Bargain sale basis is calculated property by property

Plain-English summary

An S corporation planned to have several qualified subchapter S subsidiaries donate business properties to a section 501(c)(3) charity. Some properties could be subject to mortgage debt, which is treated as an amount realized when property is transferred to a charity. The corporation asked whether the bargain sale basis calculation under section 1011(b) would apply separately to each property. The IRS ruled that basis must be computed property by property when the corporation donates mortgaged business property to the charity.

Ruling snapshot

• Question: Is basis under the section 1011(b) bargain sale rule calculated separately for each donated property?
• Outcome: approved
• Key authorities: IRC §§ 170, 1011, 1012, 1016, and 1361; Treas. Reg. § 1.1011-2

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201709001 Third Party Communication: None
Release Date: 3/3/2017 Date of Communication: Not Applicable
Index Number: 1011.01-00
Person To Contact:
-------------------------- ------------------,
---------------------------- ID No. ------------------
---------------------------- Telephone Number:
------------------------------ ----------------------
Refer Reply To:
CC:ITA:B04
PLR-116035-16
Date:
November 02, 2016

LEGEND

X = --------------------------

State = --------------

Charity = ---------------------------

business = ------------------------------------------------------------------------------------------

D1 = -----------------

D2 = ----------------------

Dear --------------:

  This responds to a letter dated May 11, 2016, and subsequent correspondence,

submitted on behalf of X, requesting a ruling under § 1011(b) of the Internal Revenue
Code (Code.)

FACTS

  According to the information submitted, X was organized under the laws of State

and elected to be treated as an S Corporation effective D1. X owns several business
properties through qualified subchapter S subsidiaries. Charity is a State non-profit
corporation that has been recognized as an organization exempt from federal income
tax under § 501(c)(3) of the Code effective D2. X plans to have several of its qualified
PLR-116035-16 2

subchapter S subsidiaries contribute certain business properties to Charity. Some of
the properties transferred to Charity may be subject to mortgage debt.

  X requests a ruling that the computation of basis under the bargain sale rules of

§ 1011(b) will be determined on a property-by-property basis.

LAW AND ANALYSIS

      Section1361(b)(3) provides that, except as provided in regulations, a qualified

subchapter S subsidiary shall not be treated as a separate corporation and all assets,
liabilities, and items of income, deduction, and credit shall be treated as assets,
liabilities, and such items (as the case may be) of the S corporation.

   Section 1011(a) provides that the gain from the sale or other disposition of

property shall be the excess of the amount realized therefrom over the adjusted basis
provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted
basis provided in such section for determining loss over the amount realized.

   Section 1011(a) provides the general rule that the adjusted basis for determining

the gain or loss from the sale or other disposition of property, whenever acquired, shall
be the basis (determined under § 1012 or other applicable sections of this subchapter
and subchapters C (relating to corporate distributions and adjustments), K (relating to
partners and partnerships), and P (relating to capital gains and losses)), adjusted as
provided in § 1016.

    Section 1011(b) provides that, if a deduction is allowable under § 170 (relating to

charitable contributions) by reason of a sale, then the adjusted basis for determining the
gain from such sale shall be that portion of the adjusted basis which bears the same
ratio to the adjusted basis as the amount realized bears to the fair market value of the
property. Under § 1.1011-2(a)(3) of the Income Tax regulations, if property is
transferred subject to an indebtedness, the amount of the indebtedness must be treated
as an amount realized for purposes of determining whether there is a sale or exchange
to which § 1011(b) of the Code and § 1.1011-2 apply, even though the transferee does
not agree to assume or pay the indebtedness. See also Ebben v. Commissioner, 783
F.2d 906 (9th Cir 1986). Therefore, pursuant to § 1011(b) and § 1.1011-2(a)(3), upon
the contribution of an encumbered property to a charity, the transfer is treated as a
bargain sale

CONCLUSION

   Based solely on the facts submitted and the representations made, the

computation of basis under the bargain sale rules of § 1011(b) is determined on a
property-by-property basis if X donates business property subject to mortgage debt to
Charity.
PLR-116035-16 3

   Except as specifically set forth above, we express no opinion concerning the

federal tax consequences of the facts described above under any other provision of the
Internal Revenue Code.

   This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent. In accordance with the
Power of Attorney on file with this office, a copy of this letter is being sent to X’s
authorized representative.

                                    Sincerely,



                                    Stephen J. Toomey
                                    Stephen J. Toomey
                                    Senior Counsel, Branch 4
                                    Office of Associate Chief Counsel (Income Tax
                                    and Accounting)

Enclosures (2)

  Copy of this letter
  Copy of this letter for section 6110 purposes

cc: