CRS REPORTS ON APPRECIATED STOCK GIFTS.

                    GIFTS OF APPRECIATED STOCK TO

Fundamental changes were made under the Deficit Reduction Act of 1984, (DRA84), to the limitations on deductibility of gifts to private foundations. The Congress raised the percentage limitation for gifts of cash and ordinary-income property from 20-percent to 30-percent of adjusted gross income (AGI) in those cases where gifts were made to private nonoperating foundations. Further, while the Congress retained the 20 percent AGI limitation for gifts of capital gain property, it allowed the charitable contribution deduction to be taken at the full fair market value for gifts of appreciated stock when given to private nonoperating foundations. Finally, under this Act, Congress extended the carry over of deductions that exceed the percentage limitation for five years for gifts made to private nonoperating foundations. ¹ The carryover provision and the increased percentage limitation for gifts became a permanent part of the Code. However, the rule allowing the deduction for appreciated stock at full market value was scheduled to expire ("sunset") on January 1, 1995. Proposals have been made in 1995 to extend this provision.

PRIOR LEGISLATIVE HISTORY AND RATIONALE

The deduction for contributions of cash or ordinary-income property made by individuals to public charities or private operating foundations may not exceed 50-percent of the taxpayer's AGI. A 30- percent limitation applies to gifts of capital gains property made to public charities, private operating foundations and two special types of nonoperating foundations. Prior to the change made by the DRA84, gifts to private nonoperating foundations by individuals of either cash or property donations were limited to 20-percent of the donor's AGI.

The Deficit Reduction Act of 1984, (DRA84), made three fundamental changes to the limitations in the case of gifts to private foundations. First, the percentage limitation for cash and ordinary-income property was increased from 20-percent to 30-percent of AGI for gifts made to private nonoperating foundations. Second, the Act retained the 20-percent limitation for gifts of capital gain property but permitted the deduction at fair market value in the case of appreciated stock given to private nonoperating foundations. Finally, the Congress permitted the carryover of deductions to five future years when the percentage limitations are exceeded. This equalized the carryover provisions for public charities, operating foundations, and nonoperating foundations.

The Congress increased the percentage limitation in recognition of the "substantial role of many grantmaking foundations in private philanthropy." ² The higher percentage limitations that are provided to public charities and operating foundations were not extended to private nonoperating foundations since Congress "concluded that a tax preference for contributions to public charities and operating foundation continues to be appropriate" since they "directly carry out charitable functions and programs, expend charitable donations more promptly, and have public involvement, support, and supervision." ³

Prior to 1984 special rules applied to gifts of appreciated stock: they could be deducted at the stock's fair market value, REDUCED BY 40 PERCENT OF THE GIFT'S UNREALIZED APPRECIATION. While the DRA84 retained a 20 percent limitation for gifts of appreciated capital gains property it permitted the deduction for gifts of appreciated stock at fair market value (without reduction for unrealized appreciation).

The DRA84 limited the fair market value donation to publicly traded stock for which quotations "must be readily available on an established securities market." ⁴ This was done in order to restrict the potential for abuse. The Congress was primarily concerned with the possibility of overvaluation but also wished to limit administrative burdens imposed by this change on the Internal Revenue Service. Further, the deduction is only available when "the cumulative aggregate amount of donations made by the donor . . . does not exceed 10 percent in value of all the outstanding stock of that corporation." ⁵ Cumulative donations made by all family members of the donor may not exceed this 10 percent value limitation. The provision was available from July 18, 1984 through expiration on December 31, 1994. A frequent argument made against tax expenditures is that they are not reviewed once enacted. Accordingly, the Congress provided a sunset date to make certain the provision was reevaluated.

The DRA84 extended to gifts of appreciated stock made to private nonoperating foundations a carryover provision that also applies to cash or ordinary income property given to public charities and private operating foundations. Thus, taxpayers can carry over contributions made in excess of the percentage limitations for a five-year period. The carryover provision was also available in the case of gifts of capital-gain property to public charities, private foundations and two special types of nonoperating foundations. The Congress concluded that the lack of a carryover provision for private nonoperating foundations was easily circumvented. The donor only needed to provide a series of smaller gifts over successive years. Further, the Congress reasoned that the extension of the carryover provisions "would not be inconsistent with longstanding Federal tax policy that generally provides more favorable treatment for contributions to public charities or operating foundations than for contributions to nonoperating foundations." ⁶

PROPOSALS FOR EXTENSION

On September 19, 1995, the Ways and Means Committee approved a tax package that includes a proposal to extend the prior tax rules associated with the gifts of appreciated stock to private foundations. Appreciated stock donations would be permissible for tax years 1995, 1996, and 1997. This change is included as part of Title XIII of the Revenue Reconciliation bill entitled Extension of Expiring Tax Provisions. The committee reasoned that the reinstatement of the provision would encourage the charitable donation of appreciated stock.

Additionally, Chairman William Roth of the Senate Finance Committee has included in his "Chairman's mark" the extension of this special rule for gifts of appreciated stock to private foundations. The only difference between the proposals is the expiration date of the provision. The Chairman's mark extends the provision from January 1, 1995, through February 28, 1997.

VERTICAL AND HORIZONTAL EQUITY ISSUES

While use of deductions and credits may act as incentives for worthy goals, the Congress has been concerned that taxpayers with substantial economic income not be able to avoid all tax liability through the use of tax exclusions, deductions and credits. For example, the Congress added items to the minimum tax base to ensure that high-income taxpayers who would have "little or no tax due to their ability to utilize tax preferences," ⁷ would pay some tax. One item that was added to the base was the untaxed appreciation deducted with respect to charitable contributions. As a result of increased media reports and arguments by certain tax exempt organizations, including museums, concerning the decline in gifts of appreciated assets to tax exempt organizations, the Congress reexamined its position of including the appreciated value as a tax preference item. In the Omnibus Budget Reconciliation Act of 1993, the Congress removed the item from the alternative minimum tax.

In addition, congressional debate has shown a concern for horizontal equity. Compare the after tax cost of a gift of money (perhaps from the sale of stock) versus a direct donor gift of appreciated stock under the proposal. Consider two individuals with equal pre-tax incomes -- both taxpayers in the 39.6 percent tax bracket. In each case, the taxpayers own stock with an original acquisition cost of $100,000 which has since appreciated in value to $500,000. The first taxpayer sells the stock, with the $500,000 in proceeds given to a nonoperating foundation. The $400,000 appreciation is subject to a 28 percent tax rate (the maximum tax rate on capital gains) or $112,000 in taxes. The taxpayer receives a tax deduction for the $500,000 gift, saving $198,000 in taxes (the maximum tax rate of 39.6 percent times $500,000). Thus, the taxpayer's aftertax cost of the gift will be $414,000 ($500,000 gift + $112,000 in taxes - $198,000 in tax savings). Like the previous example, the gift by the second taxpayer of appreciated stock which originally cost the donor $100,000 and has since increased in value by $400,000 is made directly to the nonoperating foundation. We have assumed that this gift was made before the special rule expired January 1, 1995. Like the first donor, the second donor receives a charitable contributions deduction of the fair market value of $500,000, but the second donor is not subject to tax on the appreciated value. The after tax cost of the second donor's gift is $302,000 ($500,000 gift - $198,000 in tax savings). (This example does not take into account the limitation on itemized deductions instituted under the Omnibus Budget Reconciliation Act of 1990 (OBRA90). ⁸)

ASSESSMENT

Perhaps the single most important point made in support of the law prior to expiration was that there is social value in having high income taxpayers contribute appreciated assets for public purpose or use that absent public support, individuals would contribute less to charity than is socially desirable. The argument is that the loss of the tax incentive not only harms the taxpayer who benefitted from the reduction in tax liability but also harms those who would have benefitted from the charitable gift. Thus, the public policy goal is to transfer assets from higher income taxpayers to the general public. It is generally acknowledged that high-income taxpayers are influenced by the availability of the tax deduction.

But the desirability of allowing deductions for charitable contributions has also been questioned (for example, proposals to provide lower, flatter tax rates require an inclusive tax base with fewer deductions and credits). [Also, the deduction for charitable contributions has been defended on the grounds that tax deductibility provides a better measure of a taxpayer's ability to pay taxes by excluding dollars donated to charity over which the taxpayer no longer has control.] Further, many believe that Government cannot act as a total substitute for private resources and the deduction is one means whereby private decisions are allowed to direct public funds.

The disadvantage of extending the provision is the associated revenue costs. The purpose of subjecting charitable gifts that have appreciated in value to complete taxation is to prevent what many see as an abuse by wealthy taxpayers who use the exclusion of the appreciated value and the charitable deduction to offset taxable income in order to keep from paying their "fair" share of Federal tax revenues. Those provisions of the Code which cost the Government monies have come under closer examination as legislators have asked how limited Federal resources can best be allocated. The question then becomes one of priorities since the Congress under self-imposed rules must offset tax legislation which loses revenues with other measures that restore the lost revenues. As tax laws change questions often arise as to the distributional implications of restoring the provision with offsetting revenues from other areas. An extension of prior law would favor gifts of appreciated stock to private foundations rather than donations of cash. Because there are few requirements and no costs borne by the donee for acceptance of appreciated stock, some private foundations have encouraged this tax shelter.

REVENUE EFFECTS

Table 1 provides the estimated loss in Federal revenues which stem from extending prior tax law allowing a charitable deduction for qualified appreciated stock donated to a private foundation at fair market value. The Ways and Means Committee extension is provided for tax years 1995-97. The Chairman of the Senate Finance Committee's mark allows the deduction for the period from January 1, 1995, through February 28, 1997. These estimates have been prepared by the Joint Committee on Taxation.

       TABLE 1. EXTENSION OF CONTRIBUTIONS OF APPRECIATED STOCK

² U.S. Congress. Joint Committee on Taxation. General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (H.R. 4170, 98th Congress; Public Law 98-369). Washington, U.S. Govt. Print. Off., 1984. p. 667.

³ Ibid.

⁴ Ibid. p. 668.

⁵ Ibid. p. 669.

⁶ Ibid. p. 667.

⁷ U.S. Congress. Joint Committee on Taxation. General Explanation of the Tax Reform Act of 1986 (H.R. 3838, 99th Congress; Public Law 99-514). Washington, U.S. Govt. Print. Off., 1987. p. 432- 433.

⁸ In 1996, allowable deductions will be reduced by 3 percent of the amount by which the taxpayer's adjusted gross income exceeds $117,950. Deductions may not be reduced by more than 80 percent and the adjusted gross income limit is indexed.