Comments on proposed regulations on the allocation and apportionment of charitable contributions: August 2, 1991.

• Position: Tax Executives Institute

On behalf of Tax Executive Institute, I am pleased to submit these comments on the Internal Revenue Service's proposed regulations on the allocation and apportionment of charitable contributions under section 861(b) of the Internal Revenue Code. The proposed regulations (INTL-116-90) were issued by the IRS on March 11, 1991, and were the subject of a public hearing on August 1, 1191. (1)

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 4,700 members represent more than 2,000 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayer and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that evinces solid tax policy, that taxpayers can comply with, and that the IRS can audit.

Members of TEI are responsible for managing the tax affairs of their companies on a day-to-day basis and must contend daily with the provisions of the tax laws relating to the operations of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the IRS's proposed regulations relating to the allocation and apportionment of the deduction for charitable contributions.

Overview

Treas. Reg. S 1.861-8(e)(9)(iv), which has been in effect since 1977, provides that the deduction for charitable contributions allowed by section 170 will "generally" be considered as not definitely related to any gross income. Consequently, those deductions must be ratably apportioned among U.S. and foreign sources in accordance with Treas. Reg. S 1.861-8(c). Although many charitable contributions are apportioned based on gross income under the extant regulations, a taxpayer in certain circumstances may properly allocate the deduction to one or more classes of gross income. In Notice 89-91, 1989-2 C.B. 408, the IRS announced its intention to modify the section 861 regulations essentially to eliminate the word "generally," thereby requiring taxpayers to ratably apportion the deduction for charitable contributions to all classes of gross income on an affiliated group basis.

Many commentators, including TEI, voiced policy and administrative concerns about the rule announced in Notice 89-91, and the IRS attempted to respond to those concerns in developing the proposed regulations. Specifically, the proposed regulations reject the notion that all charitable contributions should be ratably apportioned and set forth special rules for the allocation of charitable contribution deductions solely to U.S.-source gross income or, alternatively, solely to foreign-source gross income. Thus, Prop. Reg. S 1.861-8(e)(12)(i) provides that a charitable contribution deduction will be allocated to U.S.-source gross income if --

(A) The taxpayer, at the time of the contribution both designates the charitable contribution for use solely in the United States and reasonably believes that the contribution will be so used; and

(B) The contribution is not described in paragraph (e)(12)(ii) of this section [relating to charitable contribution deductions allocated solely to foreign source gross income].

Paragraph (e)(12)(ii) of Prop. Reg. S 1.861-8 provides that a deduction will be allocated solely to foreign-source gross income if the taxpayer, at the time of the contribution, konws or has reason to know that --

(A) The charitable contribution will be used solely outside the United States; or

(B) The charitable contribution may necessarily be used only outside the United States.

Under Prop. Reg. S 1.861-8(e)(12)(iii), charitable contribution deductions that fall within neither of the foregoing special rules will be apportioned ratably on the basis of gross income in accordance with Treas. Reg. S 1.861-8(c)(3). The proposed regulations, which would apply for taxable years beginning after March 12, 1991 (1991-14 I.R.B. at 35), also contain a special rule for private foundations.

The preamble to the proposed regulations requests comments on the effects of the proposed rules on U.S. charities with significant international activities. (1991-14 I.R.B. at 35.) The response to that request -- both in written comments and at the August 1 public hearing -- has been a veritable firestorm of criticism. The purpose of this letter is to set forth an administrable framework for reconciling the tax policy underlying the section 1.861-8 regulations with the Nation's well-established interest in encouraging charitable contributions, especially with respect to internationl disaster preparedness and humanitarian relief.

Allocation of the Charitable

Contribution Deduction Solely

to U.S.-Source Income Is Consistent

with the Policy Basis

underlying Treas. Reg. S 1.861-8

The practical effect of the proposed regulations is to deny a taxpayer having excess foreign tax credits any benefit for contributions for use outside the United States. Because of this effect, the regulations have been criticized as "chill[ing] the climate of philanthropy at a time when such contributions are desperately needed" and as being inconsistent with President Bush's "thousand points of light" initiative. See "Charity and the Tax Code" (Editorial), Washington Post, at C6 (July 21, 1991). Commentators on the proposed regulations have argued that, whatever the tax policy merits of the proposed regulations, they undermine the national interest in encouraging corporations and other taxpayer to make contributions for use outside the United States, especially for disaster relief and humanitarian efforts.

TEI shares this concern. We recognize, however, that the meshing of the principles underlying section 861(b) with the tax and social policy imperatives of section 170 cannot be easily accomplished. Nevertheless, we submit that reasonable allocation rules for the charitable contribution deduction can be developed that are congruent with, and indeed advance, the national interest in encouraging charitable contributions.

The section 1.861-8 regulations have long provided that deductions definitley related to a class of gross income...