When answering, please cite specifics. Which section of the tax code deals with this abuse? What cases have been prosecuted?

This SO answer describes an abusive tax scheme involving non-cash assets being donated at inflated values. How does the tax code prevent this?

If you have a software company, that can produce a box of software for $5, but the box sells for $100. (You have to make a profit and cover development costs)

But then you give these boxes to charity, that is a cost of $5 each and a tax rebate of $100 x 40% = $40. A profit of $35 per donation of $5.

Which was critiqued as follows:

Critique: This sounds like an intentional abuse of the system. The IRS often investigates schemes where non-cash assets are donated for an inflated "full value". – Chris W. Rea Apr 7 '12 at 16:24

For clarity: The question is: How does the tax code prevent this? Sub questions to guide your answer are: Which section of the tax code deals with this abuse? What cases have been prosecuted?

  • 2
    I'm voting to close this question as off-topic because it's not a question.
    – Mike Scott
    Nov 15 '16 at 20:18
  • I see four questions Nov 15 '16 at 20:19
  • With the recent edit, two of those questions are asked twice. Nov 15 '16 at 20:20
  • @NathanL: For clarity, I repeated the question (and sub-questions) at the end because apparently some people are missing them when they are at the top.
    – Mowzer
    Nov 15 '16 at 20:23
  • Also voting to close. It isn't a question relevant to "personal" finance. Nov 15 '16 at 20:25

A rather good IRS paper on the topic states that a donation of a business' in-kind inventory would be

Under IRC 170(e)(1), however, the fair market value must be reduced by the amount of gain that would not be long-term capital gain if the property had been sold by the donor at the property's fair market value (determined at the time of the contribution). Under this rule, deductions for donated inventory are limited to the property's basis (generally its cost), where the fair market value exceeds the basis.

There are references to IRC regulations in a narrative context you may find helpful:

  • a deduction under IRC 170(e)(3)
  • see Reg. 1.170A-4A(c)(2)-(3), regarding adjustments
  • General guidance on determining fair market value of donated property is found in the regulations. Reg. 1.170A-1(c)(2) and (3) provide ...

This paper goes on for 16 pages describing detailed exceptions and the political reasons for the exceptions (most of which are concerned with encouraging the donation of prepared food from restaurants/caterers to hunger charities by guaranteeing a value for something that would otherwise be trashed valueless); and a worked out example of fur coats that had a cost of goods of $200 and a market value of $1000.

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