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CRS Outlines H.R. 7 Expansion of Food Donation Deduction

AUG. 23, 2001

RL31097

DATED AUG. 23, 2001
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    charitable deduction
    exempt organizations, public charities
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-23545 (11 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 176-22
Citations: RL31097

                       CRS Report for Congress

 

 

                           August 23, 2001

 

 

                          Louis Alan Talley

 

                       Specialist in Taxation

 

                   Government and Finance Division

 

 

                      Prepared for Members and

 

                       Committees of Congress

 

 

             Charitable Contributions of Food Inventory:

 

                   Proposals for Change Under the

 

                   Community Solutions Act of 2001

 

 

Summary

 

 

[1] Included in the proposed Community Solutions Act of 2001, (H.R. 7), is a provision that would expand the tax break for businesses that donate food to qualified charitable organizations. Current law provides a deduction only to C corporations. The value of the deduction is the corporation's basis in the product plus one half the appreciation. However, this value may not exceed twice the corporation's basis in the product. The proposed change expands the provision to all taxpayers engaged in a trade or business. The legislation also defines "apparently wholesome food" to help resolve concerns with valuing time sensitive products. The legislative history shows that while Congress wanted to provide an incentive for gifts of food to qualified charities, it did not wish to provide an incentive where the donor could be in a better situation by donating the property than by selling it.

[2] Worth magazine reviewed the charitable giving by the 50 companies that gave the most in 1999. The five food concerns in the top 50 all show substantial in-kind giving. Other companies that show substantial in-kind gifts are those in the pharmaceutical/health care or computer/information technology industries. These firms, like food companies, are provided an enhanced deduction for in-kind gifts. It appears that in the case of large firms, the enhanced deduction is stimulating contributions.

[3] While the proposal reduces the equity differences between C corporations and other business concerns, it cannot entirely eliminate them. If the intent is to resolve the equity issues, a tax credit mechanism would be preferable since it would provide the same value, dollar for dollar, since a credit's value does not fluctuate with the taxpayer's marginal tax bracket.

[4] In the past, there have been problems with valuing products with shelf lives. The legislation defines "apparently wholesome food" and supports the findings of a court decision. In that case, the court found that value of the product was set by sales by the merchant and not by industry practice. This liberal interpretation makes it easier for donors to obtain the maximum deduction permitted by law.

[5] The legislation, if enacted, is expected to reduce federal tax receipts by $255 million over the five-year period of 2002-6, with an estimated loss of $626 million over a ten-year period. Opponents of this legislation fear that other worthy causes will request similar tax treatment. They have also argued that it may be preferable for the government to pay directly for food programs rather than creating "hidden back door" expenditures through the tax system. It is argued that direct control would assure funding was allocated under democratic procedures and be available equally to all based on need. It has been argued that an expansion may favor certain geographic areas of the country.

[6] This report will be updated to reflect major legislative developments.

CONTENTS

 

 

Current Tax Law

 

     Limitation on the Amount Deductible

 

     Carryforward

 

     Contributions of Property

 

     Summary of Restrictions

 

 

Proposal

 

 

Abbreviated History

 

 

Statistical Trends

 

 

Issues and Observations

 

 

LIST OF TABLES

 

 

Table 1. Charitable Giving by Food Concerns from Worth Magazine's

 

      Second Annual Listing of the 50 Companies that Gave the Most in

 

      1999

 

 

             CHARITABLE CONTRIBUTIONS OF FOOD INVENTORY:

 

                   PROPOSALS FOR CHANGE UNDER THE

 

                   COMMUNITY SOLUTIONS ACT OF 2001

 

 

[7] This report discusses a proposed change that would expand the tax break to businesses that donate food to charity. Representative Watts, along with 44 cosponsors, introduced the Community Solutions Act of 2001, (H.R. 7). The legislation contains key elements of the President's program to stimulate charitable donations. Major components of the bill are the allowance of a limited deduction to non-itemizers for donations to charity, a provision which allows tax free distributions from individual retirement accounts to charities, an increase in the cap on corporate charitable contributions, a reduction in the excise tax on net investment income of foundations, a modification of the basis of S corporation stock for charitable contributions, along with the expansion of the deduction for food inventory to all those engaged in a trade or business. The Chairman of the House Committee on Ways and Means offered an amendment in the nature of a substitute which was passed by the House of Representatives on July 19. That measure passed on a vote of 233-198. 1

[8] It has been announced by Senate Republican Conference Chair Santorum that he plans to include the charitable components of the House bill in a package of tax provisions he has already introduced with Senator Lieberman. Senate budgetary constraints place an obstacle before passage of the legislation. The estimated cost of the legislation is a loss of tax revenues of $13 billion over the 2002-2011 period. Laws that reduce receipts are subject to the pay- as-you-go requirements of the Balanced Budget and Emergency Deficit Control Act. As such, H.R. 7 will be subject to the pay-as-you-go requirements. The Administration has announced its strong support for passage of the legislation. The Office of Budget and Management has reportedly stated that "The Administration will work with Congress to ensure that any unintended sequester of spending does not occur under current law or the enactment of any other proposals that meet the President's objectives to reduce the debt, fund priority initiatives, and grant tax relief to all income tax paying Americans." 2

[9] Senate Majority Leader Tom Daschle indicated plans to bring the legislation to the Senate floor during the 107th Congress. However, he did not commit to bringing the bill up for a vote this year. As such, prospects for passage remain uncertain.

CURRENT TAX LAW

[10] Present law provides that contributions made by businesses to certain types of nonprofit organizations are deductible for income tax purposes up to specified limits. These contributions may be in the form of either cash or property. The charitable contribution deduction is allowed only for the taxable year in which the contribution is made; any unpaid subscriptions or pledges are not deductible until actually fulfilled.

[11] Some of the more typical organizations to which contributions are deductible include churches, universities, schools, and hospitals, as well as many other public assistance charities (such as food pantries, soup kitchens, homeless shelters, etc). if a contribution is made to an individual, such as a homeless family living on the street, that contribution is not deductible even though actuated by charitable motives.

[12] In order to qualify as an organization to which contributions are deductible, the recipient must be organized or incorporated in the United States or in one of its possessions and certified as a charitable organization by the Internal Revenue Service. 3 Contributions to foreign charitable organizations are not deductible. A donation, however, to an otherwise qualified organization is deductible even though some portion of the funds of such organization are used in foreign countries for charity.

LIMITATION ON THE AMOUNT DEDUCTIBLE

[13] The deduction for contributions (either in cash or in property) made by corporations is limited to 10% of taxable income (computed with adjustments). 4 The 10% cap was raised from 5% by the passage of the Economic Recovery Tax Act of 1981. The legislative history of the 1981 Act indicates that Congress was hopeful that corporate charitable contributions would be stimulated by the increase in the cap.

CARRYFORWARD

[14] As stated earlier, the deductible portion of any contribution by corporations may not exceed 10% of taxable income. However, if contributions in a given year exceed this limitation, the excess may be carried forward to future tax years. Corporations may carry over excess charitable contributions and compute tax as though the excess gifts were actually made in such subsequent years. Thus, when charitable contributions in one year exceed the limitation, a corporation might ultimately secure the full benefit (taxwise) of the contribution even though denied part of it in the year in which the contribution was first made. The law allows that excess charitable contributions may be carried forward for a five-year period.

CONTRIBUTIONS OF PROPERTY

[15] If the contribution is made in property, the basis for the contribution deduction is dependent on the type of taxpayer (i.e. individual or type of business), to whom the property is donated, and for what purpose the donated property is to be used.

[16] Corporate gifts of property that would generate capital gains if sold (e.g., stocks and bonds) are deductible by corporations at market value. However, gifts of depreciable property are deductible at the corporation's basis rather than fair market value. Thus, under current tax law the deduction is reduced by previously taken depreciation. In the case of fully depreciated machinery and equipment, the allowable charitable contribution deduction would be zero.

[17] C corporations 5 are provided more favorable tax treatment of contributions of certain types of inventory and other ordinary-income property to specified charitable organizations. They are allowed to deduct their cost plus one-half the difference between their cost and market value. However, in no case may the deduction exceed twice the cost basis. This special tax inducement is provided for capital assets defined in Internal Revenue Code section 1221(1) or (2). 6 Thus, this provision allows some corporations a larger deduction for charitable contributions of qualified tangible personal property.

[18] For a corporation to receive this enhanced deduction, the gift must be made to a "qualified" tax exempt organization. 7 Further, the property must be "used by the donee solely for the care of the ill, the needy, or infants." 8 The donee is not permitted to exchange what has been transferred for money, other property, or services. 9 The donee must furnish to the donor a statement that it does not intend to transfer the donation and that it will be used for the care of the ill, the needy, or infants. 10 If the property is subject to regulation by the Federal Food, Drug, and Cosmetic Act it must satisfy the requirements on the date of transfer and for 180 days prior thereto. 11

SUMMARY OF RESTRICTIONS

[19] In summary, current law provides that the charitable deduction for contributions of inventory and other property is as follows:

     o The gift must be made to a U.S. charitable organization;

 

 

     o There is a 10% limitation on the total amount a corporation

 

       can deduct as charitable contributions;

 

 

     o Contributions made in excess of this limitation may be carried

 

       forward for the next five years;

 

 

     o Special rules are available for gifts made by C corporations

 

       of tangible personal property (inventory) when donated to

 

       qualified charitable organizations for the care of the ill,

 

       the needy, or infants.

 

 

     o It must be established that the fair market value of the

 

       product exceeds basis in order to use the enhanced deduction.

 

 

PROPOSAL

[20] As previously discussed, current law already provides an enhanced deduction for donations by C Corporations of food products for the care of the ill, the needy, or infants. The enhanced deduction available for food products under current law is used primarily for unsaleable products. The most frequent reasons for products not being sold at market are errors in labeling, crushed or dented merchandise, or the products were close to the expiration date for recommended sale.

[21] There are three parts to the proposed change for donation of food products under the Community Solutions Act of 2001 affecting the enhanced deduction for food products. First, the proposal would extend the enhanced deduction for food inventory to all taxpayers engaged in a trade or business. Secondly, the enhanced deduction is available only for "apparently wholesome food" which would be defined under the legislation. Finally, the fair market value of donated foods would be set at the price which the same or similar food items are sold by the taxpayer at the time of the contribution, or, in the recent past. The proposal provides the effective date as applying to taxable years beginning after December 31, 2001.

[22] As currently drafted, the legislation defines "apparently wholesome food" to include food that "may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions." 12 The inclusion of the definition and the discussion of how fair market value is to be determined is designed to lessen valuation problems for taxpayers. A court case in the 9th Circuit is at odds with the regulations as issued by the Internal Revenue Service. If the proposal is enacted into law, the court case would apply throughout the United States rather than only in the circuit in which the case was decided and provide uniformity for all taxpayers.

ABBREVIATED HISTORY

[23] Prior to the passage of the Tax Reform Act of 1969, the general rule was that taxpayers who contributed appreciated property to charities were allowed a charitable contribution for the fair market value of the property. Moreover, no tax was imposed or collected on the appreciation. As an example, a farmer making a charitable contribution of a portion of his crop not only received a tax deduction of fair market value, but also escaped the tax on the difference between his crop production costs and fair market value. Because the tax savings from the charitable deduction (in the case of ordinary income property) was measured by the taxpayer's marginal tax rate, it was possible for taxpayers to make contributions which permitted a greater after-tax benefit than would have been received if the crop had been sold and the farmer allowed to keep the proceeds after paying tax on the gain. It should be remembered that tax rates at that time were much higher than today's rates. Since this provision was seen as unfair when compared with those making charitable cash gifts, the Tax Reform Act of 1969 changed the law such that the appreciated value is to result in a reduction of the contribution deduction to the extent of the appreciation.

[24] It was with passage of the Tax Reform Act of 1976 (P.L. 94-455) that corporations were provided more favorable tax treatment of contributions of inventory (such as food) to certain charitable organizations. The 1976 Act provided that such gifts by corporations were to be based on the taxpayer's basis in the property and one-half of the unrealized appreciation as long as the deduction did not exceed twice the property's basis. 13 In a summary of the Act, it was stated that the enactment of the Tax Reform Act of 1969 had resulted in reduced contributions of certain types of property to charitable institutions. In particular, those charitable organizations that provide food, clothing, medical equipment, and supplies, etc. to the needy and disaster victims have found that contributions of such items to those organizations were reduced. 14 The general explanation further stated that Congress believed that it was desirable to provide a greater tax incentive than in prior law for contributions of certain types of ordinary income property which the donee charity uses in the performance of its exempt purposes. However, Congress believed that the deduction allowed should not be such that the donor could be in a better after-tax situation by donating the property than by selling it. 15

STATISTICAL TRENDS

[25] In 2000, total charitable giving is estimated to have reached $203.45 billion. Corporations and their foundations contributed $10.86 billion, representing 1.2% of corporate pre-tax income. It is estimated that corporate giving increased by 12.1% when compared with 1999. Individual giving represents 75% of total giving. Corporate gifts are 5.3% of the total (with foundations and bequests representing the remainder). However, these numbers mask the importance of corporate charitable gifts because religious organizations receive little funding from either corporate donors or their foundations since individuals are the primary support of religious institutions. The American Association of Fund-Raising Counsel (AAFRC) Trust for Philanthropy found that for 2000, contributions to religion represented 36.5% of all charitable gifts. 16 The AAFRC states that it is important to note that companies support non-profits through cause-related marketing, public relations, sponsorships, contracts, and other joint promotional activities as well as through advertising expenditures. 17 These expenditures are not shown as charitable gifts. The AAFRC Trust for Philanthropy makes the following four points:

     o Corporate giving has ranged from a low point of 0.7% to a high

 

       of 2.3% of pretax income over 30 years with historical

 

       variation largely due to changes in tax law.

 

 

     o Profits are growing fastest in the service industries, like

 

       banking and telecommunications. Non-manufacturing companies,

 

       though driving up the profit part of the equation, cannot take

 

       advantage of tax-deductible gifts of inventory that make up

 

       much of the manufacturing sector's charitable activity.

 

 

     o There is a trend toward strategic corporate support, which is

 

       not counted as a charitable gift by the company, the IRS, or

 

       Giving USA. Nonetheless, this activity has appeal to both

 

       companies and nonprofits and may be a mutually satisfactory

 

       substitute for charitable giving.

 

 

     o There is no practical reason why companies should use pretax

 

       income as the basis for determining their charitable

 

       contribution levels. There is no reason not to pursue a

 

       strategy in which charitable support to nonprofits increases

 

       without consuming an increasing share of corporate profits.

 

       18

 

 

[26] The Conference Board has surveyed firms since 1992. In the survey for 1999 "companies reported that 28% of their contributions were in forms other than cash donations, the highest level of non- cash expenditures ever reported by companies in the Conference Board Analyses of cash and non-cash giving." 19 Among the industries reporting the largest non-cash percentages were "chemical companies, which donated 68% of their 1999 contributions in forms other than cash; pharmaceutical companies, with 64%; manufacturers of computer and office equipment, with 59%; printing, publishing and medical firms with 48%. 20 In a table of cash and non-cash contributions by industry, it was reported that the 10 companies in the Food/Beverage/Tobacco industrial classification gave 28% of their contributions in in-kind giving. 21

[27] An article which appeared in Worth magazine provided information on the 50 companies that gave the most in 1999. 22 The table which follows is a subset of the five food concerns which appear in the complete listing of 50 companies.

        TABLE 1. CHARITABLE GIVING BY FOOD CONCERNS FROM WORTH

 

       MAGAZINE'S SECOND ANNUAL LISTING OF THE 50 COMPANIES THAT

 

                         GAVE THE MOST IN 1999

 

 

   Company    1999 Total    Giving as %    Cash Giving     In-Kind

 

               Giving        of Profit                      Giving

 

 

 Kroger      $75,000,000       11.8        $43,600,000    $31,400,000

 

 Safeway      62,586,069        6.5         27,000,000     35,586,069

 

 General

 

   Mills      38,912,124        6.3         30,912,124      8,000,000

 

 Sara Lee     38,782,000        3.3         19,732,000     19,050,000

 

 Kellogg      33,742,648       10.0         12,000,000     21,742,648

 

 

[28] Several observations may be made in comparing the companies in the chart with the statistics of the remaining 45 companies that made the largest charitable gifts. In general, giving by food companies as a percentage of profits is high. In the chart, it is shown that Sara Lee gives 3.3% of profits (the lowest in the chart). According to the article in Worth, only four nonfood related companies give a greater percentage of their profits than Sara Lee (Dupont; J.C. Penney; Target and the United Parcel Service). All of the food companies show substantial in-kind giving while 15 of the remaining 45 companies show no in-kind giving at all. With the exceptions of Gannett and Dupont, all companies that provide greater in-kind giving than cash giving have an enhanced deduction provision in the Internal Revenue Code. Those companies are pharmaceutical/health care or computer/information technology firms.

ISSUES AND OBSERVATIONS

[29] Corporate charitable contributions are rarely a prominent issue in consideration of U.S. tax policy. First, corporate managers have been careful about making charitable contributions since their responsibility is to provide the highest rate of return that is legally possible to those who have invested in the corporation. Often, making charitable contributions conflicts with this mandate. Having said that, corporations do make charitable gifts all the time. It is also true that their contributions are usually intended to enhance the corporation's visibility or image before the consuming public. That is, goodwill is a valuable asset for a corporation, and charitable contributions help to create that goodwill. However, it generally makes no difference to a corporation whether it deducts its payment as a charitable contribution or as a business advertising expense. It makes no difference to the corporation because either deduction lowers its federal income tax by the same amount. Only when the special rules for contributions of inventory come into play does it make a difference as to how the gift is viewed and changes the value of the contribution under current tax law. 23

[30] There are equity challenges with extending the current enhanced tax deduction for corporate contributions of food to all taxpayers engaged in a trade or business such as small family farms and family operated restaurants (sometimes referred to as entrepreneurs in this report). A primary obstacle is that the cost basis could be higher for corporations than for a small business. This result can be caused by the inclusion of wages and germane taxes (such as Social Security, unemployment taxes, etc.) that are paid by corporations, but are not always included in the cost basis of small businesses such as farmers who grow crops or owner-chefs who own individual restaurants. For example, since it can be expected that (one-half of the) appreciation of the crops generally would be lower for corporations, with the full deductibility of the cost basis, than for individual farmers, an inherent advantage would still be given corporate farmers with their higher cost basis. For example, a corporation has a cost basis of $7,000 with appreciation of $3,000 which equals to the market price of $10,000. Since the small entrepreneur does not have a wage rate, the value of his services are within the appreciation figure. The small entrepreneur would more likely have a cost basis of $3,000 and an appreciation rate of $7,000 for the same $10,000 market price. In the corporate case, one-half of the appreciation ($1,500) and the cost basis ($7,000) is equal to $8,500. In the case of the entrepreneur, one half the appreciation ($3,500) plus the cost basis ($3,000) is equal to $6,500. Thus, the corporation would receive nearly $2,000 more in deductibility. On the other hand, the proposal does provide more equity between all taxpayers engaged in a trade or business than current law which provides the enhanced deduction only to C corporations.

[31] In addition, it should be noted that tax rates and the graduation of those rates is different for individuals and corporations. Current law provides for corporate tax rates which range between 15% and 39% depending on the company's taxable income. The Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16, reduces the top four marginal income tax rates over a six- year period. In tax year 2006, individuals will be subject to six tax rates ranging from 10% to 35%. In all cases, whether corporate or individual, the value of the enhanced deduction is dependent on the applicable tax rate. In general, 24 those with higher incomes would receive more advantage than those with lower incomes under the proposal. Thus, it does not appear that full equity can be achieved through the extension of the current enhanced deduction for corporate gifts of food inventory to all taxpayers engaged in a trade or business. Since this proposal applies only to food inventory, it would discriminate against other similar forms of charitable contributions (such as gifts of clothing or prescription drugs for the poor).

[32] From an economic perspective, use of a tax credit at the same rate would better promote equity among business taxpayers. Tax credits are subtracted from tax liability, whereas tax deductions are subtracted from income to determine the amount subject to tax. The net result is that for each $1 of tax credit the tax liability is reduced by $1. Deductions reduce tax liability by only a percentage of the deduction, depending upon the tax rate. Tax deductions are useful in defining income that should be taxable. For instance, in the case of individuals, it is typically argued that charitable gifts are funds no longer within the taxpayer's control and, thus, monies to which he/she may no longer lay real claim. Thus, here the deduction helps to define the income that should be subject to tax. Tax credits are used primarily to reduce taxes directly rather than to define the base on which taxes should be collected and are frequently used as incentives. Further, tax credits can be used by all eligible taxpayers (who owe taxes) since they are subtracted from tax liability.

[33] We have assumed under the proposed legislation that farmers may donate crops to qualified exempt organizations for gleaning 25 (the legislation is silent on this topic). A farmer's decision to abandon crops in the field is typically made at the time of harvest. Fixed costs such as seed, fertilizer, and other costs such as purchased irrigation water (typically referred to as sunk costs) are not taken into consideration when making the decision to harvest. The decision to move a crop to market is based on whether the farmer will receive a market price for the crop that exceeds his cost for harvesting, packing and transporting the crop. In those cases where the decision is marginal (i.e. the point at which the farmer may break even) to harvest or not to harvest, it would be to the farmer's advantage to make use of the proposed enhanced deduction. By opting to have the crop gleaned by an exempt organization, no expenses associated with the harvest would be incurred, while a deduction would be available to offset taxation of other taxable funds. Alternatively, the use of a carryover of the deduction for offsetting taxable funds would be available for up to five future tax years.

[34] A primary problem with products that have shelf lives is determining an appropriate value for the goods donated. Under the proposed legislation, the fair market value is determined by the price of the same or similar food items sold by the taxpayer at the time of the contribution (or, in the recent past). A safe harbor for taxpayers defines "apparently wholesome food" that is eligible for donation. Under the proposed definition, the food may be apparently wholesome even if it is not readily marketable "due to appearance, age, freshness, grade, size, surplus, or other conditions." This definition is the same as provided in the Bill Emerson Good Samaritan Food Donation Act. 26

[35] In discussing this valuation problem, 27 now a part of the legislative history, a court case is cited where the Tax Court held the value of surplus bread inventory donated to a qualified charity was the full retail price of the bread. 28 The Internal Revenue Service (IRS) contended that the retail value of the bread was half the normal sales price since the industry practice of major bakers is to discount four-day-old bread. 29 If the court had ruled the value of the bread was half the retail selling price (following industry practice), then Lucky Stores would have received no tax benefit and, thus, no encouragement to make such charitable donations. 30 The court's findings contradict regulations issued by IRS. One effect of passage of H.R. 7 would be to make the Lucky Stores case the law of the land rather than applying only in the 9th Circuit. Opponents of the provision will likely argue that there are economic incentives (rather than tax incentives) for stores to continue to make such gifts. For example, there are costs associated with disposal of product. 31 Obviously, the gifting of product reduces disposal costs. In addition, companies can expect goodwill (commonly referred to as "cause marketing"). High profile contributions can contribute to image building for the firm and influence public opinion. 32

[36] It can be expected that opponents of the legislation will argue that the proposed changes will reduce revenues to the federal government. The Joint Committee on Taxation has estimated that enactment of this provision will result in a revenue loss of $255 million over the five-year period of 2002-6, and estimated to rise to $626 million over the ten-year period of 2002-11. It can also be expected that others may request similar tax treatment 33 which, if granted, would lead to an additional reduction in tax receipts.

[37] In the past, some have argued that it would be preferable for the government to pay directly for additional support of food programs rather than creating additional hidden expenditures through the tax system. Direct government subsidy would assure that such funds were allocated under democratic procedures and would, therefore, go to all the poor strictly based on need. Further, it is argued that a direct government spending program would assure that expenditures would be subjected to periodic review under the budgetary process. Some feel that the expansion to all taxpayers engaged in a trade or business may provide greater (food) benefits to those living near farm production areas where the food is harvested, over those living far from farm areas in large cities. Further, gifts made by farms are likely to be seasonal. Others note that more restaurants are located in populated areas and that they may be the primary beneficiaries of the provision. Proponents of the proposal are most likely to argue that more food would be available to the elderly, poor, and infants for each tax expenditure dollar than through other direct government food expenditure programs. Another argued advantage would be that most likely there would be minimal federal government involvement in administering the program. Both sides can agree that the proposed change will likely complicate the return filing process for a greater number of taxpayers in the charitable contribution arena. Some have suggested that a sunset provision be included in the legislation so that Congress would have an opportunity to evaluate the success of the change.

 

FOOTNOTES

 

 

1 The House Ways and Means Committee ranking member, Representative Rangel, offered a Democratic substitute bill that proposed to pay for the bill's provisions by increasing the top individual income tax rate by 0.2% points in tax years 2002-2005 and by 0.5% in the following four years. All Republicans and 40 Democrats voted against the Democratic substitute. It failed on a vote of 261- 168.

2 Patti Mohr, "House Advances Two More Tax Bills; Senate Action Unlikely," Tax Notes, vol. 92, no. 4, July 23, 2001, p. 447.

3 Churches are not required to file for certification with the Internal Revenue Service.

4 Another section of the Community Solutions Act of 2001, (H.R. 7) proposes to increase the percentage limitation for corporate charitable contributions. The proposal would phase in this increase by raising it to 11% in 2002-2007, 12% in 2008, 13% 2009, and 15% for tax year 2010 and afterwards.

5 This provision is not available to S corporations, partnerships, and sole proprietorships.

6 The definition provides for (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business.

7 The Internal Revenue Code provides that "the use of the property by the donee is related to the purpose or function constituting the basis for its exemption under section 501."

8 Internal Revenue Code section 170(e)(3)(i).

9 Internal Revenue Code section 170(e)(3)(ii).

10 Internal Revenue Code section 170(e)(3)(iii).

11 Internal Revenue Code section 170(e)(3)(iiii). [sic]

12 U.S. Congress, Joint Committee on Taxation, Description of an Amendment in the Nature of a Substitute to H.R. 7, The "Community Solutions Act of 2001," Scheduled for Markup by the House Committee on Ways and Means on July 11, 2001, 107th Cong., 1st sess., JCX-58- 01, (Washington: July 10, 2001), p. 10.

13 No deduction is to be allowed for any part of the unrealized appreciation which would have been ordinary income (if the property had been sold) because of the application of the recapture provisions relating to depreciation. Also, no deduction is allowed for certain mining exploration expenditures, certain excess farm losses, certain soil and water conservation expenditures, and certain land-clearing expenditures.

14 U.S. Congress, Joint Committee on Taxation, Summary of the Tax Reform Act of 1976 (H.R. 10612, 94th Congress. P.L. 94-455), (Washington: GPO, 1976), p. 673.

15 Ibid. p. 673.

16 AAFRC Trust for Philanthropy Press Release, "Total Giving Reaches $203.45 Billion As Charitable Contributions Increase 5.5 Percent in 2000," [http://www.aafrc.org/press3.html], visited Aug. 16, 2001.

17 Ibid.

18 Ann E. Kaplan, ed. Giving USA 1998, The Annual Report on Philanthropy for the Year 1997. American Association of Fund-Raising Counsel Trust for Philanthropy. (New York, 1998.) p. 22.

19 Audris D. Tillman, "Corporate Contributions in 1999," The Conference Board, Inc., Research Report 1284-00-RR, New York, 2000, p. 15.

20 Ibid.

21 Ibid. p. 16.

22 Tamra Rave, Sally Schultheiss, and Sarah Bright, "The 50 Companies That Gave the Most," Worth, vol. 9, no. 11, Dec./Jan. 2001, pp. 106-111, 114-115.

23 Also, note that charitable contributions may not exceed certain levels. In the case of corporations it is 10%. For individuals, the limitation is generally 50%.

24 The graduated corporate tax rates both increase and decrease. This graduation is justified as an aid to small businesses. As corporate income rises, the graduation is eliminated through phase outs.

25 As discussed in this paper, "gleaning" is defined as the act of a tax-exempt organization that either harvests the crop or gathers the grain or other produce left in the field after an initial harvest.

26 42 U.S.C.A. section 1791 (Bill Emerson Good Samaritan Food Donation Act).

27 U.S. Congress, Joint Committee on Taxation, Description of an Amendment in the Nature of a Substitute to H.R. 7, the "Community Solutions Act of 2001," (JCX-58-01), July 10, 2001. p. 10.

28 Lucky Stores, Inc. v. Commissioner, 105 T.C. 420 (1995).

29 The Court ruled that Lucky Stores sold four-day old bread at full retail price and did not discount sales to its own customers. Further, the Court found that the quantity of sales of four day old bread was irrelevant. The Court noted that the IRS argument over the "industry practice" of discounting four day old bread did not prove fair market value but, rather, that Lucky Stores could have sold the bread at a discount if it so chose to do so.

30 Since one-half the fair market value was less than basis, Lucky Stores would have received the exact same deduction for a contribution to a food bank or for discarded inventory which, in both cases, is a tax deduction for basis.

31 Some products have higher disposal costs than others. For example, unneeded medical supplies and certain computer components may have high destruction costs.

32 It should be noted that Lucky Stores deliberately overproduced bread. By doing so they were able to assure that bread was in stock at all times for customer needs. Thus, they were able to keep their customers happy (and in their stores to purchase product) while also knowing that they would receive a tax benefit for the overproduction. Often when a firm has excess capacity, an additional unit's cost may be relatively small because there are many fixed costs. Or in some cases, there may be fixed costs associated with good produced for sale rather than good produced for contributions (such as the expenses associated with advertising costs for goods sold).

33 As an example, the pharmaceutical industry could request a similar safe harbor for valuing drugs donated near their expiration date.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    charitable deduction
    exempt organizations, public charities
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-23545 (11 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 176-22
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