss is sustained in a taxable year ending before January 1, 1976, for 
which the taxpayer is not a qualified real estate investment trust and 
the loss is a net operating loss carryback to one or more qualified 
taxable years, the carryover period is determined under Sec. 1.172-10 
(a)(7); the carryover period is determined by first applying the rule 
provided in paragraph (a)(7)(ii) of this section to obtain the carryover 
period for purposes of determining whether the net operating loss could 
have been a net operating loss carryover to a taxable year ending in 
1981. Under these facts, paragraph (a)(7)(ii) of this section provides 
for a 7-year carryover period (5 years increased by the 2 qualified 
taxable years to which the loss was a net operating loss carryback); 
therefore, since the carryover period provided for by paragraph 
(a)(7)(ii) of this section would allow the net operating loss to be a 
net operating loss carryover to a taxable year ending in 1981, under 
paragraph (a)(7)(ii)(A) of this section the applicable carryover period 
is 15 years (provided that X did not act so as to cause itself to cease 
to qualify as a real estate investment trust for the principal purpose 
of securing the benefit of a net operating loss carryover under section 
172 (b)(1)(B)).
    Example 2. (i) Facts. The facts are the same as in example (1) 
except that the taxable year ending December 31, 1973, was not a 
qualified taxable year for X.
    (ii) Applicable carryback and carryover periods. The net operating 
loss must be carried back to the 3 preceding taxable years. Section 
1.857-2 (a)(5) provides that the net operating loss deduction shall not 
be allowed in computing real estate investment trust taxable income for 
the year ending December 31, 1972. Under these facts the carryover 
period is determined under Sec. 1.172-10 (a)(7). Paragraph (a)(7)(ii) 
of this section provides for a 6 year carryover period (5 years 
increased by the 1 qualified taxable year to which the loss was a net 
operating loss carryback); therefore, since a 6 year carryover period 
would not allow the net operating loss to be a net operating loss 
carryover to a taxable year ending in 1981, paragraph (a)(7)(i)(A) of 
this section does not apply. Where the rule stated in paragraph 
(a)(7)(i)(A) of this section does not apply, paragraph (a)(7)(i)(B) of 
this section provides that the applicable carryover period is the 
carryover period determined

[[Page 186]]

under paragraph (a)(7)(ii) of this section, which, in this case, is 6 
years (provided that the principal purpose for X acting so as to cause 
itself to cease to qualify as a real estate investment trust was not to 
secure the benefit of the allowance of a net operating loss carryover 
under section 172 (b)(1)(B)).

    (d) Cross references. See Sec. Sec. 1.172-2(c) and 1.172-5(a)(5) 
for the computation of the net operating loss of a qualified real estate 
investment trust for a taxable year ending after October 4, 1976, and 
the amount of a net operating loss which is absorbed when carried over 
to a qualified taxable year ending after October 4, 1976. See Sec. 
1.857-2(a)(5), which provides that for a taxable year ending before 
October 5, 1976, the net operating loss deduction is not allowed in 
computing the real estate investment trust taxable income of a qualified 
real estate investment trust.

[T.D. 7767, 46 FR 11263, Feb. 6, 1981, as amended by T.D. 8107, 51 FR 
43346, Dec. 2, 1986]



Sec. 1.172-13  Product liability losses.

    (a) Entitlement to 10-year carryback--(1) In general. Unless an 
election is made pursuant to paragraph (c) of this section, in the case 
of a taxpayer which has a product liability loss (as defined in section 
172(j) and paragraph (b)(1) of this section) for a taxable year 
beginning after September 30, 1979 (hereinafter ``loss year''), the 
product liability loss shall be a net operating loss carryback to each 
of the 10 taxable years preceding the loss year.
    (2) Years to which loss may be carried. A product liability loss 
shall first be carried to the earliest of the taxable years to which 
such loss is allowable as a carryback and shall then be carried to the 
next earliest of such taxable years, etc.
    (3) Example. The application of this paragraph may be illustrated as 
follows:

    Example. Taxpayer A incurs a net operating loss for taxable year 
1980 of $80,000, of which $60,000 is a product liability loss. A's 
taxable income for each of the 10 years immediately preceding taxable 
year 1980 was $5,000. The product liability loss of $60,000 is first 
carried back to the 10th through the 4th preceding taxable years ($5,000 
per year), thus offsetting $35,000 of the loss. The remaining $25,000 of 
product liability loss is added to the remaining portion of the total 
net operating loss for taxable year 1980 which was not a product 
liability loss ($20,000), and the total is then carried back to the 3rd 
through 1st years preceding taxable year 1980, which offsets $15,000 of 
this loss. The remaining loss ($30,000) is carried forward pursuant to 
section 172(b)(1) and the regulations thereunder without regard to 
whether all or any portion thereof originated as a product liability 
loss.

    (b) Definitions--(1) Product liability loss. The term product 
liability loss means, for any taxable year, the lesser of--
    (i) The net operating loss for the current taxable year (not 
including the portion of such net operating loss attributable to foreign 
expropriation losses, as defined in Sec. 1.172-11), or
    (ii) The total of the amounts allowable as deductions under sections 
162 and 165 directly attributable to--
    (A) Product liability (as defined in paragraph (b)(2) of this 
section), and
    (B) Expenses (including settlement payments) incurred in connection 
with the investigation or settlement of or opposition to claims against 
the taxpayer on account of alleged product liability.

Indirect corporate expense, or overhead, is not to be allocated to 
product liability claims so as to become a product liability loss.
    (2) Product liability. (i) The term product liability means the 
liability of a taxpayer for damages resulting from physical injury or 
emotional harm to individuals, or damage to or loss of the use of 
property, on account of any defect in any product which is manufactured, 
leased, or sold by the taxpayer. The preceding sentence applies only to 
the extent that the injury, harm, or damage occurs after the taxpayer 
has completed or terminated operations with respect to the product, 
including, but not limited to the manufacture, installation, delivery, 
or testing of the product, and has relinquished possession of such 
product.
    (ii) The term product liability does not include liabilities arising 
under warranty theories relating to repair or replacement of the 
property that are essentially contract liabilities. For example, the 
costs incurred by a taxpayer in repairing or replacing defective 
products under the terms of a warranty, express or implied, are not 
product liability losses. On the other hand,

[[Page 187]]

the taxpayer's liability for damage done to other property or for harm 
done to persons that is attributable to a defective product may be 
product liability losses regardless of whether the claim sounds in tort 
or contract. Further, liability incurred as a result of services 
performed by a taxpayer is not product liability. For purposes of the 
preceding sentence, where both a product and services are integral parts 
of a transaction, product liability does not arise until all operations 
with respect to the product are completed and the taxpayer has 
relinquished possession of it. On the other hand, any liability that 
arises after completion of the initial delivery, installation, 
servicing, testing, etc., is considered ``product liability'' even if 
such liability arises during the subsequent servicing of the product 
pursuant to a service agreement or otherwise.
    (iii) Liability for injury, harm, or damage due to a defective 
product as described in this subparagraph shall be ``product liability'' 
notwithstanding that the liability is not considered product liability 
under the law of the State in which such liability arose.
    (iv) Amounts paid for insurance against product liability risks are 
not paid on account of product liability.
    (v) Notwithstanding subparagraph (iv), an amount is paid on account 
of product liability (even if such amount is paid to an insurance 
company) if the amount satisifies the provisions of paragraph (b)(2) (i) 
through (iii) of this section and the amount--
    (A) Is paid on account of specific claims against the taxpayer (or 
on account of expenses incurred in connection with the investigation or 
settlement of or opposition to such claims), subsequent to the events 
giving rise to the claims and pursuant to a contract entered into before 
those events,
    (B) Is not refundable, and
    (C) Is not applicable to other claims, other expenses or to 
subsequent coverage.
    (3) Examples. Paragraph (b)(2) of this section is illustrated by the 
following examples:

    Example 1. X, a manufacturer of heating equipment, sells a boiler to 
A, a homeowner. Subsequent to the sale and installation of the boiler, 
the boiler explodes due to a defect causing physical injury to A. A sues 
X for damages for the injuries sustained in the explosion and is awarded 
$250,000, which X pays. The payment was made on account of product 
liability.
    Example 2. Assume the same facts as in Example 1 and that A also 
sues under the contract with X to recover for the cost of the boiler and 
recovers $1,000, the boiler's replacement cost. The $1,000 payment is 
not a payment on account of product liability. Similarly, if X agrees to 
repair the destroyed boiler, any amount expended by X for such repair is 
not payment made on account of product liability.
    Example 3. Y, a professional medical association, is sued by B, a 
patient, in an action based on the malpractice of one of its doctors. B 
recovers $25,000. Because the suit was based on the services of B, the 
payment is not made on account of product liability.
    Example 4. R, a retailer of communications equipment, sells a 
telecommunication device to C. R also contracts with C to service the 
equipment for 3 years. While R is installing the equipment, the unit 
catches on fire due to faulty wiring within the unit and destroys C's 
office. Because R had not relinquished possession of this equipment when 
the fire started, any amount paid to C by R for the damage to C's 
property on account of the defective product is not payment on account 
of product liability.
    Example 5. Assume the same facts as in Example 4 except that the 
fire and resulting property damages occurred after R had installed the 
equipment and relinquished possession of it. Any amount paid for the 
property damages sustained on account of the defective product is 
payment on account of product liability.
    Example 6. Assume the same facts as in Example 4 except that the 
equipment catches on fire during the subsequent servicing of the unit. 
Because C is in possession of the unit during the servicing, any amount 
paid for the property damage sustained on account of the defective 
product would be payment on account of product liability.
    Example 7. X, a manufacturer of computers, sells a computer to A. X 
also has its employees periodically service the computer for A from time 
to time after it is placed in service. After the initial delivery, 
installation, servicing, and testing of the computer is completed, the 
computer catches on fire while X's employee is servicing the equipment. 
This fire causes property damage to A's office and physical injury to A. 
Any amount paid for the property or physical damage sustained on account 
of the defective product is payment on account of product liability.

    (c) Election--(1) In general. The 10-year carryback provision of 
this section applies, except as provided in this

[[Page 188]]

paragraph, to any taxpayer who, for a taxable year beginning after 
September 30, 1979, incurs a product liability loss. Any taxpayer 
entitled to a 10-year carryback under paragraph (a) of this section in 
any loss year may elect (at the time and in the manner provided in 
paragraph (c)(2) of this section) to have the carryback period with 
respect to the product liability loss determined without regard to the 
carryback rules provided by paragraph (a) of this section. If the 
taxpayer so elects, the product liability loss shall not be carried back 
to the 10th through the 4th taxable years preceding the loss year. In 
such case, the product liability loss shall be carried back or carried 
over as provided by section 172(b) (except subparagraph (1)(I) thereof) 
and the regulations thereunder.
    (2) Time and manner of making election. An election by any taxpayer 
entitled to the 10-year carryback for the product liability loss to have 
the carryback with respect to such loss determined without regard to the 
10-year carryback provision of paragraph (a) of this section must be 
made by attaching to the taxpayer's tax return (filed within the time 
prescribed by law, including extensions of time) for the taxable year in 
which such product liability loss is sustained, a statement containing 
the information required by paragraph (c)(3) of this section. Such 
election, once made for any taxable year, shall be irrevocable after the 
due date (including extensions of time) of the taxpayer's tax return for 
that taxable year.
    (3) Information required. In the case of a statement filed after 
April 25, 1983, the statement referred to in paragraph (c)(2) of this 
section shall contain the following information:
    (i) The name, address, and taxpayer identifying number of the 
taxpayer; and
    (ii) A statement that the taxpayer elects under section 172(j)(3) 
not to have section 172(b)(1)(I) apply.
    (4) Relationship with section 172(b)(3)(C) election. If a taxpayer 
sustains during the taxable year both a net operating loss not 
attributable to product liability and a product liability loss (as 
defined in section 172(j)(1) and paragraph (b)(1) of this section), an 
election pursuant to section 172(b)(3)(C) (relating to election to 
relinquish the entire carryback period) does not preclude the product 
liability loss from being carried back 10 years under section 
172(b)(1)(I) and paragraph (a)(1) of this section.

[T.D. 8096, 51 FR 30482, Aug. 27, 1986]



Sec. 1.173-1  Circulation expenditures.

    (a) Allowance of deduction. Section 173 provides for the deduction 
from gross income of all expenditures to establish, maintain, or 
increase the circulation of a newspaper, magazine, or other periodical, 
subject to the following limitations:
    (1) No deduction shall be allowed for expenditures for the purchase 
of land or depreciable property or for the acquisition of circulation 
through the purchase of any part of the business of another publisher of 
a newspaper, magazine, or other periodical;
    (2) The deduction shall be allowed only to the publisher making the 
circulation expenditures; and
    (3) The deduction shall be allowed only for the taxable year in 
which such expenditures are paid or incurred.

Subject to the provisions of paragraph (c) of this section, the 
deduction permitted under section 173 and this paragraph shall be 
allowed without regard to the method of accounting used by the taxpayer 
and notwithstanding the provisions of section 263 and the regulations 
thereunder, relating to capital expenditures.
    (b) Deferred expenditures. Notwithstanding the provisions of 
paragraph (a)(3) of this section, expenditures paid or incurred in a 
taxable year subject to the Internal Revenue Code of 1939 which are 
deferrable pursuant to I.T. 3369 (C.B. 1940-1, 46), as modified by Rev. 
Rul. 57-87 (C.B. 1957-1, 507) may be deducted in the taxable year 
subject to the Internal Revenue Code of 1954 to which so deferred.
    (c) Election to capitalize. (1) A taxpayer entitled to the deduction 
for circulation expenditures provided in section 173 and paragraph (a) 
of this section may, in lieu of taking such deduction, elect to 
capitalize the portion of such circulation expenditures which is 
properly chargeable to capital account.

[[Page 189]]

As a general rule, expenditures normally made from year to year in an 
effort to maintain circulation are not properly chargeable to capital 
account; conversely, expenditures made in an effort to establish or to 
increase circulation are properly chargeable to capital account. For 
example, if a newspaper normally employs five persons to obtain renewals 
of subscriptions by telephone, the expenditures in connection therewith 
would not be properly chargeable to capital account. However, if such 
newspaper, in a special effort to increase its circulation, hires for a 
limited period 20 additional employees to obtain new subscriptions by 
means of telephone calls to the general public, the expenditures in 
connection therewith would be properly chargeable to capital account. If 
an election is made by a taxpayer to treat any portion of his 
circulation expenditures as chargeable to capital account, the election 
must apply to all such expenditures which are properly so chargeable. In 
such case, no deduction shall be allowed under section 173 for any such 
expenditures. In particular cases, the extent to which any deductions 
attributable to the amortization of capital expenditures are allowed may 
be determined under sections 162, 263, and 461.
    (2) A taxpayer may make the election referred to in subparagraph (1) 
of this paragraph by attaching a statement to his return for the first 
taxable year to which the election is applicable. Once an election is 
made, the taxpayer must continue in subsequent taxable years to charge 
to capital account all circulation expenditures properly so chargeable, 
unless the Commissioner, on application made to him in writing by the 
taxpayer, permits a revocation of such election for any subsequent 
taxable year or years. Permission to revoke such election may be granted 
subject to such conditions as the Commissioner deems necessary.
    (3) Elections filed under section 23(bb) of the Internal Revenue 
Code of 1939 shall be given the same effect as if they were filed under 
section 173. (See section 7807(b)(2).)



Sec. 1.174-1  Research and experimental expenditures; in general.

    Section 174 provides two methods for treating research or 
experimental expenditures paid or incurred by the taxpayer in connection 
with his trade or business. These expenditures may be treated as 
expenses not chargeable to capital account and deducted in the year in 
which they are paid or incurred (see Sec. 1.174-3), or they may be 
deferred and amortized (see Sec. 1.174-4). Research or experimental 
expenditures which are neither treated as expenses nor deferred and 
amortized under section 174 must be charged to capital account. The 
expenditures to which section 174 applies may relate either to a general 
research program or to a particular project. See Sec. 1.174-2 for the 
definition of research and experimental expenditures. The term paid or 
incurred, as used in section 174 and in Sec. Sec. 1.174-1 to 1.174-4, 
inclusive, is to be construed according to the method of accounting used 
by the taxpayer in computing taxable income. See section 7701(a)(25).



Sec. 1.174-2  Definition of research and experimental expenditures.

    (a) In general. (1) The term research or experimental expenditures, 
as used in section 174, means expenditures incurred in connection with 
the taxpayer's trade or business which represent research and 
development costs in the experimental or laboratory sense. The term 
generally includes all such costs incident to the development or 
improvement of a product. The term includes the costs of obtaining a 
patent, such as attorneys' fees expended in making and perfecting a 
patent application. Expenditures represent research and development 
costs in the experimental or laboratory sense if they are for activities 
intended to discover information that would eliminate uncertainty 
concerning the development or improvement of a product. Uncertainty 
exists if the information available to the taxpayer does not establish 
the capability or method for developing or improving the product or the 
appropriate design of the product. Whether expenditures qualify as 
research or experimental expenditures depends on the nature of the 
activity to which the expenditures relate, not

[[Page 190]]

the nature of the product or improvement being developed or the level of 
technological advancement the product or improvement represents.
    (2) For purposes of this section, the term product includes any 
pilot model, process, formula, invention, technique, patent, or similar 
property, and includes products to be used by the taxpayer in its trade 
or business as well as products to be held for sale, lease, or license.
    (3) The term research or experimental expenditures does not include 
expenditures for--
    (i) The ordinary testing or inspection of materials or products for 
quality control (quality control testing);
    (ii) Efficiency surveys;
    (iii) Management studies;
    (iv) Consumer surveys;
    (v) Advertising or promotions;
    (vi) The acquisition of another's patent, model, production or 
process; or
    (vii) Research in connection with literary, historical, or similar 
projects.
    (4) For purposes of paragraph (a)(3)(i) of this section, testing or 
inspection to determine whether particular units of materials or 
products conform to specified parameters is quality control testing. 
However, quality control testing does not include testing to determine 
if the design of the product is appropriate.
    (5) See section 263A and the regulations thereunder for cost 
capitalization rules which apply to expenditures paid or incurred for 
research in connection with literary, historical, or similar projects 
involving the production of property, including the production of films, 
sound recordings, video tapes, books, or similar properties.
    (6) Section 174 applies to a research or experimental expenditure 
only to the extent that the amount of the expenditure is reasonable 
under the circumstances. In general, the amount of an expenditure for 
research or experimental activities is reasonable if the amount would 
ordinarily be paid for like activities by like enterprises under like 
circumstances. Amounts supposedly paid for research that are not 
reasonable under the circumstances may be characterized as disguised 
dividends, gifts, loans, or similar payments. The reasonableness 
requirement of this paragraph (a)(6) does not apply to the 
reasonableness of the type or nature of the activities themselves.
    (7) This paragraph (a) applies to taxable years beginning after 
October 3, 1994.
    (8) The provisions of this section apply not only to costs paid or 
incurred by the taxpayer for research or experimentation undertaken 
directly by him but also to expenditures paid or incurred for research 
or experimentation carried on in his behalf by another person or 
organization (such as a research institute, foundation, engineering 
company, or similar contractor). However, any expenditures for research 
or experimentation carried on in the taxpayer's behalf by another person 
are not expenditures to which section 174 relates, to the extent that 
they represent expenditures for the acquisition or improvement of land 
or depreciable property, used in connection with the research or 
experimentation, to which the taxpayer acquires rights of ownership.
    (9) The application of subparagraph (2) of this paragraph may be 
illustrated by the following examples:

    Example 1. A engages B to undertake research and experimental work 
in order to create a particular product. B will be paid annually a fixed 
sum plus an amount equivalent to his actual expenditures. In 1957, A 
pays to B in respect of the project the sum of $150,000 of which $25,000 
represents an addition to B's laboratory and the balance represents 
charges for research and experimentation on the project. It is agreed 
between the parties that A will absorb the entire cost of this addition 
to B's laboratory which will be retained by B. A may treat the entire 
$150,000 as expenditures under section 174.
    Example 2. X Corporation, a manufacturer of explosives, contracts 
with the Y research organization to attempt through research and 
experimentation the creation of a new process for making certain 
explosives. Because of the danger involved in such an undertaking, Y is 
compelled to acquire an isolated tract of land on which to conduct the 
research and experimentation. It is agreed that upon completion of the 
project Y will transfer this tract, including any improvements thereon, 
to X. Section 174 does not apply to the amount paid to Y representing 
the costs of the tract of land and improvements.


[[Page 191]]


    (b) Certain expenditures with respect to land and other property. 
(1) Expenditures by the taxpayer for the acquisition or improvement of 
land, or for the acquisition or improvement of property which is subject 
to an allowance for depreciation under section 167 or depletion under 
section 611, are not deductible under section 174, irrespective of the 
fact that the property or improvements may be used by the taxpayer in 
connection with research or experimentation. However, allow- ances for 
depreciation or depletion of property are considered as research or 
experimental expenditures, for purposes of section 174, to the extent 
that the property to which the allowances relate is used in connection 
with research or experimentation. If any part of the cost of acquisition 
or improvement of depreciable property is attributable to research or 
experimentation (whether made by the taxpayer or another), see 
subparagraphs (2), (3), and (4) of this paragraph.
    (2) Expenditures for research or experimentation which result, as an 
end product of the research or experimentation, in depreciable property 
to be used in the taxpayer's trade or business may, subject to the 
limitations of subparagraph (4) of this paragraph, be allowable as a 
current expense deduction under section 174(a). Such expenditures cannot 
be amortized under section 174(b) except to the extent provided in 
paragraph (a)(4) of Sec. 1.174-4.
    (3) If expenditures for research or experimentation are incurred in 
connection with the construction or manufacture of depreciable property 
by another, they are deductible under section 174(a) only if made upon 
the taxpayer's order and at his risk. No deduction will be allowed (i) 
if the taxpayer purchases another's product under a performance 
guarantee (whether express, implied, or imposed by local law) unless the 
guarantee is limited, to engineering specifications or otherwise, in 
such a way that economic utility is not taken into account; or (ii) for 
any part of the purchase price of a product in regular production. For 
example, if a taxpayer orders a specially-built automatic milling 
machine under a guarantee that the machine will be capable of producing 
a given number of units per hour, no portion of the expenditure is 
deductible since none of it is made at the taxpayer's risk. Similarly, 
no deductible expense is incurred if a taxpayer enters into a contract 
for the construction of a new type of chemical processing plant under a 
turn-key contract guaranteeing a given annual production and a given 
consumption of raw material and fuel per unit. On the other hand, if the 
contract contained no guarantee of quality of production and of quantity 
of units in relation to consumption of raw material and fuel, and if 
real doubt existed as to the capabilities of the process, expenses for 
research or experimentation under the contract are at the taxpayer's 
risk and are deductible under section 174(a). However, see subparagraph 
(4) of this paragraph.
    (4) The deductions referred to in subparagraphs (2) and (3) of this 
paragraph for expenditures in connection with the acquisition or 
production of depreciable property to be used in the taxpayer's trade or 
business are limited to amounts expended for research or 
experimentation. For the purpose of the preceding sentence, amounts 
expended for research or experimentation do not include the costs of the 
component materials of the depreciable property, the costs of labor or 
other elements involved in its construction and installation, or costs 
attributable to the acquisition or improvement of the property. For 
example, a taxpayer undertakes to develop a new machine for use in his 
business. He expends $30,000 on the project of which $10,000 represents 
the actual costs of material, labor, etc., to construct the machine, and 
$20,000 represents research costs which are not attributable to the 
machine itself. Under section 174(a) the taxpayer would be permitted to 
deduct the $20,000 as expenses not chargeable to capital account, but 
the $10,000 must be charged to the asset account (the machine).
    (c) Exploration expenditures. The provisions of section 174 are not 
applicable to any expenditures paid or incurred for the purpose of 
ascertaining the existence, location, extent, or quality of

[[Page 192]]

any deposit of ore, oil, gas or other mineral. See sections 617 and 263.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 8562, 59 FR 
50160, Oct. 3, 1994]



Sec. 1.174-3  Treatment as expenses.

    (a) In general. Research or experimental expenditures paid or 
incurred by a taxpayer during the taxable year in connection with his 
trade or business are deductible as expenses, and are not chargeable to 
capital account, if the taxpayer adopts the method provided in section 
174(a). See paragraph (b) of this section. If adopted, the method shall 
apply to all research and experimental expenditures paid or incurred in 
the taxable year of adoption and all subsequent taxable years, unless a 
different method is authorized by the Commissioner under section 
174(a)(3) with respect to part or all of the expenditures. See paragraph 
(b)(3) of this section. Thus, if a change to the deferred expense method 
under section 174(b) is authorized by the Commissioner with respect to 
research or experimental expenditures attributable to a particular 
project or projects, the taxpayer, for the taxable year of the change 
and for subsequent taxable years, must apply the deferred expense method 
to all such expenditures paid or incurred during any of those taxable 
years in connection with the particular project or projects, even though 
all other research and experimental expenditures are required to be 
deducted as current expenses under this section. In no event will the 
taxpayer be permitted to adopt the method described in this section as 
to part of the expenditures relative to a particular project and adopt 
for the same taxable year a different method of treating the balance of 
the expenditures relating to the same project.
    (b) Adoption and change of method--(1) Adoption without consent. The 
method described in this section may be adopted for any taxable year 
beginning after December 31, 1953, and ending after August 16, 1954. The 
consent of the Commissioner is not required if the taxpayer adopts the 
method for the first such taxable year in which he pays or incurs 
research or experimental expenditures. The taxpayer may do so by 
claiming in his income tax return for such year a deduction for his 
research or experimental expenditures. If the taxpayer fails to adopt 
the method for the first taxable year in which he incurs such 
expenditures, he cannot do so in subsequent taxable years unless he 
obtains the consent of the Commissioner under section 174(a)(2)(B) and 
subparagraph (2) of this paragraph. See, however, subparagraph (4) of 
this paragraph, relating to extensions of time.
    (2) Adoption with consent. A taxpayer may, with the consent of the 
Commissioner, adopt at any time the method provided in section 174(a). 
The method adopted in this manner shall be applicable only to 
expenditures paid or incurred during the taxable year for which the 
request is made and in subsequent taxable years. A request to adopt this 
method shall be in writing and shall be addressed to the Commissioner of 
Internal Revenue, Attention: T:R, Washington, DC, 20224. The request 
shall set forth the name and address of the taxpayer, the first taxable 
year for which the adoption of the method is requested, and a 
description of the project or projects with respect to which research or 
experimental expenditures are to be, or have already been, paid or 
incurred. The request shall be signed by the taxpayer (or his duly 
authorized representative) and shall be filed not later than the last 
day of the first taxable year for which the adoption of the method is 
requested. See, however, subparagraph (4) of this paragraph, relating to 
extensions of time.
    (3) Change of method. An application for permission to change to a 
different method of treating research or experimental expenditures shall 
be in writing and shall be addressed to the Commissioner of Internal 
Revenue, Attention: T:R, Washington, DC, 20224. The application shall 
include the name and address of the taxpayer, shall be signed by the 
taxpayer (or his duly authorized representative), and shall be filed not 
later than the last day of the first taxable year for which the change 
in method is to apply. See, however, subparagraph (4) of this paragraph, 
relating to extensions of time. The application shall:

[[Page 193]]

    (i) State the first year to which the requested change is to be 
applicable;
    (ii) State whether the change is to apply to all research or 
experimental expenditures paid or incurred by the taxpayer, or only to 
expenditures attributable to a particular project or projects;
    (iii) Include such information as will identify the project or 
projects to which the change is applicable;
    (iv) Indicate the number of months (not less than 60) selected for 
amortization of the expenditures, if any, which are to be treated as 
deferred expenses under section 174(b);
    (v) State that, upon approval of the application, the taxpayer will 
make an accounting segregation on his books and records of the research 
or experimental expenditures to which the change in method is to apply; 
and
    (vi) State the reasons for the change.

If permission is granted to make the change, the taxpayer shall attach a 
copy of the letter granting permission to his income tax return for the 
first taxable year in which the different method is effective.
    (4) Special rules. If the last day prescribed by law for filing a 
return for any taxable year (including extensions thereof) to which 
section 174(a) is applicable falls before January 2, 1958, consent is 
hereby given for the taxpayer to adopt the expense method or to change 
from the expense method to a different method. In the case of a change 
from the expense method to a different method, the taxpayer, on or 
before January 2, 1958, must submit to the district director for the 
internal revenue district in which the return was filed the information 
required by subparagraph (3) of this paragraph. For any taxable year for 
which the expense method or a different method is adopted pursuant to 
this subparagraph, an amended return reflecting such method shall be 
filed on or before January 2, 1958, if such return is necessary.



Sec. 1.174-4  Treatment as deferred expenses.

    (a) In general. (1) If a taxpayer has not adopted the method 
provided in section 174(a) of treating research or experimental 
expenditures paid or incurred by him in connection with his trade or 
business as currently deductible expenses, he may, for any taxable year 
beginning after December 31, 1953, elect to treat such expenditures as 
deferred expenses under section 174(b), subject to the limitations of 
subparagraph (2) of this paragraph. If a taxpayer has adopted the method 
of treating such expenditures as expenses under section 174(a), he may 
not elect to defer and amortize any such expenditures unless permission 
to do so is granted under section 174(a)(3). See paragraph (b) of this 
section.
    (2) The election to treat research or experimental expenditures as 
deferred expenses under section 174(b) applies only to those 
expenditures which are chargeable to capital account but which are not 
chargeable to property of a character subject to an allowance for 
depreciation or depletion under section 167 or 611, respectively. Thus, 
the election under section 174(b) applies only if the property resulting 
from the research or experimental expenditures has no determinable 
useful life. If the property resulting from the expenditures has a 
determinable useful life, section 174(b) is not applicable, and the 
capitalized expenditures must be amortized or depreciated over the 
determinable useful life. Amounts treated as deferred expenses are 
properly chargeable to capital account for purposes of section 
1016(a)(1), relating to adjustments to basis of property. See section 
1016(a)(14). See section 174(c) and paragraph (b)(1) of Sec. 1.174-2 
for treatment of expenditures for the acquisition or improvement of land 
or of depreciable or depletable property to be used in connection with 
the research or experimentation.
    (3) Expenditures which are treated as deferred expenses under 
section 174(b) are allowable as a deduction ratably over a period of not 
less than 60 consecutive months beginning with the month in which the 
taxpayer first realizes benefits from the expenditures. The length of 
the period shall be selected by the taxpayer at the time he makes the 
election to defer the expenditures. If a taxpayer has two or more 
separate projects, he may select a different amortization period for 
each project. In the absence of a showing to the contrary, the taxpayer 
will be

[[Page 194]]

deemed to have begun to realize benefits from the deferred expenditures 
in the month in which the taxpayer first puts the process, formula, 
invention, or similar property to which the expenditures relate to an 
income-producing use. See section 1016(a)(14) for adjustments to basis 
of property for amounts allowed as deductions under section 174(b) and 
this section. See section 165 and the regulations thereunder for rules 
relating to the treatment of losses resulting from abandonment.
    (4) If expenditures which the taxpayer has elected to defer and 
deduct ratably over a period of time in accordance with section 174(b) 
result in the development of depreciable property, deductions for the 
unrecovered expenditures, beginning with the time the asset becomes 
depreciable in character, shall be determined under section 167 
(relating to depreciation) and the regulations thereunder. For example, 
for the taxable year 1954, A, who reports his income on the basis of a 
calendar year, elects to defer and deduct ratably over a period of 60 
months research and experimental expenditures made in connection with a 
particular project. In 1956, the total of the deferred expenditures 
amounts to $60,000. At that time, A has developed a process which he 
seeks to patent. On July 1, 1956, A first realized benefits from the 
marketing of products resulting from this process. Therefore, the 
expenditures deferred are deductible ratably over the 60-month period 
beginning with July 1, 1956 (when A first realized benefits from the 
project). In his return for the year 1956. A deducted $6,000; in 1957, A 
deducted $12,000 ($1,000 per month). On July 1, 1958, a patent 
protecting his process is obtained by A. In his return for 1958, A is 
entitled to a deduction of $6,000, representing the amortizable portion 
of the deferred expenses attributable to the period prior to July 1, 
1958. The balance of the unrecovered expenditures ($60,000 minus 
$24,000, or $36,000) is to be recovered as a depreciation deduction over 
the life of the patent commencing with July 1, 1958. Thus, one-half of 
the annual depreciation deduction based upon the useful life of the 
patent is also deductible for 1958 (from July 1 to December 31).
    (5) The election shall be applicable to all research and 
experimental expenditures paid or incurred by the taxpayer or, if so 
limited by the taxpayer's election, to all such expenditures with 
respect to the particular project, subject to the limitations of 
subparagraph (2) of this paragraph. The election shall apply for the 
taxable year for which the election is made and for all subsequent 
taxable years, unless a change to a different treatment is authorized by 
the Commissioner under section 174(b)(2). See paragraph (b)(2) of this 
section. Likewise, the taxpayer shall adhere to the amortization period 
selected at the time of the election unless a different period of 
amortization with respect to a part or all of the expenditures is 
similarly authorized. However, no change in method will be permitted 
with respect to expenditures paid or incurred before the taxable year to 
which the change is to apply. In no event will the taxpayer be permitted 
to treat part of the expenditures with respect to a particular project 
as deferred expenses under section 174(b) and to adopt a different 
method of treating the balance of the expenditures relating to the same 
project for the same taxable year. The election under this section shall 
not apply to any expenditures paid or incurred before the taxable year 
for which the taxpayer makes the election.
    (b) Election and change of method--(1) Election. The election under 
section 174(b) shall be made not later than the time (including 
extensions) prescribed by law for filing the return for the taxable year 
for which the method is to be adopted. The election shall be made by 
attaching a statement to the taxpayer's return for the first taxable 
year to which the election is applicable. The statement shall be signed 
by the taxpayer (or his duly authorized representative), and shall:
    (i) Set forth the name and address of the taxpayer;
    (ii) Designate the first taxable year to which the election is to 
apply;
    (iii) State whether the election is intended to apply to all 
expenditures within the permissible scope of the election, or only to a 
particular project or projects, and, if the latter, include such 
information as will identify the

[[Page 195]]

project or projects as to which the election is to apply;
    (iv) Set forth the amount of all research or experimental 
expenditures paid or incurred during the taxable year for which the 
election is made;
    (v) Indicate the number of months (not less than 60) selected for 
amortization of the deferred expenses for each project; and
    (vi) State that the taxpayer will make an accounting segregation in 
his books and records of the expenditures to which the election relates.
    (2) Change to a different method or period. Application for 
permission to change to a different method of treating research or 
experimental expenditures or to a different period of amortization for 
deferred expenses shall be in writing and shall be addressed to the 
Commissioner of Internal Revenue, Attention: T:R, Washington, DC, 20224. 
The application shall include the name and address of the taxpayer, 
shall be signed by the taxpayer (or his duly authorized representative), 
and shall be filed not later than the end of the first taxable year in 
which the different method or different amortization period is to be 
used (unless subparagraph (3) of this paragraph, relating to extensions 
of time, is applicable). The application shall set forth the following 
information with regard to the research or experimental expenditures 
which are being treated under section 174(b) as deferred expenses:
    (i) Total amount of research or experimental expenditures 
attributable to each project;
    (ii) Amortization period applicable to each project; and
    (iii) Unamortized expenditures attributable to each project at the 
beginning of the taxable year in which the application is filed.

In addition, the application shall set forth the length of the new 
period or periods proposed, or the new method of treatment proposed, the 
reasons for the proposed change, and such information as will identify 
the project or projects to which the expenditures affected by the change 
relate. If permission is granted to make the change, the taxpayer shall 
attach a copy of the letter granting the permission to his income tax 
return for the first taxable year in which the different method or 
period is to be effective.
    (3) Special rules. If the last day prescribed by law for filing a 
return for any taxable year for which the deferred method provided in 
section 174(b) has been adopted falls before January 2, 1958, consent is 
hereby given for the taxpayer to change from such method and adopt a 
different method of treating research or experimental expenditures, 
provided that on or before January 2, 1958, he submits to the district 
director for the district in which the return was filed the information 
required by subparagraph (2) of this paragraph, relating to a change to 
a different method or period. For any taxable year for which the 
different method is adopted pursuant to this subparagraph, an amended 
return reflecting such method shall be filed on or before January 2, 
1958.
    (c) Example. The application of this section is illustrated by the 
following example:

    Example. N Corporation is engaged in the business of manufacturing 
chemical products. On January 1, 1955, work is begun on a special 
research project. N Corporation elects, pursuant to section 174(b), to 
defer the expenditures relating to the special project and to amortize 
the expenditures over a period of 72 months beginning with the month in 
which benefits from the expenditures are first realized. On January 1, 
1955, N Corporation also purchased for $57,600 a building having a 
remaining useful life of 12 years as of the date of purchase and no 
salvage value at the end of the period. Fifty percent of the building's 
facilities are to be used in connection with the special research 
project. During 1955, N Corporation pays or incurs the following 
expenditures relating to the special research project:

Salaries.....................................................    $15,000
Heat, light and power........................................        700
Drawings.....................................................      2,000
Models.......................................................      6,500
Laboratory materials.........................................      8,000
Attorneys' fees..............................................      1,400
Depreciation on building attributable to project (50 percent       2,400
 of $4,800 allowable depreciation)...........................
                                                              ----------
    Total research and development expenditures..............     36,000
 


The above expenditures result in a process which is marketable but not 
patentable and which has no determinable useful life. N Corporation 
first realizes benefits from the process in January 1956. N Corporation 
is entitled to deduct the amount of $6,000 ($36,000x12 months/72 months) 
as deferred expenses

[[Page 196]]

under section 174(b) in computing taxable income for 1956.



Sec. 1.175-1  Soil and water conservation expenditures; in general.

    Under section 175, a farmer may deduct his soil or water 
conservation expenditures which do not give rise to a deduction for 
depreciation and which are not otherwise deductible. The amount of the 
deduction is limited annually to 25 percent of the taxpayer's gross 
income from farming. Any excess may be carried over and deducted in 
succeeding taxable years. As a general rule, once a farmer has adopted 
this method of treating soil and water conservation expenditures, he 
must deduct all such expenditures (subject to the 25-percent limitation) 
for the current and subsequent taxable years. If a farmer does not adopt 
this method, such expenditures increase the basis of the property to 
which they relate.



Sec. 1.175-2  Definition of soil and water conservation expenditures.

    (a) Expenditures treated as a deduction. (1) The method described in 
section 175 applies to expenditures paid or incurred for the purpose of 
soil or water conservation in respect of land used in farming, or for 
the prevention of erosion of land used in farming, but only if such 
expenditures are made in the furtherance of the business of farming. 
More specifically, a farmer may deduct expenditures made for these 
purposes which are for (i) the treatment or moving of earth, (ii) the 
construction, control, and protection of diversion channels, drainage 
ditches, irrigation ditches, earthen dams, watercourses, outlets, and 
ponds, (iii) the eradication of brush, and (iv) the planting of 
windbreaks. Expenditures for the treatment or moving of earth include 
but are not limited to expenditures for leveling, conditioning, grading, 
terracing, contour furrowing, and restoration of soil fertility. For 
rules relating to the allocation of expenditures that benefit both land 
used in farming and other land of the taxpayer, see Sec. 1.175-7.
    (2) The following are examples of soil and water conservation: (i) 
Constructing terraces, or the like, to detain or control the flow of 
water, to check soil erosion on sloping land, to intercept runoff, and 
to divert excess water to protected outlets; (ii) constructing water 
detention or sediment retention dams to prevent or fill gullies, to 
retard or reduce run-off of water, or to collect stock water; and (iii) 
constructing earthen floodways, levies, or dikes, to prevent flood 
damage to farmland.
    (b) Expenditures not subject to section 175 treatment. (1) The 
method described in section 175 applies only to expenditures for 
nondepreciable items. Accordingly, a taxpayer may not deduct 
expenditures for the purchase, construction, installation, or 
improvement of structures, appliances, or facilities subject to the 
allowance for depreciation. Thus, the method does not apply to 
depreciable nonearthen items such as those made of masonry or concrete 
(see section 167). For example, expenditures in respect of depreciable 
property include those for materials, supplies, wages, fuel, hauling, 
and dirt moving for making structures such as tanks, reservoirs, pipes, 
conduits, canals, dams, wells, or pumps composed of masonry, concrete, 
tile, metal, or wood. However, the method applies to expenditures for 
earthen items which are not subject to a depreciation allowance. For 
example, expenditures for earthen terraces and dams which are 
nondepreciable are deductible under section 175. For taxable years 
beginning after December 31, 1959, in the case of expenditures paid or 
incurred by farmers for fertilizer, lime, etc., for purposes other than 
soil or water conservation, see section 180 and the regulations 
thereunder.
    (2) The method does not apply to expenses deductible apart from 
section 175. Adoption of the method is not necessary in order to deduct 
such expenses in full without limitation. Thus, the method does not 
apply to interest (deductible under section 163), nor to taxes 
(deductible under section 164). It does not apply to expenses for the 
repair of completed soil or water conservation structures, such as costs 
of annual removal of sediment from a drainage ditch. It does not apply 
to expenditures paid or incurred primarily to produce an agricultural 
crop even though they incidentally conserve soil.

[[Page 197]]

Thus, the cost of fertilizing (the effectiveness of which does not last 
beyond one year) used to produce hay is deductible without adoption of 
the method prescribed in section 175. For taxable years beginning after 
December 31, 1959, in the case of expenditures paid or incurred by 
farmers for fertilizer, lime, etc., for purposes other than soil or 
water conservation, see section 180 and the regulations thereunder. 
However, the method would apply to expenses incurred to produce 
vegetation primarily to conserve soil or water or to prevent erosion. 
Thus, for example, the method would apply to such expenditures as the 
cost of dirt moving, lime, fertilizer, seed and planting stock used in 
gulley stabilization, or in stabilizing severely eroded areas, in order 
to obtain a soil binding stand of vegetation on raw or infertile land.
    (c) Assessments. The method applies also to that part of assessments 
levied by a soil or water conservation or drainage district to reimburse 
it for its expenditures which, if actually paid or incurred during the 
taxable year by the taxpayer directly, would be deductible under section 
175. Depending upon the farmer's method of accounting, the time when the 
farmer pays or incurs the assessment, and not the time when the 
expenditures are paid or incurred by the district, controls the time the 
deduction must be taken. The provisions of this paragraph may be 
illustrated by the following example:

    Example. In 1955 a soil and water conservation district levies an 
assessment of $700 upon a farmer on the cash method of accounting. The 
assessment is to reimburse the district for its expenditures in 1954. 
The farmer's share of such expenditures is as follows: $400 for digging 
drainage ditches for soil conservation and $300 for assets subject to 
the allowance for depreciation. If the farmer pays the assessment in 
1955 and has adopted the method of treating expenditures for soil or 
water conservation as current expenses under section 175, he may deduct 
in 1955 the $400 attributable to the digging of drainage ditches as a 
soil conservation expenditure subject to the 25-percent limitation.

(74 Stat. 1001; 26 U.S.C. 180)

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6548, 26 FR 
1487, Feb. 22, 1961; T.D. 7740, 45 FR 78634, Nov. 26, 1980]



Sec. 1.175-3  Definition of ``the business of farming.''

    The method described in section 175 is available only to a taxpayer 
engaged in ``the business of farming''. A taxpayer is engaged in the 
business of farming if he cultivates, operates, or manages a farm for 
gain or profit, either as owner or tenant. For the purpose of section 
175, a taxpayer who receives a rental (either in cash or in kind) which 
is based upon farm production is engaged in the business of farming. 
However, a taxpayer who receives a fixed rental (without reference to 
production) is engaged in the business of farming only if he 
participates to a material extent in the operation or management of the 
farm. A taxpayer engaged in forestry or the growing of timber is not 
thereby engaged in the business of farming. A person cultivating or 
operating a farm for recreation or pleasure rather than a profit is not 
engaged in the business of farming. For the purpose of this section, the 
term farm is used in its ordinary, accepted sense and includes stock, 
dairy, poultry, fish, fruit, and truck farms, and also plantations, 
ranches, ranges, and orchards. A fish farm is an area where fish are 
grown or raised, as opposed to merely caught or harvested; that is, an 
area where they are artificially fed, protected, cared for, etc. A 
taxpayer is engaged in ``the business of farming'' if he is a member of 
a partnership engaged in the business of farming. See paragraphs 
(a)(8)(i) and (c)(1)(iv) of Sec. 1.702-1.

[T.D. 6649, 28 FR 3762, Apr. 18, 1963]



Sec. 1.175-4  Definition of ``land used in farming.''

    (a) Requirements. For purposes of section 175, the term land used in 
farming means land which is used in the business of farming and which 
meets both of the following requirements:
    (1) The land must be used for the production of crops, fruits, or 
other agricultural products, including fish, or for the sustenance of 
livestock. The term livestock includes cattle, hogs, horses, mules, 
donkeys, sheep, goats, captive fur-bearing animals, chickens, turkeys, 
pigeons, and other poultry. Land used

[[Page 198]]

for the sustenance of livestock includes land used for grazing such 
livestock.
    (2) The land must be or have been so used either by the taxpayer or 
his tenant at some time before or at the same time as, the taxpayer 
makes the expenditures for soil or water conservation or for the 
prevention of the erosion of land. The taxpayer will be considered to 
have used the land in farming before making such expenditure if he or 
his tenant has employed the land in a farming use in the past. If the 
expenditures are made by the taxpayer in respect of land newly acquired 
from one who immediately prior to the acquisition was using it in 
farming, the taxpayer will be considered to be using the land in farming 
at the time that such expenditures are made, if the use which is made by 
the taxpayer of the land from the time of its acquisition by him is 
substantially a continuation of its use in farming, whether for the same 
farming use as that of the taxpayer's predecessor or for one of the 
other uses specified in paragraph (a)(1) of this section.
    (b) Examples. The provisions of paragraph (a) of this section may be 
illustrated by the following examples:

    Example 1. A purchases an operating farm from B in the autumn after 
B has harvested his crops. Prior to spring plowing and planting when the 
land is idle because of the season, A makes certain soil and water 
conservation expenditures on this farm. At the time such expenditures 
are made the land is considered to be used by A in farming, and A may 
deduct such expenditures under section 175, subject to the other 
requisite conditions of such section.
    Example 2. C acquires uncultivated land, not previously used in 
farming, which he intends to develop for farming. Prior to putting this 
land into production it is necessary for C to clear brush, construct 
earthen terraces and ponds, and make other soil and water conservation 
expenditures. The land is not used in farming at the same time that such 
expenditures are made. Therefore, C may not deduct such expenditures 
under section 175.
    Example 3. D acquires several tracts of land from persons who had 
used such land immediately prior to D's acquisition for grazing cattle. 
D intends to use the land for growing grapes. In order to make the land 
suitable for this use, D constructs earthen terraces, builds drainage 
ditches and irrigation ditches, extensively treats the soil, and makes 
other soil and water conservation expenditures. The land is considered 
to be used in farming by D at the time he makes such expenditures, even 
though it is being prepared for a different type of farming activity 
than that engaged in by D's predecessors. Therefore, D may deduct such 
expenditures under section 175, subject to the other requisite 
conditions of such section.

    (c) Cross reference. For rules relating to the allocation of 
expenditures that benefit both land used in farming and other land of 
the taxpayer, see Sec. 1.175-7.

[T.D. 7740, 45 FR 78634, Nov. 26, 1980]



Sec. 1.175-5  Percentage limitation and carryover.

    (a) The limitation--(1) General rule. The amount of soil and water 
conservation expenditures which the taxpayer may deduct under section 
175 in any one taxable year is limited to 25 percent of his ``gross 
income from farming''.
    (2) Definition of ``gross income from farming.'' For the purpose of 
section 175, the term gross income from farming means the gross income 
of the taxpayer, derived in ``the business of farming'' as defined in 
Sec. 1.175-3, from the production of crops, fruits, or other 
agricultural products, including fish, or from livestock (including 
livestock held for draft, breeding, or dairy purposes). It includes such 
income from land used in farming other than that upon which expenditures 
are made for soil or water conservation or for the prevention of erosion 
of land. It does not include gains from sales of assets such as farm 
machinery or gains from the disposition of land. A taxpayer shall 
compute his ``gross income from farming'' in accordance with his 
accounting method used in determining gross income. (See the regulations 
under section 61 relating to accounting methods used by farmers in 
determining gross income.) The provisions of this subparagraph may be 
illustrated by the following example:

    Example. A, who uses the cash receipts and disbursements method of 
accounting, includes in his ``gross income from farming'' for purposes 
of determining the 25-percent limitation the following items:

Proceeds from sale of his 1955 yield of corn.................    $10,000
Gain from disposition of old breeding cows replaced by               500
 younger cows................................................
                                                              ----------
    Total gross income from farming..........................     10,500
 


[[Page 199]]

    A must exclude from ``gross income from farming'' the following 
items which are included in his gross income:

Gain from sale of tractor....................................       $100
Gain from sale of 40 acres of taxpayer's farm................      8,000
                                                              ----------
Interest on loan to neighboring farmer.......................        100
 

    (3) Deduction qualifies for net operating loss deduction. Any amount 
allowed as a deduction under section 175, either for the year in which 
the expenditure is paid or incurred or for the year to which it is 
carried, is taken into account in computing a net operating loss for 
such taxable year. If a deduction for soil or water conservation 
expenditures has been taken into account in computing a net operating 
loss carryback or carryover, it shall not be considered a soil or water 
conservation expenditure for the year to which the loss is carried, and 
therefore, is not subject to the 25-percent limitation for that year. 
The provisions of this subparagraph may be illustrated by the following 
example:

    Example. Assume that in 1956 A has gross income from farming of 
$4,000, soil and water conservation expenditures of $1,600 and 
deductible farm expenses of $3,500. Of the soil and water conservation 
expenditures $1,000 is deductible in 1956. The $600 in excess of 25 
percent of A's gross income from farming is carried over into 1957. 
Assuming that A has no other income, his deductions of $4,500 ($1,000 
plus $3,500) exceed his gross income of $4,000 by $500. This $500 will 
constitute a net operating loss which he must carry back two years and 
carry forward five years, until it has offset $500 of taxable income. No 
part of this $500 net operating loss carryback or carryover will be 
taken into account in determining the amount of soil and water 
conservation expenditures in the years to which it is carried.

    (b) Carryover of expenditures in excess of deduction. The deduction 
for soil and water conservation expenditures in any one taxable year is 
limited to 25 percent of the taxpayer's gross income from farming. The 
taxpayer may carry over the excess of such expenditures over 25 percent 
of his gross income from farming into his next taxable year, and, if not 
deductible in that year, into the next year, and so on without limit as 
to time. In determining the deductible amount of such expenditures for 
any taxable year, the actual expenditures of that year shall be added to 
any such expenditures carried over from prior years, before applying the 
25-percent limitation. Any such expenditures in excess of the deductible 
amount may be carried over during the taxpayer's entire existence. For 
this purpose in a farm partnership, since the 25-percent limitation is 
applied to each partner, not the partnership, the carryover may be 
carried forward during the life of the partner. The provisions of this 
paragraph may be illustrated by the following example:

    Example. Assume the expenditures and income shown in the following 
table:

----------------------------------------------------------------------------------------------------------------
                                                                      Deductible soil
                                                                         and water
                                                                        conservation               25
                                                                        expenditures            percent   Excess
                                                                    -------------------            of     to be
                                Year                                  Paid or  Carried   Total   gross   carried
                                                                     incurred  forward           income  forward
                                                                      during     from             from
                                                                      taxable   prior           farming
                                                                       year      year
----------------------------------------------------------------------------------------------------------------
1954...............................................................     $900      None    $900     $800     $100
1955...............................................................    1,000      $100   1,100      900      200
1956...............................................................     None       200     200    1,000     None
----------------------------------------------------------------------------------------------------------------


The deduction for 1954 is limited to $800. The remainder, $100 ($900 
minus $800), not being deductible for 1954, is a carryover to 1955. For 
1955, accordingly, the total of the expenditures to be taken into 
account is $1,100 (the $100 carryover and the $1,000 actually paid in 
that year). The deduction for 1955 is limited to $900, and the remainder 
of the $1,100 total, or $200, is a carryover to 1956. The deduction for 
1956 consists solely of this carryover of $200. Since the total 
expenditures, actual and carried-over, for 1956 are less than 25 percent 
of gross income from farming, there is no carryover into 1957.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6649, 28 FR 
3762, Apr. 18, 1963]



Sec. 1.175-6  Adoption or change of method.

    (a) Adoption with consent. A taxpayer may, without consent, adopt 
the method of treating expenditures for soil or water conservation as 
expenses for the first taxable year:
    (1) Which begins after December 31, 1953, and ends after August 16, 
1954, and
    (2) For which soil or water conservation expenditures described in 
section 175(a) are paid or incurred.

Such adoption shall be made by claiming the deduction on his income tax 
return. For a taxable year ending prior

[[Page 200]]

to May 31, 1957, the adoption of the method described in section 175 
shall be made by claiming the deduction on such return for that year, or 
by claiming the deduction on an amended return filed for that year on or 
before August 30, 1957.
    (b) Adoption with consent. A taxpayer may adopt the method of 
treating soil and water conservation expenditures as provided by section 
175 for any taxable year to which the section is applicable if consent 
is obtained from the district director for the internal revenue district 
in which the taxpayer's return is required to be filed.
    (c) Change of method. A taxpayer who has adopted the method of 
treating expenditures for soil or water conservation, as provided by 
section 175, may change from this method and capitalize such 
expenditures made after the effective date of the change, if he obtains 
the consent of the district director for the internal revenue district 
in which his return is required to be filed.
    (d) Request for consent to adopt or change method. Where the consent 
of the district director is required under paragraph (b) or (c) of this 
section, the request for his consent shall be in writing, signed by the 
taxpayer or his authorized representative, and shall be filed not later 
than the date prescribed by law for filing the income tax return for the 
first taxable year to which the adoption of, or change of, method is to 
apply, or not later than August 20, 1957, following their adoption, 
whichever is later. The request shall:
    (1) Set forth the name and address of the taxpayer;
    (2) Designate the first taxable year to which the method or change 
of method is to apply;
    (3) State whether the method or change of method is intended to 
apply to all expenditures within the permissible scope of section 175, 
or only to a particular project or farm and, if the latter, include such 
information as will identify the project or farm as to which the method 
or change of method is to apply;
    (4) Set forth the amount of all soil and water conservation 
expenditures paid or incurred during the first taxable year for which 
the method or change of method is to apply; and
    (5) State that the taxpayer will make an accounting segregation in 
his books and records of the expenditures to which the election relates.
    (e) Scope of method. Except with the consent of the district 
director as provided in paragraph (b) or (c) of this section, the 
taxpayer's method of treating soil and water conservation expenditures 
described in section 175 shall apply to all such expenditures for the 
taxable year of adoption and all subsequent taxable years. Although a 
taxpayer may have elected to deduct soil and water conservation 
expenditures, he may request an authorization to capitalize his soil and 
water conservation expenditures attributable to a special project or 
single farm. Similarly, a taxpayer who has not elected to deduct such 
expenditures may request an authorization to deduct his soil and water 
conservation expenditures attributable to a special project or single 
farm. The authorization with respect to the special project or single 
farm will not affect the method adopted with respect to the taxpayer's 
regularly incurred soil and water conservation expenditures. No adoption 
of, or change of, the method under section 175 will be permitted as to 
expenditures actually paid or incurred before the taxable year to which 
the method or change of method is to apply. Thus, if a taxpayer adopts 
such method for 1956, he cannot deduct any part of such expenditures 
which he capitalized, or should have capitalized, in 1955. Likewise, if 
a taxpayer who has adopted such method has an unused carryover of such 
expenditures in excess of the 25-percent limitation, and is granted 
consent to capitalize soil and water conservation expenditures beginning 
in 1956, he cannot capitalize any part of the unused carryover. The 
excess expenditures carried over continue to be deductible to the extent 
of 25 percent of the taxpayer's gross income from farming. No adjustment 
to the basis of land shall be made under section 1016 for expenditures 
to which the method under section 175 applies. For example, A has an 
unused carryover of soil and water conservation expenditures amounting 
to $5,000 as of December 31, 1956. On January 1, 1957, A sells his farm 
and goes out of the business of farming. The unused carryover of $5,000

[[Page 201]]

cannot be added to the basis of the farm for purposes of determining 
gain or loss on its sale. In 1959, A purchases another farm and resumes 
the business of farming. In such year, A may deduct the amount of the 
unused carryover to the extent of 25 percent of his gross income from 
farming and may carry over any excess to subsequent years.



Sec. 1.175-7  Allocation of expenditures in certain circumstances.

    (a) General rule. If at the time the taxpayer paid or incurred 
expenditures for the purpose of soil or water conservation, or for the 
prevention of erosion of land, it was reasonable to believe that such 
expenditures would directly and substantially benefit land of the 
taxpayer which does not qualify as ``land used in farming,'' as defined 
in Sec. 1.175-4, as well as land of the taxpayer which does so qualify, 
then, for purposes of section 175, only a part of the taxpayer's total 
expenditures is in respect of ``land used in farming.''
    (b) Method of allocation. The part of expenditures allocable to 
``land used in farming'' generally equals the amount which bears the 
same proportion to the total amount of such expenditures as the area of 
land of the taxpayer used in farming which it was reasonable to believe 
would be directly and substantially benefited as a result of the 
expenditures bears to the total area of land of the taxpayer which it 
was reasonable to believe would be so benefited. If it is established by 
clear and convincing evidence that, in the light of all the facts and 
circumstances, another method of allocation is more reasonable than the 
method provided in the preceding sentence, the taxpayer may allocate the 
expenditures under that other method. For purposes of this section, the 
term land of the taxpayer means land with respect to which the taxpayer 
has title, leasehold, or some other substantial interest.
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. A owns a 200-acre tract of land, 80 acres of which 
qualify as ``land used in farming.'' A makes expenditures for the 
purpose of soil and water conservation which can reasonably be expected 
to directly and substantially benefit the entire 200-acre tract. In the 
absence of clear and convincing evidence that a different allocation is 
more reasonable, A may deduct 40 percent (80/200) of such expenditures 
under section 175. The same result would obtain if A had made the 
expenditures after newly acquiring the tract from a person who had used 
80 of the 200 acres in farming immediately prior to A's acquisition.
    Example 2. Assume the same facts as in Example 1, except that A's 
expenditures for the purpose of soil and water conservation can 
reasonably be expected to directly and substantially benefit only the 80 
acres which qualify as land used in farming; any benefit to the other 
120 acres would be minor and incidental. A may deduct all of such 
expenditures under section 175.
    Example 3. Assume the same facts as in Example 1, except that A's 
expenditures for the purpose of soil and water conservation can 
reasonably be expected to directly and substantially benefit only the 
120 acres which do not qualify as land used in farming. A may not deduct 
any of such expenditures under section 175. The same result would obtain 
even if A had leased the 200-acre tract to B in the expectation that B 
would farm the entire tract.

[T.D. 7740, 45 FR 78635, Nov. 26, 1980]



Sec. 1.177-1  Election to amortize trademark and trade name
expenditures.

    (a) In general. (1) Section 177 provides that a taxpayer may elect 
to treat any trademark or trade name expenditure (defined in section 
177(b) and paragraph (b) of this section) paid or incurred during a 
taxable year beginning after December 31, 1955, as a deferred expense. 
Any expenditure so treated shall be allowed as a deduction ratably over 
the number of continuous months (not less than 60) selected by the 
taxpayer, beginning with the first month of the taxable year in which 
the expenditure is paid or incurred. The term paid or incurred, as used 
in section 177 and this section, is to be construed according to the 
method of accounting used by the taxpayer in computing taxable income. 
See section 7701(a)(25). An election under section 177 is irrevocable 
insofar as it applies to a particular trademark or trade name 
expenditure, but separate elections may be made with respect to other 
trademark or trade name expenditures. See subparagraph (3) of this 
paragraph. See also paragraph (c) of this section for time and manner of 
making election.

[[Page 202]]

    (2) The number of continuous months selected by the taxpayer may be 
equal to or greater, but not less than 60, but in any event the 
deduction must begin with the first month of the taxable year in which 
the expenditure is paid or incurred. The number of months selected by 
the taxpayer at the time he makes the election may not be subsequently 
changed but shall be adhered to in computing taxable income for the 
taxable year for which the election is made and all subsequent taxable 
years.
    (3) Section 177 permits an election by the taxpayer for each 
separate trademark or trade name expenditure. Thus, a taxpayer who has 
several trademark or trade name expenditures in a taxable year may elect 
under section 177 with respect to some of such expenditures and not 
elect with respect to the other expenditures. Also, a taxpayer may 
choose different amortization periods for different trademark or trade 
name expenditures with respect to which he has made the election under 
section 177.
    (4) All trademark and trade name expenditures are properly 
chargeable to capital account for purposes of section 1016(a)(1), 
relating to adjustments to basis of property, whether or not they are to 
be amortized under section 177. However, the trademark and trade name 
expenditures with respect to which the taxpayer has made an election 
under section 177 must be kept in a separate account in the taxpayer's 
books and records. See paragraph (c) of this section. See also section 
1016(a)(16) and paragraph (m) of Sec. 1.1016-5 for adjustments to basis 
of property for amounts allowed as deductions under section 177 and this 
section.
    (b) Trademark and trade name expenditures defined. (1) The term 
trademark and trade name expenditures, as used in section 177 and this 
section, means any expenditure which:
    (i) Is directly connected with the acquisition, protection, 
expansion, registration (Federal, State, or foreign), or defense of a 
trademark or trade name;
    (ii) Is chargeable to capital account; and
    (iii) Is not part of the consideration or purchase price paid for a 
trademark, trade name, or a business (including goodwill) already in 
existence.

An expenditure which fails to meet one or more of these tests is not a 
trademark or trade name expenditure for purposes of section 177 and this 
section.

Amounts paid in connection with the acquisition of an existing trademark 
or trade name may not be amortized under section 177 even though such 
amounts may be paid to protect or expand a previously owned trademark or 
trade name through purchase of a competitive trademark. Similarly, the 
provisions of section 177 and this section are not applicable to 
expenditures paid or incurred for an agreement to discontinue the use of 
a trademark or trade name (if the effect of the agreement is the 
purchase of a trademark or trade name) nor to expenditures paid or 
incurred in acquiring franchises or rights to the use of a trademark or 
trade name. Generally, section 177 will apply to expenditures such as 
legal fees and other costs in connection with the acquisition of a 
certificate of registration of a trademark from the United States or 
other government, artists' fees and similar expenses connected with the 
design of a distinctive mark for a product or service, litigation 
expenses connected with infringement proceedings, and costs in 
connection with the preparation and filing of an application for renewal 
of registration and continued use of a trademark.
    (2) Expenditures for a trademark or trade name which has a 
determinable useful life and which would otherwise be depreciable under 
section 167 must be deferred and amortized under section 177 if an 
election under section 177 is made with respect to such expenditures.
    (3) The following examples illustrate the application of section 
177:

    Example 1. X Corporation engages an artist to design a distinctive 
trademark for its product. At the same time it retains an attorney to 
prepare the papers necessary for registration of this trademark with the 
Federal Government. The fees of both the artist and the attorney may be 
amortized under section 177 over a period of not less than 60 continuous 
months.
    Example 2. Y Corporation wishes to expand the market served by its 
product. It acquires a competing firm in a neighboring State. The 
contract of sale provides for a purchase price

[[Page 203]]

of $250,000 of which $225,000 shall constitute payment for physical 
assets and $25,000 for the trademark and goodwill. No part of the 
purchase price may be amortized under section 177.
    Example 3. M Corporation brings suit against N Corporation for 
infringement of M's trademark. The costs of this litigation may be 
amortized under section 177.

    (c) Time and manner of making election. (1) A taxpayer who elects to 
defer and amortize any trademark or trade name expenditure paid or 
incurred during a taxable year beginning after December 31, 1955, shall, 
within the time prescribed by law (including extensions thereof) for 
filing his income tax return for that year, attach to his income tax 
return a statement signifying his election under section 177 and setting 
forth the following:
    (i) Name and address of the taxpayer, and the taxable year involved;
    (ii) An identification of the character and amount of each 
expenditure to which the election applies and the number of continuous 
months (not less than 60) during which the expenditures are to be 
ratably deducted; and
    (iii) A declaration by the taxpayer that he will make an accounting 
segregation on his books and records of the trademark and trade name 
expenditures for which the election has been made, sufficient to permit 
an identification of the character and amount of each such expenditure 
and the amortization period selected for each expenditure.
    (2) The provisions of subparagraph (1) of this paragraph shall apply 
to income tax returns and statements required to be filed after May 4, 
1960. Elections properly made in accordance with the provisions of 
Treasury Decision 6209, approved October 26, 1956 (21 FR 8319, C.B. 
1956-2, 1370), continue in effect.



Sec. 1.178-1  Depreciation or amortization of improvements on leased 
property and cost of acquiring a lease.

    (a) In general. Section 178 provides rules for determining the 
amount of the deduction allowable for any taxable year to a lessee for 
depreciation or amortization of improvements made on leased property and 
as amortization of the cost of acquiring a lease. For purposes of 
section 178 the term depreciation means the deduction allowable for 
exhaustion, wear and tear, or obsolescence under provisions of the Code 
such as section 167 or 611 and the regulations thereunder and the term 
amortization means the deduction allowable for amortization of buildings 
or other improvements made on leased property or for amortization of the 
cost of acquiring a lease under provisions of the Code such as section 
162 or 212 and the regulations thereunder. The provisions of section 178 
are applicable with respect to costs of acquiring a lease incurred, and 
improvements begun, after July 28, 1958, other than improvements which, 
on July 28, 1958, and at all times thereafter, the lessee was under a 
binding legal obligation to make.
    (b) Determination of amount of deduction. (1) In determining the 
amount of the deduction allowable to a lessee (other than a lessee who 
is related to the lessor within the meaning of Sec. 1.178-2) for any 
taxable year for depreciation or amortization of improvements made on 
leased property, or for amortization in respect of the cost of acquiring 
a lease, the term of the lease shall, except as provided in subparagraph 
(2) of this paragraph, be treated as including all periods for which the 
lease may be renewed, extended, or continued pursuant to an option or 
options exercisable by the lessee (whether or not specifically provided 
for in the lease) if:
    (i) In the case of any building erected, or other improvements made, 
by the lessee on the leased property, the portion of the term of the 
lease (excluding all periods for which the lease may subsequently be 
renewed, extended, or continued pursuant to an option or options 
exercisable by the lessee) remaining upon the completion of such 
building or other improvements is less than 60 percent of the estimated 
useful life of such building or other improvements; or
    (ii) In the case of any cost of acquiring the lease, less than 75 
percent of such cost is attributable to the portion of the term of the 
lease (excluding all periods for which the lease may be renewed, 
extended, or continued pursuant to an option or options exercisable by 
the lessee) remaining on the date of its acquisition.
    (2) The rules provided in subparagraph (1) of this paragraph shall 
not

[[Page 204]]

apply if the lessee establishes that, as of the close of the taxable 
year, it is more probable that the lease will not be renewed, extended, 
or continued than that the lease will be renewed, extended, or 
continued. In such case, the cost of improvements made on leased 
property or the cost of acquiring a lease shall be amortized over the 
remaining term of the lease without regard to any options exercisable by 
the lessee to renew, extend, or continue the lease. The probability test 
referred to in the first sentence of this subparagraph shall be 
applicable to each option period to which the lease may be renewed, 
extended, or continued. The establishment by a lessee as of the close of 
the taxable year that it is more probable that the lease will not be 
renewed, extended, or continued will ordinarily be effective as of the 
close of such taxable year and any subsequent taxable year, and the 
deduction for amortization will be based on the term of the lease 
without regard to any periods for which the lease may be renewed, 
extended, or continued pursuant to an option or options exercisable by 
the lessee. However, in appropriate cases, if the facts as of the close 
of any subsequent taxable year indicate that it is more probable that 
the lease will be renewed, extended, or continued, the deduction for 
amortization (or depreciation) shall, beginning with the first day of 
such subsequent taxable year, be determined by including in the 
remaining term of the lease all periods for which it is more probable 
that the lease will be renewed, extended, or continued.
    (3) If at any time the remaining term of the lease determined in 
accordance with section 178 and this section is equal to or of longer 
duration than the then estimated useful life of the improvements made on 
the leased property by the lessee, the cost of such improvements shall 
be depreciated over the estimated useful life of such improvements under 
the provisions of section 167 and the regulations thereunder.
    (4) For purposes of section 178(a)(1) and this section, the date on 
which the building erected or other improvements made are completed is 
the date on which the building or improvements are usable, whether or 
not used.
    (5)(i) For purposes of section 178(a)(2) and this section, the 
portion of the cost of acquiring a lease which is attributable to the 
term of the lease remaining on the date of its acquisition without 
regard to options exercisable by the lessee to renew, extend, or 
continue the lease shall be determined on the basis of the facts and 
circumstances of each case. In some cases, it may be appropriate to 
determine such portion of the cost of acquiring a lease by applying the 
principles used to measure the present value of an annuity. Where that 
method is used, such portion shall be determined by multiplying the cost 
of the lease by a fraction, the numerator comprised of a factor 
representing the present value of an annually recurring savings of $1 
per year for the period of the remaining term of the lease (without 
regard to options to renew, extend, or continue the lease) at an 
appropriate rate of interest (determined on the basis of all the facts 
and circumstances in each case), and the denominator comprised of a 
factor representing the present value of $1 per year for the period of 
the remaining term of the lease including the options to renew, extend, 
or continue the lease at an appropriate rate of interest.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Lessee A acquires a lease with respect to unimproved 
property at a cost of $100,000 at which time there are 21 years 
remaining in the original term of the lease with two renewal options of 
21 years each. The lease provides for a uniform annual rental for the 
remaining term of the lease and the renewal periods. It has been 
determined that this is an appropriate case for the application of the 
principles used to measure the present value of an annuity. Assume that 
in this case the appropriate rate of interest is 5 percent. By applying 
the tables (Inwood) used to measure the present value of an annuity of 
$1 per year, the factor representing the present value of $1 per annum 
for 21 years at 5% is ascertained to be 12.821, and the factor 
representing the present value of $1 per annum for 63 years at 5% is 
19.075. The portion of the cost of the lease ($100,000) attributable to 
the remaining term of the original lease (21 years) is 67.21% or $67,210 
determined as follows:

12.821/19.075 or 67.21%.


[[Page 205]]


    (6) The provisions of this paragraph may be illustrated by the 
following examples:

    Example 1. Lessee A constructs a building on land leased from lessor 
B. The construction is commenced on August 1, 1958, and is completed and 
placed in service on December 31, 1958, at which time A has 15 years 
remaining on his lease with an option to renew for an additional 20 
years. Lessee A computes his taxable income on a calendar year basis. 
Lessee A was not, on July 28, 1958, under a binding legal obligation to 
erect the building. The building has an estimated useful life of 30 
years. A is not related to B. Since the portion of the term of the lease 
(without regard to any renewals) remaining upon completion of the 
building (15 years) is less than 60 percent of the estimated useful life 
of the building (60 percent of 30 years, or 18 years), the term of the 
lease shall be treated as including the remaining portion of the 
original lease period and the renewal period, or 35 years. Since the 
estimated useful life of the building (30 years) is less than 35 years, 
the cost of the building shall, in accord with paragraph (b)(3) of this 
section, be depreciated under the provisions of section 167, over its 
estimated useful life. If, however, lessee A establishes, as of the 
close of the taxable year 1958, it is more probable that the lease will 
not be renewed than that it will be renewed, then in such case the 
remaining term of the lease shall be treated as including only the 15-
year period remaining in the original lease. Since this is less than the 
estimated useful life of the building, the remaining cost of the 
building would be amortized over such 15-year period under the 
provisions of section 162 and the regulations thereunder.
    Example 2. Assume the same facts as in Example 1, except that A has 
21 years remaining on his lease with an option to renew for an 
additional 10 years. Section 178(a) and paragraph (b)(1) of this section 
do not apply since the term of the lease remaining on the date of 
completion of the building (21 years) is not less than 60 percent of the 
estimated useful life of the building (60 percent of 30 years, or 18 
years).
    Example 3. Assume the same facts as in Example 1, except that A has 
no renewal option until July 1, 1961, when lessor B grants A an option 
to renew the lease for a 10-year period. Because there is no option to 
renew the lease, the term of the lease is, for the taxable years 1959 
and 1960 and for the first six months of the taxable year 1961, 
determined without regard to section 178(a). However, as of July 1, 
1961, the date the renewal option is granted, section 178(a) and 
paragraph (b)(1) of this section become applicable since the portion of 
the term of the lease remaining upon completion of the building (15 
years) was less than 60 percent of the estimated useful life of the 
building (60 percent of 30 years, or 18 years). As of July 1, 1961, the 
term of the lease shall be treated as including the remaining portion of 
the original lease period (12\1/2\ years) and the 10-year renewal 
period, or 22\1/2\ years, unless lessee A can establish that, as of the 
close of 1961, it is more probable that the lease will not be renewed 
than that it will be.
    Example 4. On January 1, 1959, lessee A pays $10,000 to acquire a 
lease for 20 years with two options exercisable by him to renew for 
periods of 5 years each. Of the total $10,000 cost to acquire the lease, 
$7,000 was paid for the original 20-year lease period and the balance of 
$3,000 was paid for the renewal options. Since the $7,000 cost of 
acquiring the initial lease is less than 75 percent of the $10,000 cost 
of the lease ($7,500), the term of the lease shall be treated as 
including the original lease period and the 2 renewal periods, or 30 
years. However, if lessee A establishes that, as of the close of the 
taxable year 1959, it is more probable that the lease will not be 
renewed than that it will be renewed, the term of the lease shall be 
treated as including only the original lease period, or 20 years.
    Example 5. Assume the same facts as in Example 4, except that the 
portion of the total cost ($10,000) paid for the 20-year original lease 
period is $8,000. Since the $8,000 cost of acquiring the original lease 
is not less than 75 percent of the $10,000 cost of the lease ($7,500), 
section 178(a) and paragraph (b)(1) of this section do not apply.

    (c) Application of section 178(a) where lessee gives notice to 
lessor of intention to exercise option. (1) If the lessee has given 
notice to the lessor of his intention to renew, extend, or continue a 
lease, the lessee shall, for purposes of applying the provisions of 
section 178(a) and paragraph (b)(1) of this section, take into account 
such renewal or extension in determining the portion of the term of the 
lease remaining upon the completion of the improvements or on the date 
of the acquisition of the lease.
    (2) The application of the provisions of this paragraph may be 
illustrated by the following examples:

    Example 1. Lessee A constructs a building on land leased from lessor 
B. The construction was commenced on September 1, 1958, and was 
completed and placed in service on December 31, 1958. Lessee A was not, 
on July 28, 1958, under a binding legal obligation to erect the 
building. A and B are not related. At the time the building was 
completed (December 31, 1958), lessee A had 3 years remaining on his 
lease with 2 options to renew for

[[Page 206]]

periods of 20 years each. The estimated useful life of the building is 
50 years. Prior to completion of the building, lessee A gives notice to 
lessor B of his intention to exercise the first 20-year option. 
Therefore, the portion of the term of the lease remaining on January 1, 
1959, shall be the 3 years remaining in the original lease period plus 
the 20-year renewal period, or 23 years. Since the term of the lease 
remaining upon completion of the building (23 years) is less than 60 
percent of the estimated useful life of the building (60 percent of 50 
years, or 30 years), the provisions of section 178(a) and paragraph 
(b)(1) of this section are applicable. Accordingly, the term of the 
lease shall be treated as including the aggregate of the remaining term 
of the original lease (23 years) and the second 20-year renewal period 
or 43 years, unless lessee A establishes that it is more probable that 
the lease will not be renewed, extended, or continued under the second 
20-year option than that it will be so renewed, extended, or continued 
under such option. If this is established by lessee A, then the term of 
the lease shall be treated as including only the remaining portion of 
the original lease period and the first 20-year renewal period, or 23 
years.
    Example 2. Assume the same facts as in Example 1, except that the 
estimated useful life of the building is 30 years. Since the term of the 
lease remaining upon completion of the building (23 years) is not less 
than 60 percent of the estimated life of the building (60 percent of 30 
years, or 18 years), the provisions of section 178(a) and paragraph 
(b)(1) of this section do not apply.
    Example 3. If in Examples 1 and (2, the lessee failed to give notice 
of his intention to exercise the renewal option, the renewal period 
would not be taken into account in computing the percentage requirements 
under section 178(a) and paragraph (b)(1) of this section. Thus, unless 
lessee A establishes the required probability, the provisions of section 
178(a) and paragraph (b)(1) of this section would apply in both examples 
since the term of the lease remaining upon completion of the building (3 
years) is less than 60 percent of the estimated useful life of the 
building in either example (60 percent of 50 years, or 30 years; 60 
percent of 30 years, or 18 years).

    (d) Application of section 178 where lessee is related to lessor. 
(1)(i) If the lessee and lessor are related persons within the meaning 
of section 178(b)(2) and Sec. 1.178-2 at any time during the taxable 
year, the lease shall be treated as including a period of not less 
duration than the remaining estimated useful life of improvements made 
by the lessee on leased property for purposes of determining the amount 
of deduction allowable to the lessee for such taxable year for 
depreciation or amortization in respect of any building erected or other 
improvements made on leased property. If the lessee and lessor cease to 
be related persons during any taxable year, then for the immediately 
following and subsequent taxable years during which they continue to be 
unrelated, the amount allowable to the lessee as a deduction shall be 
determined without reference to section 178(b) and in accordance with 
section 178(a) or section 178(c), whichever is applicable.
    (ii) Although the related lessee and lessor rule of section 178(b) 
and Sec. 1.178-2 does not apply in determining the period over which 
the cost of acquiring a lease may be amortized, the relationship between 
a lessee and lessor will be a significant factor in applying section 178 
(a) and (c) in cases in which the lease may be renewed, extended, or 
continued pursuant to an option or options exercisable by the lessee.
    (2) The application of the provisions of this paragraph may be 
illustrated by the following examples:

    Example 1. Lessee A constructs a building on land leased from lessor 
B. The construction was commenced on August 1, 1958, and was completed 
and put in service on December 31, 1958. Lessee A was not on July 28, 
1958, under a binding legal obligation to erect the building. On the 
completion date of the building, lessee A had 20 years remaining in his 
original lease period with an option to renew for an additional 20 
years. The building has an estimated useful life of 50 years. During the 
taxable years 1959 and 1960, A and B are related persons within the 
meaning of section 178(b)(2) and Sec. 1.178-2, but they are not related 
persons at any time during the taxable year 1961 or during any 
subsequent taxable year. Since A and B are related persons during the 
taxable years 1959 and 1960, the term of the lease shall, for each of 
those years, be treated as 50 years. Section 178(a) and paragraph (b)(1) 
of this section become applicable in the taxable year 1961 since A and B 
are not related persons at any time during that year and because the 
portion of the original lease period remaining at the time the building 
was completed (20 years) is less than 60 percent of the estimated useful 
life of the building (60 percent of 50 years, or 30 years). Thus, the 
term of the lease shall, beginning on January 1, 1961, be treated as 
including the remaining portion of the original lease period (18 years) 
and the renewal period (20 years), or 38 years, unless lessee A can 
establish that, as of the close of the taxable year 1961 or any 
subsequent taxable

[[Page 207]]

year, it is more probable that the lease will not be renewed than that 
it will be renewed.
    Example 2. Assume the same facts as in Example 1, except that the 
estimated useful life of the building is 30 years. During the taxable 
years 1959 and 1960, the term of the lease shall be treated as 30 years. 
For the taxable year 1961, however, neither section 178(a) nor section 
178(b) apply since the percentage requirement of section 178(a) and 
paragraph (b) of this section are not satisfied and A and B are not 
related persons within the meaning of section 178(b)(2) and Sec. 1.178-
2.

[T.D. 6520, 25 FR 13689, Dec. 24, 1960]



Sec. 1.178-2  Related lessee and lessor.

    (a) For purposes of section 178 and Sec. 1.178-1, a lessor and 
lessee shall be considered to be related persons if:
    (1) The lessor and lessee are members of an affiliated group, as 
defined in section 1504 and the regulations thereunder; or
    (2) The relationship between the lessor and lessee is one described 
in section 267(b), except that the phrase ``80 percent or more'' shall 
be substituted for the phrase ``more than 50 percent'' wherever such 
phrase appears in section 267(b).
    (b) In the application of section 267(b) for purposes of section 
178, the rules provided in section 267(c) shall apply, except that the 
family of an individual shall include only his spouse, ancestors, and 
lineal descendants. Thus, if the lessee is the brother or sister of the 
lessor, the lessee and lessor will not be considered to be related 
persons for purposes of section 178 and Sec. 1.178-1. If the lessor 
leases property to a corporation of which he owns 80 percent or more in 
value of the outstanding stock, the lessor and lessee shall be 
considered to be related persons. On the other hand, if the lessor 
leases property to a corporation of which he owns less than 80 percent 
in value of the outstanding stock and his brother owns the remaining 
stock, the lessor and lessee will not be considered to be related 
persons.
    (c) If a relationship described in section 267(b) exists 
independently of family status, the brother-sister exception does not 
apply. For example, if the lessor leases property to the fiduciary of a 
trust of which he is the grantor, the lessor and lessee will be 
considered to be related persons for purposes of section 178. This 
result obtains whether or not the fiduciary is the brother or sister of 
the lessor since the disqualifying relationship exists because of the 
grantor-fiduciary status and not because of family status.

[T.D. 6520, 25 FR 13691, Dec. 24, 1960]



Sec. 1.178-3  Reasonable certainty test.

    (a) In any case in which neither section 178 (a) nor (b) applies, 
the determination as to the amount of the deduction allowable to a 
lessee for any taxable year for depreciation or amortization in respect 
of any building erected, or other improvements made, on leased property, 
or in respect of any cost of acquiring a lease, shall be made with 
reference to the original term of the lease (excluding any period for 
which the lease may subsequently be renewed, extended, or continued 
pursuant to an option exercisable by the lessee) unless the lease has 
been renewed, extended, or continued, or the facts show with reasonable 
certainty that the lease will be renewed, extended, or continued. In a 
case in which the facts show with reasonable certainty that the lease 
will be renewed, extended, or continued, the term of the lease shall, 
beginning with the taxable year in which such reasonable certainty is 
shown, be treated as including the period or periods for which it is 
reasonably certain that the lease will be renewed, extended, or 
continued. If the lessee has given notice to the lessor of his intention 
to renew, extend, or continue a lease, the lease shall be considered as 
renewed, extended, or continued for the periods specified in the notice. 
See paragraph (c) of Sec. 1.178-1.
    (b) The reasonable certainty test is applicable to each option to 
which the lease is subject. Thus, in a case of two successive options, 
the facts in a particular taxable year may show with reasonable 
certainty that the lease will be renewed pursuant to an exercise of only 
the first option; and, beginning with such year, the term of the lease 
will be treated as including the first option, but not the second. If in 
a subsequent taxable year the facts show with reasonable certainty that 
the second option will also be exercised, the term of the lease shall, 
beginning with such subsequent taxable year, be treated as including 
both options. Although

[[Page 208]]

the related lessee and lessor rule of section 178(b) and paragraph (d) 
of Sec. 1.178-1 does not apply in determining the period over which the 
cost of acquiring a lease may be amortized, the relationship between the 
lessee and lessor will be a significant factor in determining whether 
the ``reasonable certainty'' rule of section 178(c) and this section 
applies.
    (c) The application of the provisions of this section may be 
illustrated by the following examples:

    Example 1. Corporation A leases land from lessor B for a period of 
30 years beginning with January 1, 1958. Corporation A and lessor B are 
not related persons. The lease provides that Corporation A will have two 
renewal options of 5 years each at the same annual rental as specified 
in the lease for the initial 30 years. Corporation A constructs a 
factory building on the leased land at a cost of $100,000. Corporation A 
was not, on July 28, 1958, under a binding legal obligation to erect the 
building. The construction was commenced on August 1, 1958, and was 
completed and placed in service on December 31, 1958. On January 1, 
1959, Corporation A has 29 years remaining in the initial term of the 
lease. The estimated useful life of the building on January 1, 1959, is 
40 years. The location of the leased property is particularly suitable 
for Corporation A's business and the annual rental of the property is 
lower than A would have to pay for other suitable property. No factors 
are present which establish that these conditions will not continue to 
exist beyond the initial term of the lease. Since the period remaining 
in the initial term of the lease on January 1, 1959 (29 years) is not 
less than 60 percent of the estimated useful life of the building (60 
percent of 40 years, or 24 years), the provisions of section 178(a) and 
paragraph (b)(1) of Sec. 1.178-1 do not apply, and since Corporation A 
and lessor B are not related, section 178(b) and paragraph (d) of Sec. 
1.178-1 do not apply. However, since the facts show with reasonable 
certainty that Corporation A will renew the lease for the period of the 
two options (10 years), the cost of the building shall be amortized over 
the term of the lease, including the two renewal options, or 39 years.
    Example 2. Assume the same facts as in Example 1, except that a term 
of 30 years is the longest period that lessor B is willing to lease the 
unimproved property; that there was no agreement that Corporation A will 
have any renewal options; and that any other location would be as 
suitable for Corporation A's business as the leased property. Since the 
facts do not show with reasonable certainty that the initial term of the 
lease will be renewed, extended, or continued, Corporation A shall 
amortize the cost of the building over the remaining term of the lease, 
or 29 years.

[T.D. 6520, 25 FR 13691, Dec. 24, 1960]



Sec. 1.179-0  Table of contents for section 179 expensing rules.

    This section lists captioned paragraphs contained in Sec. Sec. 
1.179-1 through 1.179-6.

      Sec. 1.179-1 Election to Expense Certain Depreciable Assets

    (a) In general.
    (b) Cost subject to expense.
    (c) Proration not required.
    (1) In general.
    (2) Example.
    (d) Partial business use.
    (1) In general.
    (2) Example.
    (3) Additional rules that may apply.
    (e) Change in use; recapture.
    (1) In general.
    (2) Predominant use.
    (3) Basis; application with section 1245.
    (4) Carryover of disallowed deduction.
    (5) Example.
    (f) Basis.
    (1) In general.
    (2) Special rules for partnerships and S corporations.
    (3) Special rules with respect to trusts and estates which are 
partners or S corporation shareholders.
    (g) Disallowance of the section 38 credit.
    (h) Partnerships and S corporations.
    (1) In general.
    (2) Example.
    (i) Leasing of section 179 property.
    (1) In general.
    (2) Noncorporate lessor.
    (j) Application of sections 263 and 263A.
    (k) Cross references.

   Sec. 1.179-2 Limitations on Amount Subject to Section 179 Election

    (a) In general.
    (b) Dollar limitation.
    (1) In general.
    (2) Excess section 179 property.
    (3) Application to partnerships.
    (i) In general.
    (ii) Example.
    (iii) Partner's share of section 179 expenses.
    (iv) Taxable year.
    (v) Example.
    (4) S corporations.
    (5) Joint returns.
    (i) In general.
    (ii) Joint returns filed after separate returns.
    (iii) Example.
    (6) Married individuals filing separately.
    (i) In general.

[[Page 209]]

    (ii) Example.
    (7) Component members of a controlled group.
    (i) In general.
    (ii) Statement to be filed.
    (iii) Revocation.
    (c) Taxable income limitation.
    (1) In general.
    (2) Application to partnerships and partners.
    (i) In general.
    (ii) Taxable year.
    (iii) Example.
    (iv) Taxable income of a partnership.
    (v) Partner's share of partnership taxable income.
    (3) S corporations and S corporation shareholders.
    (i) In general.
    (ii) Taxable income of an S corporation.
    (iii) Shareholder's share of S corporation taxable income.
    (4) Taxable income of a corporation other than an S corporation.
    (5) Ordering rule for certain circular problems.
    (i) In general.
    (ii) Example.
    (6) Active conduct by the taxpayer of a trade or business.
    (i) Trade or business.
    (ii) Active conduct.
    (iii) Example.
    (iv) Employees.
    (7) Joint returns.
    (i) In general.
    (ii) Joint returns filed after separate returns.
    (8) Married individuals filing separately.
    (d) Examples.

             Sec. 1.179-3 Carryover of Disallowed Deduction

    (a) In general.
    (b) Deduction of carryover of disallowed deduction.
    (1) In general.
    (2) Cross references.
    (c) Unused section 179 expense allowance.
    (d) Example.
    (e) Recordkeeping requirement and ordering rule.
    (f) Dispositions and other transfers of section 179 property.
    (1) In general.
    (2) Recapture under section 179(d)(10).
    (g) Special rules for partnerships and S corporations.
    (1) In general.
    (2) Basis adjustment.
    (3) Dispositions and other transfers of section 179 property by a 
partnership or an S corporation.
    (4) Example.
    (h) Special rules for partners and S corporation shareholders.
    (1) In general.
    (2) Dispositions and other transfers of a partner's interest in a 
partnership or a shareholder's interest in an S corporation.
    (3) Examples.

                        Sec. 1.179-4 Definitions

    (a) Section 179 property.
    (b) Section 38 property.
    (c) Purchase.
    (d) Cost.
    (e) Placed in service.
    (f) Controlled group of corporations and component member of 
controlled group.

            Sec. 1.179-5 Time and Manner of Making Election

    (a) Election.
    (b) Revocation.
    (c) Section 179 property placed in service by the taxpayer in a 
taxable year beginning after 2002 and before 2008.
    (d) Election or revocation must not be made in any other manner.

                     Sec. 1.179-6 Effective dates.

    (a) In general.
    (b) Section 179 property placed in service by the taxpayer in a 
taxable year beginning after 2002 and before 2008.
    (c) Application of Sec. 1.179-5(d).

[T.D. 8455, 57 FR 61316, Dec. 24, 1992, as amended by T.D. 9146, 69 FR 
46983, Aug. 4, 2004; T.D. 9209, 70 FR 40191, July 13, 2005]



Sec. 1.179-1  Election to expense certain depreciable assets.

    (a) In general. Section 179(a) allows a taxpayer to elect to expense 
the cost (as defined in Sec. 1.179-4(d)), or a portion of the cost, of 
section 179 property (as defined in Sec. 1.179-4(a)) for the taxable 
year in which the property is placed in service (as defined in Sec. 
1.179-4(e)). The election is not available for trusts, estates, and 
certain noncorporate lessors. See paragraph (i)(2) of this section for 
rules concerning noncorporate lessors. However, section 179(b) provides 
certain limitations on the amount that a taxpayer may elect to expense 
in any one taxable year. See Sec. Sec. 1.179-2 and 1.179-3 for rules 
relating to the dollar and taxable income limitations and the carryover 
of disallowed deduction rules. For rules describing the time and manner 
of making an election under section 179, see Sec. 1.179-5. For the 
effective date, see Sec. 1.179-6.
    (b) Cost subject to expense. The expense deduction under section 179 
is allowed for the entire cost or a portion of the cost of one or more 
items of section 179 property. This expense deduction is

[[Page 210]]

subject to the limitations of section 179(b) and Sec. 1.179-2. The 
taxpayer may select the properties that are subject to the election as 
well as the portion of each property's cost to expense.
    (c) Proration not required--(1) In general. The expense deduction 
under section 179 is determined without any proration based on--
    (i) The period of time the section 179 property has been in service 
during the taxable year; or
    (ii) The length of the taxable year in which the property is placed 
in service.
    (2) Example. The following example illustrates the provisions of 
paragraph (c)(1) of this section.

    Example. On December 1, 1991, X, a calendar-year corporation, 
purchases and places in service section 179 property costing $20,000. 
For the taxable year ending December 31, 1991, X may elect to claim a 
section 179 expense deduction on the property (subject to the 
limitations imposed under section 179(b)) without proration of its cost 
for the number of days in 1991 during which the property was in service.

    (d) Partial business use--(1) In general. If a taxpayer uses section 
179 property for trade or business as well as other purposes, the 
portion of the cost of the property attributable to the trade or 
business use is eligible for expensing under section 179 provided that 
more than 50 percent of the property's use in the taxable year is for 
trade or business purposes. The limitations of section179(b) and Sec. 
1.179-2 are applied to the portion of the cost attributable to the trade 
or business use.
    (2) Example. The following example illustrates the provisions of 
paragraph (d)(1) of this section.

    Example. A purchases section 179 property costing $10,000 in 1991 
for which 80 percent of its use will be in A's trade or business. The 
cost of the property adjusted to reflect the business use of the 
property is $8,000 (80 percent x $10,000). Thus, A may elect to expense 
up to $8,000 of the cost of the property (subject to the limitations 
imposed under section 179(b) and Sec. 1.179-2).

    (3) Additional rules that may apply. If a section 179 election is 
made for ``listed property'' within the meaning of section 280F(d)(4) 
and there is personal use of the property, section 280F(d)(1), which 
provides rules that coordinate section 179 with the section 280F 
limitation on the amount of depreciation, may apply. If section 179 
property is no longer predominantly used in the taxpayer's trade or 
business, paragraphs (e) (1) through (4) of this section, relating to 
recapture of the section 179 deduction, may apply.
    (e) Change in use; recapture--(1) In general. If a taxpayer's 
section 179 property is not used predominantly in a trade or business of 
the taxpayer at any time before the end of the property's recovery 
period, the taxpayer must recapture in the taxable year in which the 
section 179 property is not used predominantly in a trade or business 
any benefit derived from expensing such property. The benefit derived 
from expensing the property is equal to the excess of the amount 
expensed under this section over the total amount that would have been 
allowable for prior taxable years and the taxable year of recapture as a 
deduction under section 168 (had section 179 not been elected) for the 
portion of the cost of the property to which the expensing relates 
(regardless of whether such excess reduced the taxpayer's tax 
liability). For purposes of the preceding sentence (i) the ``amount 
expensed under this section'' shall not include any amount that was not 
allowed as a deduction to a taxpayer because the taxpayer's aggregate 
amount of allowable section 179 expenses exceeded the section 179(b) 
dollar limitation, and (ii) in the case of an individual who does not 
elect to itemize deductions under section 63(g) in the taxable year of 
recapture, the amount allowable as a deduction under section 168 in the 
taxable year of recapture shall be determined by treating property used 
in the production of income other than rents or royalties as being 
property used for personal purposes. The amount to be recaptured shall 
be treated as ordinary income for the taxable year in which the property 
is no longer used predominantly in a trade or business of the taxpayer. 
For taxable years following the year of recapture, the taxpayer's 
deductions under section 1688(a) shall be determined as if no section 
179 election with respect to the property had been made. However, see 
section 280F(d)(1) relating to the coordination of section 179 with the 
limitation on

[[Page 211]]

the amount of depreciation for luxury automobiles and where certain 
property is used for personal purposes. If the recapture rules of both 
section 280F(b)(2) and this paragraph (e)(1) apply to an item of section 
179 property, the amount of recapture for such property shall be 
determined only under the rules of section 280F(b)(2).
    (2) Predominant use. Property will be treated as not used 
predominantly in a trade or business of the taxpayer if 50 percent or 
more of the use of such property during any taxable year within the 
recapture period is for a use other than in a trade or business of the 
taxpayer. If during any taxable year of the recapture period the 
taxpayer disposes of the property (other than in a disposition to which 
section 1245(a) applies) or ceases to use the property in a trade or 
business in a manner that had the taxpayer claimed a credit under 
section 38 for such property such disposition or cessation in use would 
cause recapture under section 47, the property will be treated as not 
used in a trade or business of the taxpayer. However, for purposes of 
applying the recapture rules of section 47 pursuant to the preceding 
sentence, converting the use of the property from use in trade or 
business to use in the production of income will be treated as a 
conversion to personal use.
    (3) Basis; application with section 1245. The basis of property with 
respect to which there is recapture under paragraph (e)(1) of this 
section shall be increased immediately before the event resulting in 
such recapture by the amount recaptured. If section 1245(a) applies to a 
disposition of property, there is no recapture under paragraph (e)(1) of 
this section.
    (4) Carryover of disallowed deduction. See Sec. 1.179-3 for rules 
on applying the recapture provisions of this paragraph (e) when a 
taxpayer has a carryover of disallowed deduction.
    (5) Example. The following example illustrates the provisions of 
paragraphs (e)(1) through (e)(4) of this section.

    Example. A, a calendar-year taxpayer, purchases and places in 
service on January 1, 1991, section 179 property costing $15,000. The 
property is 5-year property for section 168 purposes and is the only 
item of depreciable property placed in service by A during 1991. A 
properly elects to expense $10,000 of the cost and elects under section 
168(b)(5) to depreciate the remaining cost under the straight-line 
method. On January 1, 1992, A converts the property from use in A's 
business to use for the production of income, and A uses the property in 
the latter capacity for the entire year. A elects to itemize deductions 
for 1992. Because the property was not predominantly used in A's trade 
or business in 1992, A must recapture any benefit derived from expensing 
the property under section 179. Had A not elected to expense the $10,000 
in 1991, A would have been entitled to deduct, under section 168, 10 
percent of the $10,000 in 1991, and 20 percent of the $10,000 in 1992. 
Therefore, A must include $7,000 in ordinary income for the 1992 taxable 
year, the excess of $10,000 (the section 179 expense amount) over $3,000 
(30 percent of $10,000).

    (f) Basis--(1) In general. A taxpayer who elects to expense under 
section 179 must reduce the depreciable basis of the section 179 
property by the amount of the section 179 expense deduction.
    (2) Special rules for partnerships and S corporations. Generally, 
the basis of a partnership or S corporation's section 179 property must 
be reduced to reflect the amount of section 179 expense elected by the 
partnership or S corporation. This reduction must be made in the basis 
of partnership or S corporation property even if the limitations of 
section 179(b) and Sec. 1.179-2 prevent a partner in a partnership or a 
shareholder in an S corporation from deducting all or a portion of the 
amount of the section 179 expense allocated by the partnership or S 
corporation. See Sec. 1.179-3 for rules on applying the basis 
provisions of this paragraph (f) when a person has a carryover of 
disallowed deduction.
    (3) Special rules with respect to trusts and estates which are 
partners or S corporation shareholders. Since the section 179 election 
is not available for trusts or estates, a partner or S corporation 
shareholder that is a trust or estate may not deduct its allocable share 
of the section 179 expense elected by the partnership or S corporation. 
The partnership or S corporation's basis in section 179 property shall 
not be reduced to reflect any portion of the section 179 expense that is 
allocable to the trust or estate. Accordingly, the partnership or S 
corporation may claim a depreciation deduction under section 168 or a

[[Page 212]]

section 38 credit (if available) with respect to any depreciable basis 
resulting from the trust or estate's inability to claim its allocable 
portion of the section 179 expense.
    (g) Disallowance of the section 38 credit. If a taxpayer elects to 
expense under section 179, no section 38 credit is allowable for the 
portion of the cost expensed. In addition, no section 38 credit shall be 
allowed under section 48(d) to a lessee of property for the portion of 
the cost of the property that the lessor expensed under section 179.
    (h) Partnerships and S corporations--(1) In general. In the case of 
property purchased and placed in service by a partnership or an S 
corporation, the determination of whether the property is section 179 
property is made at the partnership or S corporation level. The election 
to expense the cost of section 179 property is made by the partnership 
or the S corporation. See sections 703(b), 1363(c), 6221, 6231(a)(3), 
6241, and 6245.
    (2) Example. The following example illustrates the provisions of 
paragraph (h)(1) of this section.

    Example. A owns certain residential rental property as an 
investment. A and others form ABC partnership whose function is to rent 
and manage such property. A and ABC partnership file their income tax 
returns on a calendar-year basis. In 1991, ABC partnership purchases and 
places in service office furniture costing $20,000 to be used in the 
active conduct of ABC's business. Although the office furniture is used 
with respect to an investment activity of A, the furniture is being used 
in the active conduct of ABC's trade or business. Therefore, because the 
determination of whether property is section 179 property is made at the 
partnership level, the office furniture is section 179 property and ABC 
may elect to expense a portion of its cost under section 179.

    (i) Leasing of section 179 property--(1) In general. A lessor of 
section 179 property who is treated as the owner of the property for 
Federal tax purposes will be entitled to the section 179 expense 
deduction if the requirements of section 179 and the regulations 
thereunder are met. These requirements will not be met if the lessor 
merely holds the property for the production of income. For certain 
leases entered into prior to January 1, 1984, the safe harbor provisions 
of section 168(f)(8) apply in determining whether an agreement is 
treated as a lease for Federal tax purposes.
    (2) Noncorporate lessor. In determining the class of taxpayers 
(other than an estate or trust) for which section 179 is applicable, 
section 179(d)(5) provides that if a taxpayer is a noncorporate lessor 
(i.e., a person who is not a corporation and is a lessor), the taxpayer 
shall not be entitled to claim a section 179 expense for section 179 
property purchased and leased by the taxpayer unless the taxpayer has 
satisfied all of the requirements of section 179(d)(5) (A) or (B).
    (j) Application of sections 263 and 263A. Under section 
263(a)(1)(G), expenditures for which a deduction is allowed under 
section 179 and this section are excluded from capitalization under 
section 263(a). Under this paragraph (j), amounts allowed as a deduction 
under section 179 and this section are excluded from the application of 
the uniform capitalization rules of section 263A.
    (k) Cross references. See section 453(i) and the regulations 
thereunder with respect to installment sales of section 179 property. 
See section 1033(g)(3) and the regulations thereunder relating to 
condemnation of outdoor advertising displays. See section 1245(a) and 
the regulations thereunder with respect to recapture rules for section 
179 property.

[T.D. 8121, 52 FR 410, Jan. 6, 1987, as amended by T.D. 8455, 57 FR 
61316, Dec. 24, 1992]



Sec. 1.179-2  Limitations on amount subject to section 179 election.

    (a) In general. Sections 179(b) (1) and (2) limit the aggregate cost 
of section 179 property that a taxpayer may elect to expense under 
section 179 for any one taxable year (dollar limitation). See paragraph 
(b) of this section. Section 179(b)(3)(A) limits the aggregate cost of 
section 179 property that a taxpayer may deduct in any taxable year 
(taxable income limitation). See paragraph (c) of this section. Any cost 
that is elected to be expensed but that is not currently deductible 
because of the taxable income limitation may be carried forward to the 
next taxable year (carryover of disallowed deduction). See Sec. 1.179-3 
for rules relating to carryovers of disallowed deductions. See also 
sections 280F(a), (b), and (d)(1)

[[Page 213]]

relating to the coordination of section 179 with the limitations on the 
amount of depreciation for luxury automobiles and other listed property. 
The dollar and taxable income limitations apply to each taxpayer and not 
to each trade or business in which the taxpayer has an interest.
    (b) Dollar limitation--(1) In general. The aggregate cost of section 
179 property that a taxpayer may elect to expense under section 179 for 
any taxable year beginning in 2003 and thereafter is $25,000 ($100,000 
in the case of taxable years beginning after 2002 and before 2008 under 
section 179(b)(1), indexed annually for inflation under section 
179(b)(5) for taxable years beginning after 2003 and before 2008), 
reduced (but not below zero) by the amount of any excess section 179 
property (described in paragraph (b)(2) of this section) placed in 
service during the taxable year.
    (2) Excess section 179 property. The amount of any excess section 
179 property for a taxable year equals the excess (if any) of--
    (i) The cost of section 179 property placed in service by the 
taxpayer in the taxable year; over
    (ii) $200,000 ($400,000 in the case of taxable years beginning after 
2002 and before 2008 under section 179(b)(2), indexed annually for 
inflation under section 179(b)(5) for taxable years beginning after 2003 
and before 2008).
    (3) Application to partnerships--(i) In general. The dollar 
limitation of this paragraph (b) applies to the partnership as well as 
to each partner. In applying the dollar limitation to a taxpayer that is 
a partner in one or more partnerships, the partner's share of section 
179 expenses allocated to the partner from each partnership is 
aggregated with any nonpartnership section 179 expenses of the taxpayer 
for the taxable year. However, in determining the excess section 179 
property placed in service by a partner in a taxable year, the cost of 
section 179 property placed in service by the partnership is not 
attributed to any partner.
    (ii) Example. The following example illustrates the provisions of 
paragraph (b)(3)(i) of this section.

    Example. During 1991, CD, a calendar-year partnership, purchases and 
places in service section 179 property costing $150,000 and elects under 
section 179(c) and Sec. 1.179-5 to expense $10,000 of the cost of that 
property. CD properly allocates to C, a calendar-year taxpayer and a 
partner in CD, $5,000 of section 179 expenses (C's distributive share of 
CD's section 179 expenses for 1991). In applying the dollar limitation 
to C for 1991, C must include the $5,000 of section 179 expenses 
allocated from CD. However, in determining the amount of any excess 
section 179 property C placed in service during 1991, C does not include 
any of the cost of section 179 property placed in service by CD, 
including the $5,000 of cost represented by the $5,000 of section 179 
expenses allocated to C by the partnership.

    (iii) Partner's share of section 179 expenses. Section 704 and the 
regulations thereunder govern the determination of a partner's share of 
a partnership's section 179 expenses for any taxable year. However, no 
allocation among partners of the section 179 expenses may be modified 
after the due date of the partnership return (without regard to 
extensions of time) for the taxable year for which the election under 
section 179 is made.
    (iv) Taxable year. If the taxable years of a partner and the 
partnership do not coincide, then for purposes of section 179, the 
amount of the partnership's section 179 expenses attributable to a 
partner for a taxable year is determined under section 706 and the 
regulations thereunder (generally the partner's distributive share of 
partnership section 179 expenses for the partnership year that ends with 
or within the partner's taxable year).
    (v) Example. The following example illustrates the provisions of 
paragraph (b)(3)(iv) of this section.

    Example. AB partnership has a taxable year ending January 31. A, a 
partner of AB, has a taxable year ending December 31. AB purchases and 
places in service section 179 property on March 10, 1991, and elects to 
expense a portion of the cost of that property under section 179. Under 
section 706 and Sec. 1.706-1(a)(1), A will be unable to claim A's 
distributive share of any of AB's section 179 expenses attributable to 
the property placed in service on March 10, 1991, until A's taxable year 
ending December 31, 1992.

    (4) S Corporations. Rules similar to those contained in paragraph 
(b)(3) of this section apply in the case of S corporations (as defined 
in section 1361(a))

[[Page 214]]

and their shareholders. Each shareholder's share of the section 179 
expenses of an S corporation is determined under section 1366.
    (5) Joint returns--(i) In General. A husband and wife who file a 
joint income tax return under section 6013(a) are treated as one 
taxpayer in determining the amount of the dollar limitation under 
paragraph (b)(1) of this section, regardless of which spouse purchased 
the property or placed it in service.
    (ii) Joint returns filed after separate returns. In the case of a 
husband and wife who elect under section 6013(b) to file a joint income 
tax return for a taxable year after the time prescribed by law for 
filing the return for such taxable year has expired, the dollar 
limitation under paragraph (b)(1) of this section is the lesser of--
    (A) The dollar limitation (as determined under paragraph (b)(5)(i) 
of this section); or
    (B) The aggregate cost of section 179 property elected to be 
expensed by the husband and wife on their separate returns.
    (iii) Example. The following example illustrates the provisions of 
paragraph (b)(5)(ii) of this section.

    Example. During 1991, Mr. and Mrs. B, both calendar-year taxpayers, 
purchase and place in service section 179 property costing $100,000. On 
their separate returns for 1991, Mr. B elects to expense $3,000 of 
section 179 property as an expense and Mrs. B elects to expense $4,000. 
After the due date of the return they elect under section 6013(b) to 
file a joint income tax return for 1991. The dollar limitation for their 
joint income tax return is $7,000, the lesser of the dollar limitation 
($10,000) or the aggregate cost elected to be expensed under section 179 
on their separate returns ($3,000 elected by Mr. B plus $4,000 elected 
by Mrs. B, or $7,000).

    (6) Married individuals filing separately--(i) In general. In the 
case of an individual who is married but files a separate income tax 
return for a taxable year, the dollar limitation of this paragraph (b) 
for such taxable year is the amount that would be determined under 
paragraph (b)(5)(i) of this section if the individual filed a joint 
income tax return under section 6013(a) multiplied by either the 
percentage elected by the individual under this paragraph (b)(6) or 50 
percent. The election in the preceding sentence is made in accordance 
with the requirements of section 179(c) and Sec. 1.179-5. However, the 
amount determined under paragraph (b)(5)(i) of this section must be 
multiplied by 50 percent if either the individual or the individual's 
spouse does not elect a percentage under this paragraph (b)(6) or the 
sum of the percentages elected by the individual and the individual's 
spouse does not equal 100 percent. For purposes of this paragraph 
(b)(6), marital status is determined under section 7703 and the 
regulations thereunder.
    (ii) Example. The following example illustrates the provisions of 
paragraph (b)(6)(i) of this section.

    Example. Mr. and Mrs. D, both calendar-year taxpayers, file separate 
income tax returns for 1991. During 1991, Mr. D places $195,000 of 
section 179 property in service and Mrs. D places $9,000 of section 179 
property in service. Neither of them elects a percentage under paragraph 
(b)(6)(i) of this section. The 1991 dollar limitation for both Mr. D and 
Mrs. D is determined by multiplying by 50 percent the dollar limitation 
that would apply had they filed a joint income tax return. Had Mr. and 
Mrs. D filed a joint return for 1991, the dollar limitation would have 
been $6,000, $10,000 reduced by the excess section 179 property they 
placed in service during 1991 ($195,000 placed in service by Mr. D plus 
$9,000 placed in service by Mrs. D less $200,000, or $4,000). Thus, the 
1991 dollar limitation for Mr. and Mrs. D is $3,000 each ($6,000 
multiplied by 50 percent).

    (7) Component members of a controlled group--(i) In general. 
Component members of a controlled group (as defined in Sec. 1.179-4(f)) 
on December 31 are treated as one taxpayer in applying the dollar 
limitation of sections 179(b) (1) and (2) and this paragraph (b). The 
expense deduction may be taken by any one component member or allocated 
(for the taxable year of each member that includes that December 31) 
among the several members in any manner. Any allocation of the expense 
deduction must be pursuant to an allocation by the common parent 
corporation if a consolidated return is filed for all component members 
of the group, or in accordance with an agreement entered into by the 
members of the group if

[[Page 215]]

separate returns are filed. If a consolidated return is filed by some 
component members of the group and separate returns are filed by other 
component members, the common parent of the group filing the 
consolidated return must enter into an agreement with those members that 
do not join in filing the consolidated return allocating the amount 
between the group filing the consolidated return and the other component 
members of the controlled group that do not join in filing the 
consolidated return. The amount of the expense allocated to any 
component member, however, may not exceed the cost of section 179 
property actually purchased and placed in service by the member in the 
taxable year. If the component members have different taxable years, the 
term taxable year in sections 179(b) (1) and (2) means the taxable year 
of the member whose taxable year begins on the earliest date.
    (ii) Statement to be filed. If a consolidated return is filed, the 
common parent corporation must file a separate statement attached to the 
income tax return on which the election is made to claim an expense 
deduction under section 179. See Sec. 1.179-5. If separate returns are 
filed by some or all component members of the group, each component 
member not included in a consolidated return must file a separate 
statement attached to the income tax return on which an election is made 
to claim a deduction under section 179. The statement must include the 
name, address, employer identification number, and the taxable year of 
each component member of the controlled group, a copy of the allocation 
agreement signed by persons duly authorized to act on behalf of the 
component members, and a description of the manner in which the 
deduction under section 179 has been divided among the component 
members.
    (iii) Revocation. If a consolidated return is filed for all 
component members of the group, an allocation among such members of the 
expense deduction under section 179 may not be revoked after the due 
date of the return (including extensions of time) of the common parent 
corporation for the taxable year for which an election to take an 
expense deduction is made. If some or all of the component members of 
the controlled group file separate returns for taxable years including a 
particular December 31 for which an election to take the expense 
deduction is made, the allocation as to all members of the group may not 
be revoked after the due date of the return (including extensions of 
time) of the component member of the controlled group whose taxable year 
that includes such December 31 ends on the latest date.
    (c) Taxable income limitation--(1) In general. The aggregate cost of 
section 179 property elected to be expensed under section 179 that may 
be deducted for any taxable year may not exceed the aggregate amount of 
taxable income of the taxpayer for such taxable year that is derived 
from the active conduct by the taxpayer of any trade or business during 
the taxable year. For purposes of section 179(b)(3) and this paragraph 
(c), the aggregate amount of taxable income derived from the active 
conduct by an individual, a partnership, or an S corporation of any 
trade or business is computed by aggregating the net income (or loss) 
from all of the trades or businesses actively conducted by the 
individual, partnership, or S corporation during the taxable year. Items 
of income that are derived from the active conduct of a trade or 
business include section 1231 gains (or losses) from the trade or 
business and interest from working capital of the trade or business. 
Taxable income derived from the active conduct of a trade or business is 
computed without regard to the deduction allowable under section 179, 
any section 164(f) deduction, any net operating loss carryback or 
carryforward, and deductions suspended under any section of the Code. 
See paragraph (c)(6) of this section for rules on determining whether a 
taxpayer is engaged in the active conduct of a trade or business for 
this purpose.
    (2) Application to partnerships and partners--(i) In general. The 
taxable income limitation of this paragraph (c) applies to the 
partnership as well as to each partner. Thus, the partnership may not 
allocate to its partners as a section 179 expense deduction for any 
taxable year more than the partnership's taxable income limitation for

[[Page 216]]

that taxable year, and a partner may not deduct as a section 179 expense 
deduction for any taxable year more than the partner's taxable income 
limitation for that taxable year.
    (ii) Taxable year. If the taxable year of a partner and the 
partnership do not coincide, then for purposes of section 179, the 
amount of the partnership's taxable income attributable to a partner for 
a taxable year is determined under section 706 and the regulations 
thereunder (generally the partner's distributive share of partnership 
taxable income for the partnership year that ends with or within the 
partner's taxable year).
    (iii) Example. The following example illustrates the provisions of 
paragraph (c)(2)(ii) of this section.

    Example. AB partnership has a taxable year ending January 31. A, a 
partner of AB, has a taxable year ending December 31. For AB's taxable 
year ending January 31, 1992, AB has taxable income from the active 
conduct of its trade or business of $100,000, $90,000 of which was 
earned during 1991. Under section 706 and Sec. 1.706-1(a)(1), A 
includes A's entire share of partnership taxable income in computing A's 
taxable income limitation for A's taxable year ending December 31, 1992.

    (iv) Taxable income of a partnership. The taxable income (or loss) 
derived from the active conduct by a partnership of any trade or 
business is computed by aggregating the net income (or loss) from all of 
the trades or businesses actively conducted by the partnership during 
the taxable year. The net income (or loss) from a trade or business 
actively conducted by the partnership is determined by taking into 
account the aggregate amount of the partnership's items described in 
section 702(a) (other than credits, tax-exempt income, and guaranteed 
payments under section 707(c)) derived from that trade or business. For 
purposes of determining the aggregate amount of partnership items, 
deductions and losses are treated as negative income. Any limitation on 
the amount of a partnership item described in section 702(a) which may 
be taken into account for purposes of computing the taxable income of a 
partner shall be disregarded in computing the taxable income of the 
partnership.
    (v) Partner's share of partnership taxable income. A taxpayer who is 
a partner in a partnership and is engaged in the active conduct of at 
least one of the partnership's trades or businesses includes as taxable 
income derived from the active conduct of a trade or business the amount 
of the taxpayer's allocable share of taxable income derived from the 
active conduct by the partnership of any trade or business (as 
determined under paragraph (c)(2)(iv) of this section).
    (3) S corporations and S corporation shareholders--(i) In general. 
Rules similar to those contained in paragraphs (c)(2) (i) and (ii) of 
this section apply in the case of S corporations (as defined in section 
1361(a)) and their shareholders. Each shareholder's share of the taxable 
income of an S corporation is determined under section 1366.
    (ii) Taxable income of an S corporation. The taxable income (or 
loss) derived from the active conduct by an S corporation of any trade 
or business is computed by aggregating the net income (or loss) from all 
of the trades or businesses actively conducted by the S corporation 
during the taxable year. The net income (or loss) from a trade or 
business actively conducted by an S corporation is determined by taking 
into account the aggregate amount of the S corporation's items described 
in section 1366(a) (other than credits, tax-exempt income, and 
deductions for compensation paid to an S corporation's shareholder-
employees) derived from that trade or business. For purposes of 
determining the aggregate amount of S corporation items, deductions and 
losses are treated as negative income. Any limitation on the amount of 
an S corporation item described in section 1366(a) which may be taken 
into account for purposes of computing the taxable income of a 
shareholder shall be disregarded in computing the taxable income of the 
S corporation.
    (iii) Shareholder's share of S corporation taxable income. Rules 
similar to those contained in paragraph (c)(2)(v) and (c)(6)(ii) of this 
section apply to a taxpayer who is a shareholder in an S corporation and 
is engaged in the active conduct of the S corporation's trades or 
businesses.

[[Page 217]]

    (4) Taxable income of a corporation other than an S corporation. The 
aggregate amount of taxable income derived from the active conduct by a 
corporation other than an S corporation of any trade or business is the 
amount of the corporation's taxable income before deducting its net 
operating loss deduction and special deductions (as reported on the 
corporation's income tax return), adjusted to reflect those items of 
income or deduction included in that amount that were not derived by the 
corporation from a trade or business actively conducted by the 
corporation during the taxable year.
    (5) Ordering rule for certain circular problems--(i) In general. A 
taxpayer who elects to expense the cost of section 179 property (the 
deduction of which is subject to the taxable income limitation) also may 
have to apply another Internal Revenue Code section that has a 
limitation based on the taxpayer's taxable income. Except as provided in 
paragraph (c)(1) of this section, this section provides rules for 
applying the taxable income limitation under section 179 in such a case. 
First, taxable income is computed for the other section of the Internal 
Revenue Code. In computing the taxable income of the taxpayer for the 
other section of the Internal Revenue Code, the taxpayer's section 179 
deduction is computed by assuming that the taxpayer's taxable income is 
determined without regard to the deduction under the other Internal 
Revenue Code section. Next, after reducing taxable income by the amount 
of the section 179 deduction so computed, a hypothetical amount of 
deduction is determined for the other section of the Internal Revenue 
Code. The taxable income limitation of the taxpayer under section 
179(b)(3) and this paragraph (c) then is computed by including that 
hypothetical amount in determining taxable income.
    (ii) Example. The following example illustrates the ordering rule 
described in paragraph (c)(5)(i) of this section.

    Example. X, a calendar-year corporation, elects to expense $10,000 
of the cost of section 179 property purchased and placed in service 
during 1991. Assume X's dollar limitation is $10,000. X also gives a 
charitable contribution of $5,000 during the taxable year. X's taxable 
income for purposes of both sections 179 and 170(b)(2), but without 
regard to any deduction allowable under either section 179 or section 
170, is $11,000. In determining X's taxable income limitation under 
section 179(b)(3) and this paragraph (c), X must first compute its 
section 170 deduction. However, section 170(b)(2) limits X's charitable 
contribution to 10 percent of its taxable income determined by taking 
into account its section 179 deduction. Paragraph (c)(5)(i) of this 
section provides that in determining X's section 179 deduction for 1991, 
X first computes a hypothetical section 170 deduction by assuming that 
its section 179 deduction is not affected by the section 170 deduction. 
Thus, in computing X's hypothetical section 170 deduction, X's taxable 
income limitation under section 179 is $11,000 and its section 179 
deduction is $10,000. X's hypothetical section 170 deduction is $100 (10 
percent of $1,000 ($11,000 less $10,000 section 179 deduction)). X's 
taxable income limitation for section 179 purposes is then computed by 
deducting the hypothetical charitable contribution of $100 for 1991. 
Thus, X's section 179 taxable income limitation is $10,900 ($11,000 less 
hypothetical $100 section 170 deduction), and its section 179 deduction 
for 1991 is $10,000. X's section 179 deduction so calculated applies for 
all purposes of the Code, including the computation of its actual 
section 170 deduction.

    (6) Active conduct by the taxpayer of a trade or business--(i) Trade 
or business. For purposes of this section and Sec. 1.179-4(a), the term 
trade or business has the same meaning as in section 162 and the 
regulations thereunder. Thus, property held merely for the production of 
income or used in an activity not engaged in for profit (as described in 
section 183) does not qualify as section 179 property and taxable income 
derived from property held for the production of income or from an 
activity not engaged in for profit is not taken into account in 
determining the taxable income limitation.
    (ii) Active conduct. For purposes of this section, the determination 
of whether a trade or business is actively conducted by the taxpayer is 
to be made from all the facts and circumstances and is to be applied in 
light of the purpose of the active conduct requirement of section 
179(b)(3)(A). In the context of section 179, the purpose of the active 
conduct requirement is to prevent a passive investor in a trade or 
business from deducting section 179 expenses against taxable income 
derived from that trade or business. Consistent with this purpose, a 
taxpayer generally is considered to actively conduct a

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trade or business if the taxpayer meaningfully participates in the 
management or operations of the trade or business. Generally, a partner 
is considered to actively conduct a trade or business of the partnership 
if the partner meaningfully participates in the management or operations 
of the trade or business. A mere passive investor in a trade or business 
does not actively conduct the trade or business.
    (iii) Example. The following example illustrates the provisions of 
paragraph (c)(6)(ii) of this section.

    Example. A owns a salon as a sole proprietorship and employs B to 
operate it. A periodically meets with B to review developments relating 
to the business. A also approves the salon's annual budget that is 
prepared by B. B performs all the necessary operating functions, 
including hiring beauticians, acquiring the necessary beauty supplies, 
and writing the checks to pay all bills and the beauticians' salaries. 
In 1991, B purchased, as provided for in the salon's annual budget, 
equipment costing $9,500 for use in the active conduct of the salon. 
There were no other purchases of section 179 property during 1991. A's 
net income from the salon, before any section 179 deduction, totaled 
$8,000. A also is a partner in PRS, a calendar-year partnership, which 
owns a grocery store. C, a partner in PRS, runs the grocery store for 
the partnership, making all the management and operating decisions. PRS 
did not purchase any section 179 property during 1991. A's allocable 
share of partnership net income was $6,000. Based on the facts and 
circumstances, A meaningfully participates in the management of the 
salon. However, A does not meaningfully participate in the management or 
operations of the trade or business of PRS. Under section 179(b)(3)(A) 
and this paragraph (c), A's aggregate taxable income derived from the 
active conduct by A of any trade or business is $8,000, the net income 
from the salon.

    (iv) Employees. For purposes of this section, employees are 
considered to be engaged in the active conduct of the trade or business 
of their employment. Thus, wages, salaries, tips, and other compensation 
(not reduced by unreimbursed employee business expenses) derived by a 
taxpayer as an employee are included in the aggregate amount of taxable 
income of the taxpayer under paragraph (c)(1) of this section.
    (7) Joint returns--(i) In general. The taxable income limitation of 
this paragraph (c) is applied to a husband and wife who file a joint 
income tax return under section 6013(a) by aggregating the taxable 
income of each spouse (as determined under paragraph (c)(1) of this 
section).
    (ii) Joint returns filed after separate returns. In the case of a 
husband and wife who elect under section 6013(b) to file a joint income 
tax return for a taxable year after the time prescribed by law for 
filing the return for such taxable year, the taxable income limitation 
of this paragraph (c) for the taxable year for which the joint return is 
filed is determined under paragraph (c)(7)(i) of this section.
    (8) Married individuals filing separately. In the case of an 
individual who is married but files a separate tax return for a taxable 
year, the taxable income limitation for that individual is determined 
under paragraph (c)(1) of this section by treating the husband and wife 
as separate taxpayers.
    (d) Examples. The following examples illustrate the provisions of 
paragraphs (b) and (c) of this section.

    Example 1. (i) During 1991, PRS, a calendar-year partnership, 
purchases and places in service $50,000 of section 179 property. The 
taxable income of PRS derived from the active conduct of all its trades 
or businesses (as determined under paragraph (c)(1) of this section) is 
$8,000.
    (ii) Under the dollar limitation of paragraph (b) of this section, 
PRS may elect to expense $10,000 of the cost of section 179 property 
purchased in 1991. Assume PRS elects under section 179( c) and Sec. 
1.179-5 to expense $10,000 of the cost of section 179 property purchased 
in 1991.
    (iii) Under the taxable income limitation of paragraph (c) of this 
section, PRS may allocate to its partners as a deduction only $8,000 of 
the cost of section 179 property in 1991. Under section 179(b)(3)(B) and 
Sec. 1.179-3(a), PRS may carry forward the remaining $2,000 it elected 
to expense, which would have been deductible under section 179(a) for 
1991 absent the taxable income limitation.
    Example 2. (i) The facts are the same as in Example 1, except that 
on December 31, 1991, PRS allocates to A, a calendar-ye