                             105 T.C. No. 28



                      UNITED STATES TAX COURT



 LUCKY STORES, INC., AND SUBSIDIARIES, Petitioner v. COMMISSIONER
OF INTERNAL REVENUE, Respondent



     Docket No.   4446-93.                     Filed December 19, 1995.



          P made donations of its surplus bread inventory to
     food banks which qualified as permissible charitable
     donees under sec. 170(e)(3)(A), I.R.C., and claimed
     charitable contribution deductions based upon full
     retail prices for the bread. R determined the fair
     market value to be approximately 50 percent of full
     retail prices. Held, fair market value of P's bread
     contributions redetermined.



     Eric W. Jorgensen, Grady M. Bolding, and Russell D. Uzes,

for petitioner.

     Alan Summers and Kevin G. Croke, for respondent.
     NIMS, Judge:    Respondent determined the following

deficiencies in petitioner's Federal income tax:

      Taxable Year   Ending (TYE)    Deficiency
          Jan. 30,   1983            $8,797,328
          Feb. 3,    1985             2,175,135
          Feb. 2,    1986            48,255,017


     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years at

issue, and all Rule references are to Tax Court Rules of Practice

and Procedure.

     This case involves a number of issues that are being handled

in proceedings that are separate from the one under present

consideration.    In this proceeding, the parties dispute the fair

market value of bakery products, unsold canned goods, and other

general merchandise contributed to food banks by petitioner

during the years in issue.

     On its Federal income tax returns for TYE February 3, 1985

and TYE February 2, 1986, the charitable contribution years in

issue, petitioner claimed deductions for the above charitable

contributions in the amounts of $576,258 and $909,055,

respectively.    The parties agree that the cost basis of the

contributed bakery inventory for purposes of section 170(e)(3)(B)

was $1,753,495 for TYE February 3, 1985, and $3,471,236 for TYE

February 2, 1986.

     For the taxable years in issue, petitioner concedes the

portions of its claimed deductions relating to its contribution
                              - 3 -


of unsold canned goods and other general merchandise.    The amount

of petitioner's charitable deduction that relates to unsold

canned goods and other general merchandise is $85,040 for TYE

February 3, 1985 and $198,286 for TYE February 2, 1986.

     For TYE February 3, 1985, petitioner concedes the charitable

deduction amount of $91,624 relating to its contributions from

its stores in Florida.

     After these concessions, the only contributions at issue are

the 4-day-old bread and other "aged" bakery goods from

petitioner's California and Nevada stores.   At the trial, the

parties focused almost entirely on the 4-day-old bread, so we

proceed upon the assumptions that the dollar amounts of the

donations of other bakery products were relatively insignificant,

and that our conclusion as to the value of the 4-day-old bread

will establish the method for valuing these items.

     The parties also appear to agree that (1) after petitioner's

concession of the portions of its claimed deductions for the

Florida donations and the donations of canned goods and other

general merchandise, (2) after adjusting the cost basis for the

remaining contributed bakery inventory, and (3) after the

reduction required under section 170(e)(3)(B), the amounts of

charitable deductions in dispute are $663,855 for TYE February 3,

1985 and $1,300,558 for TYE February 2, 1986, based on the retail
                               - 4 -


price of the contributed bakery inventory at the time of

contribution.

     Petitioner is a Delaware corporation.   At the time it filed

its petition, its principal place of business was Dublin,

California.

                         FINDINGS OF FACT

     Some of the facts have been stipulated.

     During the years in issue, petitioner operated bakeries in

northern and southern California that baked several varieties of

white and wheat bread, muffins and buns, and other bakery

products.   Petitioner sold these private label products in its

retail stores under the "Harvest Day" label.   In addition,

petitioner's bakeries purchased from unrelated bakeries other

bakery products, including tortillas, fried pies, doughnuts, and

dinner, gourmet, and brown and serve rolls, and other items, for

sale in its stores.

     Commercial bakers generally use one of three processes for

preparing commercially baked bread:    the sponge dough method, the

liquid sponge method and the liquid brew method.   These methods

differ significantly in terms of ingredients and baking times.

The method used affects the aroma, keeping quality, and texture

of the bread.   Petitioner used the sponge dough method during the

tax years at issue.   The sponge dough method is the most time-

consuming baking process of the three general methods.
                                - 5 -


Petitioner's baking process resulted in a high quality bread,

with good aroma, keeping quality, and texture.    Petitioner used

no preservatives or inhibitors in the manufacture of this bread.

     During the years in issue, petitioner closed its bread bags

with a flat plastic disc called a "Kwik Lok."    Petitioner date

stamped each Kwik Lok with a date that was 4 days after the

bakery delivered the bread to a specific store.    For example,

petitioner date stamped the Kwik Loks for bread delivered to a

store on September 16, 1985 (a Monday) with the date "Sep 20" (a

Friday).   The date was stamped on the Kwik Lok in very small

print.   The Kwik Lok contained no other words, such as "sell by,"

"fresh through," or the like.

     Petitioner delivered to its stores each morning, except on

Wednesdays and Sundays, bread and other bakery products that had

been baked either earlier the same morning or after 6 p.m. the

previous day.   Bakery products that had been acquired by

petitioner's bakeries were also delivered at the same time.

     Each of petitioner's stores determined its need for delivery

of fresh bread on a daily basis, based on amounts of bread on

hand and anticipated sales.   Each store transmitted its daily

order to the bakery, which then adjusted its production to

accommodate store orders.   Petitioner's goal was to supply each

store with 5 percent more bread on hand than was actually
                                - 6 -


expected to be sold.    In fact, store orders exceeding actual

sales were in the 6 percent range during the years in issue.

     Petitioner's in-store employees placed the newly delivered

bread either on the store shelves or in the stock room.    If the

bread were placed in the stock room, petitioner's employees later

placed it on the shelves.    Petitioner's bread shelves are

generally 20 inches deep.    In the front part of the shelf, a

store's merchandisers typically stacked loaves of bread two-high,

with the label, or "gusset," end facing out, and the date coded

Kwik Lok facing in.    In the back part of the shelf the loaves

were also stacked two-high, but in this case the loaves were

stacked parallel with the customer aisle.    The older bread would

be placed on the top layer; the newer bread on the bottom or in

the back.   Thus, the customer would have access to the oldest

bread first, unless he/she deliberately "dug through" and "read

the codes" to find the newest bread.    A customer could buy a loaf

of petitioner's bread on the third or fourth day after delivery,

take it home, put it in a bread box or leave it on the counter

for a week to 10 days, and still have a good, edible product.

The customer could further extend the life of the bread by

freezing it.

     Bread that sits on the store shelf for 5 days does not lose

nutritional value or taste, but does lose moisture, so the bread

firms up a little bit, losing some "squeezeability."    During the
                               - 7 -


years at issue, petitioner did not offer age-related discounts on

its bread or other bakery products.

     Petitioner regularly sold 4-day-old bread at full retail

price on Sundays during the years in issue.   In addition,

individual stores sometimes sold 4-day-old bread on other days of

the week.   This would happen if a store found itself with an

oversupply of bread inventory, in which case the store would cut

off its order for new bread, and sell the 4-day-old bread

instead.

     On the five bread delivery days (Monday, Tuesday, Thursday,

Friday, and Saturday) petitioner's policy was to remove any

unsold bread on the fourth day after delivery.   For example,

bread that was delivered on the morning of Monday, September 16,

1985 (and date stamped   "Sep 20", a Friday) if unsold, would be

removed on the morning of Thursday, September 19, 1985, before

the Thursday bread delivery.

     As to petitioner's Southern California stores, pick-up

vehicles from charitable organizations went to each store and

picked up the unsold bread and other bakery products on the same

day the unsold bread and other bakery products were removed from

the shelves.   As to petitioner's Northern California stores,

petitioner's delivery drivers loaded the removed bread and other

bakery products into the delivery trucks and returned them to

petitioner's San Leandro bakery.   Pick-up vehicles from
                              - 8 -


charitable organizations then picked up the unsold bread and

other bakery products at the bakery that same day.

     Petitioner incurred significant additional labor costs as a

result of its charitable food donation program (i.e., the labor

necessary to return the 4-day-old bread to the bakery).

     The following chart is based upon petitioner's self-baked

bread rotation schedule for the Northern California stores during

the years at issue.
                                                   - 9 -


                                                LUCKY STORES
                                               BREAD SCHEDULE

PRODUCT INFORMATION                              DELIVERY, PICKUP, DONATION INFORMATION

BREAD                  KWIK LOK    LAST SALE       BREAD        REMOVED       REMOVED
BAKED BETWEEN          COLOR       DAY PER         DELIVERED    BREAD         BREAD
                                   KWIK LOK        TO STORES    PICKED        PICKED UP
                                   DATE                                       UP FROM
                       BY
                                                                              STORES
                      CHARITABLE
                                                                             ORGANIZATIONS


6:00 pm Saturday       Brown       Friday          By 9:00 am   By 9:00 am    By 2:00 pm
to 5:00 pm Sunday                                  Monday       Thursday      Thursday

6:00 pm Sunday         Pink        Saturday        By 9:00 am   By 9:00 am    By 2:00 pm
to 5:00 pm Monday                                  Tuesday      Friday        Friday

6:00 pm Tuesday        White       Monday          By 9:00 am   By 9:00 am    By 2:00 pm
to 5:00 pm                                         Thursday     Monday        Monday
Wednesday

6:00 pm Wednesday      White       Tuesday         By 9:00 am   By 9:00 am    By 2:00 pm
to 5:00 pm                                         Friday       Monday        Monday
Thursday

6:00 pm Thursday       Green       Wednesday       By 9:00 am   By 9:00 am    By 2:00 pm
to 5:00 pm Friday                                Saturday       Tuesday       Tuesday




    As the chart reveals, white Kwik Loks were used for both Thursday

    and Friday deliveries.             Each of the other three delivery days had

    its own Kwik Lok color.

         Petitioner's Southern California stores generally adhered to the

    same schedule as the Northern California stores, except that

    petitioner's Southern California stores used different colored Kwik

    Loks and the charitable organizations picked up the bread at the

    Southern California stores rather than at the bakery.

         More than 75 percent of the donated bread products consisted of

    4-day-old bread, and the remaining percentage consisted of
                                - 10 -


tortillas, fried pies, doughnuts, bagels, brown and serve rolls and

English muffins.

   Petitioner began its policy of donating unsold 4-day-old bread

and claiming a deduction based on its full retail price in 1983.

Prior to 1983, petitioner removed, or "pulled," bread from its

shelves two days a week--Mondays and Thursdays.   Prior to 1983,

petitioner offered its pulled bread for sale, which included three,

4- and 5-day-old bread (depending on the pull day), on discount

racks.   Bread that did not sell after being on the discount rack for

24 hours was either destroyed or donated.   Under petitioner's pre-

1983 policy the pulled bread was discounted approximately 50

percent, for one day only, before it was discarded or donated.

   Regional and national bakers, such as Continental (Orowheat),

Kilpatrick's, and Campbell-Taggertt (Wonder Bread), which have a

substantial share of the California pan bread market, sell their pan

bread, after that bread is pulled from the retail selling shelves of

supermarkets and other retailers, at thrift or bakery outlets at

discounts ranging from 20 to 70 percent.

   Petitioner's donations of bakery products to charitable

organizations were "qualified contributions" of inventory under

section 170(e)(3)(A) and section 1.170A-4A(b), Income Tax Regs.    The

retail price of the contributed bakery inventory for purposes of

section 170(e)(3)(B) was $3,081,204 for TYE February 3, 1985, and

$6,072,353 for TYE February 2, 1986.
                                   - 11 -


                                  OPINION

   Neither party has brought to our attention any prior case

involving the application of section 170(e)(1) and (3) to charitable

contributions of rapidly perishable inventory, and we know of none.

However, Rev. Rul. 85-8, 1985-1 C.B. 59 deals with the application

of section 170(e)(3) to charitable contributions of dated products,

and is discussed infra.

   The relevant provisions of section 170(e), in effect for the

years in issue, are as follows:

    (e) Certain Contributions of Ordinary Income and Capital Gain
Property.--

       (1) General Rule.--The amount of any charitable
   contribution of property otherwise taken into account under this
   section shall be reduced by the sum of

            (A) the amount of gain which would not have been long-
        term capital gain if the property contributed had been sold
        by the taxpayer at its fair market value (determined at the
        time of such contribution), and

                *   *     *   *     *       *   *

       (3) Special Rule for Certain Contributions of Inventory and
   Other Property.--

            (A) Qualified Contributions.--For purposes of this
        paragraph, a qualified contribution shall mean a charitable
        contribution of property described in paragraph (1) or (2)
        of section 1221, by a corporation (other than a corporation
        which is an S corporation) to an organization which is
        described in section 501(c)(3) and is exempt under section
        501(a) (other than a private foundation, as defined in
        section 509(a), which is not an operating foundation, as
        defined in section 4942(j)(3)), but only if--

                (i) the use of the property by the donee is related
            to the purpose or function constituting the basis for
            its exemption under section 501 and the property is to
                                - 12 -


             be used by the donee solely for the care of the ill, the
             needy, or infants;

                 (ii) the property is not transferred by the donee
             in exchange for money, other property, or services;

                 (iii) the taxpayer receives from the donee a
             written statement representing that its use and
             disposition of the property will be in accordance with
             the provisions of clauses (i) and (ii); and

                 (iv) in the case where the property is subject to
             regulation under the Federal Food, Drug, and Cosmetic
             Act, as amended, such property must fully satisfy the
             applicable requirements of such Act and regulations
             promulgated thereunder on the date of transfer and for
             one hundred and eighty days prior thereto.

       (B) Amount of Reduction.--The reduction under paragraph
   (1)(A) for any qualified contribution (as defined in
   subparagraph (A)) shall be no greater than the sum of--

                 (i) one-half of the amount computed under paragraph
             (1)(A) (computed without regard to this paragraph), and

                 (ii) the amount (if any) by which the charitable
             contribution deduction under this section for any
             qualified contribution (computed by taking into account
             the amount determined in clause (i), but without regard
             to this clause) exceeds twice the basis of such
             property.


   Thus, section 170(e)(1) limits the deduction for charitable

contributions of ordinary income property to the basis of the

property.   However, section 170(e)(3) allows a limited deduction in

excess of basis for charitable contributions of inventory and other

property to qualified donees.   (As previously stated, we have found

(based upon the parties' stipulation) that petitioner's

contributions were qualified contributions under section

170(e)(3)(A)).   If the inventory contributed to qualified donees has
                                - 13 -


appreciated in value, the reduction of the deduction otherwise

required under section 170(e)(1) is limited to one-half of the

ordinary income that would be recognized on a sale of the property

for its fair market value, except that the deduction may not exceed

twice the taxpayer's adjusted basis for the property.   See Bittker &

Lokken, Federal Taxation of Income, Estates and Gifts, par. 35.2.2.,

at 35-25 (2d ed. 1990).

   Section 170(e)(3) was added to the Internal Revenue Code by

section 2135(a) of the Tax Reform Act of 1976, Pub. L. 94-455, 90

Stat. 1520, 1928.   The staff report notes that under prior law

(section 170(e) before amendment) the donor of appreciated ordinary

income property (property the sale of which would not give rise to

long-term capital gain) could deduct only his/her basis in the

property rather than its full fair market value.   The purpose of

section 170(e) as originally enacted in 1969 was to prevent high-

bracket taxpayers from donating substantially appreciated ordinary

income property to charities so as to be better off after tax than

if they had simply sold the property.    Staff of Joint Committee on

Taxation, General Explanation of the Tax Reform Act of 1976, at 672

(J. Comm. Print 1976), 1976-3 C.B. (Vol. 2) 1, 684.

   The General Explanation goes on to explain the reasons for the

change:

       The rule that the donor of appreciated ordinary income
   property could deduct only his basis in the property
   effectively eliminated the abuses which led to its
   enactment; however, at the same time, it has resulted in
                               - 14 -


   reduced contributions of certain types of property to
   charitable institutions. In particular, those charitable
   organizations that provide food, clothing, medical
   equipment, and supplies, etc., to the needy and disaster
   victims have found that contributions of such items to those
   organizations were reduced.

       Congress believed that it was desirable to provide a
   greater tax incentive than in prior law for contributions of
   certain types of ordinary income property which the donee
   charity uses in the performance of its exempt purposes.
   However, Congress believed that the deduction allowed should
   not be such that the donor could be in a better after-tax
   situation by donating the property than by selling it.
   [Id., 1976-3 C.B. (Vol. 2) at 684-685.]


The Committee Report thus reflects Congressional intent to allow a

modified deduction, in limited situations, consisting of the

taxpayer's basis plus a fraction of the unrealized ordinary income

inherent in the donated property, but subject to an overall

limitation of twice adjusted basis.

   Section 1.170A-1(c), Income Tax Regs., deals with the valuation

of a charitable contribution in property.   Section 1.170A-1(c)(2)

and (3) provide:

            (2) The fair market value is the price at which the
        property would change hands between a willing buyer and
        a willing seller, neither being under any compulsion to
        buy or sell and both having a reasonable knowledge of
        relevant facts. If the contribution is made in property
        of a type which the taxpayer sells in the course of his
        business, the fair market value is the price which the
        taxpayer would have received if he had sold the
        contributed property in the usual market in which he
        customarily sells, at the time and place of the
        contribution and, in the case of a contribution of goods
        in quantity, in the quantity contributed. The usual
        market of a manufacturer or other producer consists of
        the wholesalers or other distributors to or through whom
                                 - 15 -


        he customarily sells, but if he sells only at retail the
        usual market consists of his retail customers.

            (3) If a donor makes a charitable contribution of
        property, such as stock in trade, at a time when he could
        not reasonably have been expected to realize its usual
        selling price, the value of the gift is not the usual
        selling price but is the amount for which the quantity of
        property contributed would have been sold by the donor at
        the time of the contribution.


   In the case before us, petitioner argues that it could have sold

to its regular customers at full retail prices the same quantity of

bread that it donated to food banks.      Respondent argues that the

donated bread was surplus inventory that petitioner could have sold

only at a 50-percent discount, which would have brought the selling

price below petitioner's adjusted basis.

   Section 1.170A-1(c)(2), Income Tax Regs., after reciting the

familiar general definition of "fair market value," provides the

method for establishing fair market value in the case of donated

inventory.   Under the regulation, the fair market value is the price

which the taxpayer would have received "if he had sold the

contributed property in the usual market in which he customarily

sells," in the quantity contributed.      Sec. 1.170A-1(c)(2), Income

Tax Regs.    If the taxpayer sells only at retail (as here), the

"usual market" consists of the taxpayer's retail customers.

   Section 1.170A-1(c)(3), Income Tax Regs., limits the scope of

the preceding section in those cases where it cannot be established

that the taxpayer could have realized his usual selling price.      In
                                - 16 -


this situation, the value of the gift is not the usual selling

price, but rather the amount for which the quantity of property

contributed could have been sold at the time of contribution.

   It is our task in this case to match the facts against the set

of hypotheses specified by the regulations so as to determine the

fair market value of petitioner's donated bread.    Fair market value

is not to be determined in a vacuum.     To the contrary, it must be

determined with respect to the particular property in question at

the time of contribution, subject to any conditions or restrictions

on marketability.   Cooley v. Commissioner, 33 T.C. 223, 225 (1959),

affd. per curiam 283 F.2d 945 (2d Cir. 1960).    Viewing the approach

taken by the parties in presenting this case, we can perceive no

principled basis upon which we could reach a compromise value that

lies somewhere between petitioner's claim of full retail price, and

respondent's claim of 50 percent of full retail price, nor do we

think it would be appropriate to do.

   We think respondent's proposed application of the regulations in

question is unduly restrictive and inconsistent with Congressional

intent.   In the years at issue, petitioner contributed about 6

percent of its private label bread production to food banks.

Contributions of excess inventory that is not obsolete could seldom

be valued at full retail price under respondent's view of the

regulations because in most cases if a taxpayer could have sold

contributed excess inventory at the time and in the quantity
                                - 17 -


contributed, it would have done so.      In this case, petitioner

deliberately overproduced its private label bread so to protect its

stores against the possibility of empty shelves.      We do not believe

it should be penalized for doing so.

   The parties focus mainly on the characteristics of the donated

bread.   Was there something about the 4-day-old bread that made it

unsalable in petitioner's stores at full retail price?      Petitioner's

bakery delivered bread to the stores every day except Wednesdays and

Sundays.   Any unsold bread was removed from the shelves at the

beginning of the fourth day after delivery, except for bread

delivered on Thursdays, which was removed on Mondays.

   The bread wrappers were closed with color coded Kwik Loks

indicating the so-called "pull date."      Each delivery day of the week

had its own color code except for Thursdays and Fridays.      For both

of these days, white Kwik Loks were used indicating a Monday pull

date for both.   While the white Kwik Loks for bread delivered on

Thursday and Friday bore different date codes, the date codes were

significant only to someone deliberately seeking to distinguish

between Thursday and Friday bread.    The date codes were of no

significance to the store merchandisers, who relied on the colors on

the Kwik Loks to determine pull dates.      (The date codes could

presumably have had significance to the store operators if week-old

bread somehow got scrambled with fresh bread; e.g., the date codes
                                - 18 -


would have been useful to distinguish between Monday's bread from

Week One and Monday's bread from Week Two.)

   The bread donated to the food banks was "4-day" bread except on

Mondays, when the donation was a combination of 4- and 5-day bread

(a combination of Thursday and Friday deliveries).   The parties

focus their attention on Sunday sales, since that was the day on

which sales of 4-day bread were most likely to be made.   Respondent

argues that petitioner has not proved that any Thursday (4-day)

bread was sold, and that even if some 4-day bread was sold, the

quantity sold was insignificant.

   Petitioner has no records that would establish the quantity of

Thursday bread sold on Sundays, or delivered to food banks on

Mondays.   The maintenance of such records would have required the

reading and counting of the minutely printed date codes early on

Sunday and Monday mornings, and would have served no apparent

corporate purpose.

   When the store merchandisers periodically stocked the shelves,

they placed the older bread on the top layer in the front of the

shelves, where the older bread was more likely to be sold than the

newer bread that was placed under the older bread or in the back of

the shelves, perpendicular to the bread in front whose labels faced

the customers.   But the Thursday and Friday bread eventually were

intermingled, since both bear white Kwik Loks and the store

merchandisers are indifferent to the date codes, which the Court has
                                - 19 -


found, based upon actual observation of a sample Kwik Lok, to have

been obscurely printed and hard to read.   At trial the Court

observed that petitioner's own bakery chief, Alvin Lewis, had

trouble reading the date code on the specimen in evidence without

adjusting his glasses.

   It also appears unlikely that many customers would have rejected

the Thursday bread merely on the basis of "squeezeability".     Mr.

Lewis testified that while "one day" bread is distinctive in feel

from 3- and 4-day bread, since it contains more moisture, "from the

third and fourth [day] you [can] probably never tell any

difference."

   Respondent argues that even admitting for the sake of argument

that petitioner sold Thursday--4-day--bread on Sundays, the amount

sold was small because Friday and Saturday deliveries intervened,

and the quantity of Thursday bread remaining for Sunday sale

necessarily had to be small.   Referring to the phrase "quantity

contributed" in section 1.170A-1(c)(2), Income Tax Regs., respondent

seeks to compare unfavorably the quantity of 4-day bread sold on

Sunday to the quantity of 4-day bread petitioner normally

contributed on other days.   We do not think this argument holds

water.   Obviously, the amount of Thursday bread available for sale

on Sundays, after Friday and Saturday sales of Thursday bread had

depleted the supply, would be less than the amount of 4-day bread

donated to the food banks on other days.   The significant fact is
                                - 20 -


that 4-day bread was sold on Sundays at the usual retail price, not

the quantity that was sold, which necessarily had to be smaller than

the Friday and Saturday bread remaining on the shelves.

   Respondent asserts that it is "industry practice" to pull bread

after 3 days and that other grocery chains sell it at a 50- percent

discount on discount racks or in thrift stores.   Even though

petitioner chose to do otherwise, respondent argues, the industry

practice establishes the price, and therefore the fair market value,

at which petitioner could have sold the donated bread at the time of

the contribution.   Respondent points to section 1.170A-1(c)(3),

Income Tax Regs., which limits the fair market value of contributed

inventory to the amount for which the quantity of property in

question could have been sold at the time of the contribution.

Petitioner disputes respondent's assumption as to what is industry

practice.   While respondent's argument has some force on this point,

we do not believe industry practice, such as it is, establishes the

price for which petitioner could have sold the donated bread.

   First, the record does not establish when other supermarket

chains pulled their bread for sale at discount.   Mr. Lewis testified

that he was uncertain what practice petitioner's competitors

followed regarding the time bread was left on the shelf, although he

believed that during the years in issue one of the competitors,

Alpha Beta, left its bread on its shelves a little longer than did

petitioner.   He conceded, however, that petitioner makes an effort
                               - 21 -


to remain abreast of the competition, so it stands to reason that

petitioner would try to avoid getting a reputation for selling stale

bread by leaving it on the shelves longer than its competition did.

   The parties stipulated that regional and national bakers that

have a substantial share of the California pan bread market sell

their bread, after it is pulled from the shelves, at thrift or

bakery outlets at discounts ranging from 20 to 70 percent.

Undoubtedly petitioner could have sold its bread at thrift outlets

had it chosen to do so, but this fact does not establish that

petitioner could not sell its 4-day bread at regular retail prices.

At best it merely tends to show that petitioner could have sold

"old" bread at a discount when it had in effect announced to the

public that the bread being offered at a discount was old.

   Respondent points to the general definition of fair market value

contained in the first sentence of section 1.170A-1(c)(2), Income

Tax Regs., and argues that 4-day bread could not have been sold to

"fully informed consumers," that common sense forces the conclusion

that the Sunday sales were the product of "ignorance on the part of

the customer," and "compulsion; i.e., the older bread was all that

was left and the customer had no other choice."   But by focusing

solely on the first sentence of the regulation, as respondent has

done, it is necessary to disregard the rest of the regulation which,

as we have already pointed out, provides the specific method by

which fair market value is determined in the context of contributed
                                  - 22 -


inventory.   Accordingly, generalized concepts such as respondent

would have us apply must give way in this instance to specific

rules.

   Rev. Rul. 85-8, 1985-1 C.B. 59, as noted above, deals with

charitable contributions of dated products.      Neither party

discusses, or even cites, this ruling, but for completeness we deem

it necessary to consider it.    Revenue Rulings are not accorded the

force of precedent in the Tax Court.       Rather, they represent the

position of the Commissioner on a given issue, and we deal with Rev.

Rul. 85-8 in that light.     Estate of Lang v. Commissioner, 64 T.C.

404, 406-407 (1975), affd. in part and revd. in part on other

grounds 613 F.2d 770 (9th Cir. 1980).

   Rev. Rul. 85-8 holds that when a corporation donates products in

inventory to a charitable organization shortly before the products'

expiration date, the amount allowable as a charitable contribution

deduction is equal to the taxpayer's basis in the property plus one-

half of the unrealized appreciation, not to exceed twice the

taxpayer's basis in the property.    The ruling, however, presupposes

the fact that we are charged with determining, namely, the amount of

"unrealized appreciation."    We quote the "facts" of the ruling as

follows:


       Corporation X, which is not an S corporation as defined
   in section 1361(a)(1) of the Internal Revenue Code, is a
   pharmaceutical manufacturer. X manufactures products that
   are subject to the requirement that an "expiration date" be
                                 - 23 -


   imprinted on the product or its container. The products may
   not be legally sold after the expiration date.

       Shortly before the expiration date of products that
   ordinarily were sold by X for 10x dollars, X made a qualified
   contribution of such products within the meaning of section
   170(e)(3)(A) of the Code. On its Federal income tax return, X
   claimed a deduction of 10x dollars for this contribution. At
   the time of the donation, if X had sold the products in the
   usual market in which it sold such products, X would have
   realized only 5x dollars. X could not reasonably have been
   expected to realize its usual selling price for the products due
   to the imminence of the expiration date after which the products
   could not be sold legally. X's basis in the products was 1x
   dollars. [Rev. Rul. 85-8, 1985-1 C.B. at 59.]


   It will be seen that under the postulated facts an "expiration

date" was required, presumably by law, and the products could not be

legally sold after the expiration date.   In the case before us an

expiration date was not a legal requirement, nor is there any legal

impediment related to the expiration date.   We recognize, of course,

that market forces would no doubt impose a practical impediment to

retail sales after the date on the Kwik Lok, except at a substantial

discount at thrift stores or on discount racks.

   The ruling assumes that because the expiration date was

imminent, "X could not reasonably have been expected to realize its

usual selling price ".   Id.   We think our case is different.   Here,

we are dealing with donations of rapidly perishable inventory which

petitioner had on hand for sale for a very short time, so that the

bread donations on the pull date--the day before the date code

expiration date--have to be viewed in a context different from that

of the ruling.   This was not inventory which had been on hand for a
                                - 24 -


considerable period of time before it was donated.   Instead, it was

very much "fast in, fast out," inventory.   Consequently, while we do

not necessarily quarrel with the Commissioner's conclusions in Rev.

Rul. 85-8, based upon its specific facts, we do not believe the

revenue ruling suggests that similar conclusions necessarily need be

reached in this case.

   Petitioner retained Professor Daniel L. Rubinfeld to furnish an

expert opinion as to the value of the 4-day-old bread that

petitioner donated.   Professor Rubinfeld teaches law and economics

at the University of California at Berkeley and is a principal with

the Law and Economics Consulting Group.   His expert report is a

statistical analysis based upon a physical count of petitioner's

bread sales over a 2-week period in six representative stores.

Professor Rubinfeld concludes from his statistics that, if bread is

only a few days old, consumers are indifferent to its age and will

pay full retail price for it.

   Neither party addresses Professor Rubinfeld's statistical

analysis on brief (although respondent does attack certain perceived

defects in the "survey" upon which it is based).   Professor

Rubinfeld's conclusion is founded upon certain statistical averages

referred to in his report.   This report, however, fails to explain

why these statistical averages are reliable estimates; the standard

deviations of these averages are left uninterpreted.   Without some

assistance from the parties, therefore, we are unwilling to
                                  - 25 -


undertake the kind of detailed analysis that would permit us to

determine whether Professor Rubinfeld's analysis supports the

opinion he expresses or rejects it.        We have therefore not relied

upon his report in deciding this case.

   Our review of the facts convinces us that on Sundays, and

occasionally on other days, petitioner could and did sell 4-day

bread at regular retail prices, and in sufficient quantities so as

to constitute meaningful sales.    Congress, by enacting section

170(e)(3), intended to encourage donations of the type in question

for the direct use of a special and narrowly limited class of

recipients; namely, the ill, the needy, and infants.       Section

170(e)(3)(A).   As the Conference Committee Report quoted above

notes, before the addition of section 170(e)(3), contributions of

food, clothing, medical equipment, and supplies for the benefit of

such persons had dried up as a result of the limitations imposed by

section 170(e)(1).   We think section 170(e)(3) and sections 1.170A-

1(c)(2) and (3), Income Tax Regs., should not be interpreted in such

a restrictive way as to unnecessarily inhibit donations of the type

Congress meant to encourage, and certainly petitioner's bread

donations are of that type.

   Furthermore, we again note that Congress was careful to draft

section 170(e)(3)(B) in such a way as to prevent the situation where

a taxpayer would be better off, after tax, by donating the property

than it would have been if it had sold the donated property and
                                 - 26 -


retained all the after-tax proceeds of the sale.   Staff of Joint

Comm. on Taxation, General Explanation of the Tax Reform Act of

1976, at 672 (J. Comm. Print 1976), 1976-3 C.B. (Vol. 2) at 684.

Thus, petitioner's donations do not present an opportunity for the

type of tax avoidance unintended by Congress.

   For the foregoing reasons, we agree with petitioner that its

bakery product donations to food banks should be valued at full

retail prices, and we so hold.

   At the trial, petitioner sought to have a letter stipulated into

evidence to which respondent raised a hearsay objection.     See Fed.

R. Evid. 801(a).   The letter was addressed to a revenue agent, and

was obtained by petitioner from respondent in the course of informal

discovery.   Petitioner did not call the author of the letter as a

witness, nor did petitioner attempt to account for his

unavailability.    The Court reserved judgment as to the admissibility

of the letter.    After further consideration, the Court now rules

that respondent's objection is sustained.   Informal discovery is

used, in part, to lead the discovering party to admissible evidence,

not to automatically validate it.    Zaentz v. Commissioner, 73 T.C.

469, 471-472 (1979).

   To reflect the foregoing, and to give effect to settled issues

and the issue remaining to be resolved,



                              An appropriate order will be
       - 27 -


issued directing entry of decision

under Rule 155 upon completion of

proceedings resolving the remaining

issue in this case, and sustaining

respondent's hearsay objection.
