The Tax Law of Charitable Giving. Bruce R. Hopkins

social and scientific advances have been widely and frequently extolled. Charitable groups were in the forefront of ridding society of child labor, abolitionist groups in tearing down the institution of slavery, civic-minded groups in purging the spoils system from public office. The benefits of non-profit scientific and technological research include the great reduction of scourges such as tuberculosis and polio, malaria, typhus, influenza, rabies, yaws, bilharziasis, syphilis and amoebic dysentery. These are among the myriad products of the nonprofit sector that have at least indirectly affected all Americans and much of the rest of the world besides.

      Perhaps the nonprofit activity that most directly touches the lives of most Americans today is noncommercial “public” television. A bare concept twenty-five years ago, its development was underwritten mainly by foundations. Today it comprises a network of some 240 stations valued at billions of dollars, is increasingly supported by small, “subscriber” contributions and has broadened and enriched a medium that occupies hours of the average American's day.

More particularly benefited by voluntary organizations are the one-quarter of all college and university students who attend private institutions of higher education. For hundreds of millions of Americans, private community hospitals, accounting for half of all hospitals in the United States, have been, as one Commission study puts it, “the primary site for handling the most dramatic of human experiences—birth, death, and the alleviation of personal suffering.” In this secular age, too, it is worth noting that the largest category in the nonprofit sector is still very large indeed; nearly two out of three Americans belong to and evidently find comfort and inspiration in the nation's hundreds of thousands of religious organizations. All told, it would be hard to imagine American life without voluntary nonprofit organizations and associations, so entwined are they in the very fabric of our society, from massive national organizations to the local Girl Scouts, the parent-teacher association, or the bottle recycling group.¹³⁰

§ 1.5 HISTORY OF CHARITABLE CONTRIBUTION DEDUCTION

The federal income tax charitable contribution deduction is now more than 100 years of age. Enacted in 1917, it has evolved significantly, with changes in its contours ranging from major to minor over the ensuing decades. In a remarkable understatement, one observer wrote that, over the years, “[a]lthough the basic premise remains the same,” the charitable deduction has changed from a “short statutory provision into a complex set of rules.”¹³¹

The major changes in the charitable deduction for individuals over the period generally entail the limitations on the amount that can be deducted by donors in a year (increasing from 15 to 60 percent), the creation of “preferred” categories of charitable donees, the differing treatment of gifts to public charities and private foundations, the rules concerning the deductibility of property that appreciated in value, the addition of substantiation and appraisal rules, and codification of the concept of the donor-advised fund.¹³² This aspect of the law is also informed by the breadth of the range of organizations that are considered charitable entities for purposes of the deduction.¹³³

The federal income tax charitable contribution deduction was enacted as part of the War Income Tax Revenue Act of 1917.¹³⁴ That body of law increased federal income tax rates for the purpose of paying for the United States' involvement in World War I. This deduction, however, was not enacted for lofty purposes such as incentivizing giving for charitable and like causes. Rather, it was created to “offset the potential negative effects of increased income taxes on charitable giving among the wealthy.”¹³⁵ Some legislators “feared that the [tax] increase would reduce individuals' income ‘surplus’ from which they supported charity,” in that “[i]t was thought that a decrease in private support would create an increased need for public support and even higher tax rates, so the [charitable] deduction was offered as a compromise.”¹³⁶ In short, “some policymakers were concerned that without the charitable deduction, wealthy taxpayers subjected to these higher tax rates would no longer contribute to charities or institutions of higher education (or would contribute less).”¹³⁷ The overall amount of giving that could be deducted was set at 15 percent of a donor's net taxable income.

The Individual Income Tax Act of 1944¹³⁸ revised the maximum amount that could be deducted, by changing the measuring base from net taxable income to adjusted gross income, and introduced the standard deduction. The maximum amount deductible was increased in 1952 when the percentage limitation on deductible giving was upped to 20 percent.¹³⁹ In 1954, Congress raised this limitation to 30 percent but only for certain specified categories of eligible organizations.¹⁴⁰ A commentator stated that this was the “first time that Congress encouraged certain charitable giving by granting more generous deductions for donations to certain charitable organizations than to others . . . [to] encourage additional contributions to these organizations to offset their rising costs and modest returns on endowment funds.”¹⁴¹ This list was expanded by the Revenue Act of 1964,¹⁴² along with the introduction of an unlimited charitable contribution deduction for certain high-giving taxpayers.

The Tax Reform Act of 1969¹⁴³ brought substantial changes in this area. The list of “preferred” charities was expanded, as was the scope of the charitable deduction with respect to them. The unlimited charitable deduction was phased out. Many other substantive provisions were introduced, such as the private foundation rules (with their attendant lesser deductibility limitations), various rules by which the charitable deduction for gifts of certain properties had to be reduced, a basis allocation rule for bargain sales, and the law concerning charitable remainder trusts.

The Economic Recovery Act of 1981¹⁴⁴ introduced an above-the-line charitable deduction—a charitable deduction for those who also utilized the standard deduction. This deduction expired in 1986. At the time of its enactment, it was controversial. For example, the then-Assistant Secretary of the Treasury for Tax Policy argued that this deduction “would go, in very large measure, to those who are already giving with respect to their existing gifts,”¹⁴⁵ providing them with a windfall gain, adding that the deduction “would result in a large revenue loss to the Treasury and little increased giving for the charities.”¹⁴⁶ Congress disagreed, “[b]elieving that allowing a charitable deduction to nonitemizers stimulates charitable giving, thereby providing more funds for worthwhile nonprofit organizations, many of which provide services that otherwise might have to be provided by the Federal government.”¹⁴⁷

The Deficit Reduction Act of 1984¹⁴⁸ increased the contribution limit on contributions of cash or ordinary income property to standard grantmaking private foundations. That legislation also introduced substantiation requirements, for claimed deductions of property in excess of $2,000, and penalties