Statement of Food Donation Connection

These comments call attention to a technical correction needed to the charitable giving incentives created by recent tax legislation found in H.R. 4, the Pension Protection Act of 2006, Section 1202 - “Extension of Modification of Charitable Deduction for Contributions of Food Inventory”.  This correction would bring the provision in line with the original intent of Congress to encourage food donations by all business entities.

Food Donation Connection (FDC) coordinates the donation of wholesome prepared food from restaurants and other food service organizations to local non-profit agencies that help people in need.  Federal tax code (IRC Section 170(e)(3)) has provided an incentive for C corporations to donate their food inventory since 1986. Since its founding in 1992, FDC has been involved in the effort to pass charitable giving incentives for food donations for all business entities and is currently working with several restaurant companies that have agreed to donate food if this issue is resolved.  FDC has coordinated the donation of over 110 million pounds of prepared food for companies like Yum! Brands (Pizza Hut, KFC, Taco Bell, Long John Silver’s, A&W) and Darden Restaurants (Red Lobster, Olive Garden, Smokey Bones).  We currently coordinate donations from 7,000 restaurants to 3,500 non-profit agencies nationwide.

In our discussion with Yum! Brands franchisees about the charitable giving incentives contained in H.R. 4 (Pension Protection Act of 2006, which extended the provision of H.R. 3768 (KETRA) to December 31, 2007) we discovered an issue in the tax code that negate the tax savings for S corporations that donate food. Individual S corporation shareholders may not be able to take the deduction for the donation of food inventory, depending on their basis in the corporation. In working with S corporations we have learned the following:

• S corporation income is distributed to each shareholder based on each shareholder’s ownership percentage and therefore the deductibility of the deduction depends on each shareholder having sufficient basis (i.e. ‘at risk’ IRS rule) in the company to permit deduction at the individual level.
• S corporations make ongoing distributions to shareholders rather than retain excess funds in the company and therefore S corporation shareholders have no basis (i.e. distributions reduce basis).
• As a result, S corporation shareholders do not believe they are entitled to a tax deduction and do not benefit from recent tax law changes and are therefore not motivated to donate.

Under this current situation, the shareholder basis rule trumps the intention of Congress to extend the special rule for certain contributions of food inventory to S corporations (H.R. 4 extension of H.R. 3768 Sec.305, which modified IRC section 170(e)(3)).

To remedy this situation, a technical correction could be made to the language of H.R. 4, the Pension Protection Act of 2006.  The following wording would be added to H.R. 4 section 1202:

(c) In General – Section 170(e)(3)(C) of the Internal Revenue Code of 1986 (relating to special rule for certain contributions of inventory and other property) is amended by redesignating (iv) as (v) and inserting after (iii) the following new paragraph:

(iv) S corporation BASIS LIMITATION– In the case of food contributions from S corporations, limitations on individual shareholder’s deductions due to shareholder basis (section 1366(d)(1)) on stock and debt do not apply.  However, shareholder’s basis continues to be adjusted consistent with section 1367(a).’

The immediate impact of this change would mean that over 721 restaurants in 26 states would be eligible for this deduction for donating food, and therefore willing to donate. See the list below for additional details.

It is the intent of Congress to address the needs of Americans by providing valuable resources to charitable organizations. This technical correction would fulfill the original intent of the legislation by allowing S corporations to take advantage of this charitable deduction for contributions of food inventory.

Thank you for considering these comments. 

Subchapter S Corporation Shareholder Basis Example

The following example of how an S corporation treats income distributions and deductions is provided by Rage, Inc, a 100 restaurant Pizza Hut franchise.

 Average annual profit per restaurant$65,000

Shareholder Basis at the beginning of the year    $0

Shareholder Basis at the end of the year$65,000 (same as profit)

Dividend distribution at end of year $65,000

Taxable Income to Shareholders     $65,000

Shareholder basis after Dividend Distribution returns to $0

If a restaurant donates wholesome food that results in a deduction of $1,000 they are faced with two alternatives:

1.If the dividend (profit) distribution remains $65,000 this creates an actual dividend distribution of $64,000 and would trigger a $1,000 capital gain to the shareholder.

2.The dividend distribution to the shareholder is reduced to $64,000.

Both alternatives lack the incentive to donate food that is intended by Congress for all business entities.

For S corporation shareholders to receive the intended incentive for donating food the deduction must be basis neutral and exempt from the ‘at risk’ IRS rules.

Yum! Brand Franchisees Willing to Donate with S Corp Basis Cost Resolution

The passage of H.R. 4 has roused the interest of many Yum! Brands franchisees to donate food. A number of franchised operators of Pizza Hut, KFC and Long John Silver’s restaurants that have told Food Donation Connection they would start a Harvest food donation program if the issue with S corporation basis costs can be corrected. 

The following chart lists the number of new restaurants and the pounds of food donations that can be projected from these restaurants. The poundage projections are based on averages from Yum! Brands operated restaurants. These donations include cooked prepared pizza, breadsticks, chicken, fish, mashed potatoes, vegetables, biscuits and other items that have been properly saved, packaged and chilled or frozen.  The saved food would be picked up on a regular basis by local food banks and hunger relief agencies and used in the local community.

Yum! Brands has been donating surplus food from its restaurants since 1992.  In 2006, over 1,800 local hunger relief agencies received about 11.5 million pounds of prepared food from 4,100 Yum! Brands restaurants.  This food has been a tremendous help for these agencies, as donated food frees up their limited resources for other needs.

The list of 721 restaurants represents a broad spectrum of communities across 26 states and 140 congressional districts. These restaurants are operated by 15 different franchised groups.  Since the Yum! Brands system is over 75% franchised, resolution of the S corporation tax deduction issue will result in many more opportunities to encourage donation of wholesome prepared food.

Supplemental Sheet to H.R. 4 Technical Tax Comments

Food Donation Connection (FDC) administers the Harvest Program to coordinate the distribution of excess food from restaurants and other food service organizations to qualified local non-profit organizations that help people in need. FDC has coordinated prepared food donation programs since 1992 involving the donation of over 110 million pounds of quality surplus food. We currently coordinate donations from 7,000 restaurants to 3,500 non-profit agencies nationwide.