Tax Issues Relating to Charitable
Contributions and Organizations
Jane G. Gravelle
Senior Specialist in Economic Policy
Molly F. Sherlock
Analyst in Economics
January 18, 2011
Congressional Research Service
7-5700
www.crs.gov
RL34608
CRS Report for Congress
P
repared for Members and Committees of Congress
Tax Issues Relating to Charitable Contributions and Organizations
Summary
Prior to the financial crises and subsequent recession, the value of tax benefits for charitable
contributions and organizations was estimated to be around $100 billion per year. About half of
this cost arose from the deductions for charitable contributions with the other half from
exemptions of earnings of nonprofits. In 2010, the deduction for charitable contributions results
in an estimated $40 billion in federal revenue losses. On average, endowment investments in
2009 experienced losses, meaning that the federal government did not lose revenues from
exempting asset returns from taxation.
This report provides an overview of recent changes affecting tax-exempt and charitable
organizations, while also discussing issues that may be of legislative interest in the future. The
Pension Protection Act (P.L. 109-280) included a number of restrictions related to charitable
contributions as well as restrictions on tax-exempt organizations. These changes are briefly
surveyed.
In addition to changes regarding the treatment of charitable contributions and tax-exempt
organizations that have been made in recent years, several issues may be considered in future
legislation. A number of provisions related to charitable contributions were extended temporarily
as part of the tax extenders in the Tax Relief, Unemployment Reauthorization, and Job Creation
Act of 2010 (P.L. 111-312). Most of the charitable extenders were contained in legislation first
introduced in 2001. Some provisions were enacted temporarily in 2005; further provisions and
extensions occurred in 2006, in the Pension Protection Act. These extenders include an individual
retirement account (IRA) rollover, liberalized treatment of certain gifts of inventory and
conservation property, and two more technical provisions.
Limitations on itemized deductions have been proposed as part of the Fiscal Commission’s
recommendation. President Obama’s FY2010 and FY2011 Budgets propose limiting itemized
deductions, including charitable contributions, to 28%. The Patient Protection and Affordable
Care Act (PPACA; P.L. 111-148), in response to concerns regarding charity care and community
benefits provided by tax-exempt hospitals, imposed new regulations.
Other issues that may arise reflect concerns about donor-advised funds and supporting
organizations (now under study at the Treasury Department) and educational institutions’
endowments. For donor advised funds and supporting organizations, the Treasury Department is
in the process of evaluating whether minimum distribution requirements should be imposed,
alongside other new regulations. The decline in educational institutions’ endowments have raised
concerns that such declines may lead to tuition increases. New reporting requirements for small
tax-exempt organizations, enacted under the Pension Protection Act (P.L. 109-280) may cause a
number of noncompliant tax-exempt entities to lose their tax-exempt status.
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Tax Issues Relating to Charitable Contributions and Organizations
Contents
Introduction ................................................................................................................................ 1
Current Tax Benefits ................................................................................................................... 2
Charitable Contributions ....................................................................................................... 2
Tax Exemption of Earnings ................................................................................................... 3
Expanding Benefits for Charitable Contributions and Organizations ............................................ 4
Provisions Considered But Not Adopted................................................................................ 5
Deduction for Non-Itemizers........................................................................................... 5
Reducing the Foundation Investment Income Excise Tax ................................................ 6
Raising the Corporate Charitable Deductions Cap ........................................................... 8
Unrelated Business Income of Charitable Remainder Trusts ............................................ 8
Disaster Provisions Enacted on a Temporary Basis ................................................................ 8
Provisions Now Part of the Extenders.................................................................................... 9
Contributions of Conservation Property........................................................................... 9
IRA Rollover Provision................................................................................................... 9
Extending the Deduction for Food Inventory to all Businesses....................................... 10
Contributions of Computer Equipment .......................................................................... 11
Contributions of Book Inventory ................................................................................... 11
Basis of S Corporation Stock for Charitable Contributions ............................................ 11
Unrelated Business Income: Related Party Payments..................................................... 12
Permanent Reduction in Excise Tax Reduction for Blood Collector Organizations............... 12
Recent Restrictions on Charitable Donations and Organizations ................................................ 12
Restrictions on Charitable Contributions ............................................................................. 13
Vehicle Donations and Gifts of Intellectual Property...................................................... 14
Contributions of Historical Conservation Easements ..................................................... 14
Contributions of Taxidermy Property............................................................................. 14
Recapture of Tax Benefit if Not Used for Exempt Purpose ............................................ 15
Deductions for Contributions of Clothing and Household Items..................................... 15
Recordkeeping Requirements........................................................................................ 15
Contributions of Fractional Interests.............................................................................. 15
Penalties on Overstatements of Valuations..................................................................... 16
Restrictions on Tax-Exempt Organizations .......................................................................... 16
Terrorist Activities ........................................................................................................ 16
Leasing Activities ......................................................................................................... 17
Penalties for Tax-Exempt Organizations in Prohibited Tax Shelters ............................... 17
Life Insurance ............................................................................................................... 17
Penalties and Penalty Taxes........................................................................................... 17
Credit Counseling Agencies .......................................................................................... 17
Expanding the Base for Imposing Foundation Excise Taxes........................................... 18
Defining Conventions or Association of Churches ......................................................... 18
Information Reporting: Organizations Not Filing Annual Returns.................................. 18
Disclosure to State Officials .......................................................................................... 18
Disclosure of the Unrelated Business Income Tax Return .............................................. 18
Donor-Advised Funds and Supporting Organizations .................................................... 19
Current Issues Surrounding Charitable Deductions and Organizations ....................................... 19
The Extenders ..................................................................................................................... 20
Limiting Itemized Deductions ............................................................................................. 21
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Tax Issues Relating to Charitable Contributions and Organizations
Nonprofit Hospitals............................................................................................................. 21
University and College Endowments................................................................................... 22
Donor-Advised Funds and Supporting Organizations .......................................................... 23
Reporting Requirements and Exempt Status Revocation...................................................... 23
Specific Sectors Including Media-Based Ministries ............................................................. 24
Tables
Table 1. Charitable Provisions Among the Extenders ................................................................. 20
Contacts
Author Contact Information ...................................................................................................... 24
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Tax Issues Relating to Charitable Contributions and Organizations
Introduction
Historically, the value of tax benefits for charitable contributions and organizations was estimated
to be around $100 billion per year. This figure has fallen in recent years due to the economic
recession and slow recovery. Although revisions to the treatment of charitable contributions and
tax-exempt organizations that receive these contributions have been made in recent years, a
number of issues remain unresolved. A number of provisions related to charitable contributions
have been enacted on a temporary basis as part of the “tax extenders,” including an individual
retirement account (IRA) rollover, liberalized treatment of certain gifts of inventory, and some
other provisions. The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010
(P.L. 111-312) extended these provisions through 2011. The future of various charitable tax
provisions beyond 2011 is uncertain.
This report also addresses a number of current policy issues relevant for various types of
charitable organizations. Issues relating to donor-advised funds and supporting organizations,
such as distribution requirements, remain relevant. In 2006, legislation included a directive to the
Treasury Department to study donor-advised funds and supporting organizations and make
recommendations.1 Similar concerns about whether funds were being paid out at a high enough
rate have also been directed at university and college endowments, where a combination of high
returns and relatively low payout rates has led to rapid growth. Issues have also been raised about
whether nonprofit hospitals provide enough charity care. The Patient Protection and Affordable
Care Act (PPACA; P.L. 111-148) attempted to address some of these concerns by imposing new
requirements on nonprofit hospitals while requiring the Secretary of the Treasury in conjunction
with the Secretary of Health and Human Services to report to Congress on charity care provided
by tax-exempt hospitals.2
The President’s FY2010 and FY2011 Budgets propose limiting the value of itemized deductions
(which would include charitable contributions) to 28% of each dollar. The final report of the
Fiscal Commission appointment by President Obama also recommended limiting the value of tax
benefits associated with charitable contributions.
In addition to addressing the issues mentioned above, this report discusses the current tax benefits
for tax-exempt and charitable organizations, reviews legislative changes that have taken place in
recent years, and discusses potential future legislative issues. It focuses on deductions for
charitable contributions, and on institutions that are generally eligible for deductible charitable
contributions, such as social welfare organizations, educational institutions, nonprofit hospitals,
and churches, along with conduits to those institutions such as private foundations, donor-advised
funds, and supporting organizations.
1 This report has not yet been released.
2 For more information, see CRS Report RL34605, 501(c)(3) Hospitals and the Community Benefit Standard, by Erika
K. Lunder and Edward C. Liu.
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Tax Issues Relating to Charitable Contributions and Organizations
Current Tax Benefits
The tax system provides a series of benefits for tax-exempt and charitable organizations. The
most widely estimated and discussed is the deduction for charitable contributions, which is
estimated in FY2010 to reduce federal revenue by about $40 billion.3
Another important benefit is the exemption of earnings on assets from the income tax. As
discussed below, although this benefit is difficult to estimate, it appears to be as large, and
historically has been in the neighborhood of $50 billion per year. For universities and colleges,
these benefits are several times as large as the savings by donors from deducting charitable
contributions. The value, however, likely fell temporarily given the reduction in earnings yields
during the recent economic slowdown.
Charitable Contributions
Not all tax-exempt organizations can receive tax deductible donations, but religious, educational,
social welfare, health, animal protection, and similar organizations are eligible. In recent years,
several revisions to the treatment of charitable deductions have been made, both to expand
benefits and address potential abuses. Some of the provisions that expand benefits have become
part of the “extenders,” provisions that are currently set to expire at the end of 2011.
Although charitable deductions are available to all taxpayers, individuals who take the standard
deduction do not have a marginal tax incentive to give.4 Slightly over one-third of taxpayers
itemize; about 30% deduct charitable contributions. Individuals’ contributions are, in general,
limited to 50% of income for most charities, but are restricted to 30% for certain nonprofits,
including non-operating foundations and institutions set up for the benefit of members (such as
fraternal lodges). Individuals can contribute property as well as cash, and the contribution of
appreciated assets has particularly beneficial treatment, since the value of most appreciated assets
can be deducted without including the capital gains in income. (Some contributions of property
are limited to the smaller of basis or fair market value, such as business inventory.) For that
reason, gifts of appreciated property are limited to 30% of income for most general charitable
organizations, and to 20% for organizations with more restricted giving limits, such as non-
operating private foundations. Corporate contributions are limited to 10% of taxable income.
Individuals can also deduct costs of volunteering for charitable purposes, including out-of-pocket
expenditures, costs of using a vehicle, and travel costs when there is no significant personal
element.
The treatment of charitable contributions has been of legislative interest. A series of proposals to
expand charitable benefits were made, beginning with President Bush’s 2000 presidential
3 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, JCS-3-10,
December 15, 2010. The categories for education and health are estimated separately at $5.5 billion and $4.3 billion,
respectively. Of overall charitable contributions, not all of which are deductible because they are made by non-
itemizers, more than a third are to religious organizations,13% are to education, 10% to grantmaking foundations, 9%
to human services, 8% to public society benefit, 7% to health, 4% to arts, culture and humanities, 3% to international,
about 2% to environment and animals, and 6% unclassified. The Center on Philanthropy at Indiana University, Giving
USA 2010: The Annual Report on Philanthropy for the Year 2009 (Indianapolis, IN: Giving USA Foundation, 2010).
4 The standard deduction does not impose a penalty, as it is an option that can be used when it is greater than the total
sum of itemized deductions.
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campaign, and followed by a series of bills introduced in Congress (referred to as the Community
Solutions Act and the CARE Act). The centerpiece of the initial proposal was to allow charitable
deductions for non-itemizers. This provision, which was relatively costly compared to other
proposals, was scaled back with ceilings and floors, and ultimately not adopted. A number of
more limited proposals were considered and some were adopted, largely on a temporary basis.
Proposals and enacted legislation placing restrictions on charitable contributions were largely
motivated by potential abuses, which led to some changes in the law. These included the lack of
documentation of cash contributions, but largely focused on gifts of property, where the valuation
of the property or even the existence of a true gift may be questioned. Broad reform proposals
have also suggested restricting charitable deductions in order to make incentives more efficient,
both from an economic and administrative perspective, by only allowing charitable deductions in
excess of a floor.
Tax Exemption of Earnings
A less visible, but nevertheless important, benefit is that tax exemption allows organizations to
accumulate assets without paying tax on earnings.5 Estimates discussed below suggest that the
revenue loss from this tax benefit is even larger than that associated with charitable contributions
deductions. If charitable contributions were spent quickly, this benefit would be minimal. If
contributions are held as assets and invested, the tax exemption may confer significant benefits.
There are several ways in which donations are invested rather than spent. Some types of active
tax-exempt organizations maintain assets in the form of endowments, particularly educational
institutions. Private foundations are often originally funded with a large donation and pay out a
small share of assets (required to be at least 5%, however). Two other types of institutions are
similar to private foundations in that they do not directly engage in activities and accumulate
assets from which they make payments: supporting organizations and donor-advised funds. All of
these types of asset accumulating institutions have been the subject of legislative interest.
Prior to the recent recession, revenue losses associated with allowing organizations to accumulate
assets tax-free had increased substantially with the growth of educational institution endowments.
At some institutions, earnings were substantial relative to payout rates. During FY2007 (which
ended in June 2007 for most institutions), approximately $25 billion would have been raised if
endowment earnings alone were subject to the corporate tax. 6 This is more than three times as
5 The unrelated business income tax, or UBIT, is imposed on business activities unrelated to the charitable purpose, but
it does not apply to investment earnings such as dividends and interest.
6 For FY2007 (ending in June of 2007) endowments of universities totaled $411 billion, and earned a return of 21.5%
according to the National Association of College and University Business Officers (posted at http://www.nacubo.org/
x2376.xml). At a 35% tax rate, this amount totals to $31 billion ($411 billion times 0.215 times 0.35). Based on the
allocation of assets (about 60% to 70% in equity investments), standard shares in capital gains (60%) and shares of
gains unrealized (50%), about 20% would be unrealized capital gains. The total loss would be about $25 billion ($31
billion times 0.80). The only other readily available data source of assets and earnings of specific charities is in the
survey of large charitable institutions in the Chronicle of Philanthropy (“Special Report: Jitters Among Strong
Returns,” pp. 6-11, June 24, 2008). Adding the assets of institutions outside of education indicated that these large non-
educational institutions had endowments about 40% the size of all educational institutions, with about three quarters
attributable to foundations, implying an additional revenue cost of around $10 billion, for a total of $35 billion. This
estimate is incomplete, however, as only a limited number of charities are included and not all income is from
endowments. For a more comprehensive number, some estimates of passive income are included in the national income
accounts. Earnings for educational institutions for FY2006, a year with comparable data, were $52 billion. Although
the income concepts are not precisely the same, in calendar year 2005 (which ended approximately six months earlier)
total rents, dividends and interest reported in the National Income and Product Accounts ascribed to nonprofits and
(continued...)
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Tax Issues Relating to Charitable Contributions and Organizations
large as the revenue loss for charitable donations to all educational institutions, which was
approximately $7 billion in 2007. The ratio of revenue cost of the asset earnings to charitable
contributions is probably smaller for other types of nonprofits. Nonetheless, the revenue cost of
exempting asset earnings for all charitable organizations was likely as high as $50 billion prior to
the recession, about the same size as the cost of the charitable deduction.
Returns on educational endowments were -18.7% in FY2009, and -2.5% over the 2007 through
2009 three-year period.7 Over the 10-year period, endowments earned a net return of
approximately 4%. The recent economic downturn highlights how revenue losses associated with
the tax-free accumulation of assets are susceptible to economic conditions. Revenue loss will
fluctuate as returns to assets fluctuate.
Congress also addressed some issues associated with tax-exempt organizations themselves. Some
of this concern was directed at circumstances where tax deductible donations are made to
organizations that act as conduits and do not have charitable activities. Private non-operating
foundations, recipients of donations that make grants to active organizations, are required to pay
out 5% of assets. Donor advised funds and supporting organizations, however, had no payout
requirements. These organizations were the subject of legislative interest, not only because of
concerns about payout rates, but also about the possibilities of using these organizations, which
were not subject to self-dealing rules as restrictive as foundations, for private benefit. Some
changes for these organizations were adopted, but major changes, such as payout requirements,
were not in all cases; instead, Congress has authorized Treasury studies.
Expanding Benefits for Charitable Contributions
and Organizations
Although numerous legislative proposals have been introduced since 2001 directly relevant to the
charitable sector, few of these proposals have become public law. The 111th Congress extended a
number of charitable provisions that had been allowed to expire as part of the extenders package
in the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312).
The charitable extenders, which had been allowed to expire at the end of 2009, had last been
extended by the 110th Congress as part of the Emergency Economic Stabilization Act of 2008
(P.L. 110-343). The 111th Congress also enacted legislation to accelerate tax deductions for
charitable contributions made to Haiti’s earthquake victims.8
(...continued)
retained were $64 billion (Mark Ledbetter, Comparison of BEA Estimates of Personal Income with IRS Estimates of
AGI, Survey of Current Business, November 2008, p. 38) and, if the share of capital gains were assumed to be the same
as endowment investments, total income would be $106 billion, with the total for all nonprofits roughly twice the
amount of educational institution endowment earnings. Hence, the total revenue cost would be about twice as large as
the loss from exempting endowments, or about $50 billion.
7 National Association of College and Universiy Business Officers, “Educational Endowments Returned -18.7% in
FY2009,” press release, January 28, 2010,. Available at http://www.nacubo.org/Documents/research/
2009_NCSE_Press_Release.pdf.
8 For additional background, see CRS Report R41036, Charitable Contributions for Haiti’s Earthquake Victims, by
Molly F. Sherlock.
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The 109th Congress enacted a number of pieces of legislation with provisions to promote
charitable giving. Much of this legislation was aimed at disaster relief.9 The Pension Protection
Act of 2006 (P.L. 109-280) contained a number of provisions that restricted charitable giving,
including new reporting requirements for tax-exempt organizations; new requirements on donor-
advised funds, supporting organizations, and credit counseling organizations; and enhanced
incentives for charitable giving, such as the tax-free distributions from IRA accounts for
charitable purposes.10
This section summarizes the tax proposals liberalizing charitable contributions and briefly
reviews the issues in most cases. It is followed by a section summarizing the tax proposals
restricting charitable contributions and organizations. Each proposal considered in this section is
identified as not adopted, temporary (adopted as a temporary provision without expectation of
extension), extender (adopted with an expiration date as part of the extenders proposals), or
permanent. Note that further details of provisions enacted are contained in the Joint Tax
Committee’s “Blue Books,” that summarize legislation.11
Provisions Considered But Not Adopted
In recent years, a number of provisions have been included in various proposals, but ultimately
have not been adopted. These include a deduction for non-itemizers, a reduction in the foundation
excise tax, an increase in the income limit on corporate deductions, and a proposal to replace the
disallowance of tax-exempt status for unrelated business income in a charitable remainder trust
with an excise tax.
Deduction for Non-Itemizers
The most significant charitable contributions proposal, in scope and revenue, considered in recent
Congresses was a 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 the amount of the standard deduction is larger than total
itemized deductions.12
When President George W. Bush first proposed extending the deduction for charitable
contributions to non-itemizers in 2001 no restrictions were imposed. Most legislative proposals
contained some limitation on this deduction, either in the form of a cap (a limit on the amount
that could be deducted) or a floor (where only contributions above a certain threshold could be
deducted). Although a number of proposals were contained in legislation introduced in recent
9 See the Tsunami Relief Act of 2005 (P.L. 109-1), the Katrina Emergency Relief Act of 2005 (P.L. 109-73), and the
Gulf Opportunity Zone Act of 2005 (P.L. 109-135).
10 A detailed summary of the charitable provisions in the Pension Protection Act of 2006 from the Committee on Ways
and Means is available at http://waysandmeans.house.gov/media/pdf/taxdocs/072806charitable.pdf.
11 These documents can be found on the Joint Committee’s website http://www.jct.gov/. The legislation discussed in
this report is summarized in two volumes: General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-
1-05, General Explanation of Tax Legislation Enacted in the 109th Congress, JCS-1-07, and General Explanation of
Tax Legislation Enacted in the 110th Congress, JCS-1-09.
12 Non-itemizers were allowed a limited deduction for charitable contributions from 1981-1986, a provision which was
enacted as part of the Economic Recovery Act of 1981 (P.L. 97-34).
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years, extending the deduction for charitable giving to non-itemizers has not been enacted.
Although the 2006 Pension Protection Act (P.L. 109-280) did include a number of charitable
giving incentives, a deduction for non-itemizers was not included in this piece of legislation.
Modifications to the charitable deduction have been proposed as part of broader tax reform or
deficit reduction strategies. President Obama’s Fiscal Commission recommended replacing the
charitable deduction with a 12% non-refundable tax credit available to all taxpayers.13 Under this
proposal, the credit would only be available for donations above a 2% of adjusted gross income
(AGI) floor.14 The 2005 President’s Advisory Panel on Federal Tax Reform proposal on overall
tax reform also included in its plans an extension of the deduction to non-itemizers, but added a
floor of 1% of AGI, for both itemizers and non-itemizers.15
The Congressional Budget Office (CBO) has also discussed proposals to curtail the charitable
giving deduction. A proposal that would limit deductions to donations above 2% of AGI for
itemizers would generate an estimated $221.5 billion in additional revenues over 10 years.
The CBO has also looked at extending the charitable deduction to non-itemizers. A non-itemizer’s
deduction with a $200 cap for married couples filing jointly ($100 for individual filers) would
cost $8.2 billion over 10 years. A $500/$250 cap is estimated to cost $31.3 billion over 10 years.16
The main objective of extending the charitable deduction to non-itemizers was to increase
charitable giving. Charitable provisions were, however, considered after the 2001 tax cuts which
involved considerable revenue costs. Caps were seen as a means to constrain the revenue loss. At
the same time, while the deduction for non-itemizers may increase giving, its effects would be
limited because of the cap, and the dollars of charitable giving induced per dollar of revenue loss
would be smaller, particularly with a small cap. In addition, the provision would increase
complexity for taxpayers who do not itemize.
Floors also limit the revenue cost, but increase effectiveness per dollar of revenue lost (relative to
a provision without a floor) and simplify the tax code because taxpayers with small amounts of
contributions would not qualify. Even without a cap, the deduction may not induce additional
giving as large as the revenue loss because the responsiveness of taxpayers, particularly lower
and moderate income taxpayers, to incentives may be small.17
Reducing the Foundation Investment Income Excise Tax
Current law imposes a 1% tax on investment income of foundations, and an additional 1% if the
foundation does not make a certain minimum distribution (based on average distribution rate over
13 The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 2010,
http://www.fiscalcommission.gov/news/moment-truth-report-national-commission-fiscal-responsibility-and-reform.
14 Congressional Budget Office, Budget Options: Volume 2, Washington , DC, August 2009, p. 193,
http://www.cbo.gov/ftpdocs/102xx/doc10294/08-06-BudgetOptions.pdf.
15 President’s Advisory Panel on Federal Tax Reform, Simple, Fair and Pro-Growth,: Proposals to Fix America’s Tax
System, Washington, DC, U.S. Government Printing Office, November 2005.
16 Congressional Budget Office, Budget Options: Volume 2, Washington , DC, August 2009, p. 195,
http://www.cbo.gov/ftpdocs/102xx/doc10294/08-06-BudgetOptions.pdf.
17 See CRS Report RL31108, Economic Analysis of the Charitable Contribution Deduction for Non-Itemizers, by Jane
G. Gravelle. The effects of alternative approaches on revenues and charitable giving were also addressed in
Congressional Budget Office, Effects of Allowing Nonitemizers to Deduct Charitable Contributions, December 2002.
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the previous five years), or has been subject to a tax for failure to distribute in the previous five
years. Past legislative action has sought to remove the additional 1% tax.18 Legislation introduced
in the 111th Congress, H.R. 4090 and S. 676, would have set a single tax rate of 1.32% on the
investment income of foundations.
Private foundations, whose contributors (or their families) retain the right to direct the distribution
of funds, have been subject to greater scrutiny, in part because of the possibility of the donor (or
family) obtaining a private benefit. Foundations are 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 because the tax is credited against the deduction. Since the tax and the
actual distribution sum to a fixed amount, a fall in the tax will result in a rise in the amount
distributed to other organizations. Moreover, the moving average rule that imposes the additional
1% tax if the foundation does not distribute at the average rate of the last five years discourages a
large contribution in a particular year because it increases the hurdle for future avoidance of the
tax. Proponents of current proposals to impose a fixed 1.32% tax rate on the investment income
of foundations highlight that doing so would remove the disincentive for foundations to make
large one-time payouts, often necessary to address natural disasters and other crises.19 The
reduction in the investment tax should also make private foundations more attractive to givers 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 argued 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 bill’s final explanation. 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. At the same time, simplification does not require reduction in the tax; it could be
converted to a larger flat fee.
18 A 2003 House proposal added a new provision that limited the counting of administrative costs as part of a
foundation’s minimum distribution requirement. Foundations are required to make a minimum distribution of 5%, but
that 5% can currently include administrative costs (which currently have to be “reasonable”). As originally introduced
earlier in 2003, the provision would have disallowed any administrative costs, but the proposal as reported allowed
deductions for most administrative costs, with some exceptions. This provision was not enacted.
19 Stephanie Strom, “Senate Measure Seeks to Spur Foundations to Give More,” The New York Times, March 25,
2009, Late Edition.
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Raising the Corporate Charitable Deductions Cap
Under current law corporations can deduct charitable contributions of up to 10% of income.
Proposals introduced in the House in 2003 would have gradually raised the cap to 20% (by one
percentage point each year beginning in 2004, reaching 15% in 2008-11, and 20% thereafter).
The initial (107th Congress) provision would have raised the limit to 15%. This provision is
relatively small, and most corporate giving already falls well under the cap; average giving is less
than 2% of income.
Some question the appropriateness of corporate charity, since shareholders could make their own
decisions about charitable giving. Allowing the deduction at the firm level is, however, more
beneficial to the donor since both the corporate and individual taxes are eliminated. In some
views, charitable giving by corporations is 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.20
Unrelated Business 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 period). The trust’s income is,
however, no longer exempt from tax if the trust has unrelated business income. There have been
congressional proposals to liberalize the rule by providing for a 100% excise tax on any unrelated
business income rather than loss of all tax exemption. This provision would have accounted for a
negligible cost.
Disaster Provisions Enacted on a Temporary Basis
Several provisions were enacted in 2005 in response to disasters. The Tsunami Relief Act of 2005
(P.L. 109-1) allowed contributions made in January 2005 to be treated as made in the previous
year (and therefore deductible on 2004 tax returns) to encourage giving for relief from the
Tsunami that struck in 2004. The Hurricane Katrina Emergency Relief Act of 2005 (P.L. 109-73)
adopted several provisions, effective through 2005, to encourage giving to Katrina victims. It
allowed unlimited cash contributions for individuals (normally restricted to 50% of income). It
also allowed unlimited contributions for corporations (normally restricted to 10% of taxable
income) if contributions were made to aid Katrina victims. Charitable contributions made after
the disaster were not subject to the phase out of itemized deductions. Mileage rates for deducting
costs of using a vehicle for charitable purposes to aid Katrina victims were increased from 14
cents to 70% of the business rate of 48.5 cents. Reimbursements for these costs in excess of the
mileage allowance were not included in income if the activity was for the aid of Katrina victims.
20 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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The Gulf Opportunity Zone Act (P.L. 109-135) extended the benefits of higher limits to
contributions to Hurricanes Rita and Wilma.
In 2010, Congress passed the Haiti Assistance Income Tax Incentive Act (HAITI Act; P.L. 111-
126). This legislation contained provisions similar to those enacted following the Tsunami in
2004, allowing taxpayers to claim tax deductions for giving on the previous years’ tax returns.21
Provisions Now Part of the Extenders22
A number of charitable provisions have been enacted on a temporary basis, and are now part of
the tax extenders. The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010
(P.L. 111-312) retroactively extended these provisions, which had been allowed to expire at the
end of 2009, through 2011. Prior to the most recent extension, the provision relating to donation
of conservation property was last extended by the Food and Energy Security Act of 2007 (P.L.
110-234). Six others, including the IRA rollover provision, three provisions relating to donations
of business inventory, a provision regarding the effect of a charitable donation on the basis of
stock of small corporations that elect to be taxed as partnerships, and a provision eliminating the
unrelated business income tax on arms-length rental payments to tax-exempt organizations from a
related entity were extended by the Emergency Economic Stabilization Act of 2008 (P.L. 110-
343).
Contributions of Conservation Property
Another important set of provisions, originated in the Senate, expanded benefits for contributions
for conservation purposes by lifting the cap on contributions as a percent of income. Gifts of
appreciated property are deductible at the fair market value, but, for individuals, have lower limits
(30% of income) than ordinary gifts such as cash (50% of income). The Pension Protection Act
(P.L. 109-280) increased the limit for appreciated property contributed for conservation purposes
to 50% for individuals. The provision increased the limit to 100% for farmers and ranchers,
including individuals and for corporations that are not publicly traded. To qualify, land used or
available to be used for agricultural or livestock production must remain available for such
purposes. This provision expired at the end of 2007, but was extended for an additional two years
in the Food, Conservation, and Energy Act of 2008 (P.L. 110-234). The Tax Relief,
Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended this
provision through 2011, at an estimated cost of $111 million. As noted above, lower income limits
for gifts of appreciated property reflect concerns about the overstatement of fair market value and
the deduction of amounts that have not been included in income.
IRA Rollover Provision
Currently, individuals aged 70½ and older are allowed to make tax free distributions from
individual retirement accounts to charities. This provision was adopted on a temporary basis in
21 For additional background, see CRS Report R41036, Charitable Contributions for Haiti’s Earthquake Victims, by
Molly F. Sherlock.
22 More information on the extenders can be found in CRS Report RL32367, Certain Temporary Tax Provisions that
Expired in December 2009 (“Extenders”), by James M. Bickley.
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the Pension Protection Act in 2006 but expired at the end of 2007, and is now extended through
2011. The treatment benefits non-itemizers, who would not otherwise be able to take a deduction.
Although this treatment may appear no different, for itemizers, 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. This treatment reduces adjusted gross
income, which can trigger a variety of phase-outs and phase-ins, including the phase-in of
taxation of Social Security benefits. There are also income limits on charitable contributions:
individuals can contribute no more than 50% of income in cash and no more than 30% in
appreciated property. Since IRAs tend to be held by higher income individuals, the taxpayers
might be somewhat more sensitive to the incentive to give; however, the law does not specify
why this particular group of taxpayers was targeted for an expansion of charitable giving
provisions. This provision was adopted in P.L. 109-280 with a $100,000 annual limit. It was
originally projected to cost $238 million in the first year and $856 million over 10 years. The two
year extension included in P.L. 111-312 has an estimated 10-year cost of $949 million.
Extending the Deduction for Food Inventory to all Businesses
Corporations 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 food. There
have been disputes between taxpayers and the IRS about how to measure the fair market value of
food.23 The charitable contributions proposals would have allowed unincorporated businesses (or
businesses that are incorporated but do not pay the corporate tax) 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), although this deduction would be limited to the
corporate percentage cap on deductions in general. This provision’s cost was relatively small.
The provision’s objective was to create more equity among different types of taxpayers and
resolve disputes (largely in the taxpayer’s favor). However, as with the deduction of appreciated
property, these rules allow firms to deduct amounts that have not been included in income.
Although the provision is limited by allowing only one-half the appreciation, these products, if
sold, would be taxed at full rates (rather than the lower rates imposed on individual capital gains).
In addition, as with gifts of capital gain property, an important concern is the potential
overstatement of market value. Firms may only be able to sell donated inventory at a much lower
price because the product is damaged in appearance, is older, or has other characteristics that
would require deep discounting to sell. Moreover, a firm with market power may not wish to sell
all of its inventory because increasing supply will drive the price down more for a sale than a
donation. It is possible that a provision that is extended to non-corporate businesses, which are
smaller and more numerous, will be more difficult to monitor for compliance.
For inventory that cannot be practically sold, the barrier to a donation by the firm is the extra
costs encountered in distributing the product. Thus, there is a tradeoff between creating an
incentive and providing a windfall for the firm.
23 See CRS Report RL31097, Charitable Contributions of Food Inventory: Proposals for Change, by Pamela J.
Jackson.
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The Katrina Emergency Relief Act of 2005 (P.L. 109-73) provided treatment to unincorporated
firms (not to exceed 10% of business income) through 2005 but did not make the other changes.
The Pension Protection Act of 2006 (P.L. 109-280) extended the provision through 2007, and the
Emergency Economic Stabilization Act of 2008 (P.L. 110-343) extended it through 2009. The Tax
Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended
this provision through 2011, with an estimated cost of $134 million over 10 years.
Contributions of Computer Equipment
C corporations that donate computer technology and/or equipment to educational organizations or
tax-exempt charities that support elementary and secondary education are eligible for a deduction.
In concrete terms, this rule requires that no more than 50% of the cost is due to parts purchased
elsewhere. The issues surrounding this provision are the same as those related to other
contributions of inventory, such as food inventory.
The Tax Relief and Health Care Act of 2006 (P.L. 109-432) extended the credit for two years.
Most recently, the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) extended the
provision through 2009. The Tax Relief, Unemployment Reauthorization, and Job Creation Act of
2010 (P.L. 111-312) extended this provision through 2011, with an estimated cost of $350 million
over 10 years.
Contributions of Book Inventory
A provision that originated in the Senate extended the treatment of food inventories to book
inventories for C corporations that donated to public elementary and secondary schools. As with
all contributions of property, valuation may be an issue. Book publishers who have printed too
many books may only be able to sell them at a discount, and perhaps a potentially deep one. This
provision was enacted in the Katrina Emergency Relief Act of 2005 (P.L. 109-73) through 2005.
The Pension Protection Act of 2006 (P.L. 109-280) extended the provision through 2007, and the
Emergency Economic Stabilization Act of 2008 (P.L. 110-343) extended it through 2009. The Tax
Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended
this provision through 2011, with an estimated cost of $53 million over 10 years.
Basis of S Corporation Stock for 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 Congressional proposals on
charitable contributions provided that the taxpayer would 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’s cost was relatively small. The Pension Protection Act of
2006 (P.L. 109-280) included this provision effective through 2007, and the Emergency
Economic Stabilization Act of 2008 (P.L. 110-343) extended it through 2009. The Tax Relief,
Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended this
provision through 2011, with an estimated cost of $67 million over 10 years.
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Tax Issues Relating to Charitable Contributions and Organizations
Unrelated Business Income: Related Party Payments
Charities are subject to a tax on unrelated business income. Rents, royalties and annuities are
excluded from income subject to the tax except when received by a majority owned subsidiary.
Among provisions included in the 108th Congress version of charity proposals was one to exclude
certain items (such as rent) received by a subsidiary from a tax on unrelated business income
except for the excess over an arms-length price. As with other provisions, however, the
determination of arms-length rents is not always straightforward when there are not closely
comparable properties. This provision was adopted in the Pension Protection Act (P.L. 109-280),
and applied to payments through 2007. The Emergency Economic Stabilization Act of 2008 (P.L.
110-343) extended it through 2009. The Tax Relief, Unemployment Reauthorization, and Job
Creation Act of 2010 (P.L. 111-312) extended this provision through 2011, with an estimated cost
of $40 million over 10 years.
Permanent Reduction in Excise Tax Reduction for Blood Collector
Organizations
The Pension Protection Act of 2006 (P.L. 109-280) included a provision exempting qualified
blood collectors from a variety of excise taxes, including communications taxes and taxes relating
to fuels and vehicles. This provision is directed at the Red Cross.
Recent Restrictions on Charitable Donations and
Organizations
Congress has considered many provisions in recent years aimed at preventing potential abuse,
with many problematic areas identified by the Internal Revenue Service.24 The Senate Finance
Committee has investigated many compliance issues.25 In 2004 and 2005, the Senate Finance
Committee held hearings on the subject. Also, early in 2005, the Joint Committee on Taxation
published an study on options to improve tax compliance that included a number of provisions
relating to charitable contributions and tax-exempt organizations.26
The concerns expressed in these hearings and studies focused on potential abuses of charitable
organizations, on the valuation of gifts of property, and on certain types of organizations,
including donor-advised funds and supporting organizations. These two types of organizations,
like private foundations, permit contributions to build up an account without necessarily making a
contribution. Private foundations, however, are subject to a 5% payout requirement and a number
of special restrictions to prevent funds from being used for the benefit of the donor. Donor-
advised funds are funds where the donor contributes to an account in an institution and the
24 See, for example, testimony of Mark Everson, Commissioner of Internal Revenue, Statement on Exempt
Organizations, Enforcement Problems, Accomplishments and Future Directions before the Senate Finance Committee,
April 5, 2005, at http://finance.senate.gov/hearings/testimony/2005test/metest040505.pdf.
25 Summary of Senator Chuck Grassley’s Non-Profit Oversight, November 20, 2007, at
http://www.senate.gov/%7Efinance/press/Gpress/2007/prg112007a.pdf.
26 Joint Committee on Taxation, Options to Improve Tax Compliance and Reform Tax Expenditures. JCS-2-05, January
27, 2005, at http://www.jct.gov/s-2-05.pdf.
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institution subsequently makes contributions, advised by the donor. Supporting organizations do
not have a direct charitable purpose, but support organizations that do.27
More broad ranging proposals to make the charitable contributions deduction more effective and
less subject to claims of small undocumented deductions would have introduced a floor. Earlier
proposals associated with expansions of the deductions to non-itemizers proposed dollar floors,
but these proposals tended to focus on floors as a percent of income. As noted above, the Deficit
Commission’s proposal would create a charitable credit available to all taxpayers, subject to a
floor of 2% of income. The 2005 President’s Advisory Panel on Tax Reform proposed a floor
equal to 1% of income. The Congressional Budget Office included a budget option for a floor of
2%.
Some changes were enacted in 2003 and 2004, but most of the restrictive provisions that were
adjusted were part of the Pension Protection Act of 2006.
Restrictions on Charitable Contributions
A series of restrictions on charitable donations, aimed at reducing abuse, were adopted in 2006.
Most of these provisions related to gifts of appreciated property, where the gift is deducted at fair
market value. These gifts account for about 25% of all donations, and for much larger shares of
donations of higher income taxpayers. For taxpayers with incomes above $10 million, gifts of
property account for 50% of contributions. Taxpayers with incomes above $1 million account for
18% of cash gifts, but 40% of property gifts.28 This provision is especially beneficial to the donor
because a deduction is allowed for the full value, while the appreciation is not taxed. While the
valuation of contributions such as publicly traded stock is straightforward, the valuation of gifts
where value is not easily assigned presents some issues for tax compliance. If the taxpayer can
value donated property at an excessive value, it is even possible to benefit privately from making
a contribution rather than by selling the property.
The President’s Advisory Commission on Tax Reform proposed in 2005 that individuals be
allowed to sell appreciated property and donate the proceeds without paying the capital gains tax,
to address the valuation problem.29
During the debate on the treatment of gifts of appreciated property, some broad changes were
discussed. For example, the Joint Committee on Taxation presented an option in its study to allow
only the basis to be deducted for gifts of property that were not publicly traded. A Senate staff
discussion paper, among a broad array of options discussed, considered “baseball arbitration,”
where the court can only find for the taxpayer’s original value or the IRS value, which would
27 Issues surrounding supporting organizations and donor-advised funds, as well as gifts of appreciated property, are
discussed in the testimony of Jane G. Gravelle, on Charities and Charitable Giving: Proposals for Reform, before the
Senate Finance Committee, April 5, 2005, at http://finance.senate.gov/hearings/testimony/2005test/jgtest040505.pdf
28 These data are reported in the testimony of Jane G. Gravelle, on Charities and Charitable Giving: Proposals for
Reform, before the Senate Finance Committee, April 5, 2005, at http://finance.senate.gov/hearings/testimony/2005test/
jgtest040505.pdf.
29 President’s Advisory Panel on Federal Tax Reform, Simple, Fair and Pro-Growth,: Proposals to Fix America’s Tax
System, Washington, DC, U.S. Government Printing Office, November 2005.
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create an incentive to limit any overstatement of value.30 Although these provisions were not
adopted, a number of changes were, as detailed below.
Vehicle Donations and Gifts of Intellectual Property
Growing concerns about the abuse of donations of used vehicles and of patents and other
intellectual property led to several revisions in the American Jobs Creation Act of 2004 (P.L. 108-
357). According to IRS data, in 2003, $2.3 billion of deductions associated with vehicles was
deducted, for those taxpayers who had non-cash contributions of $500 or more.31 Often charities
resold vehicles at a much smaller value than the value deducted by the taxpayer.32 The revision
required that, for vehicles with a value of $500 or more, the deduction is restricted to the value of
resale, if the vehicle is resold rather than used or refurbished by the charity. The act also extended
to corporations the requirement of an appraisal for a donation of property (other than readily
valued property such as cash, inventory, and publicly traded securities) of $5,000. This appraisal
is not required in the case of resale of a vehicle by an organization. It also required appraisals to
be attached to tax returns for gifts valued at $500,000 or more. Finally the law restricted the
donation of intellectual property, which could be valued at fair market value, to the lesser of basis
(roughly cost of developing or purchasing) or market value.
Contributions of Historical Conservation Easements
As a general rule, a taxpayer cannot take a deduction for a partial interest in a property. However,
gifts of conservation or historical easements (where the taxpayer restricts the use of property)
may be made. Their value is the reduction in the value of the property due to the easement. One
concern that arose was that taxpayers were making gifts of easements on historical facades (the
front of the building), which involve an agreement not to change the facade, when the regulations
in the historical district already imposed this restriction. Thus there could be no effect on property
values. A provision in the Pension Protection Act required these easement to be limited to
buildings but to apply to the entire exterior (not just the facade), and that an appraisal be supplied.
Contributions of Taxidermy Property
Press reports suggested that individuals involved in big game hunting were receiving deductions
for contributing their mounted trophies at inflated prices which were often resold at a lower
price.33 In addition to the revenue effects, concern was expressed by environmental and animal
rights groups. The Pension Protection Act restricted the deduction to the cost of mounting the
trophy; thus, cost does not include the cost of hunting trips.
30 For a discussion, see the testimony of Jane G. Gravelle, on Charities and Charitable Giving: Proposals for Reform,
before the Senate Finance Committee, April 5, 2005, at http://finance.senate.gov/hearings/testimony/2005test/
jgtest040505.pdf.
31 Janette Wilson and Michael Strudler, “Individual Non-Cash Charitable Contributions 2003,” Internal Revenue
Service, Statistics of Income Bulletin, Spring 2006, p. 59.
32 See, for example, the report by the GAO, Vehicle Donation: Benefits to Charities and Donors but Limited Program
Oversight, GAO-04-73, November 2003, at http://www.gao.gov/new.items/d0473.pdf.
33 See Zachary A. Goldfarb, “Pension Bill Also Curbs Hunter’s Breaks,” Washington Post, August 5, 2006.
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Recapture of Tax Benefit if Not Used for Exempt Purpose
The Pension Protection Act requires individuals who give gifts of appreciated property to be
subject to a recapture tax if the property is not used by the organization for its exempt purposes
and is sold within three years. If the property is sold in the same year, the donor generally deducts
basis (cost); if sold after that year, the donor must include in income the difference between fair
market value claimed and the basis.
Deductions for Contributions of Clothing and Household Items
Contributions of used clothing and household items present difficulties because these items are
difficult and time intensive to value and audit. They are significant in value, however. In 2003,
these contributions were estimated at $8.6 billion for those with $500 or more of non-cash
contributions; clothing accounted for two thirds of the total.34 The amounts would be larger if
taxpayers with contributions of less than $500 in cash were included. The Pension Protection Act
disallows the deduction for items not in good used condition or better and provides the Internal
Revenue Service with broad authority to disallow deductions. Items valued more than $500 may
be deducted if not in good used condition or better if accompanied by an appraisal. Household
items do not include items such food, art, antiques, jewels and gems, and collections.
Recordkeeping Requirements
The Pension Protection Act changed the rule that allowed substantiation of small cash
contributions by a written record or log. All cash contributions must be substantiated by a bank
record (e.g., cancelled check) or receipt from the organization.
Contributions of Fractional Interests
Taxpayers could deduct contributions of fractional interests in art although they could not deduct
a contribution of a future right to the art.35 For example the taxpayer could contribute a 10%
interest in an art work to a museum, and receive a deduction for 10% of the value of the art. The
museum would have the right to possess the art for 10% of the year. There were several concerns
34 Janette Wilson and Michael Strudler, “Individual Non-Cash Charitable Contributions 2003,” Internal Revenue
Service, Statistics of Income Bulletin, Spring 2006, p.59.
35 The magnitude of these donations is difficult to determine as is the degree of potential abuse. Certain museums that
had wealthy patrons using this process could lose significant donations, although these art works may not necessarily
be exhibited constantly because of fractional ownership. According to a news report, the San Francisco Museum of
Modern Art received 48% of donations in fractional giving in the fiscal year ending in 2001, although the share fell to
10% the next year and has recently climbed to 20% (See Sarah Duxbury, “SFMOMA Turns ‘Timeshare’ Gifts into an
Art Form,” San Francisco Business Times, August 19, 2005). In general, most discussions of fractional giving in the
news seem to suggest that having the donor keep the art is not uncommon. (See Rachel Emma Silverman, “Joint
Custody for your Monet,” Wall Street Journal Online, July 7, 2007). A law journal article, in discussing the proposal to
require physical possession stated: “This would effectively put an end to fractional gifts of large sculptures that are
difficult and expensive to move every year. It will also substantially curtail fractional gifts of paintings since it is
usually not the best idea to constantly move a fragile painting every year.” This discussion also suggests that physical
possession is an important issue. See Ralph E. Lerner, “Fractional Gifts of Art.” New York Law Journal, April 24,
2006. A New York Times article stated “in practice, many museums have waived their right to possess pieces at all
except when they needed them for exhibitions.”Jeremy Kahn, “Museums Fear Tax Law Changes on Some Donations,”
New York Times, September 13, 2006.
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about this tax treatment. First, a court decision (Winokur v. Commissioner) settled in 1988 found
that physical possession was not required to make a fractional interest donation, only the right to
physical possession.36 The Internal Revenue Service challenged this case, but the court found for
the taxpayer. As a result, individuals could keep art work in their possession, perhaps through
their lifetimes, or even pass the property on to their heirs, while still securing a charitable
contribution deduction. The second is a concern that the possession or display of the art by the
museum itself enhances the market value of the work, effectively increasing the value of the art
work, and the value of future deductions or sales compared to an outright gift. Another set of
issues relates to estate taxes. Estate taxes can be reduced by a reduction in value due to minority
discounts—the view taken by the courts that an ownership of a minority interest in an asset loses
some value because of lack of control. The minority ownership does not, however, affect the
value of the charitable deduction for income or estate tax purposes. The Pension Protection Act
requires physical possession by the donee; requires the gift to be completed within 10 years or at
the donor’s death, whichever comes first; disallows fractional donation of a property that is not
wholly owned by the donor, or the donor and donee for later gifts (the Secretary of the Treasury
can make an exception if multiple owners donate similar fractional shares); and requires that
subsequent fractional shares are limited to market value at the time of the original donation. If
these restrictions are not met the tax savings from the deduction are recaptured with interest and a
10% penalty.
Penalties on Overstatements of Valuations
This provision lowered the thresholds for imposing penalties for overstatements of value for the
income tax and understatement for the estate tax. It also established a separate penalty structure
for appraisers.
Restrictions on Tax-Exempt Organizations
A few provisions were enacted during the 108th Congress that applied to tax-exempt
organizations, but most provisions were enacted in the 109th Congress, primarily in the Pension
Protection Act in 2006. Some of these provisions affect organizations that are tax exempt but are
not charitable organizations.
Terrorist Activities
The Military Family Tax Relief Act of 2003 (P.L. 108-121) provided for automatic suspension of
the tax-exempt status of organizations placed on the designated list of terrorist organizations or
supporters of terrorism. Normally, suspension of tax-exempt status requires or permits
administrative and judicial proceedings.
36 Winokur v. Commissioner, 90 T.C. 733 (1988). James Winokur contributed fractional interests in paintings to the
Carnegie Museum, and the museum had a right to possess the paintings but never did. This case is summarized in
Marylynne Pitz, “Fractional Donations Require Close Look at the Law,” Pittsburgh Post-Gazette, July 24, 2005:
http://www.postgazette.com/pg/05205/541620.stm.
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Leasing Activities
In a provision not directly affecting contributions or tax-exempt status, but which nevertheless
might have consequences for tax-exempt organizations, the American Jobs Creation Act of 2004
also restricted the ability of parties leasing arrangements to obtain favorable tax treatment.37
Penalties for Tax-Exempt Organizations in Prohibited Tax Shelters
Some tax shelter operations require participation of a tax-exempt entity. This provision imposed
penalties on exempt organizations that are a party in a prohibited tax shelter transaction. It was
enacted in the Tax Increase Prevention and Reconciliation Act (P.L. 109-222) in 2006.
Life Insurance
Investments in life insurance are subject to beneficial tax treatment, including exemptions when
assets are paid at death and deferral of tax on investment earnings. State laws restrict the holding
of an interest in life insurance if there is no insurable interest (e.g., a relationship with the
insured). Some states exempt charities from the insurable interest and some allow insurable
interests for private investors if there is also a charitable organization involved. The Pension
Protection Act does not directly affect these relationships but requires temporary reporting on life
insurance arrangements by exempt organizations (for two years) and mandates a study of this
issue by the Treasury Department.
Penalties and Penalty Taxes
A series of penalties applies to certain actions of charitable and tax-exempt organizations. The
most punitive penalty for an inappropriate action, in general, is to revoke the exempt status. There
are a series of intermediate sanctions that generally impose monetary penalties. An excess benefit
tax applies to transactions of charitable welfare organizations (other than private foundations) and
social welfare organizations. Private foundations are subject to taxes and/or penalties for self-
dealing, failure to distribute income, on excess business holdings, for investments that jeopardize
the charitable purposes, and for taxable expenditures (such as lobbying or making open-ended
grants to institutions other than charities). The Pension Protection Act increased those taxes and
penalties.
Credit Counseling Agencies
Nonprofit credit counseling agencies obtained tax-exempt status because their purpose was
largely to educate and counsel consumers, and perhaps offer some tailored debt management
plans as well. A rapid growth of tax-exempt credit counseling agencies occurred in the 1990s.
Press reports and investigations suggested that there was widespread abuse and that these new
firms were not primarily being used for educational purposes but were used to enroll individuals
into payment plans. The Internal Revenue Service performed audits and revoked tax-exempt
status for some agencies. The Pension Protection Act established a series of standards and
37 A discussion of this issue can be found in CRS Report RL32479, Tax Implications of SILOs, QTEs, and Other
Leasing Transactions with Tax-Exempt Entities, by Maxim Shvedov.
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Tax Issues Relating to Charitable Contributions and Organizations
requirements for exempt credit counseling agencies and treated debt management plans as an
unrelated business, with earnings subject to the unrelated business income tax.
Expanding the Base for Imposing Foundation Excise Taxes
As discussed above, foundations are subject to excise taxes on investment income. The Pension
Protection Act expanded the base to include additional types of income—such as income from
financial contracts, annuities, and certain capital gains.
Defining Conventions or Association of Churches
A convention or association of churches is not required to file an information return and is subject
to provisions generally applicable to churches. The Pension Protection Act specified that a
convention or association of churches would not fail to qualify because there are individual
members.
Information Reporting: Organizations Not Filing Annual Returns
Although exempt organizations are generally required to file information returns, certain
organizations are exempt (these include small organizations, certain religious organizations and
certain government related organizations). The Pension Protection Act, requires these
organizations to report contact information to the Internal Revenue Service (i.e., organizational
title, address) using the Form 990-N, also known as the e-postcard.38 Organizations failing to file
for three years will have their tax-exempt status revoked.39
Disclosure to State Officials
The Secretary of the Treasury is required to notify the appropriate State officer of a refusal to
recognize an organization as a charitable one that may receive tax deductible contributions,
revocation of that status, and the mailing of a notice of deficiency for certain taxes. Returns and
records relating to this disclosure must be made available for inspection. This provision in the
Pension Protection Act revises the rules for disclosure of tax information to state authorities,
including the disclosure, upon request, of a notice of proposed refusal to recognize, revoke, or
issue a deficiency, names and addresses of applicants, and associated returns.
Disclosure of the Unrelated Business Income Tax Return
Organizations are required to make information and application materials available for public
inspection. The Pension Protection Act requires disclosure to be applied to the return reporting
unrelated business income.
38 More information is available from the Internal Revenue Service at http://www.irs.gov/charities/article/0,,id=
169250,00.html.
39 The Internal Revenue Service provides answers to frequently asked questions regarding automatic revocation of tax-
exempt status for entities failing to file informational returns. This information is available at http://www.irs.gov/
charities/article/0,,id=221600,00.html.
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Donor-Advised Funds and Supporting Organizations
The Pension Protection Act authorized Treasury Department studies of donor advised funds and
supporting organizations and made other changes to their status. Donor advised funds are funds
where donors make contributions and the institution holding the accounts makes contributions to
charitable organizations with the advice of the donor. Although the donor has no legal control, in
practice the donor’s wishes are likely to be respected. Supporting organizations do not actively
engage in charitable activities but support organizations that do by contributing funds to them.
Supporting organizations fall into three types: Type I controlled by the charitable organizations,
Type II, controlled by the same entity controlling the charitable organization and Type III, related
to the charitable organization. Type III organizations may support many charitable organizations.
These types of organizations had many features in common with private foundations, but were
not subject to self dealing rules and other restrictions (meant to prevent the donor from receiving
a private benefit) or payout requires (meant to keep the organization from accumulating funds
without paying out some amount for charitable purposes). There was some evidence that abuses
were occurring and that, in some cases, little was being paid out. In addition to the mandated
studies, other changes, including the following, were made.
Donor-advised funds eligible for charitable contributions were specifically defined in the law.
They were prohibited from providing benefits to the donors, they were required to have a
governance structure if grants were made to individuals (such as a scholarship fund), and
contributions of closely held businesses had to be sold within a short period of time.
Supporting organizations must indicate which type they are and certain Type III organizations
will eventually be subject to a minimum payout (with the Treasury Secretary making such a
determination through issuance of regulations). In August 2007, the Treasury issued proposed
regulations and invited comment, indicating the same minimum distribution rule applying to
foundations (5% of assets) is expected to be applied.40
In general, the Pension Protection Act prohibits supporting organizations from making grants or
loans, or paying compensation, to substantial contributors. Supporting organizations cannot
receive contributions from persons who control the organization, and from private foundations if
the supporting organization is controlled by significant persons at the foundation. They are not
eligible for the rollover treatment for individual retirement accounts (IRAs). Type III
organizations must also file additional information and cannot support foreign nonprofits.
Current Issues Surrounding Charitable Deductions
and Organizations
There are a number of tax issues regarding charitable deductions and tax-exempt organizations
that may be of interest in the 112th Congress. The charitable extenders discussed above are set to
expire at the end of 2011. The President’s Fiscal Commission suggested modifying the charitable
deduction as part of comprehensive tax reform to address the deficit and fiscal sustainability.
40 For more information, see IRS Notice 2007-21, available at http://www.irs.gov/pub/irs-drop/n-07-21.pdf.
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President’s Obama’s FY2011 Budget proposed to limit the value of itemized deductions,
including charitable contributions to 28%.
In addition, there is interest, as indicated by hearings and by activities of the Senate Finance
Committee in the tax-exempt status of nonprofit hospitals and in university endowments. The
Patient Protection and Affordable Care Act (PPACA; P.L. 111-148) imposed a number of new
requirements on 501(c)(3) tax-exempt hospitals. The Finance Committee has also shown interest
in specific tax-exempt organizations, such as media related ministries.
Provisions enacted under the Pension Protection Act continue to raise issues of interest to the tax-
exempt sector. The findings of Treasury studies on donor-advised funds and supporting
organizations may have broader implications for the charitable sector generally. In 2010, a
number of small tax-exempt organizations had their tax-exempt status revoked after failing to
meet information reporting requirements enacted as part of the Pension Protection Act. These
issues are discussed in greater detail in the sections below.
The Extenders
Table 1 reports the expected revenue cost of extending each of the charitable provisions
contained in the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L.
111-312) There are two issues associated with these charitable benefits “extenders”: whether they
are effective or appropriate provisions, and, if so, whether they should be temporary when most
of the provisions of the tax code are permanent. The specific issues associated with each of these
provisions was discussed earlier.
Table 1. Charitable Provisions Among the Extenders
10- Year Revenue
Cost of
Extension(Millions
Provision
of Dollars)
Tax-free distributions from IRAs for charitable purposes
$979
Charitable deduction for contributions of food inventory
$134
Charitable deduction for contributions of computer equipment
$350
Charitable deduction for contributions of book inventories
$53
Special rule for S corporations making charitable contributions
$82
Increased contribution limit for contributions of appreciated real property for conservation
$111
Special treatment of certain payments to controlling exempt organizations
$40
Source: Joint Committee on Taxation, JCX-54-10, December 10, 2010.
One criticism that could be made of using temporary provisions for charitable purposes is that
although the budgetary cost is smaller for a provision extended only a year at a time, the intention
is to continue the provision. This practice causes the official projected budget deficits to be
smaller than they will likely be, takes up the time of the Congress with considering the extenders,
and creates some uncertainty for taxpayers.
On the other hand, an argument that could be made in favor of temporary provisions is that a
temporary provision makes reconsideration of the merits and design of the provisions more likely.
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Evidence suggests, however, that relatively few temporary provisions have been revised. One
exception is the R&D tax credit, which has been the subject of some major revisions.
Nevertheless, it could be argued that the temporary nature of these provisions is conducive to
better tax policy because provisions are reconsidered even though they are rarely revised.
Limiting Itemized Deductions
Various proposals have been put forth that would limit the tax benefits associated with charitable
contributions. The Fiscal Commission recommended replacing the charitable deduction with a
12% non-refundable tax credit, available only for contributions above 2% of income. President
Obama’s FY2011 Budget proposed limiting the value of itemized deductions (which would
include charitable contributions) to 28% of each dollar. Thus, under the proposal, taxpayers in the
top brackets (currently 33% and 35%) would have each dollar of deductions reduced by 28 cents
on the dollar rather than a reduction based on their marginal tax rate (for example, 33 cents).
Although there has been concern expressed about the effect on charitable giving, especially
during difficult economic times, the provision would not affect giving today if it does not go into
effect immediately. In fact, enactment today of a future change would be expected to increase
contributions as taxpayers seek to make contributions before the cap is imposed. Estimates of
permanent effects on charitable giving from the 28% limitation suggest the effects would be
relatively small, generally around 1%.41
The itemized deduction cap overall is projected to raise about $22 billion in FY2012 when fully
in effect, rising over time. The cost in the first 5 years (FY2011-FY2015) is projected at $110
billion and the cost over 10 years (FY2011-FY2020) is projected at $291 billion.42 Internal
Revenue Service statistics suggest that charitable contributions account for about a quarter of
itemized deductions at higher income levels.
Nonprofit Hospitals
The Patient Protection and Affordable Care Act (PPACA; P.L. 111-148) imposed a number of new
requirements on 501(c)(3) tax-exempt hospitals. Prior to the enactment of PPACA, the tax writing
committees, and especially Senator Grassley, had shown interest in nonprofit hospitals. A major
concern was the degree of charity care and whether nonprofit hospitals are providing benefits that
justify their charitable and tax-exempt status. The Congressional Budget Office released a study
in 2006 that found that nonprofit hospitals overall provided only slightly more charity care than
for profit hospitals.43 The Senate Finance Committee held hearings on the topic “Taking the Pulse
of Charitable Care and Community Benefits at Non-Profit Hospitals,” on September 13, 2006,
41 CRS Report R40518, Charitable Contributions: The Itemized Deduction Cap and Other FY2011 Budget Options, by
Jane G. Gravelle and Donald J. Marples. Paul N. Van de Water, Proposal to Cap Deductions for High Income
Households Would Reduce Charitable Deductions by Only About 1%, Center on Budget Policy and
Priorities, http://www.cbpp.org/cms/index.cfm?fa=view&id=2700. “How Changes in Tax Rates Might Affect
Itemized Charitable Giving, by Deb Partha and Mark O. Wilhelm, The Center on Philanthropy at Indiana University
found a reduction of less than 1%, http://www.philanthropy.iupui.edu/docs/2009/
2009_TaxChangeProposal_WhitePaper.pdf.
42 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals,
Washington , DC, February 2010.
43 Congressional Budget Office, Nonprofit Hospitals and the Provision of Community Benefits, December 2006.
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and the House Ways and Means Committee held hearings on “The Tax Exempt Hospital Sector,”
on May 26, 2005.
In a staff discussion draft released July 18, 2007, by Senator Grassley, the following concerns
were raised about nonprofit hospitals: establishing and publicizing charity care, the amount of
charity care and community benefits provided, conversion of nonprofit assets for use by for-
profits, ensuring an exempt purpose for joint ventures with for-profits, governance, and billing
and collection practices.44 Subsequently, on October 24, 2007, Senator Grassley authorized a
round-table to discuss the draft. Also in July 2007, the IRS released an interim report on nonprofit
hospitals, where they found that the median share of revenues spent on charity care was 3.9% and
almost half of hospitals spent 3% or less. The average was 7.4%.45
Under PPACA, tax-exempt hospitals are subject to four new requirements.46 First, hospitals will
be required to conduct a “community health needs assessment” and adopt an implementation
strategy to meet those needs.47 Second, hospitals are required to written financial assistance and
emergency care policies. Third, hospitals may not charge individuals eligible under the financial
assistance policy more than the lowest amount charged to those with insurance coverage. Finally,
hospitals are required to make reasonable efforts to determine if an individual is eligible for
financial assistance before beginning extraordinary collections actions.
PPACA also requires the Treasury Secretary to review the community benefit activities of tax-
exempt hospitals. Additionally, the Treasury Secretary, in consultation with the Secretary of
Health and Human Services (HHS) will be required to report annually to Congress information on
charity care, bad debt expenses, unreimbursed costs for services, and community benefit
activities.
University and College Endowments
Universities and colleges are classified as charitable organizations eligible to receive deductible
contributions, and, also, as tax-exempt entities, do not pay tax on their investments. As indicated
above, prior to the financial crises and subsequent recession, the benefit of exempting endowment
income of colleges and universities from taxes was estimated at around $25 billion. At $25
billion, this exemption was worth more than three times the benefit of charitable deductions to all
educational institutions. Historically, these high yields were coupled with relatively low payout
rates. For the fiscal year that ended June 2007, endowments were $411 billion and the average
rate of return was 21.5%. The payout rate was 4.6%. As a result of those relationships along with
contributions, endowments grew 18.4% between FY2006 and FY2007 (about thee and a half
times the growth rate of the economy), continuing an ongoing trend from recent years.
The losses in college and university endowment funds experienced during the recession have
raised new issues of concern. In FY2009, losses were 18.7% on average.48 Prior to the onset of
44 Tax Exempt Hospitals: Discussion Draft, at http://finance.senate.gov/press/Gpress/2007/prg071907a.pdf.
45 Internal Revenue Service, Hospital Compliance Program Interim Report, at http://www.irs.gov/pub/irs-tege/
eo_interim_hospital_report_072007.pdf.
46 For additional background, see CRS Report RL34605, 501(c)(3) Hospitals and the Community Benefit Standard, by
Erika K. Lunder and Edward C. Liu.
47 This provision becomes effective for taxable years starting after March 23, 2012.
48 National Association of College and University Business Officers, Commonfund Study of Endowments, Available at
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the recession, Senator Grassley, ranking member of the Finance Committee, discussed concern
that colleges were not using enough of their endowments funds to provide an affordable
education.49 Tuition rates remain an issue of interest. In 2010, following the release of data on
college and university endowment losses, Senator Grassley noted:50
I hope colleges won’t rely on double-digit losses as a reason to raise tuition or freeze student
aid. Many of them relied on some risky investments, like hedge funds, to get big gains in
recent years, and now those strategies are causing losses. … Pay-out rates over the last
decade rarely topped 5 percent, even when investment returns were in double digits.
Donor-Advised Funds and Supporting Organizations
The two basic issues associated with donor-advised funds and supporting organizations were
possibilities of receiving private benefit by donors and payout rates. As noted above, while some
changes were enacted, others remain possible. Although payout requirements are planned
(administratively) for Type III supporting organizations, there are no payout requirements for
donor-advised funds and for other supporting organizations. These issues might be revisited when
Treasury completes its studies.51
The Treasury was directed to study specific issues: whether deductions for contributions to donor-
advised funds and supporting organizations are appropriate given the use of the assets or benefits
to the donor, whether donor-advised funds should have a distribution requirement, whether the
retention of rights by donors means that the gift is not completed, and whether these issues apply
to other charities or charitable donors. Thus, it is possible that results of the studies could also
have implications for charities in general.
Reporting Requirements and Exempt Status Revocation
The Pension Protection Act of 2006 implemented new reporting requirements for tax-exempt
organizations with revenues of less than $25,000.52 Entities failing to file required information
returns (Form 990-N, also known as the e-postcard) with the IRS for three consecutive years will
have their tax-exempt status revoked. Thus, revocations took place for the first time in 2010.
There are more than 714,000 tax-exempt organizations registered with the IRS that would be
subject to new reporting requirements. As of July 2010, 41% of these organizations had yet to
file.53 There are various reasons why registered tax-exempt organizations may not file the
(...continued)
http://www.nacubo.org/Research/NACUBO_Endowment_Study.html.
49 Charles E. Grassley, “Wealthy Colleges Must Make Themselves More Affordable,” Chronicle of Higher Education,
May 29, 2008, http://finance.senate.gov/press/Gpress/2008/prg052908d.pdf.
50 Office of Senator Grassley, “Grassley: Students, Families Shouldn’t Bear Brunt of College Endowment Losses,”
press release, January 27, 2010, http://grassley.senate.gov/news/Article.cfm?customel_dataPageID_1502=24983.
51 See Nick Tarlson, “Donor Advised Funds: Prepare for Closer Scrutiny,” Journal of Accountancy, 2008,
http://www.aicpa.org/pubs/jofa/jan2008/donor_advised_funds.htm.
52 The IRS website provides details on the information tax-exempt entities are required to report to be in compliance
with this new law. See http://www.irs.gov/charities/article/0,,id=177792,00.html.
53 Amy Blackwood and Katie L. Roeger, Here Today, Gone Tomorrow: A Look at Organizations that May Have Their
Tax-Exempt Status Revoked, The Urban Institute: National Center for Charitable Statistics, Washington , DC, July 8,
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required information returns. Some of these organizations may no longer exist. The required
filings will help the IRS determine which organizations remain active. On the other hand, active
organizations may not file if they are not aware of the new filing requirements. The IRS extended
the filing deadline to October 15, 2010 to give charities that would have been required to file
earlier in the year more time to comply with this new law. Further, the IRS has posted a list of
organizations in danger of losing their tax-exempt status on their website.54
Specific Sectors Including Media-Based Ministries
Over a period of time the Senate Finance Committee has examined specific charitable
organizations or groups as well as specific charitable donation practices. Some of these
investigations were spurred by media reports and some by IRS studies; they have led to both
legislation and self correction by entities involved.
In 2007, Senator Grassley sent inquiries to several media-based ministries for information on
their finances. Religious organizations do not have to file the information (990) forms that other
tax-exempt organizations have to file, so generally it is difficult to obtain information on the
activities of these tax-exempt entities. The results of this inquiry were announced on January 6,
2011. While not all ministries provided the requested information, enough information was
gathered for Senator Grassley to determine that internal reforms were taking place.55
Author Contact Information
Jane G. Gravelle
Molly F. Sherlock
Senior Specialist in Economic Policy
Analyst in Economics
jgravelle@crs.loc.gov, 7-7829
msherlock@crs.loc.gov, 7-7797
(...continued)
2010, http://www.urban.org/UploadedPDF/412135-tax-exempt-status.pdf.
54 See http://www.irs.gov/charities/article/0,,id=225889,00.html.
55 For additional information and access to the full reports, see The Office of Senator Grassley, “Grassley Releases
Review of Tax Issues Raised by Media-based Ministries,” press release, January 6, 2011, http://grassley.senate.gov/
news/Article.cfm?customel_dataPageID_1502=30359.
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