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Case Lucky Star INC. ET Al vs. Commissioner, Research Paper Example

Pages: 4

Words: 1156

Research Paper

Lucky Starr Inc. is a bakery operating business with operations in Northern and Southern California as well as in Nevada, was a petitioner in a disputed case with the Commissioner as the responder, on the grounds that its valuation of 4 days old baked and canned products donated to charity institutions were valued at retail prices instead of a 50% discounting of its value on its income tax submission for the years 1985 and 1986 respectively.

Central to the case is Section 170 (e) 1 and 3, which deals with marketable valuation of charitable contributions of rapidly perishing inventory, and Lucky Star Inc. charitable deductions that were in dispute were $ 663,865 and $1,300,558 TYE for February3, 1985 and 1986 respectively, on retail donations based on the retail price of contributed bakery inventory at the time of contribution, for Florida donations of canned goods and other general merchandise, after cost adjusting for remaining contributed inventory.

Both respondent and petitioner were in agreement that it was their interpretation of the valuation methodology as it relates to Section 170 (e) 1and 3 that were on trial, as well as the appropriate definition of what is a fair market value concept regarding perishable baked unsold canned and other general merchandise. Finally, the classification of Lucky Star Incorporation as Corporation X or S, the critical and unchallenged testimony of an expert and the relevance of related cases in terms of precedent were factually significant, and may impact decisively on the final ruling by the presiding judge.

Analysis

The case of Lucky Star Inc. v Commissioner relate to the provisions of section 170 (e) (1) and (3) on charitable donations at the time of the trial.  Section 170 (e) deals with certain contributions of ordinary income and capital gain property, where the general rule states that the amount of charitable contribution of property otherwise taken into account shall be reduced by the sum of the amount of gain that would not have been long term capital, if the property contributed had been sold by the tax payer at its fair market value.

Commissioner as respondent in the case argued that Lucky Star Inc. should have reduced its valuation of its donated bread that was on retailers’ shelves for 4 days and remain unsold by 50 % of its retail value as the law required, since the product had lost its squeezability, and could not be sold at the prevailing retail price to consumers if they were informed and not under compulsion.

On the part of the petitioner, the legal counsel team advocated that, (a) their client had been following the practice since 1983, (b) it had to recover the annual cost of transporting the donated products back to a number of its store locations for pickup, and (c) base on its expert witness Professor Daniel Rubinfeld, bread that sits on store shelves for four days does not lose nutritional values or taste, despite reductions in moisture content and squeeze- ability.

The general interpretation of a fair market value under Section 1.170A-1 (C) (2) on Income Tax regulations, infer that it is the price which the taxpayer would have received if he had sold the contributed property in the usual market place in which he customarily sells the contributed quantity.    Base on this interpretation, Lucky Star Inc could favorably argue that it made the right decision in valuing the donated products at the retail prices submitted on its 1985 and 1986 tax deductible declarations, and under section170 (e) 3 (A) subsections (i) and (ii), the property was donated for the purpose of taking care of the ill, the needy (homeless) and infants and was not exchanged for money at the time of these transactions.

However, the respondent could counter impressively, that under section 170 (e) 3 b s. (i), the amount of qualified contribution shall be no greater than one half of the amount computed under paragraph 1(A), and as such Lucky Star Inc. stood in violation when it applied the retail price in its tax deductible submissions for the years 1985 and 1986 respectively, and should be penalized retroactively to 1983, base on its own admission.

In the case Cooley v. Commissioner 333T.C 223,225 (1959) affd., per curium 283 F 2d  945 [6AFTR 2d 5940] 2nd Circ.1960, a similar scenario existed, in that both judges found no principled basis to facilitate  a meaningful compromise between the petitioners claim for the retail price, and the respondent argument that a 50%  discounting of the price was legally appropriate.

The fact that there was no precedent case to draw upon may have motivated the actions of the respondent to take the case to court for a favorable ruling, but unfortunately for this party, revenue rulings are not accorded the force of precedence in Tax Court.

Lucky Star Inc. may seem to have the advantage in terms of its position be relatable to the favorable ruling to the petitioner Estate Lang in Estate Lang v. Commissioner 64T.C. 404, 407 (1975), because Rule 85-8 holds that when a corporation donates products in inventory to a charitable organization shortly before the expiration date, the amount allowable as deduction should be equal to the tax payer basis in the property as well as one half of the unrealized appreciation, but not in excess of its basis in the same property.

Although force of precedence are not accorded in Tax Court, Lucky Inc. could argue that it was in the same position as Estate Lang, and had to impose the retail prices in both years because that were less than 200% of its basis in the products  and  the computed unrealized appreciations combined.

The respondent could intervene and exploit a perceived weakness in Lucky Inc. case concerning its computation of the unrealized appreciations, which it could posit would have been minimal, difficult to calculate and lacked evidential support in the case.

Lucky Star Inc. could close the case outcome definitely by arguing that it could have sold its products even beyond the expiry date and maximized its revenue, because under section 1361 (a) 1 of the Internal Revenue Code only a Corporation X is bound to provide expiration imprints on its product and is legally bound not to sell its product after the expiry period.

On the contrary, Lucky Star could argue with justification, that it was an S Corporation, had concerns for the ill, needy and infants, and wanted to fulfill its corporate responsibility role in a society that it had benefitted significantly from, especially since 1983.

Decision

The judge after much deliberations, would have to rule in favor of Lucky Inc. because precedent had no effect, the company successful prove that its products did not lose nutritional value after 4 days on the shelf, it had concerns for the less privilege in the society, was a Corporation S instead of X, incurred significant annual delivery cost to charity recipients, and had a retail price that had not violated section 170 (e) 1 and 3 as charged by its opponent in the case presented.

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