Rev. Rul. 55-531

I.T. 3932, C.B. 1948-2, 7, has been reconsidered in the light of the decisions in Mamie F. Farrier v. Commissioner , 15 T.C. 277, acquiescence, C.B. 1955-1, 4, and Elsie SoRelle v. Commissioner , 22 T.C. 459, acquiescence, C.B. 1955-1, 6, and Revenue Ruling 55-138, C.B. 1955-1, 223.

In I.T. 3932, supra , a livestock raiser made a bona fide gift to his son of cattle which the father had raised and which had a fair market value of $1,500 at the time of the gift. When the cattle were sold about eight months later for $2,100, the proceeds of the sale were received by the son. The ruling holds that (1) the fair market value of the cattle on the date of the gift is includible in computing the father's gross income for the taxable year in which the gift was made, and (2) the excess of the selling price of the cattle over the fair market value on the date of the gift represents ordinary income to the son.

The foregoing ruling was based upon the decision of the Supreme Court of the United States in Helvering v. Paul R. G. Horst , 311 U.S. 112, Ct. D. 1472, C.B. 1940-2, 206. In that case the owner of negotiable bonds detached interest coupons therefrom shortly before their due date and delivered them as a gift to his son, who procured their payment. The Court held the donor taxable on the amount received by the son. In support of the conclusion reached, the Court said in part:

Although the donor here, by the transfer of the coupons, has precluded any possibility of his collecting them himself he has nevertheless, by his act, procured payment of the the interest, as a valuable gift to a member of his family. Such a use of his economic gain, the right to receive income, to procure a satisfaction which can be obtained only by the expenditure of money or property, would seem to be the enjoyment of the income whether the satisfaction is the purchase of goods at the corner grocery, the payment of his debt there, or such nonmaterial satisfactions as may result from the payment of a campaign or community chest contribution, or a gift to his favorite son. * * * The enjoyment of the economic benefit accruing to him by virtue of his acquisition of the coupons is realized as completely as it would have been if he had collected the interest in dollars and expended them for any of the purposes named.

In the Farrier case, the court considered the question whether the fair market value of cattle given by the taxpayer to her daughter represented taxable income to the donor as a result of the gift. In this case, there had been no sale of the cattle in the taxable year involved. The court held that the rule in the Horst case, which the Commissioner had relied upon, was not applicable. The court pointed out that in the Horst case the donor had two independent and separable kinds of property rights in the bonds, one the right to receive the principal at maturity of the bonds and the other to receive the interest payments. It was the `power to command its (the interest) payment to others which constituted an economic gain to him.' The question in the Horst case was `whether because one who in fact receives payment for services or interest payments is taxable only on his receipt of the payments, he can escape all tax by giving away his rights to income in advance of payment.' The court then stated that in the Farrier case there was no such question. It said, `No income is involved. There has been no sale of the cattle and no income realized either by the donor or anyone else. The donor simply made a gift of the property itself before realization of any income thereon. The income, if there was ever to by any, had to await the sale of the cattle * * *.' The court held that the gift by the taxpayer to her daughter did not result in taxable gain to the donor.

In the SoRelle case, the taxpayer, a farmer and rancher, gave a parcel of land to each of his four children together with its unharvested wheat crop. The court held that the gifts of four parcels of land and the matured wheat crops thereon, which gifts were made just prior to harvest, did not result in the donor realizing income to the extent of the market value of the wheat. The court said, `We are not here concerned with a mere reallocation of business income within the family group. We have instead an actually completed and admittedly bona fide gift of income producing property, and the gift of that property carried with it the unharvested wheat crop which was still on the land. This wheat became the property of the four children to whom the land was given and when the wheat was harvested and later sold the income resulting therefrom belonged to the children and was taxable to them * * *.'

In the light of the above cases, it follows that no income is realized by a farmer or other producer by reason of his gifts of farm or other products. Revenue Ruling 55-138, supra , reached a similar conclusion with respect to charitable contributions of farm or other inventoriable products.

In many instances, the taxpayer has deducted at least some items representing cost of the donated property in the years in which such costs were paid or incurred. In other cases involving inventoriable property, such costs have been reflected as a part of the `cost of goods' thereby, under permissible accounting methods, providing in effect for the deduction of such costs upon sale of the goods. This has been done on the assumption that such costs have been a part of the costs incurred in the business of the taxpayer. When the goods become the subject of a gift, they are removed from the business operations of the taxpayer and such costs attributable thereto should likewise be eliminated from business costs. If, for example, the products or goods were grown or manufactured in the year of the gift, such costs applicable thereto should be disallowed. If the cost has been paid or incurred in an earlier year and is reflected in cost of goods carried in opening inventory of the year in which the gift is made, it becomes evident that an inventory adjustment should be made as of the time of the gift of property included therein to reflect the removal from the business of the donated asset and its cost, thereby counterbalancing the reduction of income caused by the removal of the goods from the business.

In view of the foregoing, the following treatment should be accorded gifts of agricultural or manufactured products or property held for sale in the ordinary course of business:

(1) The fair market value of the donated property is not includible in the gross income of the donor for Federal income tax purposes.

(2) There must be an adjustment to the opening inventory in the year of the gift effecting the removal of the cost or other basis of the donated asset. Items of cost applicable to such property are not deductible by the donor as an ordinary and necessary expense in the current or in any subsequent year.

(3) The basis of the gift in the hands of the donee is the same as in the hands of the donor, that is, the cost of such gift which is not allowable as a deduction to the donor in the current year plus items of cost which have properly not been deducted by the donor in prior years, or in the case of inventoried property the last inventoried basis plus the current's cost, if any, applicable to the gift, except that if such basis as computed above is greater than the fair market value of the property at the time of gift then for the purpose of determining loss the donee's basis shall be such fair market value.

Accordingly, I.T. 3932, C.B. 1948-2, 7, is hereby revoked