Wrong. The mention is right here:
You’re reading way too much into this case. The case involved one of these serial forgiveness situations, with some particularly unique facts. We don’t have any of that in the OP. This is presently a “no rule” area for the IRS and has been for a long time. And for good reason.
Your problems with my theory all spring from the fact that you are stuck in an accounting mindset where nothing exists or has relevance unless a dollar figure is attached to it.
I’m really not stuck on a single fact. All I know is that with Cash, basis always equals FMV. Your theory invokes the idea that it doesn’t. Guy lends $10k in cash to charity. He forgives later, when the value of his Receivable is lower than the amount he advanced. If this is really a donation of cash, in the year of forgiveness, there is no way possible for the deduction to be different than the amount advanced. And also note, your theory wouldn’t adequately cover a situaiton when then Receivable was actually worth more than the amount advanced. Seems odd that your theory doesn’t work when value is lower, doesn’t work when the value is higher, but does work when value equals basis. Your theory also falls flat as to the Sec 170 actual payment requirement within the taxable year.
If you could clear your head of all that and approach things from a practical standpoint
My head is pretty clear. Story’s situation was this: He funded construction…hard outlays by the church. Of great importance is that he wanted to control the management and supervision of the project, so he had the charity sign a promissory note. If the charity didn’t do things his way, now he has a backup plan. If the charity did things his way, then here, keep the money I advanced. That was the purpose of the Note and the reason it was bonafide. This is not the situation with a plain old loan, where the evidence of indebtedness exists just so the charity is forced to do things the lender’s/donor’s way. I have no problem with the result and analysis in Story. But it won’t hold up in any factually dissimilar situation, such as the OP’s situation, which involves an ordinary loan from what I can see and no serial forgiveness. And it won’t hold up because it would be inapplicable. Nonetheless, we are all in agreement that when we have bonafide indebtedness – in a serial and non-serial forgiveness situation – we get a deduction upon forgiveness. We’re not debating that point.
There is this passage from Story:
Of course, a gift or contribution to a qualified organization may be made in property and be the basis for a deduction authorized by section 170, and respondent does not argue that if there was a debt from Soldiers Chapel in Nelson's favor, he could not have made gifts or contributions to the organization in 1957 and 1958 by canceling portions of the debt.3Given that said passage references the old Rev Rul, via Footnote #3, it’s clear that the word “property” is referring to the Note. But I digress, because the whole cash vs. non-cash thing wasn’t really taken up in the case. Like I said, back then, it didn’t matter. Take a look at the 1955 Form 1040. Again, you’re reading a cash vs. non-cash element into the case, and quite frankly, it wasn’t even an issue. In other words, even if the court came right out and said that the contribution was non-cash, in the form of a Note, it wouldn’t have mattered back then. Nowadays, though, it would, given the strict substantiation rules surrounding non-cash donations. With the changed landscape, I can totally see the IRS distinguishing current cases from Story, completely relying on the old Rev Rul, and putting the taxpayer that didn’t get an appraisal in a real bind. And I think the IRS would have a good chance of winning.
In Story, the real focus was on the bonafideness of the debt. Part of that discussion involved some comments about the charity’s financial condition. But that discussion wasn’t surrounding the valuation of the Note. It surrounded the intention of creating bonafide indebtedness and the ability of the charity to repay. But even so, the court was satisfied that the Note could have been paid off. I can totally see the IRS using this idea not just to determine the validity of the Note, but to value it as well. And guess what: The burden of proof is on the taxpayer. If the IRS argues that this is a non-cash contribution, and wins, it makes little difference that the charity could easily pay off the note through non-appraisal evidence.
Further, there is nothing more practical than pointing out that that cash has a basis equal to value. Any theory premised on the fact that I advanced Cash of $10k and my deduction might be something different falls short of being able to classify the donation a cash donation.
Like I said, just tell your clients not to get an appraisal for their ordinary loans to charity…I myself wouldn’t want to chance it. The old Rev Rul is pretty clear when it comes to an ordinary loan.