During the last several weeks, we have heard a lot about the faulty response to Hurricane Katrina. President Bush has now signed tax legislation into law designed to provide “tax-based” relief to the victims of Katrina. We saw a rush to amend the Internal Revenue Code following both 9/11 and the more recent South Asia tsunamis. Most of what has been enacted is highly symbolic window-dressing. “We did something.”
When all is said and done, the victims of Katrina would have received far more benefit had Congress written the following provision into law:
Section 1. IRS Full Employment Act. The Congress of the United States considered stupid...
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and half-baked legislation to show that we care. Rather than enacting such stupid and half-baked legislation, we hereby mandate that those employees of the IRS who would have toiled away on implementing regulations, revisions to tax forms, and guidance interpreting our stupid and half-baked ideas, instead go to Mississippi, Alabama, and Louisiana and participate in the clean up operations. We further authorize that the President of the United States transport these employees on Air Force One on one of his now frequent and many trips to said same region.
Federal/State Coordination and Information Sharing; If Katrina Taught Us One Lesson. One of the proposals on the table was to allow for information sharing between the Federal government and the states regarding charitable organizations. Most experts have fought for such sharing for ages. Yet, with all the hoopla about how vital Federal/state coordination is when responding to problems crossing their respective jurisdictions--like hurricanes-- the one provision that made sense because it recognized the need for cooperation didn't survive the process. And it would have cost next to nothing.
End Ad Hoc Legislative Responses to Disasters. If Congress and the President want to direct relief to victims of disasters through Section 170—the Internal Revenue Code provision providing the deduction for charitable contributions—why not do it on a rational and planned basis? In other words, let’s end the ad hoc responses, and assuming that the Internal Revenue Code provides the appropriate venue for providing relief, add a permanent set of provisions to the tax law that are triggered by a presidential declaration of a disaster and that are then appropriately targeted.
These ad hoc responses are not without cost. They require that the tax forms and instructions be temporarily modified for a one or two year period of time. The IRS has limited resources; constantly revising tax forms wastes those resources. Moreover, these temporary revisions to the forms also burdens the private companies that develop tax preparation software. With a permanent set of code provisions in place, the forms would only need to be revised once. Hopefully these permanent disaster-relief lines on the Form 1040 would never be used, but when disaster struck, the forms would be ready to go without the need for reptitious, but costly modifications.
The other cost to these temporary provisions is tax fraud. Given their temporary nature, these provisions don’t warrant full blown regulations or guidance. As a practical matter, they are not incorporated into the audit procedures or agent training. This permits some taxpayers to abuse the system. How many people deducted January 2005 contributions to run of the mill charities on their 2004 returns? Recall that Congress passed legislation permitting people to deduct contributions to relief organizations made during January 2005 on their 2004 returns. It was a "we will trust you to do the honorable thing" provision. Fat chance when it comes to tax compliance.
Right now everyone has focused on the victims of Katrina and Rita. But there have been other disasters and unfortunately there will be future disasters. It clearly is a tragedy if you lost your house and possessions to Hurricane Katrina. Will it be any less of a tragedy when a community loses all its houses and possessions to a wild fire in Colorado or New Mexico this summer or to a California earthquake two years from now or to a flood in Ohio next spring? As a matter of equity, shouldn’t we decide what benefits we are going to provide to victims of all major disasters rather than let the emotions of the moment carry the day.
Provisions in Katrina Relief Bill. Having made our point, here is how Congress and the President amended the provisions in the Internal Revenue Code related to charity—this should be viewed as a tentative discussion and no decisions should be based on it.
Suspending Limitations on Individual Contributions. In the case of individuals, the law suspends the income-based limitations on the amount of deductible charitable contributions. The suspension applies to qualified contributions, which are cash contributions made during the period beginning on August 28, 2005, and ending on December 31, 2005, to a charitable organization described in Section 170(b)(1)(A) (other than a supporting organization described in Section 509(a)(3)). Those references include the basic charitable organizations. The explanation contains a number of numerical examples that illustrate how the limits are applied when there are both contributions to qualified charities and those that are not qualified.
Congress should have begun by asking how many taxpayers really run up against the 50% limit that would normally apply. Our elected representatives should have then asked if making a temporary amendment to the tax return made sense. They didn't and it doesn't.
Suspending Limitations on Corporate Contributions. In the case of a corporation, the deduction for qualified contributions is allowed up to the amount by which the corporation's taxable income (as computed under Section 170(b)(2)) exceeds the deduction for other charitable contributions. The term "qualified contributions" has the saming meaning for the corporate suspension as it does for the provision suspending the limitations for contributions by individuals.
Limitation on Overall Itemized Deductions. For purposes of the overall limitation on itemized deductions, the charitable contribution deduction up to the amount of qualified contributions (as defined above) paid during the year is not treated as an itemized deduction for purposes of the overall limitation on itemized deductions. Does Congress really believe that taxpayers pay attention to this annoying provision when they decide to make charitable contributions?
Increase in Standard Mileage Rate for Charitable Use of Vehicles. A taxpayer who uses a vehicle in providing donated services to charity solely for the provision of relief related to Hurricane Katrina is permitted to compute the taxpayer's charitable mileage deduction using a rate (rounded to the next highest cent) equal to 70% of the business mileage rate in effect on the date of the contribution, rather than the charitable standard mileage rate generally in effect under Section 170(i) (currently 14 cents per mile). For purposes of this provision, the term vehicle includes any vehicle described in Section 170(f)(12)(E)(i) (i.e., a motor vehicle manufactured primarily for use on the public streets, roads, and highways). As an alternative to determining the amount of the deduction using the mileage rate described in the provision, a taxpayer may determine the amount of the deduction using actual out- of-pocket expenditures. The provision applies for purposes of contributions made during the period beginning on August 25, 2005, and ending on December 31, 2006.
Mileage Reimbursements to Charitable Volunteers Excluded from Gross Income. Reimbursement by an organization described in Section 170(c) (including public charities and private foundations) to a volunteer for the costs of using a passenger automobile in providing donated services to charity solely for the provision of relief related to Hurricane Katrina is excludable from the gross income of the volunteer up to an amount that does not exceed the business standard mileage rate prescribed for business use (as periodically adjusted), provided that recordkeeping requirements applicable to deductible business expenses are satisfied. The provision does not permit a volunteer to claim a deduction or credit with respect to amounts excluded under the provision. The provision applies for purposes of use of a passenger automobile during the period beginning on August 25, 2005, and ending on December 31, 2006.
Charitable Deduction for Contributions of Food Inventories. Any taxpayer, whether or not a C corporation, engaged in a trade or business is eligible to claim the enhanced deduction for donations of food inventory. For taxpayers other than C corporations, the total deduction for donations of food inventory in a taxable year generally may not exceed 10% of the taxpayer's net income for such taxable year from all sole proprietorships, S corporations, or partnerships (or other entity that is not a C corporation) from which contributions of apparently wholesome food are made. For example, if a taxpayer is a sole proprietor, a shareholder in an S corporation, and a partner in a partnership, and each business makes charitable contributions of food inventory, the taxpayer's deduction for donations of food inventory is limited to 10% of the taxpayer's net income from the sole proprietorship and the taxpayer's interests in the S corporation and partnership. However, if only the sole proprietorship and the S corporation made charitable contributions of food inventory, the taxpayer's deduction would be limited to 10 percent of the net income from the trade or business of the sole proprietorship and the taxpayer's interest in the S corporation, but not the taxpayer's interest in the partnership.
Under the provision, the enhanced deduction is available only for food that qualifies as "apparently wholesome food." "Apparently wholesome food" is defined as food intended for human consumption that meets all quality and labeling standards imposed by Federal, State, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions. The provision is effective for contributions made after August 28, 2005, and before January 1, 2006.
The First Lady Librarian Provision--Charitable Deduction for Contributions of Book Inventories. The provision extends the present-law enhanced deduction for C corporations to qualified book contributions. A qualified book contribution means a charitable contribution of books to a public school that provides elementary education or secondary education (kindergarten through grade 12) and that is an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The enhanced deduction is not allowed unless the donee organization certifies in writing that the contributed books are suitable, in terms of currency, content, and quantity, for use in the donee's educational programs and that the donee will use the books in such educational programs. The provision is effective for contributions made after August 28, 2005 and before January 1, 2006.
There are a number of other provisions in the bill that provide other types of tax relief for the victims of Katrina. Included in these provisions are a number of provisions relating to IRAs and pension plans. It appears as if a number of charities are already thinking about how they can turn these provisions to their advantage.
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