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§ 9.19 BARGAIN SALESThese rules as applied to a bargain sale are illustrated by the followingexample:EXAMPLE 9.9H has long-term capital gain property that has a fair market value of $20,000. H’s basis in theproperty is $8,000. H sold the property to a tax-exempt, charitable hospital for $8,000.Consequently, H made a charitable contribution to the hospital of $12,000 ($20,000 – $8,000).The transaction was thus partially a contribution ($12,000) and partially a sale ($8,000).H thus received a gain of $8,000. To determine the net gain, H had to reduce the gain by theamount of the basis allocable to it. The basis allocated to the sale portion of the transaction was$3,200 ($8,000/$20,000 × $8,000). The basis allocated to the gift element of the transactionwas $4,800 ($12,000/$20,000 × $8,000).A bargain sale will also arise when the property transferred to a charitableorganization is subject to a debt, even though the donor does not receive anypayment for the transfer of the property. 455In one case, a court held that a charitable contribution of property, subject toa nonrecourse indebtedness, constituted a bargain sale that gave rise to taxablegain. 456 A dissent observed that the holding is erroneous because the donorswere not relieved of any personal liability by the transfer of the land.(c) Interplay with Deduction Reduction RuleA court ruled that the federal tax regulations accompanying the appreciationreduction rule 457 were invalid to the extent that they required reduction of adonor’s charitable deduction, arising by reason of a bargain sale, by the amountof the unrealized appreciation of the sale portion of the property. 458 Under thefacts of the case, the donors sold appreciated long-term capital gain property to acharitable organization in a bargain sale. The regulations accompanying theserules 459 provided that, in the case of a bargain sale to which the deduction reductionrule applies, no deduction is allowable unless the gift exceeds the appreciationreduction amount for all of the property. Because this interpretation of therules would have eliminated any charitable contribution deduction, the donorscontended that the deduction reduction rule only causes a reduction in theircharitable deduction of the inherent gain in the donated portion of the property.In agreeing with the donors, the court parsed the language of the deductionreduction rule, which speaks of the “property contributed,” and concluded thatCongress referenced, in connection with bargain sales, only the property donatedand not the property sold as well. Therefore, the court pronounced the regulations“unreasonable” and thus invalid. 460 The regulations were subsequentlyrevised to reflect this opinion.455 See § 9.20.456 Ebben v. Commissioner, 783 F.2d 906 (9th Cir. 1986).457 IRC § 170(e)(1). See § 4.4.458 Bullard Estate v. Commissioner, 87 T.C. 261 (1986).459 Reg. §§ 1.170A-4(c), 1.1011-2.460 Bullard Estate v. Commissioner, 87 T.C. 261 (1986). 329