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SPECIAL GIFT SITUATIONSThe donor of the property that is inventory contributed under these rulesmust make a corresponding adjustment to cost of goods sold, decreasing thecost of goods sold by the lesser of the fair market value of the contributed itemor the amount of basis (determined under the rules described in the precedingparagraph). 79EXAMPLE 9.4During 2005, Y, a corporation using the calendar year method of reporting taxes, made aqualified contribution of women’s coats. a The fair market value of the property at the date ofcontribution was $1,000 and the basis of the property was $200. The amount of the charitablecontribution that would have been taken into account under the general charitable deductionrules is $1,000. The amount of gain that would not have been long-term capital gain if theproperty had been sold was $800 ($1,000 – $200). The amount of the contribution had to bereduced by one-half of the amount that would not have been capital if the property had beensold, or $400 (1/2 of $800).After this reduction, the amount of the contribution that was taken into account was $600($1,000 – $400) A second reduction had to be made in the amount of the charitable contributionbecause this amount (as first reduced to $600) was more than an amount equal to twice the basisof the property, or $400. The amount of the further reduction is $200 [$600 – (2 × $200)], andthe amount of the contribution as finally reduced was $400 [$1,000 – ($400 + $200)]. Y alsohad to reduce its cost of goods sold for the year of the contribution by $200. baThe coats were stock in trade of Y (inventory). IRC § 1221(1). See text accompanied by notes 40 and 41.bReg. § 1.170A-4A(c)(4), Example (1).(g) Recapture ExcludedA deduction is not allowed under these rules for any amount that would havebeen treated as ordinary income if the property had been sold by the donor, onthe date of its contribution, for an amount equal to its fair market value. 80EXAMPLE 9.5The facts of this example are based on Example 9.4, except that the basis of the property was$600. The amount of the first reduction was $200 (($1,000 – $600)/2). As reduced, theamount of the contribution that was taken into account was $800 ($1,000 – $200). Therewas no need for a second reduction because $800 is less than $1,200, which is twice thebasis of the property. Y, however, had to decrease its cost of goods sold for the year ofcontribution by $600. aaReg. § 1.170A-4A(c)(4), Example (2).Thus, before making either of the two reductions (see above), the fair marketvalue of the contributed property must be reduced by the amount of gain thatwould have been recognized (if the property had been sold) as ordinary incomeby reason of one of these recapture rules. 8179 Reg. § 1.170A-4A(c)(3).80 This property might be treated as ordinary income property pursuant to IRC §§ 617, 1245, 1250, 1251, or 1252.81 Reg. § 1.170A-4A(d). 280