The Senate on October 11 finally approved by a 69-17 vote a bicameral agreement (H.R. 4520) to replace the extraterritorial income exclusion with a revenue-neutral package that includes a manufacturing deduction, a corporate rate cut, and international tax reforms. The House approved the $140 billion corporate tax cut bill on October 7 by a 280-141 vote; it now heads to President Bush's desk for his signature. The final bill includes provisions that will increase reporting requirements by corporations for noncash charitable contributions, reduce deductions for gifts of intellectual property, impose stiff requirements on gifts of vehicles, and extend the existing deduction for gifts of computer equipment used for education and of scientific property used for research.

PGDC Summary:

The 600-page bill is beyond the scope of the PGDC; however, four charitable provisions made their way to final passage:

Increased Reporting for Noncash Contributions by Corporations

There also is a provision that will require increased reporting for noncash charitable contributions. It would extend to C corporations the requirement that a donor obtain a qualified appraisal of the donated property if the amount of the claimed deduction is more than $5,000 and would provide that if the amount of the contributed property other than cash, inventory, or publicly traded securities exceeds $500,000, the donor must attach the qualified appraisal to the donor's tax return. (Appraisals are not required for donations of certain vehicles that the donee does not use but sells at fair market value; see the description of the vehicle donation provisions above.)

Intellectual Property

Another provision of the bill would make changes to the charitable contribution rules for donations of patents and other intellectual property. A taxpayer's deduction for that donation would be limited to the lesser of the taxpayer's basis in the donated property or the property's fair market value. A taxpayer could claim additional deductions in years following the donation based on the income that the donated property provides to the donee. The donor could claim a deduction for 100 percent of qualified donee income for the first and second years ending on or after the donation, 90 percent the third year, 80 percent the fourth year, and so on.

The additional deductions could be taken only to the extent that the aggregate of the amounts calculated according to the sliding scale exceed the amount of the deduction claimed on the donation. After the legal life of the patent or other intellectual property expires or after the 10th anniversary of the donation, no charitable deduction would be allowed.
When the contribution is made the donor would have to tell the donee that the donor intends to treat the contribution as a contribution subject to the additional deduction provisions, and the donor would be required to get written substantiation from the charity of the amount of any qualified donee income resulting from the donated property. The donee would have to report its income related to the donated property to the IRS.

Sheldon Steinbach of the American Council on Education, who in January expressed concern over the effect IRS scrutiny of intellectual property donations might have on corporate donations to colleges and universities, told Tax Analysts after the House vote that his organization had recommended alternative approaches to Congress, but without success. "We were faced with a virtual stonewall because of the $3 billion" in revenue the provision is expected to bring in, he said.

Steinbach said he is not sure what the implications of the provision would be, though he expects some corporations would continue to donate intellectual property to higher education institutions even if their deduction is limited to basis. Perhaps down the road the provision could be modified, he added.

Vehicle Donations

The vehicle donation provision reflects mounting criticism from the IRS, Congress, and the press that some taxpayers are claiming inflated charitable deductions for donations of useless vehicles. Under the provision, if a charity sells a donated vehicle for which the claimed value exceeds $500 without significantly using or improving it, the amount of the deduction cannot be more than the gross proceeds from the sale.

To get a deduction, a donor would have to obtain a contemporaneous written acknowledgment by the donee. If the charity sells the vehicle without significantly using or improving it, the acknowledgment must certify that the vehicle was sold in an arm's-length transaction between unrelated parties, report the gross proceeds from the sale, and state that the deductible amount may not exceed the gross proceeds.

If the charity does not sell the vehicle, the acknowledgment must explain how the vehicle will be used or improved, define how long the vehicle will be used, and state that the vehicle will not be sold or transferred before the use or improvement is completed. Charities would be penalized if they do not provide acknowledgments or if they furnish acknowledgments that they know are false or fraudulent.

In addition, the Secretary may prescribe regulations or other guidance that exempts sales of vehicles that are in direct furtherance of the donee's charitable purposes from the gross sales price limitation (such as selling a vehicle to a needy person at a discount).

Contributions of computer equipment used for education and of scientific property used for research

This current law provision has been extended through until January 1, 2006.

Charitable Giving Incentives Omitted

Though Senate taxwriter Rick Santorum, R-Pa., and other lawmakers had hoped to attach a package of charitable giving tax incentives to the ETI repeal bill, they could not do so. The House and Senate have each passed charitable giving bills (H.R. 7; S. 476), but the legislation, which includes a charitable deduction for nonitemizers and tax-free IRA withdrawals for charitable donations, has not made it to conference because Senate Democrats fear they will be excluded from the negotiations. In March a Senate Finance Committee staffer said the chances of having the charitable giving tax breaks piggyback on the ETI repeal legislation were slim because of the lack of offsets.

Manager's Statement

The charitable provisions contained in the Managers Statement have been excerpted and are provided in the following PDF file:

Download: Charitable Provisions ETI Repeal Bill.pdf