Rev. Rul. 80-69

ISSUE

How is the fair market value of property contributed to charity determined for federal income tax purposes under the circumstances described below?

FACTS

During 1978, an individual taxpayer who was not a dealer in gems purchased an assortment of gems for 500x dollars from a promoter who asserted that the price was "wholesale", even though the promoter and various other dealers engaged in numerous similar sales at similar prices with individuals who were not dealers in gems. The promoter represented that if the taxpayer held the gems for over one year and then contributed them to charity the taxpayer would be entitled to a deduction of 1500x dollars at the time of contribution. The promoter contended that the value at the time of contribution would be at least three times as much as the price paid by the taxpayer. The taxpayer contributed the gems to a public museum 13 months after purchase, claiming a charitable contributions deduction of 1500x dollars. The museum is an organization described in section 170(c) of the Internal Revenue Code, contributions to which are deductible under section 170(a)(1). The museum will use the gems in a manner related to its exempt purposes.

LAW AND ANALYSIS Section 170(a)(1) of the Code allows as a deduction any charitable contribution (as defined in section 170(c)) payment of which is made within the taxable year.

Section 1.170A-1(c)(1) of the Income Tax Regulations provides that 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 contribution, reduced as provided in section 170(e)(1) of the Code.

Section 1.170A-1(c)(2) of the regulations provides that 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 a reasonable knowledge of relevant facts.

The definition of fair market value depends upon a knowledgeable willing buyer and a knowledgeable willing seller. To determine fair market value, reference is made to the most active marketplace at the time of the donor's contribution. The best evidence of fair market value depends on actual transactions and not on some artificially calculated estimate of value contrary to the prices at which the very gems at issue changed hands in the marketplace. The 500x dollars at which the promoter sold the gems to the taxpayer and others, rather than a mere speculative claim of what the gems would be worth, is the best evidence of the maximum fair market value of the gems.

HOLDING

For federal income tax purposes the fair market value of the gems was no greater than 500x dollars.