Senate Committee Report Summarizes Charitable Deduction ‘Reforms’

• Published date: 01 January 2020
• Date: 01 January 2020
• DOI: http://doi.org/10.1002/npc.30674

Bruce R. Hopkins’ NONPROFIT COUNSEL

January 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

organizations.”

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)] ◆

SENATE COMMITTEE REPORT

SUMMARIZES CHARITABLE

DEDUCTION ‘REFORMS’

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

percent.”

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. ◆