The Early Years: 1917-1924
To promote private philanthropy, Congress introduced a charitable contribution deduction in the tax code, initially established by the War Income Tax Revenue Act of 1917.
Taxpayers can deduct contributions made within the year to organizations dedicated to religious, charitable, scientific, or educational purposes, as well as to societies aimed at preventing cruelty to children or animals These deductions are limited to 15% of the taxpayer's taxable net income, calculated without considering this deduction To qualify, these contributions must be verified according to regulations set by the Internal Revenue Commissioner and approved by the Secretary of the Treasury.
Since its original enactment in 1917, Congress has significantly revised the rules governing charitable contributions, with some amendments being minor while others have introduced major changes to the statutory provisions.
In a brief timeframe, Congress considered modifications to the 15% ceiling on charitable contributions Although these changes were not enacted, the Senate Finance Committee, in the Revenue Act of 1924, suggested removing the ceiling for taxpayers who donated over 90% of their net income in the current and previous ten years This repeal could have allowed taxpayers to significantly reduce their tax liability through extensive charitable giving However, the Senate Finance Committee believed that consistent large contributions over time would result in less tax abuse.
Tax Period 1938-1958
The Revenue Act of 1938 introduced important modifications to the rules governing charitable contribution deductions A key change was that Congress allowed taxpayers to claim the deduction only if they had made the payment during the tax year.
21 War Income Tax Revenue Act of 1917, ch 63, § 1201(2), reprinted in J.S SEID-
MAN, SEIDMAN's LEGISLATIVE HISTORY OF FEDERAL INCOME TAx LAws, 1938-1861, at 944 (1938).
The legislative history of this proposal indicates that its purpose is to significantly exempt individuals from income taxation if they consistently donate nearly their entire income to charitable organizations.
In the 20031 taxable year, regardless of the accounting method used, an amendment was introduced to clarify the eligibility for a charitable contribution deduction when a taxpayer pledges a donation, even if the payment occurs in a subsequent taxable year Prior to this amendment, the statute did not specify when a taxpayer could claim the deduction if the charitable pledge was made within the taxable year but the payment was deferred to a later year.
Congress revised the 15% ceiling on charitable contribution deductions with the Individual Income Tax Act of 1944, shifting the measurement from "net taxable income" to "adjusted gross income." This change allowed for a higher allowable deduction, as adjusted gross income could surpass net taxable income due to the inclusion of various deductions For instance, with an adjusted gross income of $25,000, a taxpayer could claim a maximum deduction of $3,750 In 1952, Congress further increased the maximum deduction from 15% to 20% of adjusted gross income, enhancing the benefits for taxpayers.
In 1954, Congress renumbered the charitable contribution deduc- tion provisions to the current § 170 Congress also increased the per- missible maximum deduction that could be claimed by individual
24 Revenue Act of 1938, [1939] 1 Stand Fed Tax Serv (CCH) 328.
25 Comm Reports on 1938 Bill, [1939] 1 Stand Fed Tax Serv (CCH) 328, at 1889-90.
In the case of Mann v Comm'r, 35 F.2d 873 (D.C Cir 1929), the court ruled that a cash basis taxpayer could not deduct accrued charitable pledges, indicating that such deductions are unlikely even for accrual basis taxpayers Conversely, in the Appeal of Musselman, 1 B.T.A 41 (1924), it was determined that accrual basis taxpayers can deduct charitable contributions in the year the payment is promised, rather than in the year the actual payment is made.
27 Individual Income Tax Act of 1944, [1944] 1 Stand Fed Tax Serv (CCH) $ 323, at 2055.
30 [1952] 2 Stand Fed Tax Rep (CCH) 328, at 6005 (Aug 13, 1952) (citing "P.L.
Taxpayers can deduct charitable contributions up to 30% of their adjusted gross income, with an additional 10% deduction available if the contribution is made directly to qualifying organizations, such as churches, educational institutions, or hospitals This additional deduction does not apply to payments made to trusts for the benefit of these organizations The intent behind this statutory amendment was to promote increased donations to help offset the rising operational costs of these entities, marking a significant shift in tax policy by providing more favorable deductions for certain charitable contributions.
In 1958, Congress amended § 170(b) to allow taxpayers to deduct disallowed charitable contribution amounts as a net operating loss carryover under § 172 Additionally, the amendments were designed to prevent double deductions for both interest and charitable contributions Specifically, if a charitable organization received property subject to a liability, the taxpayer's charitable contribution deduction would be reduced by any interest paid after the contribution that was linked to that liability.
Tax Period 1960-1969
In 1960, Congress amended the charitable contribution provisions to allow a deduction of up to $50 per month for taxpayers who main-
35 Technical Amendments Act of 1958, Pub L No 85-866, § 11, 72 Stat 1606, 1609
While this amendment provided the carryover to corporations only, a later amendment provided the carryover to individuals Revenue Act of 1964, Pub L.
36 Technical Amendments Act of 1958, Pub L No 85-866, § 12, 72 Stat 1606, 1610
When a recipient acquires property subject to a liability or mortgage, they are not personally responsible for repaying that debt; in cases of secured obligations, creditors may pursue foreclosure However, if the recipient explicitly assumes the liability, they become personally liable, allowing creditors to take legal action against the recipient's assets and employ various collection methods.
38 Technical Amendments Act of 1958, Pub L No 85-866, § 12, 72 Stat 1606, 1610
Taxpayers who support elementary, middle, or high school students within their household can benefit from deductions on maintenance expenditures made under a written agreement with a charitable organization Following a 1962 amendment, Congress mandated that any charitable contribution deduction be reduced by the amount equivalent to potential § 1245 gain if the property were sold at fair market value Additionally, Congress expanded the list of nonprofit organizations eligible for an extra 10% deduction to include foundations associated with certain state colleges and universities.
In 1964, Congress amended § 170 to expand the list of organizations eligible for a 30% limitation on charitable contributions, including those that receive significant support from government units or the public Additionally, an unlimited charitable contribution deduction was introduced for taxpayers donating over 90% of their taxable income for the current year and at least eight of the previous ten years A similar proposal had been introduced by the Senate Finance Committee in 1924 but was not enacted at that time.
The Tax Reform Act of 1969 marked a significant amendment to charitable contribution provisions, as Congress sought to address concerns that high-income taxpayers were not contributing their fair share of taxes At that time, there were 154 taxpayers with adjusted gross incomes over $200,000 and 21 earning over $1 million who paid no income tax at all This led Congress to believe that many wealthy individuals were exploiting certain transactions to minimize their tax liabilities.
39 Charitable Contribution Amendments of 1960, Pub L No 86-779, § 7, 74 Stat.
41 Generally, under § 1245 of the Code, where a taxpayer disposes of certain depre- ciable property, gain that is attributable to depreciation must be recharacterized as ordinary income See I.R.C § 1245(a)(1).
42 Revenue Act of 1962, Pub L No 87-834, § 13(d), 76 Stat 960, 1034.
43 Charitable Contribution Amendments of 1962, Pub L No 87-858, § 2, 76 Stat.
44 Revenue Act of 1964, Pub L No 88-272, § 209, 78 Stat 19, 43.
45 [1964] 2 Fed Taxes (Prentice-Hall, Inc.) 12,034, at 12,038 (Jan 1, 1964).
46 See supra note 22 and accompanying text.
In response to perceived tax abuse, Congress implemented changes to charitable contribution deductions, notably phasing out the unlimited deduction by 1974, capping it at 50% of a taxpayer's adjusted gross income This change followed the 1969 Act, which raised the deduction ceiling from 30% to 50% and included contributions to operating foundations Additionally, the Act introduced reforms for donations of appreciated property, limiting deductions to 30% of the contribution base unless taxpayers opted to base their deduction on the property's adjusted basis, in which case the limit was set at 50% These reforms aimed to curb taxpayer abuse associated with claiming deductions for appreciated property donations.
Under the Tax Reform Act of 1969, taxpayers must reduce their charitable contribution deductions by any short-term capital gains or ordinary income that would have been recognized if the property had been sold at its fair market value.
50 Id at 1653 During taxable year 1966, itemized deductions totaled $130 million and 116% of the adjusted gross income Id
51 1 A PRACTITIONER'S GUIDE TO THE TAX REFORM ACT OF 1969, at 74 (Miriam I.R. Eolis & Joseph S Robinson eds., 1970) [hereinafter PRACTITIONER'S GUIDE].
52 The contribution base is defined as the taxpayer's adjusted gross income less any net operating loss carryback I.R.C § 170(b)(1)(f) (2002).
The Tax Reform Act of 1969, specifically under Public Law No 91-172, defines an "operating foundation" in § 4942(j)(3) of the Internal Revenue Code as a private foundation that allocates at least 85% of its income directly towards the active pursuit of its organizational purpose.
54 Tax Reform Act of 1969, Pub L No 91-172, sec 201(a)(1)(B), § 170(b)(1)(D), 83 Stat 487, 551.
In 1966, nearly $79 million of the total $130 million in itemized deductions was attributed to charitable contributions, as reported in H.R REP No 91-413 (1969) Of these charitable deductions, 70% stemmed from property contributions, predominantly consisting of untaxed appreciated property.
In 2003, a new provision was established regarding the donation of appreciated property to charitable organizations, specifically targeting assets held for six months or less, § 306 stock, and inventory This change limited the charitable contribution deduction to the taxpayer's cost basis unless the taxpayer chose to recognize the gain on the transfer The primary aim was to prevent businesses from misclassifying donations as charitable contributions to receive deductions based on the fair market value, instead of claiming them as business expenses deductible at cost Following this amendment, there was consistent treatment of charitable contributions and business expense deductions.
The case of Bialo v Commissioner highlights the tax evasion that Congress aimed to prevent In this case, the taxpayer owned over 86% of a closely-held corporation, which distributed nonvoting preferred stock as a dividend while having earnings and profits Shortly after receiving the stock, the taxpayer donated it to a charitable trust, intending to maintain control over the corporation while benefiting from a charitable deduction The court noted the abuse in this transaction, stating that the taxpayer sought to utilize the corporation's earnings to make a charitable contribution without recognizing dividend income or losing corporate control An accountant involved in the transaction acknowledged the potential tax savings, illustrating the complexities and potential pitfalls of such arrangements.
57 1 PRACTITIONER's GUIDE, supra note 51, at 72.
58 Today, a short-term capital gain arises when the taxpayer disposes of an asset held for no more than one year rather than six months I.R.C § 1222(1) (2002).
Section 306 of the Code mandates that taxpayers recognize ordinary gain income, rather than capital gain income, when disposing of stock received in a corporate stock distribution, which is excluded from gross income under § 305 This provision was established to prevent capital gain treatment for "preferred stock bailouts," where preferred stock is distributed and subsequently sold or redeemed, as illustrated in the case of Bialo v Comm'r, 88 T.C 1132 (1987).
60 Tax Reform Act of 1969, Pub L No 91-172, sec 201(a)(1)(B), § 170(e)(1)(A), 83 Stat 487, 555.
61 1 PRACTITIONER's GUIDE, supra note 51, at 73.
Charitable contributions could have resulted in an after-tax income of $35,000 for the taxpayer, considering their marginal tax bracket Instead of realizing a taxable event through the distribution of preferred stock, the taxpayer benefited from a charitable contribution deduction.
$100,000 upon his contribution of the stock to his charitable trust 6 7
The Tax Court determined that tax avoidance could be inferred from objective facts, even without egregious evidence In a specific case, the taxpayer contended that the stock did not qualify as § 306 stock since the sale of preferred stock wasn't part of a plan aimed at evading federal income taxes; however, the Tax Court dismissed this argument.
The 1969 Act introduced specific rules regarding the charitable contribution of appreciated property, stipulating that a taxpayer's deduction would be reduced by 50% of the appreciation that would have been recognized as long-term capital gain if the property had been sold at fair market value This reduction applied to gifts of tangible personal property to a donee or governmental unit when the donated item was unrelated to the recipient's purpose For instance, a work of art donated to a university's art department would not incur a deduction reduction, whereas if it was displayed in a dean's office, the reduction would apply Additionally, contributions to private non-operating foundations were subject to this reduction unless the foundation distributed the property within two and a half months after the end of the contribution year The Act also introduced a basis allocation rule for bargain sales to charities.
The court determined that the exception specifically pertains to the dispositions of § 306 stock by minority shareholders, or in cases where there is a prior or simultaneous disposition of the common stock related to the preferred stock issuance.
70 The percentage is 62.5% if the contribution involves corporate donors 1 PRACTI- TIONER'S GUIDE, supra note 51, at 73.
74 Treasury Regulations define "non-operating foundations" in the following manner:
Tax Period 1970-1988
The Tax Reform Act of 1976 introduced significant changes to corporate charitable contributions, allowing corporations (excluding subchapter S corporations) to deduct up to half of the appreciation plus the taxpayer's basis on certain ordinary income property donations However, Congress denied deductions for individuals who incurred expenses to influence legislation on behalf of charitable organizations, aiming to streamline the enforcement of lobbying expenses through organizational records Furthermore, the Revenue Act of 1978 repealed the previously unlimited charitable deduction, which had already been capped at 50% since 1969.
In 1981, Congress amended the tax Code to allow non-itemizing taxpayers to claim charitable contribution deductions for contributions made between 1982 and 1986 This change enabled many low- and middle-income taxpayers to benefit from the deduction, with the intent to encourage charitable giving and increase funding for nonprofit organizations that provide essential services often funded by the Federal Government During this period, taxpayers could claim only a specified percentage of an allowable dollar cap for their charitable contributions.
75 1 PRACTITIONER'S GUIDE, supra note 51, at 76.
76 Comm Reports on Pub L No 94-455 (Tax Reform Act of 1976), [2002] 4 Stand. Fed Tax Rep (CCH) 11,600, at 25,865-25,866.
78 H.R CONF REP No 97-215, at 201-02 (1981), reprinted in 1981 U.S.C.C.A.N.
285, 291-92 (reporting on Economic Recovery Tax Act of 1981).
79 STAFF OF JOINT COMM ON TAXATION, 97TH CONG., GENERAL EXPLANATION OF THEECONOMIC RECOVERY AND TAX ACT OF 1981, at 49 (Joint Comm Print 1981).
Taxable Year Percentage Dollar Cap
In 1982, the Tax Equity and Fiscal Responsibility Act introduced a minor amendment to charitable contribution provisions by including amateur athletic organizations as eligible for deduction More substantial changes were made in 1984 under the Deficit Reduction Act, which mandated substantiation for donated property valued over $2,000 and established penalties for overvaluation Additionally, this Act extended the five-year carryover deduction to contributions made to private non-operating foundations and raised the contribution limit from 20% to 30% for cash or ordinary income property donations.
In 1986, Congress chose not to permanently establish the above-the-line deduction for charitable contributions, limiting taxpayers to claiming these expenses only through itemized deductions The Revenue Act of 1987 further clarified Congress's position by imposing a statutory disqualification on organizations engaged in political activities, even if they partially qualified as tax-exempt charitable organizations.
The Technical and Miscellaneous Revenue Act of 1988 introduced two significant amendments to § 170 Firstly, taxpayers who contribute to colleges or universities and gain the right to purchase athletic tickets can only deduct 80% of their contribution Secondly, Congress eased the substantiation requirements for corporate donations of inventory intended for the care of the ill, needy, or infants.
80 Id at 50; see also H.R CONF REP No 97-215, at 201-02 (1981), reprinted in 1981 U.S.C.C.A.N 285, 291-92 (reporting on Economic Recovery Tax Act of 1981).
81 Comm Reports on Pub L No 98-369 (Deficit Reduction Act of 1984), [2002] 4 Stand Fed Tax Rep (CCH) 11,600, at 25,859.
82 Deficit Reduction Act of 1984, Pub L No 98-369, § 301(a)(1), 98 Stat 494, 777.
Organizations that engage in political activities are defined as those that participate in or intervene in political campaigns for candidates seeking public office, as outlined in the Revenue Act of 1987.
85 Comm Reports on Pub L No 100-647 (Technical and Miscellaneous Revenue Act of 1988), [2002] 4 Stand Fed Tax Rep (CCH) 11,600, at 25,857.
Tax Period 1993-1998
In 1993, the Omnibus Budget Reconciliation Act introduced significant changes to § 170, notably amending the deduction requirements for charitable contributions The new regulation mandated that taxpayers must obtain written substantiation from the donee organization for any donation of $250 or more, a substantial decrease from the previous $2,000 threshold established by the Deficit Reduction Act of 1984 Additionally, the Act required charitable organizations to provide written statements to donors for contributions exceeding $75 that were made partly for goods and services, clarifying that the allowable deduction is the contribution amount minus the value of the goods and services received.
In 1996, Congress enacted an amendment to § 170 within the Small Business Job Protection Act, permitting contributions of qualified appreciated stock to private foundations in accordance with § 170(e)(5) This amendment was effective for a limited period, from July 1, 1996, to May 31, 1997.
In 1997, the qualified contribution list was expanded to include donations of computer technology and equipment to educational organizations and § 501(c)(3) entities focused on elementary and secondary education Additionally, the effective date for contributions of stock to private foundations was extended until June 30, 1998, a provision that was later made permanent by the Tax and Trade Relief Extension Act of 1998.
Summary of Major Changes
Equity Considerations
Charitable organizations play a crucial role in providing societal value, raising questions about whether their objectives should receive tax subsidies The complexity of charitable contribution rules prompts calls for simplification, particularly by removing percentage limitations Additionally, there is a need to consider amending these rules to incentivize contributions to organizations focused on poverty alleviation Lastly, the current structure limits lower-income taxpayers from benefiting from tax subsidies for their charitable donations, affecting the overall progressive tax system.
94 The list of eligible organizations is found in § 170(b)(1)(A) of the Code.
The Tangible Value and Promotion of Charitable
The Tangible Value of Charitable
Congress established charitable contribution provisions to promote giving, recognizing the vital role of charitable organizations in supporting communities The significance of these organizations is undeniable, especially in addressing health crises like the AIDS epidemic, which affected millions globally in the 1990s Advances in medical care have extended the lives of those with HIV and AIDS, leading to an increased demand for long-term care facilities, such as the Bailey-Holt House in New York City, where average stays have notably increased Organizations like God's Love We Deliver exemplify the essential services provided to those in need, showcasing the importance of charities in delivering basic necessities Beyond direct support, charitable organizations contribute significantly to the economy, employing 8% of the national workforce and providing substantial financial compensation, with $277.1 billion allocated in salaries and benefits in 1997 This highlights the extensive impact of charitable organizations on both social welfare and economic stability.
Subsidizing Charitable Organizations Through
Tax subsidies are a key method for promoting charitable organizations, but governments can also support these entities through direct funding The rationale behind offering tax incentives for charitable contributions lies in encouraging donations and enhancing the financial viability of charitable organizations.
99 GIVING USA 1998, supra note 3, at 96
102 Felicity Barringer, Moving Beyond the Four Horsemen of Philanthropy Beat, N.Y. TIMES, Nov 20, 2000, at F8.
103 Internal Revenue Serv., supra note 8, at 49.
Tax exemptions for money or property used for charitable purposes are justified by the idea that the government offsets lost revenue through reduced financial burdens that would otherwise require public funding Additionally, these exemptions contribute to the overall welfare of society.
In 1999, charitable deductions claimed on tax returns reached approximately $270 billion, with the government subsidizing a portion based on taxpayers' marginal tax rates If all taxpayers were in the 39.6% tax bracket, the government subsidy would amount to $107 billion This tax subsidy is justified by the idea that the loss in tax revenue is counterbalanced by the savings from not having to directly fund initiatives aimed at promoting general welfare.
Direct funding for charitable organizations is often seen as more effective than tax subsidies, but challenges arise when Congress allocates funds to religious groups due to the constitutional separation of church and state The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 allows religious organizations to access federal funds for social programs, provided these programs comply with the Establishment Clause Importantly, the Act prohibits the use of federal funds for sectarian worship, instruction, or proselytization.
104 ROBERT W WILLAN, INCOME TAXES, CONCISE HISTORY AND PRIMER 31 (1994).
105 Internal Revenue Serv., STAT INCOME BULL., Spring 2001, at 274.
The Establishment Clause of the First Amendment prohibits Congress from establishing a religion, which means the government cannot associate with religious organizations, endorse religious doctrines, or interfere in religious matters This principle was highlighted in the case Freedom From Religion Foundation, Inc v McCallum, reinforcing the separation of church and state in the United States.
107 See 42 U.S.C § 604a (2002) But see Carmen M Guerricagoita, Innovation Does
The article "Not Cure Constitutional Violation: Charitable Choice and the Establishment Clause" published in the Georgetown Journal on Poverty Law & Policy, analyzes the implications of charitable choice rules, ultimately concluding that they infringe upon the Establishment Clause In the case of Freedom From Religion Foundation, Inc., the district court evaluated the constitutionality of the charitable choice statute under the Establishment Clause but determined that the case did not present a direct challenge to the statute itself.
108 42 U.S.C §§ 604a(a) & (c) (2002) The Act permits the states to either contract with the religious-based organizations or to accept certificates, vouchers, and other disbursement methods.
The landmark Supreme Court case Lemon v Kurtzman established a standard for evaluating whether charitable programs violate the Establishment Clause The Court determined that a program does not breach the Clause if it has a secular purpose, its primary effect neither advances nor inhibits religion, and it avoids excessive government-religion entanglement A violation occurs if any of these criteria are met In Agostini v Felton, the Court refined this approach by examining whether unrestricted cash payments to religious organizations would breach the Establishment Clause Courts have since applied these standards to assess the permissibility of government involvement under the Establishment Clause.
States are prohibited from making unrestricted cash payments to religious institutions However, when public funding reaches faith-based organizations through the independent choices of individuals, it is considered indirect funding In this scenario, the individual participant decides to support the religious organization, which diminishes the risk of public funding primarily advancing religion, thus adhering to the establishment clause The Supreme Court has determined that if individuals freely select the publicly funded program, the method of funding—whether it passes through the individual first or goes directly to the organization—does not affect its classification as indirect funding.
Federal courts have addressed cases regarding potential violations of the Establishment Clause due to funding for religious-based programs In the case of Freedom from Religion Foundation, Inc v McCallum, the United States District Court for the Western District of Wisconsin examined whether state funding for religious-based residential treatment and faith-based counseling for drug and alcohol addiction infringed upon the Establishment Clause The caregiver, Faith Works, received funding from multiple sources, but concerns arose specifically from contracts with the Department of Corrections and grants from the Department of Workforce Development Through its contract with the Department of Corrections, Faith Works managed a halfway house focused on long-term treatment.
111 Id., cited in Freedom From Religion Found., Inc., 179 F Supp 2d at 966.
113 Freedom from Religion Found., Inc., 179 F Supp 2d at 970.
The Faith Works program required offenders to be open to developing their faith and spirituality, although participation was not mandatory, as they could choose other facilities In Milwaukee, Faith Works was the only long-term residential treatment option available Offenders who declined to participate were placed in non-faith-based halfway houses The program received significant funding from the Department of Workforce Development, totaling $150,000 in 1998 and $450,000 in 1999, aimed at promoting spiritual, emotional, and economic stability, with funds distributed in a fixed amount rather than based on participant numbers A court ruling found this funding to be impermissible direct funding, while the Department of Corrections funding was upheld, as the court determined that offenders made an independent choice to attend Faith Works Ultimately, the court concluded that the program did not violate the Establishment Clause, as participation was contingent upon consenting to its religious aspects, and the government's role was deemed indirect.
In the case of Johnson v Economic Development Corp., the Sixth Circuit Court of Appeals examined the legality of utilizing tax-exempt bonds for funding the construction of a Catholic elementary and secondary school, focusing on potential violations of the Establishment Clause.
123 Freedom from Religion Found., Inc v McCallum, 214 F Supp 2d 905 (W.D Wis.
2002) While the counselors recommended a particular program, the offender had to consent to the program, and the counselors had to document the consent.
The plaintiff, a taxpayer from Oakland County, claimed that the Economic Development Corporation breached the Establishment Clause by issuing tax-exempt bonds to a Roman Catholic school He argued that no Supreme Court case allowed public funds to reimburse expenses for religious schools or provide them with direct financial aid However, the court dismissed this argument, referencing a Supreme Court decision that validated a New York law permitting state reimbursement for both religious and secular nonpublic schools for state-mandated testing costs Additionally, the Sixth Circuit acknowledged the Supreme Court's stance against a blanket prohibition on all forms of direct government assistance.
In the Johnson case, the Sixth Circuit rejected the plaintiffs' claim that tax-exempt revenue bonds were equivalent to cash subsidies under the Establishment Clause, emphasizing the distinction between subsidies and tax exemptions The court noted that tax exemptions do not necessitate a direct transfer of government revenue Ultimately, applying the modified Lemon test from Agostini, the court determined that the use of tax-exempt revenue bonds did not breach the Establishment Clause.
The use of school vouchers for children attending religious private schools is a contentious issue, recently highlighted by the Supreme Court's review of Ohio's voucher program In a close 5-4 decision, the Court overturned the Sixth Circuit's ruling that deemed the program unconstitutional under the Establishment Clause The Ohio voucher program allows families to access financial aid for private education, sparking ongoing debates about the separation of church and state in educational funding.
In 1974, the Michigan Legislature introduced the Economic Development Corporation Act aimed at reducing unemployment The Act was designed to support local businesses through renovation, construction, and remodeling initiatives, with the belief that such assistance would ultimately lower the unemployment rate.
125 The tax-exempt bonds carried lower interest rates than conventional loans.
127 Id (citing Comm for Pub Educ & Religious Liberty v Regan, 444 U.S 646 (1980)).
Historical Reasons for the Complexity
Many American taxpayers express frustration over the complexity and length of the tax code, with former Treasury Secretary Paul O'Neill labeling its 9,500 pages as an "abomination." The intricate rules surrounding tax incentives, particularly the charitable contribution deduction, have significantly expanded since their introduction in 1917, evolving from a single paragraph to seven statutory pages and 108 pages of Treasury Regulations This evolution highlights how decades of modifications have contributed to the current complexity of tax rules While some argue for simplification, this complexity is viewed as an inevitable outcome of the charitable contribution deduction, stemming largely from the Tax Reform Act of 1969, which aimed to curb tax abuse Despite empirical evidence indicating issues with itemized deductions, there remains debate over the appropriateness of the limitations imposed by the 1969 legislation.
The Tax Reform Act of 1969 introduced new restrictions on provisions deemed inequitable or prone to abuse, such as those related to private foundations and charitable contributions, resulting in increased complexity In certain cases, Congress's response was an overreaction to specific issues, particularly concerning private foundations Consequently, affected taxpayers now face greater complexities while trying to access diminished benefits.
The Committee suggested that Congress should implement tax laws that are more generalized, focusing on broad tax objectives instead of intricate rules This approach aims to simplify the tax system and enhance its effectiveness, a viewpoint supported by various scholars in the field.
In his article "Many Unhappy Returns," John O Fox highlights former Secretary O'Neill's criticism of the current tax code, which spans 9,500 pages filled with intricate details O'Neill argues that while each word may have its justification, the overall complexity of the code is unacceptable and needs reform.
144 Steuerle & Sullivan, supra note 7, at 402.
145 Roberts et al., supra note 6, at 346-47.
The complexity of tax laws has significantly increased as Congress has shifted from broad standards to detailed statutory rules, resulting in longer and more intricate legislation (Colliton, 1995).
In 2003, C Eugene Steuerle and Martin A Sullivan advocated for simplifying the tax code by removing percentage limitations on charitable contribution deductions They argued that the 30% limitation introduced unnecessary complexity into the tax law, which likely deterred charitable giving more due to its convoluted nature and perceived implications than any actual economic impact on donors.
Detailed tax rules are essential for ensuring fairness in tax policy and preventing tax abuse, particularly in relation to charitable contributions The relationship between general rules and tax fairness is inversely proportional; repealing detailed regulations would likely lead to increased tax abuse and inequity Historical evidence supports this view, as seen in the complexity introduced by percentage limitations in § 170, which were established to address perceived unfairness in the tax system For instance, in 1966, 154 high-income taxpayers with adjusted gross incomes exceeding $200,000 paid no income tax, highlighting the need for stringent regulations to promote tax equity.
The 1969 Tax Reform Act aimed to address the issue of high-income taxpayers avoiding taxes through itemized deductions In 1966, itemized deductions reached $130 million, representing 116% of the adjusted gross income Notably, charitable contribution deductions amounted to nearly $79 million, highlighting their significant role in the overall deductions.
In 2023, taxpayers reported $130 million in itemized deductions, with 70% of the $79 million attributed to property contributions to charitable organizations, much of which had appreciated in value While the percentage limitations on charitable contribution deductions introduce complexity, their significance should not be overlooked The Tax Reform Act of 1969 established intricate rules to limit these deductions, reflecting Congress's intent to impose restrictions based on legislative history.
147 Steuerle & Sullivan, supra note 7, at 417.
CHARITABLE CONTRIBUTIONS abusive nature of itemized deductions, including those for charitable contributions 154
An analysis of the history of § 170 provisions highlights the necessity of complexity in achieving tax fairness Internal Revenue Service statistics reveal the volume of returns claiming charitable contribution deductions and the total amount of these deductions.
Year Returns Reporting Total Amount of Charitable
The Tax Reform Act of 1986 aimed to simplify the Internal Revenue Code by eliminating many deductions and limiting the deductibility of various expenditures While this simplification was a legitimate goal, it inadvertently created inequities, particularly for nonitemizers who could not claim the charitable contribution deduction When nonitemizers were temporarily allowed to claim this deduction, approximately ten million additional returns included it However, after Congress chose not to make this provision permanent, the number of taxpayers claiming the deduction dropped by about seven million Consequently, statistics from the Internal Revenue Service indicate a significant decline in the number of individuals claiming the deduction since the 1986 amendment.
154 See supra notes 47-56 and accompanying text.
155 Internal Revenue Serv., supra note 8, at 206.
156 S REP No 99-313, at 3 (1986) (stating general purpose of the Tax Reform Bill of
157 In a treatise on charitable giving, Professor Bruce R Hopkins states:
Tax policy makers often emphasize goals like "fairness" and "simplicity," particularly in political discussions However, these objectives frequently conflict with one another, as achieving "fairness" often requires more complex measures.
The complexity of U.S tax laws arises from the need to differentiate between taxpayers in diverse situations to ensure fairness Given the intricate nature of American society, it is expected that tax regulations mirror this complexity.
Recent data indicates that while the total claimed deductions have risen, the increase is predominantly among wealthy taxpayers In contrast, lower-income taxpayers are not benefiting from government subsidies for their charitable contributions, highlighting a disparity in tax benefits.
Impact on Progressive Taxation
Since the 1913 Income Tax Act, this country has upheld a progressive income tax system, which mandates that higher-income individuals pay a larger percentage of their income in taxes This system operates on the ability-to-pay principle, recognizing that those with greater income have a higher capacity to contribute Despite ongoing debates and attempts to replace it with a flat tax or consumption-based tax, the progressive income tax has proven resilient and remains intact.
The existing rules governing charitable giving are misaligned with the principles of a progressive tax system Currently, the inability of non-itemizing taxpayers to claim charitable contribution deductions undermines this progressive structure, as only higher-income individuals benefit from these deductions Consequently, the government primarily subsidizes donations made by itemizers Additionally, this framework results in an "upside-down" subsidy, where low-income taxpayers receive less benefit from charitable contributions compared to their higher-income counterparts.
158 Internal Revenue Serv., STAT INCOME BULL., Fall 1998, at 248.
159 For example, in 1995, Senators Sam Nunn and Pete Domenici proposed the "USA
In 1995, the Tax Act proposed by Senators Nunn and Domenici aimed to implement a consumption-type tax, allowing taxpayers to defer taxes on saved income while also permitting deductions for charitable contributions Concurrently, Representative Dick Armey introduced the "Freedom and Fairness Restoration Act," which suggested a flat 20% tax on wages, retirement distributions, and unemployment compensation, reducing to 17% after 1997, and excluding taxes on interest and dividends Other proposals during this period included H.R 3097, which sought to replace the current tax code with a low tax rate for all taxpayers, and S 488, which also called for a 20% flat tax with a cap on charitable contribution deductions.
160 See Bullock, supra note 9, at 341 ("[r]efusing a deduction entirely to [middle- and low-income individuals] breaches a basic tenet of the progressive rate structure").
The Economic Growth and Tax Relief Reconciliation Act of 2001 exacerbates the issue by eliminating the phaseout of itemized deductions for higher-income taxpayers, a change that will take effect over a five-year period starting in 2006.
2001 TAX LEGISLATION, supra note 11, $ 210, at 51
CHARITABLE CONTRIBUTIONS lower tax subsidies than high-income taxpayers because of their lower marginal income tax rates 1 6 2
The legislative history of the predecessor to § 170 reveals that the original intent behind the charitable contribution deduction was to benefit wealthy taxpayers by allowing them to deduct charitable donations While this rationale was appropriate in 1917, when only affluent individuals were subject to taxes, it no longer reflects the current societal landscape.
Many lower- to middle-income taxpayers contribute significantly to charitable organizations but often cannot claim a charitable contribution deduction on their taxes Research indicates that those who take the standard deduction account for roughly one-third of all charitable donations Notably, lower-income individuals tend to donate a higher percentage of their income to charity compared to their higher-income peers, highlighting their generosity despite financial constraints.
In 1998, the Internal Revenue Service reported that 69% of tax returns claimed the standard deduction, with over half of these returns coming from taxpayers with adjusted gross incomes below $20,000 The standard deduction aims to support charitable contributions for nonitemizers, suggesting that many taxpayers earning under $20,000 benefit from a similar deduction.
162 Many scholars have addressed the "upside-down subsidy" in their scholarship.
See, e.g., Charles T Clotfelter, What is Charity? Implications for Law and Policy:
Tax Induced Distortions in the Voluntary Sector, 39 CASE W RES L REV 663,
Distortions in the price of charitable giving occur due to varying subsidy rates and prices faced by different individuals, which often do not align with the actual characteristics of the gift Additionally, the use of charitable contribution deductions raises concerns, as high-income taxpayers can afford to make these contributions at a lower cost compared to low-income taxpayers.
D Griffith, Theories of Personal Deductions in the Income Tax, 40 HASTINGS L.J.
The concept of the "upside-down" subsidy in charitable contribution deductions highlights concerns about equity in tax policy, with critics arguing that these deductions disproportionately benefit those who are least in need of financial assistance Research indicates that adjustments to tax rates could mitigate this issue, promoting a system that is both revenue neutral and distributionally fair Advocates for a more direct expenditure budget criticize the current deduction system, suggesting it creates an imbalance that Congress would likely not endorse if approached as a direct subsidy.
164 Tax Report, WALL ST J., May 2, 2001, at Al
165 See GIVING USA 1998, supra note 3.
166 See Bullock, supra note 9, at 341, 343; Davies, supra note 6, at 1771.
167 Internal Revenue Serv., supra note 8, at 213.
In 2003, eleven million taxpayers with adjusted gross incomes between $40,000 and $75,000 claimed the standard deduction, along with an additional 1.3 million taxpayers earning between $75,000 and $100,000 IRS statistics revealed that over half of the charitable contribution deductions in 1998 came from taxpayers with adjusted gross incomes of at least $100,000, while approximately 76% of these deductions were claimed by those earning at least $60,000 Notably, taxpayers with incomes of $1 million or more contributed 1.2% more in property donations compared to cash contributions.
It is probable that many of the noncash charitable gifts are in the form of appreciated property This raises the fairness issue discussed above.
The case of Herman v United States highlights how affluent taxpayers can leverage significant tax deductions to lower their effective income tax rates In the 1990 tax year, the plaintiffs donated medical equipment valued at over $1 million to a hospital, despite having purchased it for only $40,000 two years earlier when the hospital was in bankruptcy The hospital intended to auction the equipment, anticipating a sale price of around $37,000 Each plaintiff subsequently claimed a charitable contribution deduction reflecting the appraised value of the donation.
The Internal Revenue Service permitted a deduction of only $20,000 for each plaintiff, despite the property being appraised at $501,190 The district court recognized that while the plaintiffs benefited from tax windfalls, they were justified in using the appraised value to determine their charitable contribution deductions, as there was no evidence of fraudulent activity This case highlights how higher-income taxpayers exploited tax regulations by acquiring property at prices significantly lower than fair market value, donating it to charity, and subsequently claiming substantial deductions.
In the realm of charitable contributions, 37% of donations from taxpayers with adjusted gross incomes between $200,000 and $500,000 were noncash, while a significant 62% of contributions from those earning between $500,000 and $1 million were also noncash In contrast, for other taxpayers, the percentage of noncash gifts varied from 17% to 27%.
During the trial, the hospital's attorney revealed that the $37,000 valuation of the equipment was derived from its liquidation value appraisal The court noted, in a separate comment, that this valuation significantly underestimated the property, ultimately harming the hospital's creditors.
CHARITABLE CONTRIBUTIONS amount of the fair market value At the same time, nonitemizing tax- payers are denied the opportunity to claim even a modest deduction.
The Use (or Lack Thereof) of Charitable
Empirical Data Outlining Trends in Charitable
The breakdown of charitable giving for 1997176 was as follows:
Type of Charitable Amount of Contribution Percentage of Total Organization (in billions of dollars) Charitable Giving
Charitable organizations aimed at alleviating poverty fall into two main categories: human services organizations and public/society benefit organizations Human services organizations encompass areas such as crime prevention, youth services, housing, and vocational training, while public/society benefit organizations focus on community improvement and neighborhood revitalization In 1997, charitable giving reached approximately $159.42 billion, yet only $21 billion was directed towards these poverty-alleviating organizations This indicates that a significant portion of donations did not support initiatives aimed at reducing poverty Although some organizations, like the Salvation Army, are included in this category, many others pursue different objectives Furthermore, research suggests that most human services organizations do not prioritize the needs of low-income individuals, with only a small fraction providing essential resources like food and clothing This trend in charitable giving has remained consistent over the years, as seen in 1999.
176 GIVING USA 1998, supra note 3, at 23.
179 See Bullock, supra note 9, at 346-47.
$190.16 billion.180 The majority of this charitable giving was made to religious organizations, and the second highest amount was made to educational institutions 1 8 1
Charitable giving aimed at assisting the most vulnerable populations remains limited, with only three out of the top twenty-five organizations receiving significant donations in 1999 focused on poverty relief In contrast, six of the top twenty-five recipients were prestigious educational institutions, including Harvard, Cornell, Duke, Stanford, Columbia, and the University of Pennsylvania, highlighting a trend where donations primarily benefit elite universities rather than low-income individuals This pattern is further reflected in charitable bequests, where approximately one-third of contributions from decedents in 1995 went to educational, medical, or scientific organizations, while less than 1% was directed towards improving social welfare for the needy Overall, the data suggests that donors tend to favor organizations that provide them with direct or indirect benefits.
Enacting Legislation to Encourage Charitable
To encourage charitable giving to organizations that assist low-income individuals, Congress has proposed new measures, recognizing that many people currently contribute only small amounts Existing regulations already offer diverse incentives for donations.
According to Just Give, a significant 75% of donations come from individual contributors, highlighting the crucial role of personal giving in charitable funding For more information, visit their donor information page at http://www.justgive.org.html/doninfo/billions.html (last accessed on October 3, 2001), which is also available in the University of Nebraska Law College library.
182 Peter Kilborn, Charitable For Poor Lags Behind Need, N.Y TIMES, Dec 12, 1999, at Al
183 NETSCAPE, CHARITIES RECEIVING HIGHEST DONATIONS IN 1999, at http:l! webcenter.netscape.inforplease.com/ipaA0770757.html (last visited Apr 11,
In 2001, the Salvation Army emerged as the top recipient of donations, followed by America's Second Harvest, which ranked eighth, and Habitat for Humanity International, which secured the ninth position in donation receipts.
186 Internal Revenue Serv., STAT INCOME BULL., Summer 1999, at 81-82.
187 See Bullock, supra note 9, at 343.
Charitable contributions are subject to percentage limitations based on the classification of the charitable organizations Generally, deductions are limited to 50% or 30% of an individual's adjusted gross income, depending on the type of organization Contributions to churches, educational institutions, hospitals, museums, and anti-poverty organizations fall under the 50% limitation, while donations to private foundations are limited to 30% This disparity in treatment has been a topic of scholarly debate, and there are ongoing legislative proposals aimed at encouraging charitable giving, particularly to organizations that assist the poor Notably, Representative James T Kolbe of Arizona introduced a proposal on February 14, 2001, which seeks to amend the tax code to offer a nonrefundable credit of up to $100 for single taxpayers.
Taxpayers filing a joint return can receive a $200 deduction for charitable contributions made to organizations that address poverty To qualify, the charitable organization must serve individuals whose incomes are at or below 150% of the poverty threshold.
Tax laws should not be changed to favor organizations aimed at alleviating poverty Instead, Congress should consider direct funding for nonprofit organizations that address poverty While it cannot allocate funds to religious-based charities due to constitutional restrictions, it can support other charitable organizations focused on reducing poverty For instance, Habitat for Humanity provides affordable homeownership for low-income individuals by supplying materials and utilizing volunteers for construction Contributions of cash or supplies to such organizations are already tax-deductible under current law.
To enhance support for Habitat for Humanity, Congress should consider allocating grant funds to the Department of Housing and Urban Development This approach would help circumvent the technical challenges associated with utilizing the Code to provide additional incentives.
189 See H.R 673, 107th Cong § 25B (2001) A taxpayer is entitled to elect to take the charitable contribution deduction in lieu of the nonrefundable credit Id § 25B(f).
191 GivING USA 1998, supra note 3, at 51.
The proposal to amend tax laws to promote charitable giving for poverty-combating organizations appears beneficial in theory, but it faces significant practical challenges Key issues include the difficulty in clearly defining which nonprofits qualify for favorable tax treatment, the existence of other charitable organizations that contribute equally or more to societal welfare, and the likelihood that such amendments would spur numerous special interest groups to lobby for similar benefits.
The proposed legislation outlines specific criteria for charitable organizations to qualify for enhanced tax incentives, requiring that they assist individuals with incomes below 150% of the poverty line and allocate at least 70% of their annual expenditures towards exempt purposes This proposal mirrors a 1995 initiative criticized by Professor Alice Gresham Bullock, who argued that the funding usage standards were inadequate and would impose additional record-keeping burdens on taxpayers, leading to increased costs for the Internal Revenue Service Moreover, the proposal would heighten the administrative load on charitable organizations The 2001 proposal by Representative Kolbe failed to address these administrative issues, suggesting that the potential benefits of the legislation are overshadowed by its administrative challenges.
Charitable organizations play a crucial role in combating poverty, and their significance should not be underestimated The primary goal of these organizations is to alleviate the impacts of poverty, making their contributions invaluable in the pursuit of social welfare and community support.
192 See H.R 673, 107th Cong § 25B(d)(3)(A) (2001) No more than 30% of the ex- penditures can be made for administrative expenses, lobbying, fundraising, and litigation Id
Charitable contributions to nonprofit healthcare organizations are often as valuable, if not more so, than those aimed at combating poverty These healthcare organizations encompass a wide range of entities, including those focused on research and specific diseases, such as the American Cancer Society, which actively campaigns against smoking to mitigate its severe health impacts Many health organizations are dedicated to researching cures for life-threatening diseases like Parkinson's, AIDS, cancer, and Alzheimer's Current tax provisions already provide higher deduction limits for donations to nonprofit health organizations and poverty-combating charities, suggesting that no additional incentives are necessary from Congress to promote charitable giving in these areas.
In 1997, the IRS identified 580,416 active nonprofit organizations as § 501(c)(3) tax-exempt entities, receiving a total of $146.2 billion in contributions, gifts, and grants Should Congress amend charitable contribution rules to boost incentives for giving aimed at alleviating poverty, it could trigger lobbying from various special interests seeking similar advantages This has led to proposed bills aimed at enhancing charitable giving incentives across different sectors, a phenomenon referred to as the "ABC Syndrome." The "ABC Syndrome" results in increased statutory complexity, which Congress should strive to avoid.
197 GIVING USA 1998, supra note 3, at 93.
198 Internal Revenue Serv., supra note 8, at 47.
200 See, e.g., H.R 744, 107th Cong (2001) (encouraging charitable giving for medical research); S 462, 107th Cong (2001) (promoting education by granting a credit for contributions to organizations providing scholarships to students attending elementary and secondary schools).
201 See Vada Waters Lindsey, The Widening Gap under the Internal Revenue Code: The Need for Renewed Progressivity, 5 FLA TAX REV 1 (2001).
1089 tional complexity into an already necessarily complex statutory provision.
Perspectives on the Future of Charitable Giving
The Effect of the Estate Tax Repeal
Under current estate and gift tax provisions, taxes are levied on devises, bequests, and inter vivos gifts However, donors can benefit from an unlimited deduction for charitable bequests and gifts to charitable organizations Historically, decedents have contributed significant amounts to charities through these bequests According to the Internal Revenue Service, for estate tax returns filed between 1995 and 1997, decedents reported substantial charitable deductions.
Year Charitable Percentage of Percentage of Percentage of
Contribution Returns all Deductions Gross Estate
In 2001, President George W Bush signed into law a massive
$1.35 trillion tax cut The law included a phaseout of the estate tax. Under the Economic Growth and Tax Relief Reconciliation Act of
As of 2001, the estate tax is set to be fully eliminated for individuals who pass away after 2009 For those who die between 2001 and 2010, estate tax liabilities have been decreased due to modifications in the unified credit and estate tax rates The updated rates and credits reflect these changes.
205 Internal Revenue Serv., supra note 186, at 80, 96, 99, 102, 105.
The repeal of the estate tax may only be temporary, as the Economic Growth and Tax Relief Reconciliation Act of 2001 is set to expire at the end of 2010 Unless new legislation is passed to reinstate the tax cut from 2001, the repeal will not last.
The amended tax rates apply to the gift tax, while the exemption is limited to the estate tax Following the full phaseout of the estate tax, the highest rate for gift tax will be 35%.
Year Exemption Amount Tax Rate
Before the Economic Growth and Tax Relief Reconciliation Act, recipients of devised property received a "stepped-up" basis equal to the fair market value at the decedent's death To address potential tax abuse from tax-free income and estate tax relief, Congress eliminated the full stepped-up basis under § 1014, replacing it with a carryover basis However, the 2001 Act allows for a basis increase of up to $1,300,000 for estate property, with an additional $3 million step-up for property passing to a surviving spouse Despite these changes, significant tax advantages remain for retaining property until death and bequeathing it through a will.
The potential repeal of the estate tax and the maximum step-up of $4.3 million may lead to diminished incentives for wealthy individuals to donate money or appreciated assets to charitable organizations, likely resulting in a decrease in charitable bequests Effective estate planning has historically encouraged substantial charitable contributions as a means to mitigate estate tax liability In 1997, charitable contribution deductions claimed by decedents amounted to $14.3 billion, accounting for 8.8% of the total.
209 2001 TAx LEGISLATION, supra note 11, 9 332, at 118.
212 See, e.g., Karen C Burke & Grayson M.P McCouch, Death Without Taxes?, 20
The repeal of the estate tax could significantly impact charitable giving by altering the distribution of bequests, potentially harming organizations that rely on tax-sensitive donations (VA TAX REV 499, 2001) Furthermore, the appropriateness of the federal transfer tax is supported by various arguments highlighting its importance in maintaining equitable wealth distribution (James R Repetti, 76 N.Y.U L REV 825, 2001).
To promote charitable giving effectively, Congress may need to enhance the charitable contribution tax incentive, especially if the estate tax repeal becomes permanent after 2010 Although the initial attempt to make the repeal permanent was unsuccessful, ongoing efforts to weaken or eliminate the estate tax are anticipated Currently, there is pending legislation aimed at removing the sunset provision of the 2001 Act, which could solidify the tax cuts enacted under that legislation.
2001 Act will be permanently extended, including a permanent repeal of the estate tax.
Reformation of the Charitable Contribution Rules
Some members of Congress have acknowledged the necessity of subsidizing charitable contributions for nonitemizers In 2001, the House of Representatives approved a proposal allowing nonitemizers to deduct up to $25 for charitable donations made in 2002 and 2003, with an increase to $100 starting in 2010 For joint filers, the deduction would be $50 in 2002 and 2003, rising to $200 in 2010 While this proposal aimed to reduce inequities between itemizers and nonitemizers, it did not fully address the disparities in tax treatment Ultimately, Congress has yet to act on this proposal.
Congress has explored the possibility of introducing a credit to enhance existing income tax charitable contribution regulations Notably, on February 7, 2001, Representative Dan Burton proposed the "Charitable Giving Act of 2001," which aimed to enable taxpayers to receive a credit of up to $200 for cash donations.
213 See supra note 205 and accompanying text.
The Senate voted 54-44 against the repeal of the estate tax, falling short of the required sixty votes for passage, as reported by Shailagh Murray in the Wall Street Journal on June 13, 2002.
215 See John D McKinnon & Lynn Asinof, Why You Should Rewrite Your Will: Es- tate-Tax Repeal is Dead, but Families Must Still Adjust Plans; Protecting the
Spouse, WALL ST J., June 13, 2002, at Dl
217 Tom Herman, Tax Report: A Special Summary and Forecast of Federal and State Tax Developments, WALL ST J., July 25, 2001, at Al
219 Id current charitable contribution deduction 220 The enactment of the
The proposed $200 credit would enhance, rather than replace, the existing charitable contribution deduction, allowing all taxpayers to claim a credit for cash donations Taxpayers can still deduct cash contributions exceeding $200 and property donations, with the credit taking priority over the deduction unless an affirmative election is made to forgo it Although the bill was referred to the House Ways and Means Committee, no further action has been taken Given the phaseout of the estate tax, it is crucial to revise charitable contribution rules to encourage more charitable giving Implementing a nonrefundable credit offers greater tax savings than deductions, thereby providing a stronger incentive for donations.
The enactment of a credit alongside the current deduction presents a significant drawback, as itemizing taxpayers, typically those with higher incomes, can claim both a deduction and a credit, while non-itemizing, lower-income taxpayers are limited to a modest credit Additionally, the proposed credit's nonrefundable nature means that taxpayers without a tax liability in a given year will receive no tax benefit This creates a tension between mitigating the effects of estate tax repeal on charitable contributions and maintaining the integrity of progressive taxation Although it may be challenging to reconcile both objectives due to their inherent conflict, future amendments to charitable contribution rules can be structured to reduce this tension.
The proposed $200 credit, alongside the existing charitable contribution deduction, aims to mitigate the effects of the upside-down subsidy by offering nonitemizers government support for their charitable donations To enhance this tax incentive, the bill should be amended to include property contributions, in addition to cash donations As the estate tax is gradually eliminated, the motivation for making charitable bequests of appreciated property diminishes By allowing gifts of appreciated property to qualify for the proposed credit, Congress would create a stronger incentive for charitable giving.
220 H.R 494, 107th Cong § 30B (2001) Several scholars have analyzed the viability and impact of transforming the charitable contribution deduction to a tax credit.
See, e.g., Evelyn Brody, Charities in Tax Reform: Threats to Subsidies Overt and
Covert, 66 TENN L REV 687 (1999); Bullock, supra note 9.
A deduction lowers a taxpayer's taxable income, whereas a tax credit directly reduces the amount of tax owed on a dollar-for-dollar basis However, a nonrefundable tax credit has a key limitation: it offers no benefits if the taxpayer has no tax liability for the year.
To enhance tax savings and mitigate the disincentive for charitable bequests due to estate tax repeal, immediate tax deductions are preferred over future benefits Increasing the maximum tax credit to $400 for single taxpayers and $800 for married couples filing jointly can strengthen this incentive Additionally, the credit should decrease as the taxpayer's adjusted gross income rises, preserving the integrity of the progressive tax system and ensuring the credit remains fiscally responsible for the government This proposed modification aims to balance encouraging charitable contributions while maintaining a sustainable tax framework.
Congress utilizes varying percentages to determine tax credits linked to socially beneficial activities, such as adoption and higher education For child and dependent care expenses, the maximum credit is set at 35% of the taxpayer's adjusted gross income, decreasing to a minimum of 20% as income rises The child tax credit phases out for single taxpayers at an adjusted gross income of $75,000 and for married couples at $110,000 Additionally, a nonrefundable credit for adoption expenses is available, which begins to phase out at an adjusted gross income of $150,000.
Congress also promotes education in several ways under the Code.
Taxpayers can receive a credit for eligible educational expenses, which phases out for single filers with an adjusted gross income over $50,000 and joint filers exceeding $100,000 Additionally, Congress should consider implementing a credit to enhance the existing charitable contribution deduction, promoting increased charitable giving.
222 I.R.C § 21(a)(2) (2002) The 35% figure applies for taxable years after December
31, 2002 Prior to that time, the figure was 30%.
223 Id For taxpayers with adjusted gross incomes of at least $43,000, the credit is 20% of the allowable expenses.
Charitable contributions are influenced by the discretion to establish appropriate percentages and phase-out amounts, taking into account various factors These include the anticipated impact of the proposed credit on revenue and the likely effects of the estate tax phase-out on charitable giving.
Taxpayers can carry forward the reduced amount of their credit for up to five years, in accordance with applicable percentage limitations This aligns with existing charitable contribution provisions, which permit the carryforward of deductions that exceed percentage limits For instance, if a single taxpayer makes a charitable contribution, they can apply this carryforward rule to their credit.
$1,000, the taxpayer would be able to claim a maximum credit of $400.
If Congress established a 20% tax credit for a specific income level, a taxpayer would receive an $80 credit for the current taxable year, with the remaining $320 carried forward for up to five years In subsequent years, the taxpayer's credit would be limited to the 20% maximum Therefore, if the taxpayer made an additional $1,000 charitable contribution, they would not be able to claim any portion of it as a credit; instead, it would be reported as a deduction under § 170's general provisions.
The charitable contribution deduction is a crucial aspect of the tax code, yet it fails to benefit a significant portion of taxpayers, with only about 27% of income tax returns claiming this deduction in 1998 This ineffectiveness undermines the intended income tax incentive for many individuals and conflicts with the principles of a progressive tax system To foster greater charitable giving, Congress must reform the current charitable contribution rules, especially in light of impending changes to estate and gift tax provisions While unlimited charitable contribution deductions exist under estate tax laws, the anticipated phaseout of estate taxation may lead to a decrease in charitable donations It's important to recognize that charitable contributions are interconnected within both income tax and estate and gift tax frameworks.
To enhance the effectiveness of charitable contribution rules, Congress should consider revising § 170 to bolster tax incentives for donations These proposed changes would not only encourage greater charitable giving but also align with the principles of a progressive tax system.
228 Internal Revenue Serv., supra note 8, at 205-06.