the effective cost of their donations would still be lower.”160
The JEC report also addresses the matter of a tax credit, noting 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, regardless 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 charitable 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.”161
As to the percentage limitations, a good case can be made that the various existing percentages (from 20 to 60 percent) are confusing and unnecessary, and need to be blended and trimmed.
With a progressive tax system, it is inevitable that the tax benefits of a deduction are likely to accrue to the wealthier of taxpayers. Thus, one commentator lamented the “disparate treatment between taxpayers who itemize their tax returns [sic] and those who claim the standard deduction.”162 Another observer stated that the charitable deduction “has almost always disproportionately benefited a relatively high-income minority of households.”163 Those finding this to be a great inequity often fail to understand that a form of charitable deduction is built into the standard deduction. In any event, an above-the-line charitable deduction is an expensive undertaking for the federal government. It is not likely to be tried again soon.
From time to time, as noted, a tax credit is considered as an alternative or a supplement to the charitable contribution deduction for individuals. Tax credits of this nature, also as noted, can be costly from the standpoint of the federal fisc. Further, studies have shown that a federal charitable tax credit would significantly alter the allocation of gift dollars to types of charities in relation to the way these dollars are directed to charity under the current federal income tax charitable contribution deduction system.
NOTES
2 2 See Part Three.
5 5 Companion books by the author provide a summary of the law concerning tax-exempt organizations as such (Tax-Exempt Organizations), planning considerations for tax-exempt organizations (Planning Guide), IRS examinations of tax-exempt organizations (IRS Audits), and regulation of the charitable fundraising process (Fundraising). Governance of tax-exempt organizations is the subject of Hopkins & Gross, Nonprofit Governance: Law, Practices, & Trends (Hoboken, NJ: John Wiley & Sons, 2009). These bodies of law are reviewed in less technical detail in Hopkins, Starting and Managing a Nonprofit Organization: A Legal Guide, 7th edition (Hoboken, NJ: John Wiley & Sons, 2017). All of these areas of the law (and others) are also covered in the Bruce R. Hopkins' Nonprofit Law Library, an e-book published by John Wiley & Sons in 2013.
6 6 The term nonprofit organization is used throughout, rather than the term not-for-profit. The latter term is used, however, in the federal tax setting, to describe activities (rather than organizations) whose expenses do not qualify for the business expense deduction. Internal Revenue Code of 1986, as amended, section (IRC §) 183. Throughout this book, the Internal Revenue Code is cited as the “IRC.” The IRC constitutes Title 26 of the United States Code.
7 7 A discussion of these sectors appears in Ferris & Graddy, “Fading Distinctions among the Nonprofit, Government, and For-Profit Sectors,” in Hodgkinson, Lyman, & Associates, The Future of the Nonprofit Sector, ch. 8 (San Francisco: Jossey-Bass, 1989). An argument that the sector should be called the first sector is advanced in Young, “Beyond Tax Exemption: A Focus on Organizational Performance versus Legal Status,” in id. ch. 11.
8 8 See Tax-Exempt Organizations ch. 12.
9 9 The Supreme Court wrote that a “nonprofit entity is ordinarily understood to differ from a for-profit corporation principally because it ‘is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees’” (Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 585 (1997), quoting from Hansmann, “The Role of Nonprofit Enterprise,” 89 Yale L.J. 835, 838 (1980)).
10 10 One commentator stated that charitable and other nonprofit organizations “are not restricted in the amount of profit they may make; restrictions apply only to what they may do with the profits.” Weisbrod, “The Complexities of Income Generation for Nonprofits,” in Hodgkinson et al., ch. 7.
11 11 Norwitz, “The Metaphysics of Time: A Radical Corporate Vision,” 46 Bus. Law. (no. 2) 377 (Feb. 1991).
12 12 The federal law of tax exemption for charitable organizations requires that each of these entities be organized and operated so that “no part of . . . [its] net earnings . . . inures to the benefit of any private shareholder or individual.” IRC § 501(c)(3).
13 13 IRC §§ 501(c)(9), (17), and (21) (employee benefit trusts), and IRC § 501(c)(7) (social clubs). See Tax-Exempt Organizations chs. 18, 15, respectively.
14 14
