Charity Reform: Overview of Finance Committee Giving Reform Proposals
(Sept. 6, 2005) This month, the Senate Finance Committee is expected to finally introduce legislation that will dramatically affect numerous tax incentives for charitable giving.
AFP is greatly concerned because the committee is considering eliminating or significantly modifying the deductions for noncash charitable contributions, such as art, collectibles, real estate, household goods, books, food, medicine and clothing.
While the exact language of the legislation is not publicly available, the committee likely will base the bill on the Joint Committee on Taxation's (JCT) 435-page report 'Options to Improve Tax Compliance and Reform Tax Expenditures' that was published on Jan. 27, 2005.
The JCT report describes a number of proposals aimed at reducing the deficit and ensuring greater compliance with current tax laws. Section VIII of the report specifically addresses charitable organizations. The provisions described below come from that report.
Proposals to Use Cost Basis Instead of Fair Market Value for Noncash Gifts
The JCT proposed two options related to the charitable deduction for gifts of property, both of which would limit the deduction to the donor's basis in the assets.
The proposals would eliminate or restrict the fair market value of the following types of gifts:
- Land and real estate
- Stock in family companies
- S corp stock
- Privately traded securities
Publicly traded securities, intellectual property and vehicles would be exempt.
AFP is concerned that this valuation change will have a devastating effect on charities. A similar proposal enacted in 1986, replacing fair market value with the donor's basis for gifts of appreciated property, was fully repealed in 1993 after a dramatic reduction in giving. In addition, initial evidence shows that donations of vehicles have plummeted by nearly 50 percent since the beginning of 2005 when new regulations regarding these types of contributions came into effect.
The JCT and the Senate Finance Committee argue that if noncash giving does decrease because of these valuation changes, donors can simply sell their property privately (as opposed to donating it) and then give the proceeds of that sale to the charities.
However, this logic is flawed on two levels.
- It is uncommon for people to give the proceeds of a private sale to charities.
- Many charities rely on the actual property (not cash) for their altruistic activities (e.g., museums rely on the donation of artwork).
Proposals to Cap Gifts of Clothing and Other Household Goods at $500
Another problematic proposal is a limitation on the deduction individuals can take for household items and clothing. Deductions for such property would be capped at $500 annually with no carry-over to the next year for excess gifts. Only paintings, antiques and other art objects would be exempt.
In its reasoning, the JCT pointed to concerns and abuses with the valuation process. It also noted that it considered completely eliminating the deduction for these types of gifts, but felt that limiting the deduction would be sufficient.
AFP feels that this cap is arbitrary and unreasonable. The committee failed to provide evidence as to why such a low cap is necessary or why it would be effective at all. Moreover, this proposal would place a great strain on those charities that rely on these types of donations.
AFP Lobbying Efforts
In response to these proposals, AFP has met with members of the Senate Finance Committee and their staffs to urge them to preserve the current noncash gift deduction rules. We continue to point out that no crisis exists in the sector and that current laws would cover those rare instances of abuses.
The key is having Congress provide enough resources to the IRS for enforcement purposes. As a compromise, AFP has urged Congress to tighten appraisal rules--something that would do much to ensure accurate valuation without impeding upon donations of noncash gifts. AFP also has noted several changes that would restore confidence in the accuracy of fair market-value deductions, including:
- Strengthening the definition of a qualified appraisal and a qualified appraiser for these purposes
- Expanding penalties on taxpayers for grossly inflated valuations for deduction purposes
- Imposing new penalties on appraisers for such valuations
- Mandating electronic filing of Forms 8282 and 8283
Information about non-giving charity proposals is available here.