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§ 9.19 BARGAIN SALES(a) Definition of Bargain SaleA bargain sale is a transfer of property to a charitable organization, when thetransaction is in part a sale or exchange of the property and in part a charitablecontribution of the property. 437 Basically, a bargain sale is a sale of an item ofproperty to a charitable organization at a price that is less than the fair marketvalue of the property; the amount equal to the fair market value of the property,less the amount that is the sales price, is regarded as a contribution to the charitableorganization. 438A court upheld a bargain sale transaction in which persons sold stock to acity for less than the fair market value of the securities. The city wanted the propertyrepresented by the stock for use as part of a sewage treatment program. Thestock had a value of $7.9 million and was sold for $4 million. 439 In another case,two individuals sold to a charitable organization a custom flybridge steel fishingtrawler for $25,000, to be used to teach delinquent youths individual responsibilityby going on sea cruises. The vessel was custom-made for the sellers; it had afair market value of $160,000. 440 Likewise, the sale of residential parcels of realestate to a state environmental restoration agency by a partnership was held tobe a bargain sale. 441Disputes can arise as to whether a transaction is a bargain sale or a regularsale of property at fair market value. In one of these instances, a court held thatthe conveyance to a county of an easement restricting the development of landgave rise to a bargain sale and thus a charitable contribution deduction, despitethe IRS’s contention that the amount paid by the county for the transfer was itsfair market value. 442 The county acquired the easement pursuant to an agriculturalland preservation program. The donors were paid $309,000 (in money andpromise of installment payments). The court found the value of the easement tobe $518,000, resulting in a charitable deduction in the amount of $209,000. TheIRS contended that the easement was worth only the $309,000 the governmentpaid for it, that sum being in line with amounts the county generally paid fordevelopment rights under the program.(b) Allocation of BasisThe charitable deduction arising from the making of a bargain sale may be anamount equal to the value of the gift portion of the property transferred. The charitablededuction may be less, however, inasmuch as a deduction reduction rule 443potentially applies to the contribution element in a bargain sale. (The deductionreduction rule requires that, under certain circumstances, the amount that is equal437 Reg. § 1.170A-4(c)(2)(ii). When the charitable organization is involved in the financing of the purchase componentof a bargain sale, a result may be unrelated debt-financed income. See Tax-Exempt Organizations ch. 29.See, e.g., Tech. Adv. Mem. 9431001 (real property donated to charitable organization may have been debt-financed,absent statutory exception).438 See, e.g., Stark v. Commissioner, 86 T.C. 243 (1986); Knott v. Commissioner, 67 T.C. 681 (1977).439 Waranch v. Commissioner, 58 T.C.M. (CCH) 584 (1989).440 Fair v. Commissioner, 66 T.C.M. (CCH) 460 (1993).441 Hay v. Commissioner, 64 T.C.M. (CCH) 228 (1992).442 Browning v. Commissioner, 109 T.C. 303 (1997).443 See § 4.4(b). 327