DESCRIPTION OF PRESENT LAW AND CERTAIN PROPOSALS 

RELATING TO CHARITABLE GIVING AND 

INDIVIDUAL DEVELOPMENT ACCOUNTS

Scheduled for a Joint Hearing

before the

SELECT REVENUE MEASURES AND

HUMAN RESOURCES SUBCOMMITTEES

of the

HOUSE COMMITTEE ON WAYS AND MEANS

on June 14, 2001

Prepared by

the Staff of the

JOINT COMMITTEE ON TAXATION

June 13, 2001

JCX-55-01
i

CONTENTS

Page

INTRODUCTION........................................................................................................... 1

I. INCENTIVES FOR CHARITABLE GIVING......................................................... 2

A. Provide a Charitable Deduction for Nonitemizers................................................. 2

B. Permit Tax-Free Distributions from IRAs for Charitable Purposes....................... 4

C. Establish Enhanced Deduction for Charitable Contributions of Food

Inventory................................................................................................................ 5

II. INDIVIDUAL DEVELOPMENT ACCOUNTS ...................................................... 7
1

INTRODUCTION

The Subcommittees on Select Revenue Measures and on Human Resources of the House 

Committee on Ways and Means have scheduled a joint hearing on issues relating to charitable 

giving and individual development accounts for June 14, 2001.

This document,1 prepared by the staff of the Joint Committee on Taxation, contains a 

description of present-law rules and proposals contained in H.R.7, the “Community Solutions 

Act of 2001,”2 relating to Federal tax incentives for charitable giving and individual development 

accounts.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Description of 

Present Law and Certain Proposals Relating to Charitable Giving and Individual Development 

Accounts (JCX-55-01), June 13, 2001.

2

 H.R.7 was introduced on March 29, 2001, by Representative Watts and others. 
2

I. INCENTIVES FOR CHARITABLE GIVING

A. Provide a Charitable Deduction for Nonitemizers

Present Law

In computing taxable income, a taxpayer who itemizes deductions generally is allowed to 

deduct the amount of cash and the fair market value of property contributed to a charity 

described in section 501(c)(3) or a Federal, State, or local governmental entity. The deduction 

also is allowed for purposes of calculating alternative minimum taxable income. 

The amount of the deduction allowable for a taxable year with respect to a charitable 

contribution of property may be reduced depending on the type of property contributed, the type 

of charitable organization to which the property is contributed, and the income of the taxpayer.3

A taxpayer who does not itemize deductions (i.e., who takes the standard deduction) may 

not take a separate deduction for charitable contributions.4

A payment to a charity (regardless of whether it is termed a "contribution") in exchange 

for which the donor receives an economic benefit is not deductible, except to the extent that the 

donor can demonstrate that the payment exceeds the fair market value of the benefit received 

from the charity. To facilitate distinguishing charitable contributions from purchases of goods or 

services from charities, present law provides that no charitable contribution deduction is allowed 

for a separate contribution of $250 or more unless the donor obtains a contemporaneous written 

acknowledgement of the contribution from the charity indicating whether the charity provided 

any good or service (and an estimate of the value of any such good or service) to the taxpayer in 

consideration for the contribution.5 In addition, present law requires that any charity that 

receives a contribution exceeding $75 made partly as a gift and partly as consideration for goods 

or services furnished by the charity (a “quid pro quo” contribution) is required to inform the 

contributor in writing of an estimate of the value of the goods or services furnished by the charity 

and that only the portion exceeding the value of the goods or services is deductible as a 

charitable contribution.6

Under present law, total deductible contributions of an individual taxpayer to public 

charities, private operating foundations, and certain types of private nonoperating foundations 

 

3

 Secs. 170(b) and (e).

4

 Sec. 170(a). The Economic Recovery Tax Act of 1981 adopted a temporary provision 

that permitted individual taxpayers who did not itemize income tax deductions to claim a 

deduction from gross income for a specified percentage of their charitable contributions. The 

maximum deduction was $25 for 1982 and 1983, $75 for 1984, $150 for 1985, and $300 for 

1986. The nonitemizer deduction terminated after 1986.

5

 Sec. 170(f)(8).

6

 Sec. 6115.
3

may not exceed 50 percent of the taxpayer’s contribution base, which is the taxpayer’s adjusted 

gross income for a taxable year (disregarding any net operating loss carryback).7 To the extent a 

taxpayer has not exceeded the 50-percent limitation, (1) contributions of capital gain property to 

public charities generally may be deducted up to 30 percent of the taxpayer’s contribution base, 

(2) contributions of cash to private foundations and certain other charitable organizations 

generally may be deducted up to 30 percent of the taxpayer’s contribution base, and (3) 

contributions of capital gain property to private foundations and certain other charitable 

organizations generally may be deducted up to 20 percent of the taxpayer’s contribution base.8

Contributions by individuals in excess of the 50-percent, 30-percent, and 20-percent limit 

may be carried over and deducted over the next five taxable years, subject to the relevant 

percentage limitations on the deduction in each of those years.

In addition to the percentage limitations imposed specifically on charitable contributions, 

present law imposes a reduction on most itemized deductions, including charitable contribution 

deductions, for taxpayers with adjusted gross income in excess of a threshold amount, which is 

indexed annually for inflation.9 The threshold amount for 2001 is $132,950 ($66,475 for married 

individuals filing separate returns). For those deductions that are subject to the limit, the total 

amount of itemized deductions is reduced by 3 percent of adjusted gross income over the 

threshold amount, but not by more than 80 percent of itemized deductions subject to the limit. 

The effect of this reduction is to limit partially a taxpayer’s charitable contributions deduction.

Description of Proposal

Section 101 of H.R.7 would allow taxpayers who do not itemize their deductions to 

deduct their charitable contributions up to the amount of the standard deduction, in addition to 

their standard deduction. Amounts that would otherwise be deductible under section 170 could 

be deducted from adjusted gross income, in the same manner as the standard deduction and the 

deduction for personal exemptions under present law. The percentage limitations, substantiation 

requirements, carryforward, and other present-law rules would apply to nonitemizer charitable 

contributions. The nonitemizer deduction would be allowed for purposes of calculating 

alternative minimum taxable income.

Effective date.--The deduction would apply for taxable years beginning after the date of 

enactment. 

 

7

 Sec. 170(b)(1)(A).

8

 Sec. 170(b)(1)(B), (C), and (D).

9

 Sec. 68.
4

B. Permit Tax-Free Distributions from IRAs for Charitable Purposes

Present Law

Under present law, individuals may make deductible and nondeductible contributions to a 

traditional individual retirement arrangement (“IRA”). Amounts in a traditional IRA are 

includible in income when withdrawn (except to the extent the withdrawal represents a return of 

nondeductible contributions). Individuals may also make nondeductible contributions to a Roth 

IRA. Qualified withdrawals from a Roth IRA are excludable from gross income. Withdrawals 

from a Roth IRA that are not qualified withdrawals are includible in gross income to the extent 

attributable to earnings. Includible amounts withdrawn from a traditional IRA or a Roth IRA 

before attainment of age 59-1/2 are subject to an additional 10-percent early withdrawal tax, 

unless an exception applies.

If an amount withdrawn from a traditional IRA or a Roth IRA is donated to a charitable 

organization, the rules relating to the tax treatment of withdrawals from IRAs apply and the 

charitable contribution is subject to the normally applicable limitations on such contributions, 

e.g., the percentage limitations and the overall limit on itemized deductions. Thus, for example, 

under present law, a taxpayer subject to the phaseout on itemized deductions would not be able 

to deduct the full amount of an IRA distribution given to charity.

Description of Proposal

Section 102 of H.R.7 would provide an exclusion from gross income for otherwise 

taxable IRA withdrawals from a traditional or a Roth IRA for qualified charitable distributions. 

A qualified charitable distribution would be defined as any distribution from an IRA that is made 

on or after the date the IRA owner attains age 59-1/2, and that is made directly (1) to a charitable 

organization to which deductible contributions can be made; (2) to a charitable remainder 

annuity trust or charitable remainder unitrust; (3) to a pooled income fund (as defined in sec. 

642(c)(5)); or (4) for the issuance of a charitable gift annuity. The exclusion would apply with 

respect to distributions described in (2), (3), or (4) only if no person holds an income interest in 

the trust, fund, or annuity attributable to such distributions other than the IRA owner, his or her 

spouse, or a charitable organization.

In determining the amount includible in gross income by reason of a payment from a 

charitable remainder annuity trust or charitable remainder unitrust to which a qualified charitable 

distribution from an IRA was made, the taxpayer would be required to treat as ordinary income 

(as described in sec. 664(b)(1)) the portion of the distribution from the IRA to the trust which 

would have been includible in income but for the proposal. Similarly, in determining the amount 

includible in gross income by reason of a payment from a charitable gift annuity purchased with 

a qualified charitable distribution from an IRA, the taxpayer would not be permitted to treat the 

portion of the distribution from the IRA used to purchase the annuity as an investment in the 

annuity contract.

The amount otherwise allowable as a deduction to the individual for the year as charitable 

contributions would be reduced by the amount of qualified charitable distributions that would 

otherwise be includible in income.
5

Effective date.--The bill would be effective for taxable years beginning after the date of 

enactment.

C. Establish Enhanced Deduction for Charitable Contributions of Food Inventory

Present Law

In the case of a charitable contribution of inventory or other ordinary-income or shortterm capital gain property, the amount of the deduction is limited to the taxpayer's basis in the 

property. In the case of a charitable contribution of tangible personal property, the deduction is 

limited to the taxpayer's basis in such property if the use by the recipient charitable organization 

is unrelated to the organization's tax-exempt purpose. In cases involving contributions to a 

private foundation (other than certain private operating foundations), the amount of the 

deduction is limited to the taxpayer's basis in the property.10

Under present law, a taxpayer’s deduction for charitable contributions of food inventory 

generally is limited to the taxpayer’s basis (typically, cost) in the inventory. However, C 

corporations may claim a deduction in excess of basis for certain charitable contributions.11 This 

augmented deduction is equal to the lesser of (1) basis plus one-half of the item’s appreciated 

value (i.e., basis plus one half of fair market value minus basis) or (2) two times basis. To be 

eligible for an enhanced deduction, the taxpayer must establish that the fair market value of the 

donated item exceeds basis. The valuation of food inventory has been the subject of ongoing 

disputes between taxpayers and the IRS. In one case, the Tax Court held that the value of 

surplus bread inventory donated to charity was the full retail price of the bread rather than half 

the retail price, as the IRS asserted.12

Description of Proposal

Section 103 of H.R.7 would amend the present-law charitable contribution deduction 

rules of section 170 to (1) expand the class of taxpayers eligible to claim an augmented 

deduction for charitable contributions of food inventory, (2) change the calculation of the 

deductible amount and cap the maximum benefit at fair market value, and (3) modify and clarify 

the determination of fair market value for such contributions.

Under the bill, any taxpayer, rather than only a C corporation, engaged in a trade or 

business would be eligible to claim an enhanced deduction for donations of food inventory under 

section 170(e). Moreover, the calculation of the enhanced deduction under the bill differs from 

present law. The enhanced deduction for food inventory would equal fair market value less the 

amount (if any) by which the amount of the contribution exceeds twice the basis of the donated 

food. For example, if donated food had a value of $40 and a basis of $15, the amount of the 

deduction would be reduced from fair market value by $10 because the amount of the 

 

10 Sec. 170(e)(1).

11 Sec. 170(e)(3).

12

 Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995).
6

contribution ($40) exceeds twice basis ($15 X 2) by $10, resulting in a deduction of $30. 

However, if basis were $20 the deduction would equal $40 because the amount of the 

contribution ($40) would not exceed twice basis ($20 X 2) so there would not be a reduction 

from fair market value. For purposes of the enhanced deduction, taxpayers who use the cash 

method of accounting have a deemed basis of 50 percent of the fair market value of the 

contribution.

In addition, the bill would provide that the fair market value of donated food that cannot 

or will not be sold solely due to internal standards of the taxpayer, lack of market, or similar 

circumstances, would be determined without regard to such factors and, if applicable, by taking 

into account the price at which the same or similar food items are sold by the taxpayer at the time 

of the contribution or in the recent past.

Effective date.--The bill would be effective for taxable years beginning after December 

31, 2001.
7

II. INDIVIDUAL DEVELOPMENT ACCOUNTS

Present Law

Individual development accounts were first authorized by the Personal Work and 

Responsibility Act of 1996. In 1998, the Assets for Independence Act established a five-year 

$125 million demonstration program to permit certain eligible individuals to open and make 

contributions to an individual development account. Individual development account 

contributions do not receive a tax preference but are matched by contributions from a state 

program, a participating nonprofit organization, or other “qualified entity.” The IRS has ruled 

that matching contributions (and earnings thereon) by a qualified entity are a gift and not taxable 

to the account owner.13 The qualified entity chooses a matching rate, which must be between 50 

and 400 percent. Individual development account withdrawals can be made for certain higher 

education expenses, a first home purchase, or small business capitalization expenses. Matching 

contributions typically are held separately and must be paid directly to a mortgage provider, 

university, or business capitalization account at a financial institution. The Department of Health 

and Human Services administers the individual development account program.

Description of Proposal

H.R.7 would provide for a tax credit for an eligible entity (i.e., qualified financial 

institutions or their contractual affiliates) that has an individual development account program in 

a taxable year. The tax credit would be equal to the amount of matching contributions made by 

the eligible entity under the program (up to $500 per taxable year) plus $100 for each individual 

development account opened during the taxable year under the program plus $30 for each 

individual development account maintained during the taxable year under the program. The 

amount of the credit would be adjusted for inflation after 2002. No deduction or other credit 

would be available with respect to the amount of matching funds taken into account in 

determining the credit.

Nonstudent U.S. citizens or legal residents between the ages of 18 and 60 (inclusive) that 

meet certain income requirements would be eligible to open and contribute to an individual 

development account. An individual would be required to certify that he or she owns no other 

individual development account (except in the case of a rollover) and present documentation of 

income eligibility. The income limit would be adjusted gross income of $20,000 for single filers, 

$40,000 for joint-filers, and $25,000 for head-of-household filers. Eligibility in a taxable year 

would be based on the previous year’s adjusted gross income. The income limits would be 

adjusted for inflation after 2002. 

Under the bill, an individual development account must: (1) be solely owned by the 

eligible individual for whom the account was established, (2) consist only of cash contributions, 

(3) be held by a qualified financial institution (i.e., any person authorized to be a trustee of any 

individual retirement account under section 408(a)(2)), and (4) not commingle account assets 

with other property (except in a common trust fund or common investment fund). These 

 

13 Rev. Rul. 99-44, 1999-2 C.B. 549.
8

requirements must be reflected in the written governing instrument creating the account. An 

individual development account must be established for an eligible individual as part of a 

qualified individual development account program, which could be established by any qualified 

financial institution, qualified nonprofit organization, or Indian tribe. The entity establishing the 

program would be required to establish as part of the program a separate parallel account for all 

matching funds and earnings thereon. Parallel accounts would be dedicated to an individual 

development account and would be exempt from tax under the bill. 

The bill would permit individuals to withdraw amounts from an individual development 

account for qualified expenses of the account owner, owner’s spouse, or dependents as well as 

nonqualified expenses subject to certain restrictions. Qualified expenses include qualified: (1) 

higher education expenses (as generally provided by section 72(t)(7)), (2) first-time homebuyer 

costs (as generally provided by section 72(t)(8)), (3) business capitalization or expansion costs 

(expenditures made pursuant to a business plan that has been approved by the financial 

institution, nonprofit, or Indian tribe), (4) rollovers of the balance of the account (including the 

parallel account) to another individual development account for the benefit of the same owner, 

and (5) final distributions in the case of a deceased account owner. Withdrawals for qualified 

expenses must be paid directly to the unrelated third party to whom the amount is due, except in 

the case of expenses under a qualified business plan, rollover, or final distribution. Such 

withdrawals would not be permitted until the account owner completes a financial education 

course offered by a qualified financial institution, qualified nonprofit organization, Indian tribe 

or governmental entity. The Secretary of the Treasury (the “Secretary”) would be required to 

establish minimum standards for such courses. Withdrawals for nonqualified expenses would 

result in the account owner’s forfeiture of a proportionate amount of matching funds unless the 

withdrawn funds are re-contributed to the individual development account by the September 30 

following the withdrawal.

The qualified entity administering the individual development account program would 

generally be required to make quarterly payments of matching funds on a dollar-for-dollar basis 

for the first $500 contributed by the account owner in a taxable year. This dollar amount would 

be adjusted for inflation after 2002. Matching funds may be provided also by State, local, or 

private sources. For account owners who attain age 61, matching funds would be deposited into 

the parallel account of the individual development account of the owner on the first day of the 

succeeding taxable year. Balances of the individual development account and parallel account 

would be reported annually to the account owner. If an account owner ceased to meet eligibility 

requirements, matching funds generally would not be permitted to be paid during the period of 

ineligibility. Any amount withdrawn from a parallel account shall not be includible in an eligible 

individual’s gross income.

Qualified entities administering a qualified program would be required to report to the 

Secretary that the program is administered in accordance with legal requirements. If the 

Secretary determined that the program was not so operated, the Secretary would have the power 

to terminate the program. Qualified entities also would be required to report annually to the 

Secretary information about the number of individuals making contributions to individual 

development accounts, the amount of matching funds contributed, the amount of funds 

withdrawn and for what purpose, and balance information. 
9

The Secretary would be required to submit to Congress annual progress reports on the 

status of qualified individual development programs. Within 12 months of the date of 

enactment, the Secretary would be required to develop a process to monitor the cost and 

outcomes of the qualified account programs. The Secretary would be authorized to prescribe 

necessary or appropriate regulations, including regulations providing rules to recapture credits 

claimed with respect to individuals who forfeit matching funds.

Effective date.--The bill would be effective for taxable years beginning after December 

31, 2001. The credit would be effective for any expenditure made in any taxable year beginning 

after December 31, 2001, and before January 1, 2009, and with respect to any individual 

development account opened before January 1, 2007.