Menu
Tax Notes logo

CRS SUMMARIZES OBRA TREATMENT OF CHARITABLE CONTRIBUTIONS.

DEC. 20, 1990

90-579E

DATED DEC. 20, 1990
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Index Terms
    charitable deduction
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-102
  • Tax Analysts Electronic Citation
    91 TNT 3-19
Citations: 90-579E

Charitable Contributions of Appreciated Assets

                          December 20, 1990

 

 

                          Louis Alan Talley

 

                    Research Analyst in Taxation

 

                         Economics Division

 

 

SUMMARY

This report examines the two changes in the tax law for charitable contributions of appreciated assets under provisions of the Tax Reform Act of 1986, TRA86 (Public Law 99-514) and the Revenue Reconciliation Act of 1990 (Public Law 101-508). After passage of the TRA86 which provided the taxing of the appreciated value under the alternative minimum tax (AMT), gifts of appreciated assets declined. As a result of media reports of this decline and arguments by tax- exempt organizations, the Congress reexamined its position of including the appreciated value of charitable contributions as a tax preference item. This has resulted in a one-year period during which such gifts will not be subject to the alternative minimum tax, under a provision enacted as part of the Revenue Reconciliation Act of 1990. While not explicitly stated, this special tax treatment was limited by the Congress to a one-year period to prevent future revenue losses during a time of large and continuing Federal budget deficits.

TAX REFORM ACT OF 1986 AND APPRECIATED ASSETS UNDER THE AMT

Prior to the passage of the Tax Reform Act of 1986, a taxpayer was permitted to deduct the full market value of gifts of property to qualified organizations, not just the purchase price. This allowed the donor not only to escape taxation on any appreciated value but also to reduce otherwise taxable income by the amount of the untaxed appreciation. The Tax Reform Act of 1986 continued this treatment in computing regular tax liability, but provided that the appreciated value was to be included in the alternative minimum tax base. Thus, those individuals subject to the alternative minimum tax would be taxed on the appreciated value of such gifts. The alternative minimum tax rate was 21 percent for individuals and 20 percent for corporations.

Stated as the congressional rationale for this change was the following:

Congress concluded that the minimum tax should serve one overriding objective: to ensure that no taxpayer with substantial economic income can avoid significant tax liability by using exclusions, deductions and credits. Although these provisions may provide incentives for worthy goals, they become counterproductive when taxpayers are allowed to use them to avoid virtually all tax liability. The ability of high-income taxpayers to pay little or no tax undermines respect for the entire tax system and, thus, for the incentive provisions themselves. In addition, even aside from public perceptions, Congress concluded that it is inherently unfair for high-income taxpayers to pay little or no tax due to their ability to utilize tax preferences. . . . 1

In addition, Congress concluded that certain items, not presently treated as preferences, must be added to the minimum tax base in order for it to serve its intended purpose of requiring taxpayers with substantial economic incomes to pay some tax. The items as to which Congress reached the determination include . . . untaxed appreciation deducted with respect to charitable contributions . . . 2

During congressional consideration of this change, a number of advantages were often cited in support of retention of then current law. Perhaps the single most important point made in support of prior law was that there is social value in having high income taxpayers contribute appreciated assets for public purpose or use, and they are usually assumed to be strongly influenced by the tax deduction. In particular, Lawrence D. Lindsey has stated that the minimum tax provision "will significantly affect" donors of "unique assets" 3 (such as an Old Master's painting). Bruce Hopkins, the author of a textbook on the taxation of nonprofit organizations, "criticized the proposal because it would result in an overall reduction in charitable contributions." Hopkins indicated that "to take away incentives such as capital gains exclusion hurts only the taxpayer who receives the benefit of rate reduction, . . . however, in the case of charitable incentives, it is the recipients of the charity's services who suffer most." 4

Studies by the American Association of Museums, the Association of Art Museum Directors, and Charles T. Clotfelter for the National Bureau of Economic Research, Inc. have reported a substantial decline in donations of appreciated property since passage of the Tax Reform Act of 1986. 56

This reported decline in gifts might be partly attributable to the change in the treatment of appreciated property. However, it must be remembered that the purpose of the provision was to prevent what some saw as an abuse by wealthy taxpayers who used deductions, such as those for appreciated property, to keep from paying their "fair share" under the Federal tax laws. Additionally, it has been noted that the prior tax treatment encouraged taxpayers to make contributions in the form of property rather than in cash even though many tax-exempt organizations would prefer the donation in cash. Also of note, the Internal Revenue Service has had difficulty in the past with taxpayers overstating the value of items donated.

This decline in giving could also be the result of other factors not often taken into consideration. Art prices had for several years following the passage of TRA86 spiraled upward in value. Some individuals may have held onto such art work until the market peaked. Because of the lower tax rates many individuals can make more by selling the item now than they could before tax reform. Conversely, this lowering of tax rates raises the aftertax cost of making a charitable contribution. Economists have generally held that contributions are sensitive to tax deductibility or stated simply, deductibility provides an incentive effect which varies with the marginal tax rate of the giver. 7 The decline in tax rates alone could reduce charitable giving, since it makes the after tax cost greater. There are a number of studies which find significant price elasticities, and estimates of reduced giving as a result of passage of the Tax Reform Act of 1986 have ranged from 10 percent to 25 percent. 8 Additionally, it was projected that higher income giving would be more affected and thus the types of organizations, such as art and educational institutions, to which the wealthy typically make donations.

REVENUE RECONCILIATION ACT OF 1990 AND APPRECIATED ASSETS UNDER THE AMT

As a result of increased media reports and arguments by certain organizations, including museums, concerning the decline in gifts of appreciated assets to tax-exempt organizations, the Congress re- examined its position of including the appreciated value as a tax preference item. The Revenue Reconciliation Act of 1990 contains an amendment, originally introduced by Senator Daniel Patrick Moynihan, which provides a one-year period when gifts of "tangible personal property" will not be subject to the alternative minimum tax. While not explicitly stated, it is generally believed that this special tax treatment is limited to a one-year period to prevent continuing revenue losses in future years because of large and continuing Federal budget deficits. Limiting it to tangible personal property excludes gifts of stock and land, which also limits the revenue loss.

Thus, the Revenue Reconciliation Act of 1990 provides a one-year window for charitable contributions of the specified appreciated property. As such, for tax year 1991 gifts of these appreciated assets will not be treated as a tax preference item subject to the alternative minimum tax. However, the law does provide that the gifts must be related to the recipient's tax-exempt purpose. One example of a qualifying contribution would be the donation of a painting to a tax-exempt art museum. A gift of the same painting to, for example, a hospital probably would not qualify because the painting was not related to the hospital's exempt function. Likewise, the gift of appreciated stock to the same art museum would not qualify for this special tax treatment because stock is not tangible personal property. Thus, this tax act enables taxpayers to deduct the fair market value for gifts made only during tax year 1991 (subject to other limitations that may be applicable).

A numerical example would be a taxpayer who purchased a painting for $100,000 whose value subsequently increased to $1,000,000 and donated the painting to an art museum. During tax year 1991, the taxpayer would receive a charitable contribution deduction of $1,000,000. The appreciated value ($900,000) would never have been subject to Federal individual income taxes. After 1991 the difference between the taxpayer's cost and the value of the gift would be included ($900,000) in the taxpayer's alternative minimum tax computation.

The Revenue Reconciliation Act of 1990 makes other changes in the area of charitable contributions. A limitation on certain itemized deductions (such as those for charitable contributions) was included in the law. As such, beginning in 1991, to the extent that a taxpayer's adjusted gross income exceeds $100,000, his itemized deductions will be reduced by 3 percent of adjusted gross income in excess of $100,000. This $100,000 floor will be adjusted for inflation in future years. However, itemized deductions subject to the 3 percent limitation cannot be reduced by more than 80 percent. This provision is scheduled to sunset after 1995. Additionally, a minor change (an increase) in marginal tax rates might affect the willingness of taxpayers to make large charitable contributions, and the alternative minimum tax rate was increased from 21 to 24 percent. Obviously, enough data is not available at this time from which to draw reliable conclusions as to how these changes might affect giving. While a number of studies find significant price elasticities and estimates of giving based on marginal tax rates, the interaction between this small increase in regular tax rates, the increase in the alternative minimum tax, in combination with reduced itemized deductibility and the one-year window for gifts of appreciated assets is impossible to gauge.

 

FOOTNOTES

 

 

1 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.

2 Ibid., p. 434.

3 Lindsey, Lawrence B. Gifts of Appreciated Property; More to Consider. Tax Notes, January 5, 1987. p 69.

4 Tax Reform: Treatment of Appreciated Property Focal Point of University Opposition to Treasury Plan. The Bureau of National Affairs. Daily Tax Report, No. 248, December 26, 1984. p. G-2 -- G-4.

5 Glueck, Grace. Donations of Art Fall Sharply After Changes in the Tax Code. New York Times, May 7, 1989. p. 1, 32.

6 Clotfelter, Charles T. The Impact of Tax Reform on Charitable Giving: A 1989 Perspective. Cambridge, Mass., National Bureau of Economic Research, 1990. p. 19-20. (NBER Working Paper No. 3273)

7 A study which finds that rate cuts do not necessarily hurt charitable contributions was Briston, Ralph B. Tax Cuts and Charitable Giving. Tax Notes, July 15, 1985. p. 323-326.

8 For example, Auten Gerald, and Gabriel Rudney. Charitable Deductions and Tax Reform: New Evidence on Giving Behavior. Committee on Federal Taxation and Finance of the National Tax Association-Tax Institute of America, November 26, 1983. Another study of interest is Lindsey, Lawrence B. The Effect of the Treasury Proposal on Charitable Giving: A Comparison of Constant and Variable Elasticity Models. Cambridge, Mass., National Bureau of Economic Research, Inc., March 1985 (NBER Working Paper #1592). An overview of major studies can be found in Clotfelter, Charles T. Federal Tax Policy and Charitable Giving. Chicago, University of Chicago Press, 1985. A table of these studies is provided on pages 57-59.

DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Index Terms
    charitable deduction
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-102
  • Tax Analysts Electronic Citation
    91 TNT 3-19
Copy RID