Tax Issues Relating to Charitable Contributions and Organizations

Tax Issues Relating to Charitable
Contributions and Organizations
August 5, 2008
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division

Tax Issues Relating to Charitable
Contributions and Organizations
The value of tax benefits for charitable contributions and organizations is
estimated to be around $100 billion per year. About half of this cost arises from the
deductions for charitable contributions, and about half from exemptions of earnings
of non-profits.
While revisions to the treatment of charitable contributions and tax-exempt
organizations that receive contributions have been made in the past few years, several
issues may be considered in future legislation. Of most immediate concern are the
provisions that, as a part of the “extenders,” expired at the end of 2007 and may be
considered for extension. Other issues that may arise reflect concerns about donor-
advised funds and supporting organizations (now under study at the Treasury
Department), nonprofit hospitals’ provision of charity care, and educational
institutions’ use of growing endowments. While no current proposals are under
consideration, charitable contribution floors and extensions to non-itemizers were
included in the President’s Advisory Panels’ tax proposals and in the Congressional
Budget Office’s budget options study.
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 (P.L. 109-280). These
extenders include an individual retirement account (IRA) rollover, liberalized
treatment of certain gifts of inventory and conservation property, and two more
technical provisions. (One of these technical provisions relates to the treatment of
corporations that elect to be taxed as partnerships, and the other to the definition of
unrelated business income of tax-exempt organizations, which is subject to tax.)
These “extenders” are being considered currently in various bills.
Legislation, primarily in the Pension Protection Act, also imposed restrictions
on contributions and charitable organizations to address abuses. The Act made
changes relating to donor-advised funds and supporting organizations, which receive
charitable contributions for further donation. That legislation also commissioned the
Treasury Department to study this issue and make recommendations, including
whether minimum distributions should be required. In addition, some of the same
concerns about whether funds were being paid out at a high enough rate were also
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 non-profit hospitals provide enough charity care. The Senate Finance
Committee has, in the past, investigated potential abuses raised by the Internal
Revenue Service or reported in the media. These investigations have sometimes led
to self-correction and sometimes led to legislation.
This report will be updated to reflect legislative and other changes.

Current Tax Benefits...............................................1
Charitable Contributions........................................2
Tax Exemption of Earnings......................................3
Expanding Benefits for Charitable Contributions and Organizations.........5
Provisions Considered But Not Adopted............................5
Deduction for Non-Itemizers.................................6
Reducing the Foundation Investment Income Excise Tax...........7
Raising the Corporate Charitable Deductions Cap................8
Unrelated Business Income of Charitable Remainder Trusts........8
Disaster Provisions Enacted on a Temporary Basis....................9
Provisions Now Part of the Extenders..............................9
Contributions of Conservation Property........................9
IRA Rollover Provision....................................10
Extending the Deduction for Food Inventory to all Businesses......10
Contributions of Scientific and Computer Property..............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.........................15
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.....................17
Restrictions on Tax-Exempt Organizations.........................17
Terrorist Activities........................................17
Leasing Activities........................................17
Penalties for Tax-Exempt Organizations in Prohibited Tax
Shelters .............................................17
Life Insurance............................................17
Penalties and Penalty Taxes.................................17
Credit Counseling Agencies................................18
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

The Extenders...............................................20
Donor Advised Funds and Supporting Organizations.................21
Non-Profit Hospitals..........................................22
University and College Endowments..............................22
Specific Sectors Including Media-Based Ministries..................23
List of Tables
Table 1: Charitable Provisions Among the Extenders.....................20

Tax Issues Relating to Charitable
Contributions and Organizations
The value of tax benefits for charitable contributions and organizations is
estimated to be around $100 billion per year. While revisions to the treatment of
charitable contributions and tax-exempt organizations that receive these contributions
have been made in the 108th and 109th Congress, a number of issues remain
unresolved. Several liberalizations of tax benefits for charitable contributions,
including an individual retirement account (IRA) rollover, liberalized treatment of
certain gifts of inventory, and some other revisions expired at the end of 2007. These
“extenders” are being considered currently in various bills. Certain issues relating
to donor-advised funds and supporting organizations, which receive charitable
contributions for further donation, were addressed in 2006. The legislation also
included a directive to the Treasury Department to study this issue and make
recommendations. In addition, some of the same concerns about whether funds were
being paid out at a high enough rate were also 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 non-profit hospitals
provide enough charity care.
This report reviews those issues, beginning with a discussion of current tax
benefits, a review of legislative changes in the past four years, and a discussion of
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, non-
profit hospitals, and churches, along with conduits to those institutions such as
private foundations, donor-advised funds, and supporting 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 FY2008 to reduce federal revenue by1
about $46 billion.

1 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years
2007-2011, JCS- 3-07, September 24, 2007. The categories for education and health are
estimated separately at $7 billion and $5.2 billion respectively. Of overall charitable
contributions, not all of which are deductible because they are made by non-itemizers, about
a third are to religious organizations,14% are to education, 10% each to private foundations
and human services, around 7% each to health and public society benefit, about 4% each to
arts, culture and humanities and international, and about 2% to environment and animals,

Another important benefit is the exemption of earnings on assets from the income
tax. As discussed below, while this benefit is difficult to estimate, it appears to be
as large, 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.
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. Over the past several 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 expire or have expired but are seen as likely
to be extended or reinstated.
While charitable deductions are available to all taxpayers, individuals who take
the standard deduction do not have a marginal tax incentive to give. (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.) 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 non-profits, 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 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. These temporary provisions are now part of the extenders; they
expired at the end of 2007.

1 (...continued)
with the remaining 8% unclassified. See Giving USA 2006, distribution posted at
[] .

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,2 and 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, 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.
The revenue loss of this latter benefit has likely increased substantially with the
growth of educational institution endowments, particularly by some educational
institutions where earnings have been substantial relative to pay-out rates. If
university endowment earnings alone were subject to the corporate tax, the revenue
gain is roughly estimated at over $25 billion per year for FY2007 (which ended, for
most of these institutions, in June 2007). It is more than three times as large as the
revenue loss for charitable donations to all educational institutions, which total
around $7 billion. While the ratio of revenue cost of the asset earnings to charitable
contributions is probably smaller for other types of non-profits, the cost for all non
profits would probably be around $50 billion, about the same size as the cost of the
charitable deduction.3

2 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
3 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 []). 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

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 pay-out requirements, were not in all cases; instead,
Congress has authorized Treasury studies.
Although legislation has not been introduced, the tax-writing committees,
especially the Senate Finance Committee, have been examining the status of some
other tax-exempt organizations through hearings and studies. These include
nonprofit hospitals where issues about the amount of charity care provided have been
raised. The Senate Finance Committee has also focused on the growing endowments
of universities and colleges. Because these educational institutions are considered
active operations, there are no payout requirements. Low payout rates relative to
earnings, however, have led to a rapid growth of endowments, at the same time that
tuition rates have risen faster than inflation.

3 (...continued)
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 non-profits and 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.

Expanding Benefits for Charitable
Contributions and Organizations
Legislative proposals involving expanded tax incentives for charity began in the

107th Congress with the Community Solutions Act of 2001 (H.R. 7). This bill,

passed in 2001 by the House, had eight new tax provisions designed to benefit
charitable giving including a capped deduction for non-itemizers. The President had
proposed three of these tax provisions in his original 2001 tax proposal, but these
provisions were not included in the 2001 tax cut (P.L. 107-16). Senate consideration
also began in the 107th Congress with S. 1924, introduced by Senators Lieberman and
Santorum, which would have provided a temporary non-itemizers deduction with a
higher cap along with other provisions. The Senate Finance Committee reported this
bill, the CARE Act of 2002, with a temporary non-itemizers deduction with both a
floor and ceiling, but it was not considered on the floor, containing some other
provisions of H.R. 7. In the 108th Congress, similar bill, S. 476, was passed by the
Senate on April 9, 2003. S. 476 included some provisions that also would restrict
charitable organizations, aimed at concerns about abuse. A new version of H.R. 7
passed the House in 2003. No further action occurred in that Congress.
A 109th Congress bill, S. 7, included charitable provisions. Some limited
provisions, largely aimed at disasters, including 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), provided additional benefits. The
Senate continued to propose some of these charitable provisions along with revenue
raisers, which were enacted in 2006 in The Pension Protection Act (P.L. 109-280).
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.4
Provisions Considered But Not Adopted
Four provisions were included in various proposals, but ultimately not adopted:
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.

4 These documents can be found on the Joint Committee’s website [].
The legislation discussed in this report is summarized in two volumes: General Explanationth
of Tax Legislation Enacted in the 108 Congress, JCS-1-05, and General Explanation of Taxth
Legislation Enacted in the 109 Congress, JCS-1-07

Deduction for Non-Itemizers. The most significant charitable contributions
proposal, in scope and revenue, considered in the last three Congresses was a
deduction for non-itemizers, which was directed at encouraging charitable
contributions. Under current law a taxpayer can either itemize deductions (the major
deductions are charitable contributions, excess medical expenses, mortgage interest,
and state and local income and property taxes) or choose the standard deduction. The
standard deduction is advantageous if that amount is larger than total itemized
deductions. (A limited deduction for non-itemizers was formerly available for 1981-

1986, enacted as part of the Economic Recovery Tax Act of 1981 (P.L. 97-34).)

Proposals for extending the deduction to non-itemizers were considered under
various proposals, in some cases including caps and floors. President Bush’s initial
proposal would have extended the deduction to itemizers with no restrictions that
differed from those of itemizers. The first version of the House bill in the 107th
Congress (2001) would have imposed a cap on the deduction, with a phased in
increase to $200 for married couples and $100 for singles. The initial Lieberman-
Santorum plan, S. 1924, would have provided a larger cap of $600 and $400; the
Senate Finance Committee reported a version of S. 1924 (as a substitute for H.R. 7)
with a temporary non-itemizers deduction with floor and a ceiling ($250/$500 for
singles and $500/$1,000 for joint returns). This provision with a floor and a ceilingth
was also in the 108 Congress bills.
In its most recent Budget Options study, the Congressional Budget Office
estimated that a non-itemizer’s deduction with a $200/$100 cap would cost $3.4
billion over five years and $7.9 billion over ten years, while a $500/$250 cap would
cost $14.7 billion and $38.7 billion respectively.5
While no further proposals in this area were considered in Congress in 2005, the
President’s advisory group proposing overall tax reform included in their plans an
extension of the deduction to non-itemizers, but added a floor of 1% of income, for6
both itemizers and non-itemizers. The Congressional Budget Office also discussed
a 2% floor as a separate provision in their budget options report, indicating that such
a floor would gain revenue of about $20 billion per year in the first year, $100 billion
over five years, and $250 billion over ten years.7
The main objective of this extension of the 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.

5 Congressional Budget Office, Budget Options, February 2007, p. 273.
6 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.
7 Congressional Budget Office, Budget Options, February 2007, p. 272.

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.8
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 the previous five years), or has been subject to a tax for failure
to distribute in the previous five years. The House considered several bills that
would have eliminated the extra 1% tax. This provision accounted for a $2.3 billion
revenue cost over 10 years when last considered in 2003. The proposal was not
included in the Senate bills under consideration at this time.
Private foundations, whose contributors (or their families) retain the right to
direct the distribution of funds, have always been subject to greater scrutiny, in part
because of the possibility of the donor (or family) obtaining a private benefit.
Foundations are 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 which 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. 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

8 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.

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.
The 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.
The provisions affecting foundations were not adopted.9 Moreover, concerns
about abuse ultimately led to some increases in taxes and penalties including those
on foundations, which are described below.
Raising the Corporate Charitable Deductions Cap. Under current law
corporations can deduct charitable contributions of up to 10% of income; the 2003
House proposals 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 was not in the Senate bill. This provision is relatively small, and most
corporate giving already falls well under the cap; the 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 a10
positive effect and cross section results not finding an effect.
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

9 CRS Report RS21603, Minimum Distribution Requirement for Private Foundations:
Proposal to Disallow Administrative Costs, by Jane G. Gravelle.
10 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.


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 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. The Gulf Opportunity
Zone Act P. L. 109-135 extended the benefits of higher limits to contributions to
Hurricanes Rita and Wilma.
Provisions Now Part of the Extenders
Seven provisions were enacted with expiration dates; they expired at the end of
2007, although one has since been extended. The extended provision relates to
donation of conservation property. The remaining six are now included in various
bills to authorize them for an additional year. They include 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.
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 has recently been
extended for an additional two years in the Food, Conservation, and Energy Act of

2008, P.L. 110-234. 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. All of the proposed charitable contribution
proposals considered in Congress included a provision to allow tax free distributions
from individual retirement accounts to charities by individuals aged 70 and ½ or
older. This provision was adopted on a temporary basis in the Pension Protection
Act in 2006 but expired at the end of 2007. The treatment benefits non-itemizers,
who would not otherwise be able to take a deduction, although in the President’s
original proposals nonitemizers would be allowed a deduction in any case.
While 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 and expired at the end of 2007. It was projected to cost $238 million in
the first year, and $856 million over ten years.
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.11
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. While 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

11 See CRS Report RL31097, Charitable Contributions for Food Inventory: Proposals for
Change, by Pamela Jackson.

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.
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.
Contributions of Scientific and Computer Property. Certain special
treatment (similar to that for food inventory) is allowed for certain scientific property
used for research and for contributions of computer technology and equipment,
provided the property is constructed by the taxpayer. In concrete terms, this rule
requires that no more than 50% of the cost is due to parts purchased elsewhere. The
issues surrounding this provision are the same as those related to other contributions
of inventory, such as food inventory. This provision expired in 2003. The proposals
would have allowed property assembled, as well as constructed, to be eligible and
make the provision permanent, although the Senate proposal involved an extension.
The Working Families Tax Relief Act of 2004 (P.L. 108-311) extended the existing
provisions through 2005 and The Tax Relief and Health Care (P.L. 109-432)
extended the provision, including the expansion to assembled property, through


Contributions of Book Inventory. A provision that originated in the Senate
extended the treatment of food inventories to book inventories 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.
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.
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 applies to
payments through 2007.
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 over the last three Congresses aimed
at preventing potential abuse, with many problematic areas identified by the Internal
Revenue Service.12 The Senate Finance Committee, and Senator Grassley, currently
the ranking member, have investigated many compliance issues.13 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.14
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

12 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:
13 Summary of Senator Chuck Grassley’s Non-Profit Oversight, November 20, 2007:
[ h ttp:// ce/press/Gpress/2007/prg112007a.pdf] .
14 Joint Committee on Taxation, Options to Improve Tax Compliance and Reform Tax
Expenditures. JCS-2-05, January 27, 2005, posted at [].

contributions to build up an account without necessarily making a contribution.
Private foundations, however, are subject to a 5% pay-out 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 institution subsequently makes contributions, advised by the
donor. Supporting organizations do not have a direct charitable purpose, but support
organizations that do.15
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. The President’s Advisory Panel on Tax
Reform proposed a floor equal to 1% of income.16 The Congressional Budget Office
included a budget option for a floor of 2%,17 with an estimated revenue gain of about
$20 billion in the first year, $99 billion over five years, and $250 billion over ten
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. 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.18 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.

15 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, posted at:

[ gt est040505.pdf]
16 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.
17 Congressional Budget Office, Budget Options, February 2007.
18 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, posted
at: [].

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.19
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 create an incentive
to limit any overstatement of value.20 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-cash21
contributions of $500 or more. Often charities resold vehicles at a much smaller
value than the value deducted by the taxpayer.22 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

19 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.
20 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, posted
at: [].
21 Janette Wilson and Michael Strudler, “Individual Non-Cash Charitable Contributions

2003,” Internal Revenue Service, Statistics of Income Bulletin, Spring 2006, p. 59.

22 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:
[ h t t p : / / n ew.i t e ms / d0473.pdf }.

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.23
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.
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.24 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
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.25 For example the taxpayer could contribute

23 See Zachary A. Goldfarb, “Pension Bill Also Curbs Hunter’s Breaks,” Washington Post,
August 5, 2006.
24 Janette Wilson and Michael Strudler, “Individual Non-Cash Charitable Contributions

2003,” Internal Revenue Service, Statistics of Income Bulletin, Spring 2006, p.59.

25 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

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 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.26
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.

25 (...continued)
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.
26 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:
[ 05205/541620.stm].

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
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.
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.27
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

27 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

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. Non-profit 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 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.
While exempt organizations are required generally 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).
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.

Donor-Advised Funds and Supporting Organizations. The Pension
Protection Act authorized Treasury Department studies of donor advised funds and28
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. While 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 expected29
to be applied.
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

28 Issues surrounding supporting organizations and donor-advised funds 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, posted at:
[]. See also Nick G.
Tarlson, “Donor-Advised Funds Preparing for Closer Scrutiny,” Journal of Accountancy
Online, January 2008 [].
29 The proposed regulation can be found at:
[ an20071800/edocke t.access.gpo.go v/ 2 0 07/p

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 non-profits.
Current Issues Surrounding Charitable
Deductions and Organizations
As indicated in the discussion above, two issues of current legislative interest
are the extenders, and any potential legislation arising from the Treasury studies of
donor advised funds and supporting organizations. In addition, there is interest, as
indicated by hearings and by activities of the Senate Finance Committee in the tax-
exempt status of non-profit hospitals and in university endowments. The Finance
Committee has also in the past examined specific areas of the charitable giving and
tax-exempt charitable world, including specific tax-exempt organizations. These
examinations were spurred by studies and by media reports. Most recently, Senator
Grassley has inquired of the finances of media related ministries. Finally, there
remains a possibility that a floor could be imposed on charitable giving as part of a
broad tax reform, given the recommendations of the President’s Advisory Panel and
the inclusion of that provision in the Congressional Budget Office options paper.
The Extenders
Table 1 reports the expected revenue cost of extending each of the six
provisions that expired at the end of 2007 for one year. 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
ProvisionRevenue Cost
(Millions of Dollars)
Individual Retirement Account Rollover$465
Extending Food Inventory Provision $71
Contributions of Scientific and Technological Property$260
Contribution of Books$32
Modifying the Basis of S Corporation Stock$62
Unrelated Business Income of Related Parties$35
Source: Joint Committee on Taxation, JCX26-08 [].

The contributions of conservation property, which has already been extended two years, was
estimated to cost $54 billion for a one year extension in an earlier estimate, JCX 107-07
[ h t t p : / / www.j c t . go v/ x-105-07.pdf ] .
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. Evidence suggests, however, that relatively
few temporary provisions have been revised. Only one extender of dozens allowed
since the first extender was enacted in 1981 has been allowed to lapse. Most
provisions are not revised either, although the R&D tax credit 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.
The issues surrounding the specific charitable extenders are discussed above.
History suggests they are likely to be enacted, however, and several bills have been
introduced to extend all provisions that expired in 2007.30
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 pay-out
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 completes31
its studies.
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.

30 See CRS Report RL32367, Certain Temporary Tax Provisions (“Extenders”) Expired in

2007, by Pamela Jackson and Jennifer Teefy.

31 See Nick Tarlson, “Donor Advised Funds: Prepare for Closer Scrutiny,” Journal of
Accountancy, 2008: [].

Non-Profit Hospitals
The tax writing committees, and especially Senator Grassley, have also been
interested in non-profit hospitals. A major concern is the degree of charity care and
whether non-profit hospitals are providing benefits that justify their charitable and
tax-exempt status. The Congressional Budget Office released a study in 2006 that
found that non-profit hospitals overall provided only slightly more charity care than
for profit hospitals.32 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 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 non-profit 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.33
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 non-profit
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%.34
One of the concerns expressed in the staff discussion draft was that, since 1969,
with a revenue ruling issued by the Internal Revenue Service, non-profit hospitals
were not required to demonstrate specific standards for charity to qualify for exempt
status (and in some cases to be eligible to receive tax deductible charitable
contributions); rather they must meet a community benefit standard that is not
quantitatively defined.35
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, the benefit of exempting endowment income
of colleges and universities from taxes is estimated at around $25 billion, more than
three times the benefit of charitable deductions to all educational institutions. IN the
past few years, endowments have been growing rapidly because of very high yields,
coupled with relatively low payout rates. For the fiscal year that ended June 2007,

32 Congressional Budget Office, Nonprofit Hospitals and the Provision of Community
Benefits, December 2006.
33 Tax Exempt Hospitals: Discussion Draft, at:
34 Internal Revenue Service, Hospital Compliance Program Interim Report, at:
[ ht t p: / / www.i r pub/ i r s-t e ge / e o_i nt er i m_hospi t a l _r e por t _072007.pdf ] .
35 See CRS Report RL34605, Tax-Exempt Section 501(c)(3) Hospitals: Community Benefit
Standard and Schedule H, by Erika Lunder and Edward C. Liu for further discussion of the
legal issues involved in defining community benefit.

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 on-going trend from recent years.
This growth may slow or reverse in FY2008, given the performance of the economy,
but the trend in high earnings has persisted for longer periods of time inclusive of
business cycles.36
The Senate Finance Committee received testimony on college endowments in
connection with hearings held on offshore funds in 2007. Marge university
endowments are invested in, among other assets, offshore hedge funds, and one issue
discussed during the hearing was whether these investments were being used to avoid
the unrelated business income tax. The witnesses discussed the growth of
endowments and also addressed the relationship between endowments and
affordability, showing that a very small increase in payout of universities and
colleges with the largest endowments could obviate the need for tuition increases and
could fund significant increases in student aid.37 The Senate Finance Committee
also sent a survey to colleges with endowments of more than $500 million to obtain
more details about their endowments and pay-outs.38 Senator Grassley, ranking
member of the Finance Committee, recently discussed his concern that, in exchange
for tax exemption, colleges were expected to provide affordable education, and why
colleges were not spending more of their endowment funds for this purpose.39
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;

36 See “Special Report: Jitters Amid Strong Returns,” Chronicle of Philanthropy, July 24,
2008, pp. 6-11. There was a similar period of slow growth during the 2001 recession, but
funds still averaged high returns over the five year period that included the recession. See
memorandum by Jane G. Gravelle. Congressional Research Service, analyzing endowment
earnings, payouts, and uses that formed the basis for testimony, at:
37 See testimony of Jane G. Gravelle, Congressional Research Service and testimony of Lynn
Munson, Center for College Affordibility and Productivity, before the Senate Finance
Committee, September 26, 2007:
[ g.pdf]
Also see the memorandum by Jane G. Gravelle. Congressional Research Service, analyzing
endowment earnings, payouts, and uses that formed the basis for testimony, at:
38 Senate Finance Committee Press Release, “Baucus, Grassley Write to 136 Colleges, Seek
Details of Endowment Pay-Outs, Student Aid.”:
39 Charles E. Grassley, “Wealthy Colleges Must Make Themselves More Affordable,”
Chronicle of Higher Education, May 29, 2008:

they have led to both legislation and self correction by entities involved. Some of
these examples are mentioned in a summary of Senator Grassley’s oversight
available on the Senate Finance Committee’s web page; they include in addition to
issues associated with some of the provisions enacted in the Pension Protection Act
and other bills, the Red Cross, the Nature Conservancy, and the Smithsonian.40
Recently, Senator Grassley has 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 that it
is difficult to obtain information. The issues of concern and status of this
investigation, which relate to issues such as governance and compliance with tax
withholding laws, are contained in a recent press release.41

40 Summary of Senator Chuck Grassley’s Non-Profit Oversight, November 20, 2007:
[ h ttp:// ce/press/Gpress/2007/prg112007a.pdf] .
41 [].