Charitable Contributions of Food Inventory: Proposals for Change

Charitable Contributions of Food Inventory:
Proposals for Change
Updated October 8, 2008
Pamela J. Jackson
Specialist in Public Finance
Government and Finance Division

Charitable Contributions of Food Inventory:
Proposals for Change
Summary
Tax law provides an enhanced deduction for certain charitable contributions of
food inventory. The value of the existing deduction is the corporation’s basis in the
donated product plus one half of the amount of appreciation, as long as that amount
is less than twice the basis in the product. This deduction has generally been limited
to contributions made by a certain type of corporation, C corporations.
The Katrina Emergency Tax Relief Act of 2005 (KETRA, P.L. 109-73)
temporarily extended the enhanced deduction to include contributions made by other
types of businesses, sole proprietors, partnerships, and S corporations in particular.
The Pension Protection Act of 2006 (P.L. 109-280) further extended the temporary
expansion of qualified donors through January 1, 2008. The Emergency Economic
Stabilization Act of 2008 (H.R. 1424; P.L. 110-343), which was signed into law on
Friday, October 3, 2008, retroactively extends the temporary expansion of eligible
donors through December 31, 2009.
Other legislation in the 110^th Congress has also proposed changes to the
deduction. S. 689 proposes to permanently extend and expand the charitable
deduction for contributions of food inventory, while H.R. 3976 proposes making the
provision permanent. H.R. 3996 and H.R. 6049, both passed by the House, include
provisions to retroactively extend the temporary expansion of eligible donors through
December 31, 2008, as do H.R. 3970, S. 3335, and S. 3125. S. 2886, S. 3098, and
S. 3322 and its companion H.R. 6587 H.R. 3628 proposes extension through 2011.
Additionally, S. 1132 proposes to qualify Indian tribes as eligible recipients of
tax deductible contributions of food inventory. S. 2420, the Federal Food Donation
Act of 2008, which became law in June 2008 (P.L. 110-247), revised the Federal
Acquisition Regulation to require certain contracts to private entities to include a
clause that encourages the donation of food.
A review of charitable giving by the 50 companies that were the largest
corporate donors revealed that five food concerns in that group showed substantial
in-kind giving in 1999. Other companies in the pharmaceutical/health care or
computer/information technology industries also made substantial in-kind gifts.
These firms, like food companies, are provided an enhanced deduction for in-kind
gifts. It appears that in the case of large firms, the enhanced deduction has stimulated
contributions.
Although the temporary expansion of the enhanced deduction may have the
effect of reducing equity differences between C corporations and other business
concerns, it may not entirely eliminate them. If the intent is to resolve the equity
issues, transforming the deduction to a credit might be more effective. Unlike
deductions, whose value is based on the tax rate of the taxpayer, tax credits provide
dollar-for-dollar value and do not fluctuate with the taxpayer’s marginal tax bracket.
This report will be updated to reflect major legislative developments.

Contents
In troduction ......................................................1
Tax Law.........................................................2
Limitation on the Amount Deductible..............................2
Carryforward .................................................3
Contributions of Property — Including Food Products.................3
Summary of Restrictions........................................4
Past Legislative Proposals...........................................5
Abbreviated History................................................6
Statistical Trends..................................................7
Issues and Observations.............................................9
Equity Concerns...............................................9
Tax Rate Differentials.....................................10
An Alternative Possibility: Tax Credit........................10
Other Issues.................................................11
Appropriate Valuation of Donated Goods......................11
Direct Subsidy Programs as an Alternative.....................12
List of Tables
Table 1. Charitable Giving by Food Concerns...........................8

Charitable Contributions of Food Inventory:
Proposals for Change
Introduction
This report discusses the temporary change in the tax law governing charitable
donations of food. Recent legislation expanded the existing tax incentive for firms
that are C corporations to all businesses that donate food to charity.
In response to the devastation from Hurricane Katrina, the Katrina Emergency
Tax Relief Act of 2005 (KETRA, P.L. 109-73) was enacted. That legislation
included a temporary expansion of the tax deduction for charitable contributions of
food inventory. The law allowed all donors of wholesome food inventory to benefit
from the enhanced deduction for donations made between August 28, 2005, and
January 1, 2006. The Pension Protection Act of 2006 (P.L. 109-280) extended the
temporary expansion through January 1, 2008. The Emergency Economic
Stabilization Act of 2008 (H.R. 1424; P.L. 110-343), which was signed into law on
Friday, October 3, 2008, retroactively extends the temporary expansion of eligible
donors through December 31, 2009.
In the 110^th Congress, the Good Samaritan Hunger Relief Tax Incentive
Extension Act of 2007 (S. 689) proposes to permanently extend and expand the
charitable deduction for contributions of food inventory. H.R. 3976 proposes making
the provision permanent.
H.R. 3996, the Temporary Tax Relief Act of 2007, and H.R. 6049, the
Renewable Energy and Job Creation Act of 2008, which were passed by the House,
both include a provision to retroactively extend the temporary expansion of eligible
donors through December 31, 2008, as do H.R. 3970, the Tax Reduction and Reform
Act of 2007; S. 3335, the Jobs, Energy, Families, and Disaster Relief Act of 2008;
and S. 3125, the Energy Independence and Tax Relief Act of 2008.
Proposals to retroactively extend the temporary expansion of eligible donors
through December 31, 2009, have been made in S. 2886, the Alternative Minimum
Tax and Extenders Tax Relief Act of 2008; S. 3098, also titled the Alternative
Minimum Tax and Extenders Tax Relief Act of 2008; and S. 3322 and its companion
H.R. 6587, the Midwestern Disaster Tax Relief Act of 2008. H.R. 3628, the
Promoting Charitable Actions Act of 2007, proposes extension through 2011.
Additionally, S. 1132 proposes to qualify Indian tribes as eligible recipients of
tax deductible contributions of food inventory.

S. 2420, the Federal Food Donation Act of 2008, which became law in June
2008 (P.L. 110-247), revised the Federal Acquisition Regulation to require certain
contracts to private entities to include a clause that encourages the donation of food.
Specifically, the law requires that all contracts above $25,000 for the provision,
services, or sale of food in the United States, or for the lease or rental of Federal
property to a private entity for events at which food is provided in the United States,
shall include a clause that encourages the donation of excess, apparently wholesome
food to nonprofit organizations that provide assistance to food-insecure people.¹ The
legislation does not address the tax treatment of those donations.
Tax Law
A discussion of the tax treatment for contributions made by all types of
businesses is provided. Generally, these contributions may be made only to certain
types of nonprofit organizations, may be deductible for income tax purposes only up
to specified limits, and may be in the form of either cash or property. The charitable
contribution deduction is allowed only for the taxable year in which the contribution
is made; any unpaid subscriptions or pledges are not deductible until actually
fulfilled.
Some of the more typical organizations to which contributions are deductible
include churches, universities, schools, and hospitals, as well as many other public
assistance charities (such as food pantries, soup kitchens, homeless shelters, etc). If
a contribution is made to an individual, such as a homeless family living on the
street, that contribution is not deductible even though actuated by charitable motives.
In order to qualify as an organization to which contributions are deductible, the
recipient must be organized or incorporated in the United States or in one of its
possessions and certified as a charitable organization by the Internal Revenue
Service.² Contributions to foreign charitable organizations are not deductible. A
donation, however, to an otherwise qualified organization is deductible even though
some portion of the funds of such organization are used in foreign countries for
charity.
Limitation on the Amount Deductible
The deduction for contributions (either in cash or in property) made by
corporations is limited to 10% of taxable income (computed with adjustments). The
10% cap was raised from 5% by the passage of the Economic Recovery Tax Act of
1981. The legislative history of the 1981 Act indicates that Congress was hopeful
that corporate charitable contributions would be stimulated by the increase in the cap.

¹ U.S. Congress, Committee on Homeland Security and Governmental Affairs, S.Rept.

110-338, Federal Food Donation Act of 2008 (S. 2420), May 22, 2008.

² Churches are not required to file for certification with the Internal Revenue Service.

Carryforward
Although the deductible portion of any contribution by corporations may not
exceed 10% of taxable income in any given year, if contributions exceed this
limitation, the excess may be carried forward to future tax years. Corporations may
carry over excess charitable contributions and compute tax as though the excess gifts
were actually made in such subsequent years. Thus, when charitable contributions
in one year exceed the limitation, a corporation might ultimately secure the full
benefit (taxwise) of the contribution even though denied part of it in the year in
which the contribution was initially made. The law allows that excess charitable
contributions may be carried forward for a five-year period. This carryforward
provision applies to both gifts of cash or property.
Contributions of Property — Including Food Products
In general, if a charitable contribution is made in the form of property, the basis
for the charitable deduction is dependent on the type of taxpayer (i.e., individual or
form of business entity), to whom the property is donated, and for what purpose the
donated property is to be used.
Corporate gifts of property that would generate capital gains if sold (e.g., stocks
and bonds) are deductible by corporations at market value. However, gifts of
depreciable property are deductible at the corporation’s basis rather than fair market
value. Thus, under current tax law, the deduction is reduced by previously taken
depreciation. In the case of fully depreciated machinery and equipment, the
allowable charitable contribution deduction would be zero.
Under current tax law, C corporations³ are provided more favorable tax
treatment of contributions of certain types of inventory and other ordinary-income
property to specified charitable organizations. This provision is temporarily
available to S corporations⁴, partnerships, and sole proprietorships. Through 2007,
all donors are allowed to deduct their cost plus one-half the difference between their
cost and the market value of the donated goods. However, in no case may the
deduction’s value exceed twice the cost basis. This special tax inducement is
provided for capital assets defined in Internal Revenue Code §1221(1) or (2).⁵ Thus,

³ The Internal Revenue Code normally subjects corporate profits to the corporate income tax
under its subchapter C; corporations subject to income tax are thus often referred to as “C
corporations.”
⁴ S corporations are not subject to the corporate income tax and their net profits are passed
through to the individual shareholders, the number of which must be limited to 75 or less,
who are taxed on the profits under the individual income tax.
⁵ The definition provides for (1) stock in trade of the taxpayer or other property of a kind
which would properly be included in the inventory of the taxpayer if on hand at the close
of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business; (2) property, used in his trade or business, of a
character which is subject to the allowance for depreciation provided in section 167, or real
property used in his trade or business. Examples would be dented canned goods given by
(continued...)

this provision allows very large corporations a bigger deduction for charitable
contributions of qualified tangible personal property.
For a donor to receive this enhanced deduction, the gift must be made to a
“qualified” tax exempt organization.⁶ Further, the property must be “used by the
donee solely for the care of the ill, the needy, or infants.”⁷ The donee is not permitted
to exchange what has been transferred for money, other property, or services.⁸ The
donee must furnish the donor with a statement that it does not intend to transfer the
donation and that it will be used for the care of the ill, the needy, or infants.⁹ If the
property is subject to regulation by the Federal Food, Drug, and Cosmetic Act it must
satisfy the requirements on the date of transfer and for 180 days prior thereto.¹⁰
The enhanced deduction for food is available only for food that qualifies as
“apparently wholesome food.” “Apparently wholesome food” is defined under the
Katrina Emergency Tax Relief Act of 2005 (KETRA) as food intended for human
consumption that meets all quality and labeling standards imposed by federal, state,
and local laws and regulations even though the food may not be readily marketable
due to appearance, age, freshness, grade, size, surplus, or other conditions.
Summary of Restrictions
In summary, current law provides that the charitable deduction for contributions
of inventory and other property is as follows:
^!The gift must be made to a U.S. charitable organization;
^!There is a 10% limitation on the total amount a corporation can
deduct as charitable contributions;
^!Contributions made in excess of this limitation may be carried
forward for the next five years;
^!Special rules are available for gifts made by C corporations of
tangible personal property (inventory) when donated to qualified
charitable organizations for the care of the ill, the needy, or infants.
^!It must be established that the fair market value of the product
exceeds basis in order to use the enhanced deduction.

⁵ (...continued)
Safeway to a food bank, Sara Lee frozen goods given to a homeless women’s shelter, or
contributions of cereal by General Mills to Second Harvest.
⁶ The Internal Revenue Code provides that “the use of the property by the donee is related
to the purpose or function constituting the basis for its exemption under section 501.”
⁷ Internal Revenue Code §170(e)(3)(i).
⁸ Internal Revenue Code §170(e)(3)(ii).
⁹ Internal Revenue Code §170(e)(3)(iii).
¹⁰ Internal Revenue Code §170(e)(3)(iiii).

Past Legislative Proposals
As noted earlier in this report, current law provides an enhanced deduction for
donations made by C Corporations of property, which includes food products, for the
care of the ill, the needy, or infants. This enhanced deduction available for food
products is used primarily by businesses for unsaleable products. The most frequent
reasons for products not being sold at market are errors in labeling, merchandise that
has been crushed or dented, or products that may be too close to the expiration date
recommended for sale.
There have been four parts to legislation proposing to change the tax law for^th
donated food products, two of which were addressed in the 109 Congress.
Typically, the proposals would extend the enhanced deduction for food inventory to
all taxpayers engaged in a trade or business. Secondly, the enhanced deduction
would be available only for “apparently wholesome food” which is newly defined
under some of the legislative proposals. Third, the determination of basis of the
qualified contributions would be set as a percentage of the food’s fair market value.
Finally, some proposals have set the fair market value of donated foods to be the
same price as similar food items sold by the taxpayer at the time of the contribution,
or, in the recent past.
Apparently Wholesome Food. Typically, legislative proposals have
defined “apparently wholesome food” to include food that “may not be readily
marketable due to appearance, age, freshness, grade, size, surplus, or other
conditions.” The new law provides a slightly more rigorous definition. The
inclusion of the definition and the discussion of how fair market value is to be
determined is designed to lessen valuation problems for taxpayers caused by a lack
of clarity in the regulations.
A court case in the 9^th Circuit was also at odds with the regulations regarding
donation valuation as issued by the Internal Revenue Service and the findings in that
case clarified the issue. The court case held that the value of surplus bread inventory
donated to a qualified charity was determined to be the same as the full retail price¹¹
of the bread. The Internal Revenue Service (IRS) contended that the retail value of
the bread was half the normal sales price since the industry practice of major bakers
is to discount four-day-old bread, but if the court had ruled the value of the bread was
half the retail selling price, the donor would have received no tax benefit and, thus,¹²
no encouragement to make such charitable donations. The court’s findings
contradicted regulations issued by IRS.
The new definition of “apparently wholesome food” parallels the definition
included in the Bill Emerson Good Samaritan Food Donation Act (42 U.S.C.

1791(b)(2)). That act defines the term “apparently wholesome food” as food that

¹¹ Lucky Stores, Inc. v. Commissioner, 105 T.C. 420 (1995).
¹² Since one-half the fair market value was less than basis, the donor would have received
the exact same deduction for a contribution to a food bank or for discarded inventory which,
in both cases, is a tax deduction for basis.

meets all quality and labeling standards imposed by federal, state, and local laws and
regulations even though the food may not be readily marketable due to appearance,
age, freshness, grade, size, surplus, or other conditions. This definition was also used
in the temporary law enacted by the Katrina Emergency Relief Act (P.L. 109-73).
Abbreviated History
Prior to the passage of the Tax Reform Act of 1969, the general rule was that
taxpayers who contributed appreciated property to charities were allowed a charitable
contribution for the fair market value of the property. Moreover, no tax was imposed
or collected on the appreciation. As an example, a farmer making a charitable
contribution of a portion of his crop not only received a tax deduction of the fair
market value of the donated crops, but also escaped the tax on the difference between
his crop production costs and fair market value. Because the tax savings from the
charitable deduction (in the case of ordinary income property) was measured by the
taxpayer’s marginal tax rate, it was possible for taxpayers to make contributions
which permitted a greater after-tax benefit than would have been received if the crop
had been sold and the farmer allowed to keep the proceeds after paying tax on the
gain. It should be remembered that tax rates at that time were much higher than
today’s rates. Since this provision was seen as unfair when compared with those
making charitable cash gifts, the Tax Reform Act of 1969 changed the law so that the
appreciated value was to result in a reduction of the contribution deduction to the
extent of the appreciation.
It was with passage of the Tax Reform Act of 1976 (P.L. 94-455) that
corporations were provided more favorable tax treatment of contributions of
inventory (such as food) to certain charitable organizations. The 1976 Act provided
that such gifts by corporations were to be based on the taxpayer’s basis in the
property and one-half of the unrealized appreciation as long as the deduction did not
exceed twice the property’s basis.¹³ In a summary of the act, it was stated that the
enactment of the Tax Reform Act of 1969 had resulted in reduced contributions of
certain types of property to charitable institutions. In particular, those charitable
organizations that provide food, clothing, medical equipment, and supplies, etc. to
the needy and disaster victims had found that contributions of such items to those¹⁴
organizations were reduced. It was stated in the general explanation of the law that
Congress believed that it was desirable to provide a greater tax incentive than in prior
law for contributions of certain types of ordinary income property which the donee
charity uses in the performance of its exempt purposes. However, Congress believed

¹³ No deduction is to be allowed for any part of the unrealized appreciation which would
have been ordinary income (if the property had been sold) because of the application of the
recapture provisions relating to depreciation. Also, no deduction is allowed for certain
mining exploration expenditures, certain excess farm losses, certain soil and water
conservation expenditures, and certain land-clearing expenditures.
¹⁴ U.S. Congress, Joint Committee on Taxation, Summary of the Tax Reform Act of 1976
(H.R. 10612, 94^th Congress. P.L. 94-455), committee print, 94^th Cong., 2^nd sess., December

29, 1976, (Washington: GPO, 1976), p. 673.

that the deduction allowed should not be such that the donor could be in a better
after-tax situation by donating the property than by selling it.¹⁵
Statistical Trends
In 2006, total charitable giving was estimated to have reached $295 billion.
Corporations and their foundations contributed $12.7 billion in cash and in-kind
donations. Two predictors of corporate giving, corporate pretax profits and the gross
domestic product both rose in 2006. Individual giving represented 75.6% of total
giving and corporate gifts were 4.3% of the total (with foundations and bequests
representing the remainder). However, these numbers mask the importance of
corporate charitable gifts because religious organizations receive little funding from
either corporate donors or their foundations since individuals are the primary support
of religious institutions. The American Association of Fund-Raising Counsel
(AAFRC) Trust for Philanthropy, Inc. found that for 2006, contributions to religion
represented 32.8% of all charitable gifts.¹⁶ It is important to remember that
companies support non-profits through cause-related marketing, public relations,
sponsorships, contracts, and other joint promotional activities as well as through
advertising expenditures. These types of expenditures are not shown as charitable
gifts. In an earlier edition of Giving USA, the AAFRC Trust for Philanthropy, Inc.
made the following four points:
^!Corporate giving has ranged from a low point of 0.7% to a high of
2.3% of pretax income over 30 years, with historical variation
largely due to changes in tax law.
^!Profits grow fastest in the service industries, like banking and
telecommunications. Non-manufacturing companies cannot take
advantage of tax-deductible gifts of inventory that make up much of
the manufacturing sector’s charitable activity, even though non-
manufacturers make up a large component of profit growth.
^!There is a trend toward strategic corporate support, which is not
counted as a charitable gift by the company, the IRS, or Giving
USA. Nonetheless, this activity appeals to both companies and non-
profits and may be a mutually satisfactory substitute for charitable
giving.
^!There is no practical reason why companies should use pretax
income as the basis for determining their charitable contribution
levels. There is no reason not to pursue a strategy in which
charitable support to non-profits increases without consuming an
increasing share of corporate profits.¹⁷

¹⁵ Ibid. p. 673.
¹⁶ Giving USA 2004, The Annual Report on Philanthropy for the Year 2006. A publication
of the Giving USA Foundation, researched and written by the Center on Philanthropy at
Indiana University, (Glenview, IL, 2007) p. 100.
¹⁷ Ann E. Kaplan, ed. Giving USA 1998, The Annual Report on Philanthropy for the Year
(continued...)

The Conference Board, which has surveyed the charitable giving behavior of
firms, wrote that, in 1999, “companies reported that 28% of their contributions were
in forms other than cash donations, the highest level of non-cash expenditures ever
reported by companies in the Conference Board Analyses of cash and non-cash
giving.”¹⁸ Among the industries reporting the largest non-cash percentages were
“chemical companies, which donated 68% of their 1999 contributions in forms other
than cash; pharmaceutical companies, with 64%; manufacturers of computer and
office equipment, with 59%; printing, publishing and medical firms with 48%.”¹⁹ In
a table of cash and non-cash contributions by industry, it was reported that the 10
companies in the Food/Beverage/Tobacco industrial classification gave 28% of their
contributions in in-kind giving.²⁰
An article which appeared in Worth magazine provided information on the 50
companies that gave the most in 1999. The table which follows is a subset of the five
food concerns which appear in the complete listing of 50 companies.
Table 1. Charitable Giving by Food Concerns
Giving
CompanyCash GivingIn-Kind Giving1999 Total Givingas % of
Profit
K r oger $43,600,000 $31,400,000 $75,000,000 11.8
Safeway $27,000,000 $35,586,069 $62,586,069 6.5
General Mills$30,912.124$8,000,000$38,912,1246.3
Sara Lee$19,732,000$19,050,000$38,782,0003.3
K e llogg $12,000,000 $21,742,648 $33,742,648 10.0
^Source:^T^a^m^r^a^Ra^ve^,^Sa^l^l^y^Sc^hul^t^h^eⁱ^ss,^aⁿ^d^Sa^r^a^{h B}^rⁱ^ght^.^“T^he⁵⁰^Co^m^p^aⁿⁱ^e^s^T^h^a^t^G^a^ve^t^h^e^M^o^st^.^”
^Wo^r^t^h^{, v}^o^l^.^{9, n}^o^{. 11 (D}^ec./^J^an^{. 2001), pp. 106-}^{111, 114-}^115.
Several observations may be made by comparing the companies in Table 1 with
the statistics of the remaining 45 companies that made the largest charitable gifts.
In general, giving by food companies as a percentage of profits is high. In Table 1,
it is shown that Sara Lee gave 3.3% of profits (the lowest percentage of the firms
listed in the chart). According to the article in Worth, only four nonfood related
companies gave a greater percentage of their profits than Sara Lee (Dupont; J.C.

¹⁷ (...continued)

1997. American Association of Fund-Raising Counsel Trust for Philanthropy. (New York,

1998), p. 22.

¹⁸ Audris D. Tillman. Corporate Contributions in 1999. The Conference Board, Inc.,
Research Report 1284-00-RR, New York, 2000, p. 15.
¹⁹ Ibid.
²⁰ Ibid. p. 16.

Penney; Target, and the United Parcel Service). All of the food companies showed
substantial in-kind giving while 15 of the remaining 45 companies showed no in-kind
giving at all. With the exceptions of Gannett and Dupont, all companies that
provided greater in-kind giving than cash giving also benefit from the enhanced
deduction provision in the Internal Revenue Code. Those companies are
pharmaceutical/health care or computer/information technology firms.
Issues and Observations
Corporate charitable contributions are rarely a prominent issue in consideration
of U.S. tax policy. First, corporate managers have been careful about making
charitable contributions since their responsibility is to provide the highest rate of
return that is legally possible to those who have invested in the corporation. Often,
making charitable contributions conflicts with this mandate. Having said that,
corporations do make charitable gifts all the time. It is also true that their
contributions are usually intended to enhance the corporation’s visibility or image
before the consuming public. That is, goodwill is a valuable asset for a corporation,
and charitable contributions help to create that goodwill. However, it generally
makes no difference to a corporation whether it deducts its payment as a charitable
contribution or as a business advertising expense because either deduction lowers its
federal income tax by the same amount.²¹ Only when the special rules for
contributions of inventory come into play does it make a difference as to how the gift
is viewed and how the value of the contribution changes under current tax law.
Equity Concerns
There are equity challenges to extending the current enhanced tax deduction for
corporate contributions of food to all taxpayers engaged in a trade or business, such
as small family farms and family operated restaurants (sometimes referred to as
entrepreneurs in this report). A primary obstacle is that the cost basis could be higher
for corporations than for a small business. This result can be caused by the inclusion
of wages and germane taxes (such as Social Security, unemployment taxes, etc.) that
are paid by corporations, but are not always included in the cost basis of small
businesses such as farmers who grow crops or owner-chefs who own individual
restaurants. Since it can be expected that (one-half of the) appreciation of the crops
generally would be lower for corporations, with the full deductibility of the cost
basis, than for individual farmers, an inherent advantage would still be given
corporate farmers with their higher cost basis. For example, if a corporation has a
cost basis of $7,000 with appreciation of $3,000, this equals a market price of
$10,000. A small entrepreneur would more likely have a cost basis of $3,000 and an
appreciation rate of $7,000 for the same $10,000 market price. In the corporate case,
one-half of the appreciation ($1,500) and the cost basis ($7,000) is equal to $8,500.
In the case of the entrepreneur, one half the appreciation ($3,500) plus the cost basis
($3,000) is equal to $6,500. Thus, the corporation would receive nearly $2,000 more
in deductibility.

²¹ Also, note that charitable contributions may not exceed certain levels. In the case of
corporations it is 10%. For individuals, the limitation is generally 50%.

It can be argued that the temporary law provides more equity among all
taxpayers engaged in a trade or business than the current, permanent law which
provides the enhanced deduction only to C corporations and does not include
provisions for S businesses or individuals.
Tax Rate Differentials. In addition, it should be noted that tax rates and the
graduation of those rates are different for individuals and corporations. Current law
provides for corporate tax rates which range between 15% and 35% depending on the
company’s taxable income (phase-outs can make the effective rates for certain
corporations rise as high as 39%). In tax year 2005, individuals will be subject to six
tax rates ranging from 10% to 35%. In all cases, whether corporate or individual, the
value of the enhanced deduction is dependent on the applicable tax rate. Typically,
those with higher incomes would receive more advantage than those with lower
incomes under the proposal.²² Thus, it does not appear that full equity can be
achieved through the extension of the current enhanced deduction for corporate gifts
of food inventory to all taxpayers engaged in a trade or business. For example, a
large corporation will most likely have a 35% rate. A small farmer filing a joint
return whose income is less than $182,800 would be subject to a 28% rate. It may
also be noted that the law applies only to food inventory, and as such, may
discriminate against other similar forms of charitable contributions (such as gifts of
clothing for the poor).
An Alternative Possibility: Tax Credit. From an economic perspective,
the use of a tax credit, rather than a deduction, would better promote equity among
all business taxpayers. Tax deductions are useful in defining income that should be
taxable. For instance, in the case of individuals, it is typically argued that charitable
contributions are made using funds that are no longer within the taxpayer’s control
and, thus, monies to which the taxpayer may no longer lay real claim. In this
instance, the deduction helps to define the income that should be subject to tax.
Tax credits are subtracted from tax liability, whereas tax deductions are
subtracted from income to determine the amount subject to tax. The net result is that
for each $1 of tax credit the tax liability is reduced by $1. Deductions reduce tax
liability by only a percentage of the deduction, depending upon the tax rate of the
taxpayer. Tax credits are used primarily to reduce taxes directly rather than to define
the base on which taxes should be collected and are frequently used as incentives.
Further, tax credits can be used by all eligible taxpayers (who owe taxes) since they
are subtracted directly from tax liability.

²² The graduated corporate tax rates both increase and decrease across taxable incomes.
This graduation is justified as an aid to small businesses. As corporate taxable income rises,
the graduation is eliminated through phase-outs. Corporate tax rates for taxable income up
to $50,000 are 15%; between $50K and $75K the rate is 25%; between $75K and $100K
the rate is 34%; between $100K and $335K the rate is 39%; between $335K and $10M the
rate is 34%; between $10M and $15M the rate is 35%; between $15M and $18,333,333 the
rate is 38%; taxable incomes over that amount pay at the 35% rate. Most very large
corporations pay a tax rate of 35%.

Other Issues
We have assumed that farmers may donate crops to qualified organizations for
gleaning, which is defined as the act of a tax-exempt organization that either harvests
the crop or gathers the grain or other produce left in the field after an initial harvest.²³
A farmer’s decision to abandon crops in the field is typically made at the time of
harvest. Fixed costs such as seed, fertilizer, and other costs such as purchased
irrigation water (typically referred to as sunk costs) are not taken into consideration
when making the decision to harvest. The decision to move a crop to market is based
on whether the farmer will receive a market price for the crop that exceeds his cost
for harvesting, packing and transporting the crop. In those cases where the decision
is marginal (i.e., the point at which the farmer may break even) to harvest or not to
harvest, it would be to the farmer’s advantage to make use of the proposed enhanced
deduction. By opting to have the crop gleaned by an exempt organization, no
expenses associated with the harvest would be incurred, while a deduction would be
available to offset taxation of the farmer’s other taxable funds. Alternatively, the use
of a carryover of the deduction for offsetting taxable funds could be available for up
to five future tax years.
Appropriate Valuation of Donated Goods. A primary problem with
products that have shelf lives is determining an appropriate value for the goods
donated. Under certain proposals, the fair market value can be determined by the
price of the same or similar food items sold by the taxpayer at the time of the
contribution (or, sold in the recent past). Prior legislative language provided a safe
harbor for taxpayers by defining “apparently wholesome food” that is eligible for
donation. Under this proposed definition, the food may be apparently wholesome
even if it is not readily marketable “due to appearance, age, freshness, grade, size,
surplus, or other conditions.” This definition is the same as provided in the Bill
Emerson Good Samaritan Food Donation Act.²⁴
In discussing this valuation problem, which is now a part of the legislative²⁵
history, a court case was cited where the Tax Court held the value of surplus bread
inventory donated to a qualified charity was determined to be the same as the full²⁶
retail price of the bread. The Internal Revenue Service (IRS) contended that the
retail value of the bread was half the normal sales price since the industry practice of²⁷
major bakers is to discount four-day-old bread. If the court had ruled the value of

²³ Proposed legislation is silent on this topic.
²⁴ 42 U.S.C.A. § 1791 (Bill Emerson Good Samaritan Food Donation Act).
²⁵ U.S. Congress, Joint Committee on Taxation, Description of an Amendment in the Nature
of a Substitute to H.R. 7, the “Community Solutions Act of 2001,” committee print, 107^th^st
Cong., 1 sess. (Washington: GPO, 2001), p. 10.
²⁶ Lucky Stores, Inc. v. Commissioner, 105 T.C. 420 (1995).
²⁷ The Court ruled that Lucky Stores sold four-day old bread at full retail price and did not
discount sales to its own customers. Further, the Court found that the quantity of sales of
four-day old bread was irrelevant. The Court noted that the IRS argument over the “industry
practice” of discounting four-day old bread did not prove fair market value but, rather, that
(continued...)

the bread was half the retail selling price (following industry practice), then Lucky
Stores would have received no tax benefit and, thus, no encouragement to make such
charitable donations.²⁸ The court’s findings contradicted regulations issued by IRS.
One effect of passage of the proposed legislation would be to make the ruling
in the Lucky Stores case the law of the land rather than being applicable only in the
9^th Circuit. Opponents of the provision may argue that there are economic incentives
(rather than tax incentives) for stores to continue to make such gifts. For example,
there are costs associated with disposal of product.²⁹ Obviously, the gifting of
products reduces disposal costs. In addition, companies can expect goodwill
(commonly referred to as “cause marketing”). High profile contributions can
contribute to image building for the firm and influence public opinion.³⁰
It is anticipated that opponents of the legislation may argue that the changes
would reduce revenues to the federal government. The Joint Committee on Taxation
estimated that enactment of the provision in the “Care” legislation introduced during
the 108^th Congress would have resulted in a revenue loss of $255 million over the
five-year period of 2002-2006, with an estimated increase to $626 million over the
10-year period of 2002-2011.³¹ It was expected that other industries would have
requested similar tax treatment,³² which, if granted, would have lead to an additional
reduction in tax receipts at a time of increasing budget deficits.
Direct Subsidy Programs as an Alternative. In the past, some have
argued that it would be preferable for the government to pay directly for the
additional support of food programs rather than creating expenditures through the tax
system. Direct government subsidies would assure that such funds were likely to be
allocated under objective procedures and would, therefore, go to all the poor strictly
based on need. Further, it is argued that a direct government spending program

²⁷ (...continued)
Lucky Stores could have sold the bread at a discount if it so chose to do so.
²⁸ Since one-half the fair market value was less than basis, Lucky Stores would have
received the exact same deduction for a contribution to a food bank or for discarded
inventory which, in both cases, is a tax deduction for basis.
²⁹ Some products have higher disposal costs than others. For example, unneeded medical
supplies and certain computer components may have high destruction costs.
³⁰ It should be noted that Lucky Stores deliberately overproduced bread. By doing so they
were able to assure that bread was in stock at all times for customer needs. Thus, they were
able to keep their customers happy (and in their stores to purchase product) while also
knowing that they would receive a tax benefit for the overproduction. Often when a firm
has excess capacity, an additional unit’s cost may be relatively small because there are many
fixed costs. Or in some cases, there may be fixed costs associated with goods produced for
sale rather than goods produced for contributions (such as the expenses associated with
advertising costs for goods sold).
³¹ Cost estimates for the proposals introduced in the 109^th Congress are not available.
³² As an example, the pharmaceutical industry could request a similar safe harbor for valuing
drugs donated near their expiration date.

would assure that expenditures would be subjected to periodic review under the
budgetary process.
Some feel that the expansion of the charitable deduction to all taxpayers
engaged in a trade or business provides greater (food) benefits to people living near
farm production areas where the food is harvested, more so than to people living far
from farm areas in large cities. Further, gifts made by farms are likely to be seasonal.
Others note that more restaurants are located in populated areas and that they may be
the primary beneficiaries of the provision. Proponents of the proposals are most
likely to argue that more food would be available to the elderly, poor, and infants for
each tax expenditure dollar than through other direct government food expenditure
programs. Another argued advantage would be that, most likely, there would be
minimal federal government involvement in administering the program. Both sides
have agreed that the proposed change would add complexity to the tax return filing
process for a greater number of taxpayers in the charitable contribution arena. Some
have suggested that since there is a sunset provision Congress would have an
opportunity to evaluate the success of the change.