Rev. Rul. 55-157

The taxpayer in the instant case sold a parcel of real estate to an educational organization, contributions to which are deductible under section 23(o) of the Internal Revenue Code of 1939. The terms of settlement provided for a cash payment amounting to less than 30 percent of the purchase price with the balance of the purchase price represented by twenty equal annual installment notes. The transaction as a whole did not amount in substance to a gift of the difference between the value of the real estate and the amount of the cash payment. The taxpayer elected to report the income derived from the sale on the installment basis prescribed in section 44 of the Code. Advice has been requested whether the taxpayer will be subject to Federal income tax as provided by section 44(d) of the Code if he makes a gift of each annual payment as it falls due and whether the credited payment will represent a contribution deductible to the extent provided by section 23(o) of the Code.

Under the provisions of section 44(d) of the Code, if an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and, in case of a distribution, transmission, or disposition otherwise than by sale or exchange, the fair market value of the obligation at the time of such distribution, transmission, or disposition. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. See section 39.44-5 of Regulations 118.

Section 23(o) of the Code provides that in computing net income an individual taxpayer may take a deduction for the contribution or gift payment of which is made within the taxable year to or for the use of certain organizations to an amount which does not exceed 20 per centum of the taxpayer's adjusted gross income. If the contribution or gift is other than money, the basis for calculation of the amount thereof shall be the fair market value of the property at the time of the contribution or gift. Section 39.23(o)-1 of Regulations 118.

On the basis of the foregoing, it is held that the taxpayer is subject to Federal income tax as provided in section 44(d) of the Code with respect to the notes which are credited to the organization as gifts. The fair market value of each note as of the date credited as a gift will constitute an allowable deduction to the extent prescribed in section 23(o) of the Code