Senate Committee Report Summarizes Charitable Deduction ‘Reforms’

Published date01 January 2020
Date01 January 2020
January 2020 5
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
received contributions of timeshare interests. The court,
however, did not then determine the amount of the
penalty to be assessed.
The applicable language in the penalty provision
(IRC § 6700(a), third sentence) requires the court to
determine the nature of the offending “activity” Tarpey
engaged in. He asserted that his only activity in this
regard was preparation of fraudulent appraisals. By
decision dated November 7, however, the court held
that the activity giving rise to the penalty against Tarpey
“encompasses the entire arrangement facilitated and
organized by Tarpey to solicit timeshare donations,
appraise the timeshares, and direct profits to his other
The court then was required to determine whether
the income derived from the DFC “properly” may be
imputed to Tarpey. This determination first required the
court to decide whether the doctrine of piercing the
corporate veil may be applied in this context. The court
decided that the DFC functioned as Tarpey’s alter ego,
and thus that the DFC’s corporate veil may be pierced so
as to impute DFC’s income to Tarpey.
In reaching its decision as to alter ego, the court
relied on the Ninth Circuit’s venerable holding in Towe
Antique Ford Foundation v. Internal Revenue Service
(summarized in the November 1993 issue). This appellate
court conjured a six-factor test to determine whether an
entity constitutes an individual’s alter ego, five of which
were held to apply in the Tarpey case: (1) the individual
asserted a position of control over the entity, (2) the indi-
vidual controls the entity’s actions without any need to
consult others, (3) the individual used the entity to shield
the individual from personal liability, (4) the individual
used the entity for the individual’s financial benefit, and
(5) the individual mingled the individual’s personal affairs
in the affairs of the entity.
This saga does not, however, end here. The court
was not satisfied with the IRS’s calculation of the pen-
alty amount ($9 million). It stated that “[n]either Tarpey
nor the Court can be expected to divine the method”
the government used to calculate its penalty request.
The court asked the government for a “thorough and
accurate assessment” of the penalty amount. [4.1(a)]
The Joint Economic Committee (Republicans) issued a
report, as part of its Social Capital Project, titled “Reform-
ing the Charitable Deduction” (No. 5-19 (November
2019)). Aside from some statistics, there is nothing new
in this report. It seems that the ways to “reform” the
federal income tax charitable contribution deduction are
two: convert it to an above-the-line deduction or to a tax
credit. (For a similar report, commissioned by Indepen-
dent Sector, see the August 2019 issue.)
Above-the-Line Deduction
The severe decline in the number of individual tax-
payers who itemize their deductions and thus can claim
charitable contribution deductions is renewing interest
in an above-the-line deduction approach. The report
pronounces the fact that only itemizers can utilize chari-
table deductions is “unfair.” This is not so, assuming one
accepts the assumption that the charitable deduction is
an element built into the standard deduction.
A reform option is to make the charitable deduction
available to itemizers and nonitemizers. This approach
would increase charitable giving but decrease federal
revenue. The JEC report cites a study showing that
an above-the-line charitable deduction would have
increased giving in 2018 by $21.5 billion and reduced
that year’s government revenue by $25.8 billion.
The report concludes this portion of its analysis with
the observation that, “[w]hile an above-the-line deduc-
tion would treat lower-income donors more fairly with
respect to their charitable giving, it would still result in
their having a higher after-tax price of giving compared
with today’s itemizers.” The report continues: “Because
higher-income taxpayers generally have higher tax rates,
the effective cost of their donations would still be lower.”
Tax Credit
The JEC report notes that, for example, with a 25
percent charitable credit, a donor’s tax liability would be
reduced by 25 percent of the value of all gifts, regard-
less of the tax rates or the size of the gifts. However,
the report adds that, unless made refundable, this credit
would apply only to the extent the donor has tax liability.
The same study estimated that replacing the chari-
table deduction with a 25 percent nonrefundable tax
credit would have a greater positive impact on charitable
giving and a greater reduction in federal revenue than
the above-the-line deduction: it would have increased
giving in 2018 by $23.3 billion and reduced revenue by
$31.1 billion.
The JEC report stated that a credit approach has also
been estimated to have a larger positive effect on the
number of new donors compared to an above-the-line
deduction. Another study cited by the committee, of
various ways to penalize giving less among nonitemizers
while leaving the current deduction unchanged, found
that a 25 percent tax credit, of the options considered,
“would most increase the number of households giving,
both overall and at all income levels except the top 1
Note: The JEC report does not discuss the point that
these law revisions concerning the charitable deduction
would also change the fields within the charitable sector
that receive the most charitable dollars.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT