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§ 9.11 COMMODITY FUTURES CONTRACTSAn individual donated commodities futures contracts to a charitable organization.He obtained a ruling from the IRS stating that he would be entitled to thecharitable contribution deduction for the fair market value of the contracts andwould not personally realize any capital gain or loss as long as certain conditionswere satisfied. The conditions were met; gifts of this nature were made in1974 through 1978 and 1980. The tax law as to commodities futures contractswas adjusted in 1981, with the revised law providing that gains or losses fromany termination of a person’s obligations or rights under these contracts aretreated as 60 percent long-term capital gain or loss and 40 percent short-termcapital gain or loss. This change in the law posed a problem for this donor, inthat there is no charitable contribution deduction for the value of donated propertyto the extent that it would have given rise to short-term gain to the donorhad the donor sold the property. 312The donor attempted to solve this problem by contributing to charity onlythe portion of the contracts that was characterized as long-term capital gain.Pursuant to an agreement, the contracts were transferred into a brokerageaccount controlled by the charity’s trustee. When the contracts were sold, theportion of the proceeds representing long-term capital gain was transferred to abrokerage account for the charity. The donor paid the annual capital gains tax onthe net short-term capital gain.These tax rules pertaining to regulated futures contracts instruct taxpayersas to the correct method of income recognition when they sell or otherwisetransfer futures contracts. These contracts are annually treated as if they hadbeen sold for fair market value on the final business day of the tax year. As everycontract is constructively sold each year, a taxpayer must recognize accruedgains and losses annually by marking the contracts to market. 313 This rule as toconstructive recognition of accrued gain is an exception to the general rule, bywhich recognition of any capital gain or loss is delayed until the time of sale orexchange. The IRS asserted that these rules apply in the instance of charitablegifts.This mark-to-market rule also applies to instances in which persons terminateor transfer their obligations or rights under a regulated futures contract.The statute lists a variety of ways that a futures contract can be terminated ortransferred: “[B]y offsetting, by taking or making delivery, by exercise or beingexercised, by assignment or being assigned, by lapse, or otherwise.” 314It was the word otherwise that was held to embrace transfers by charitable gift.The appellate court wrote that these mark-to-market rules “appear to govern allterminations and transfers of futures contracts.” 315 By contrast, the trial courtmused that the language “describe[s] economic activity that seems fundamentallydifferent from charitable giving.” 316 But the appellate court stated that “[t]here is noreason for excluding charitable donations from the definition of transfer.” 317 The312 IRC § 170(e)(1)(A). See § 4.4.313 IRC § 1256(a)(1).314 IRC § 1256(c)(1).315 Greene v. United States, 79 F.3d 1348, 1354 (2d Cir. 1996).316 Greene v. United States, 864 F. Supp. 407, 414 (S.D.N.Y. 1994).317 Greene, 79 F.3d at 1355. 309