Order Code RS21144
Updated January 29, 2003
CRS Report for Congress
Received through the CRS Web
Tax Incentives for Charity:
An Overview of Legislative Proposals
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Summary
This reports describes and, in some cases, briefly discusses, the tax provisions of
the Community Solutions Act (H.R. 7, which passed the House on July 19, 2001). The
provisions include charitable deductions for non-itemizers, rollovers of IRAs into
charitable uses, a reduction in the excise tax on private foundation income, an increase
in the deductions cap for corporate contributions, and several narrower provisions
relating to business contributions of property and charitable remainder trusts. In 2002,
the Senate also reported a substitute that included a number of similar provisions (The
CARE Act of 2002), along with some revenue offsets (user fees and corporate tax
shelters).
The Community Solutions Act of 2001 (H.R. 7), which passed the House on July 19,
2001 had eight new tax provisions designed to benefit charities and charitable giving.
The bill also contained provisions relating to charitable choice (directed at religious
organizations’ role in administering government programs).1 According to the Joint
Committee on Taxation, the charitable tax benefit provisions were projected to cost $13.3
billion over 10 years; when fully phased in they cost $2.4 billion on an annual basis.
President Bush proposed three of these tax provisions in his original tax proposal (2001),
but these provisions were not included in the 2001 tax cut (P.L. 107-16). The President’s
FY2003 budget included these provisions except the last one (self-constructed property),
with expanded features in two cases (the non-itemizer’s deduction and deductions for
inventories), along with a change expediting consideration of applications for exempt
status. S. 1924, introduced in the Senate in the 107th Congress by Senators Lieberman and
Santorum after discussion with the President, would provide a temporary non-itemizers
deduction with a higher cap. The Senate Finance Committee reported out a version of the
bill on June 18, 2002, the CARE Act of 2002 with a temporary non-itemizers deduction
with both a floor and ceiling. It excluded some provisions of H.R. 7 but contained others,
and is estimated to cost $10 billion per year, although the bill contained revenue offsets.
The stated purpose of the tax revision is to encourage giving to charitable organizations:
1 For a discussion of charitable choice provisions, see CRS Report RS20948, Charitable Choice
Provisions of H.R. 7.
Congressional Research Service ˜ The Library of Congress

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“to provide funds to charitable organizations, many of which will perform activities that
otherwise would have to be performed by the Federal Government.”2
This report summarizes the tax provisions affecting charitable contributions and
briefly reviews the issues in most cases. Provisions are discussed in order of their revenue
cost in 2011 in H.R. 7, when fully phased in. A final section summarizes the major
changes made by the Senate proposal and some proposed floor amendments.
Deduction for Non-Itemizers
Under current law a taxpayer can either itemize deductions (the major deductions are
charitable contributions, excess medical expenses, mortgage interest, and state and local
income and property taxes) or choose the standard deduction. The standard deduction is
advantageous if that amount is larger than total itemized deductions. H.R. 7 would allow
someone who takes the standard deduction to deduct charitable contributions in addition,
but with caps as shown in Table 1. (The President’s original proposal and his FY2003
proposal have no cap.)
The non-itemizer’s charitable deduction was the single most important tax provision
of H. R. 7, initially accounting for about one third of the cost, but by 2011 when fully
phased in, would account for 48% of the total cost. This new deduction was not capped
in the President’s original proposal and was much larger ($7.6 billion in 2011); it
accounted for virtually all (94%) of the cost of charitable provisions in that year.
Table 1: Caps on Charitable Contribution Deduction for
Non-Itemizers in H.R. 7
Year
Cap For Single Returns
Cap for Joint Returns
2002-2003
$25
$50
2004-2006
$50
$100
2007-2009
$75
$150
2010 and after
$100
$200
While the deduction for non-itemizers may increase giving, its effects would be
limited, in large part because of the cap. The effect on charitable giving per dollar of
revenue loss would be significantly increased if the cap were lifted or removed. Even
without a cap, the deduction is unlikely to induce additional giving as large as the revenue
loss because evidence suggests that the responsiveness of taxpayers, particularly lower and
2 Joint Tax Committee, Description of an Amendment in the Nature of a Substitute to H.R. 7,
the “Community Solutions Act of 2001,” JCX-58-01, July 10, 2001.

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moderate income taxpayers, to incentives is small.3 The provision would also increase
complexity of tax filing by including another line item.
A limited deduction for non-itemizers was formerly available for 1981-1986, enacted
as part of the Economic Recovery Tax Act of 1981 (P.L. 97-34).

IRA Rollover Provision
The second largest tax provision in H.R. 7 is one allowing tax free distributions from
individual retirement accounts to charitable organizations by individuals aged 70 and1/2
and over. While this treatment may appear no different from simply including the amounts
in adjusted gross income and then deducting them as itemized deductions, it can provide
several types of benefits even to those who itemize. Apparently an important motivation
is to reduce adjusted gross income which can trigger a variety of phase-outs and phase-ins,
including the phase-in of taxation of Social Security benefits. (Another potentially
important phase-out effect, that for itemized deductions, is now scheduled to be
eliminated.) There are also income limits on charitable contributions.
However, unlike the case in the President’s proposal, this provision can also benefit
those who take the standard deduction by allowing exclusions that would not be otherwise
allowed. In effect, a return with the standard deduction would have no cap on charitable
deductions up to the limit of aggregate IRA amounts, since the taxpayer could simply
channel contributions through an IRA. (This effect did not matter in the President’s
proposal which had no cap).
This provision accounts for 29% of the estimated revenue cost in the first full year,
and 18% in the long run according to the Joint Committee on Taxation. Since IRAs tend
to be held by higher income individuals, the taxpayers might be somewhat more sensitive
to the incentive to give; however, it is not clear why this particular group of taxpayers is
targeted.
Reduce the Excise Tax on Foundation Investment
Income
Under current law, there is a 1% tax on investment income of foundations, and an
additional 1% if the foundation does not make a certain minimum distribution (based on
distributions made in the previous 5 years), or has been subject to a tax for failure to
distribute in the previous 5 years. H.R. 7 would eliminate the extra 1% tax. This
provision accounts for 32% of the revenue cost in the first year, but 12% in the long run.

Private foundations, whose contributors (or their families) retain the right to direct
the distribution of funds, have always been subject to greater scrutiny, in part because of
the possibility of the donor (or family ) obtaining a private benefit. Foundations are
3 See CRS Report RL31108, Economic Analysis of the Charitable Contribution Deduction for
Non-Itemizers.

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required to distribute 5% of their assets each year (or pay a penalty), but the tax is credited
against that distribution.
If the foundation is just making the minimum distribution, every dollar of tax
reduction should be funneled into distributions. Moreover, the moving average
discourages a large contribution in a particular year. The reduction in the investment tax
would also make private foundations more attractive in general, although that increased
attractiveness might in part induce more contributions, and in part replace contributions
that might have gone to other charities. The effects should be small, however, because the
tax is small.

Proponents of reducing the tax also argue that it should be reduced because it brings
in revenue that is in excess of IRS audit costs, which they indicate was the original
purpose of the tax (which was introduced in 1969). The revenue stream from this tax has,
however, been quite variable recently because it is heavily affected by the stock market.
In any case, a reading of the legislative history indicates that while the Senate
characterized the tax as an audit fee, the House referred more generally to the notion that
private foundations should bear part of the cost of government generally because of their
ability to pay (as well as viewing it in part as a user fee), and both objectives were cited
in the final explanation of the bill. It was reduced twice (in 1978 and 1984) based on the
argument regarding costs of audit versus revenue.
Another argument made for eliminating the additional tax is the additional
complication arising from it. Of course, one could as easily simplify by converting the
entire tax to a flat fee; simplification does not require reduction.
Raising the Cap on Charitable Deductions of
Corporations
Under current law corporations can deduct charitable contributions of up to 10% of
income; the proposal would gradually raise the cap to 15%. This provision accounts for
8% of the first year cost, and 11% of the final cost. Most corporate giving already falls
well under the cap; the average giving is less than 2% of income.
There has been some dispute over the propriety of allowing a corporate charitable
deduction, since shareholders could make their own decisions about charitable giving. In
some views, charitable giving by corporations is simply another management perk that
might be excessive because of monitoring problems by shareholders (this problem is also
called an agency cost problem). Others argue that corporations should be encouraged to
give to charity and to be socially responsible. Economists have studied models in which
charitable giving is part of the firm’s profit maximizing behavior (e.g. by gaining the firm
good will). Evidence on the effectiveness of the deduction is mixed, with time series
studies showing a positive effect and cross section results not finding an effect.4
4 See James R. Boatsman and Sanjay Gupta, “Taxes and Corporate Charity: Empirical Evidence
from Micro-Level Panel Data, “ National Tax Journal, Vol. 49, June 1996, pp. 193-213.

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Extend Present Law Section 170(e) Deduction for Food
Inventory to all Businesses
Under present law, firms that donate inventory to charity in general get a deduction
for the cost (not the market value). A special rule allows businesses paying the corporate
tax to also exclude half the appreciation (half the difference between market value and cost
of production, if the inventory is given to an organization that directly passes it on to the
ill, the needy, or infants, as long as the total deduction is no more than twice the cost. An
important category of donations is that of food and there have been disputes between
taxpayers and the IRS about how to measure the fair market value of food. Under the bill,
unincorporated businesses (or businesses that are incorporated but do not pay the corporate
tax) would also be allowed the additional deduction, and the fair market value of
wholesome food would be considered the price at which the firm is currently selling the
item (or sold it in the past). This provision accounts for 7% of the first year cost, and 3%
of the cost in 2011. (The President’s 2003 budget would allow all of the market value to
be deducted, but retains the two times basis restriction).
The objective of the provision is to create more equity among types of taxpayers and
resolve disputes (largely in the taxpayer’s favor). However, one important concern about
donated inventory is whether firms might be profiting from charitable contributions for
items that they could not otherwise sell.5
Modify the Basis of S Corporation Stock for Certain
Charitable Contributions
Under current law, a shareholder in a Subchapter S corporation (a corporation treated
as a partnership) is allowed to deduct his or her pro rata share of any corporate
contribution. At the same time, the taxpayer must decrease the basis of stock by that
amount (which is a way of reflecting the effect on the shareholder’s asset position). The
bill provides that the taxpayer will not have to reduce basis in the stock to the extent a
deduction is taken in excess of adjusted basis of the donated property (e.g. cost). This
provision appears to be consistent with allowing a deduction for the market value of
appreciated property without including the appreciation in income (a special benefit
generally available to taxpayers). This provision would cost almost 3% of loss in the first
year, and slightly over 2% in 2011.
Modify Tax on Unrelated Business Taxable Income of
Charitable Remainder Trusts
Current law provides tax deductions for some portion of a trust and income tax
exemption on the earnings, if a remainder of the assets is left to charity (while paying
income to a non-charitable donee, usually a spouse or other relative during an interim
5 See CRS Report RL31097, Charitable Contributions of Food Inventory: Proposals for Change
Under the Community Solutions Act of 2001.

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period). The trust’s income is, however, no longer exempt from tax if the trust has
unrelated business income. This provision liberalizes the rule by providing for a 100%
excise tax on any unrelated business income rather than loss of all tax exemption. This
provision accounts for a negligible share of the cost (less than ½ of 1%).
Modify the Self Constructed Property Rules for Certain
Charitable Corporations
Certain special treatment (similar to that for food inventory) is allowed for certain
scientific property used for research and for contributions of computer technology and
equipment, provided the property is constructed by the taxpayer. In concrete terms, this
rule requires that no more than 50% of the cost is due to parts purchased elsewhere. This
bill would allow property assembled, as well as constructed. This provision is not
included in the President’s FY2003 budget.
Modifications in the Senate Proposal
The Lieberman-Santorum plan, S. 1924, would have provided non-itemizer
deductions with a cap of $400 ($800 for joint returns); the Senate Finance Committee
reported a version of S. 1924 (as a substitute for H.R. 7) with a temporary non-itemizers
deduction with floor and a ceiling ($250/$500 for singles and $500/$1000 for joint
returns), costing $10 billion from 2002-20012. The proposal includes the IRA rollover
provision but not the foundation excise tax reduction or the increase in corporate
contributions cap. The remaining four minor provisions of H.R. 7 are included. There are
also a number of additional provisions some of them relatively small. The most important
in revenue cost terms is allowing a deduction for the fair market value of federal
government bonds ($1.077 billion). Another important set of provisions relate to benefits
for contributions for conservation purposes including a 25% exclusion from capital gains
on the sale or exchange of property to the government for conservation purposes ($698
million) and lifting contribution caps for contributions for conservation purposes ($285).
A third provision is allowing the food inventory treatment for book inventories as well
($273 million). There are a number of minor provisions as well. The bill also includes
increases in grants, as well as revenue offsets relating to tax shelters and user fees.
Action on the Senate floor awaited agreement on floor amendments. One floor
amendment included in the managers’ amendment and proposed by Senator Lincoln would
allow foundations a longer period (up to 10 years) to eliminate excess holdings of stock
to avoid a heavy tax on excess business holdings. Some indications have been made that
Wal-Mart is a firm that may especially benefit from this change. This provision
substitutes for an amendment proposed, but then withdrawn, during committee
consideration which would have raised the limit on holdings in one firm from 2% to 5%.
The second amendment, offered by Senator Hutchinson, would include the provisions of
S. 2078, allowing State and local candidates for public office to be exempt from certain
tax reporting requirements. There were indications that other amendments might have
been considered, but the proposal never came to the floor, due, in part, to the press of other
legislative business.

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