-18-

the taxpayer would have to certify the taxpayer's beliefs
about participation in war, the source or genesis of such
beliefs, and how the beliefs affect the taxpayer's life.
Under the bill, each IRS publication of general instructions
for an income tax return (or questionnaire provided for by
the bill) must include an explanation of the purpose of the
Peace Tax Fund, the criteria for determining whether an
individual is eligible to make a designation to the Peace Tax
Fund, and an explanation of the process for making such a
designation. In addition, upon receipt of the questionnaire,
the IRS would be required to issue a receipt (originally
attached to the questionnaire) to the taxpayer indicating
timely filing of the questionnaire.

Estate and gift tax returns

H.R. 1870 also would apply to Federal estate and gift
tax liability. In the case of estate tax payments, the bill
would allow an election to be made by the executor or
administrator of a taxable estate to have the Federal estate
tax imposed by section 2001 transferred when paid to the
Peace Tax Fund. The election.could .be made -if.:the executor
or:administrator has the written authority of the decedent
who qualified as an eligible conscientious objector (under
the criteria discussed above). Similarly, the bill would
allow eligible individuals to elect that the Federal gift tax
imposed by section 2501 be transferred when paid to the Peace
Tax Fund, 26

United States Peace Tax Fund

Establishment of the Fund.--The bill would establish the
Peace Tax Fund within the Department of the Treasury. On at
least a monthly basis, amounts would be transferred from the
general fund of the Treasury to the Peace Tax Fund on the
basis of estimates by the Secretary of the Treasury of the

35 the Secretary of the Treasury may require any taxpayer
who makes a designation under the bill to provide additional
information as may be necessary to verify the taxpayer's
status as an eligible individual. If the Secretary of the
Treasury determines that an individual is not eligible under
the bill to make a designation, then the Secretary must send
written notice to the taxpayer stating the reasons for denial
of the designation, and the taxpayer may challenge the
Secretary's ruling by bringing a declaratory judgment action
in the United States Tax Court or in United States district
court.

36 The elections in estate and gift tax cases would be made
in the manner as prescribed by Treasury Department
regulations.



-12-

organized and operated exclusively for charitable purposes
if: (1) it has at least 20 members; (2) no one member holds
(after the organization's second taxable year) more than 10
percent {by value) of the interests in the organization; (3)
no one member controls the organization or any other member;
(4) the members are permitted to dismiss the organization's
investment advisor, following reasonable notice, upon a vote
of the members holding a majority of interest in the
organization; and (5) the organization is organized and
operated exclusively to hold, commingle, and collectively
invest (including arranging for investment services by
independent contractors) in stocks and securities, the monies
contributed by the members, and to collect income therefrom
and turn over the entire amount thereof, less expenses, to
such members.

Thus, under H.R. 1733, a common fund meeting the bill's
criteria would be deemed to be operated exclusively for
charitable purposes and would qualify for tax-exempt status
under section 501(c)(3), providgd that the other requirements
of that section were satisfied. If these requirements were
met,.the .common fund generally -would .be exempt from Federal
:income tax ‘and yould be eligible to receive tax-deductible
contributions.?

H.R. 1733 provides that a common fund meeting the bill's
requirements would be subject to the present-law excise tax
provisions applicable to private foundations (see footnote 17
supra), other than sections 4940 and 4942, In addition, each
member's proportionate share (whether or not distributed) of
the net income (including capital gains) of the common fund
would be treated, for purposes of the excise tax imposed
under present-law section 4940, as net investment income of
the member for the taxable year of such member in which the
taxable year of the common fund ends.

21 T° qualify for tax-exempt status, the common investment
fund would be subject to restrictions applicable to all
organizations described in section 501(c)(3), such as
prohibitions on private inurement,. participation in political
campaigns, and substantial lobbying activities.

22 tf such a common fund satisfied the present-law criteria
for a public charity (see sec. 509(a)), then any contribution
made to it (rather than directly made to one or more private
foundation members) would be governed by the more liberal
contribution rules applicable to public charities under
section 170. If a common fund did not meet present-law
criteria for a public charity, then under H.R. 1733 (as
drafted) the common fund would itself have private foundation
status.



-22-
Effective dates

The provisions of the bill generally would apply to
taxable years beginning after (and estates of decedents dying
after, and gifts made after) December 31, 1991.

Issues

In general

Money is fungible, including tax receipts received by
the Federal Government. Thus, to the extent that tax
receipts remaining in the general fund and not deposited into
the Peace Tax Fund are sufficient to pay for the military
activities, there would be no overall reduction in the
Government's funding of military activities as a result of
the bill. However, H.R. 1870 would result in a pool of tax
revenues being set aside and appropriated for certain
non-military purposes (i.e., the portion of taxes paid by
conscientious objectors that is equivalent to the percentage
of actual appropriations made for military purposes for that
fiscal.year). -This portion of ‘taxes paid by conscientious
objectors would be’ disbursed from the Peace Tax Fund as
authorized in advance by appropriation Acts, by way of grants
approved by the Board of Trustees to fund eligible
non-military activities conducted by public and private
organizations. Thus, the bill would establish another grant
disbursing agency of the Federal Government and a new
spending category for the enumerated non-military programs
eligible to receive Peace Tax Fund distributions under H.R.
1870.

The bill could produce better tax compliance in cases of
individuals opposed to Government military activities to the
extent they are satisfied with the bill's designation and
appropriation procedures. However, establishment of a
dedicated Peace Tax Fund could encourage requests from other
groups for similar treatment of their Federal income, estate,
and gift tax payments (and even requests for similar
treatment of excise tax payments). For example, taxpayers
opposed to income transfer programs might wish to dedicate
their tax payments to. Government expenditures for goods and
services. A proliferation of such dedicated funds could
increase the likelihood of future constraints on the
Government's spending.

Administrative issues

The administrative process provided for by H.R. 1870 for
certifying eligibility for a taxpayer's designation of tax
Payments to the Peace Tax Fund may be cumbersome for the IRS.
Furthermore, in requiring judgments about ethical and
religious motivations of taxpayers and the sincerity of their
claimed beliefs (see footnotes 34 and 35 supra), the bill



-3-

stocks and securities on behalf of its members (and certain
other criteria are met).

Summary of bill

H.R. 1733 would provide that an organization comprised
of 20 or more members that are tax-exempt private foundations
or community foundations would be treated as organized and
operated exclusively for charitable purposes if it is
organized and operated exclusively to collectively invest in
stocks and securities on behalf of its members (and certain
other criteria are met).

H.R. 1870
Present law

Other than the exception for taxpayers to designate that
$l of their income tax liability be paid to the Presidential
Election Campaign Fund, taxpayers may not designate
particular Federal programs to receive Federal tax payments
for.which-they. are liable. .Taxpayers-are not relieved from
paying any portion of their. Federal ‘tax liability on the
ground that they ‘are :conscientiously .opposed to funding
military activities of the Federal-Government.

Summary of bill

H.R. 1870 would allow individual taxpayers (other than
nonresident aliens) to designate that their income, estate,
or gift tax payments for any taxable year be paid into a
“Peace Tax Fund" to be established under the bill. Taxpayers
eligible to make such a designation would be limited to
individuals who demonstrate that, by reason of religious
training and belief, they are conscientiously opposed to
participation in war in any form. With respect to each
fiscal year, certain amounts in the Peace Tax Fund would be
appropriated for eligible nonmilitary purposes under the
bill, and the remaining portion would be returned to the
general fund of the Treasury but could not be used for
military purposes. The.bill also would establish a Board of
Trustees to administer payments from the Peace Tax Fund as
authorized in advance by appropriation Acts, by way of grants
to public and private entities conducting. eligible
nonmilitary activities. In addition, H.R. 1870 would provide
amnesty from civil or criminal penalties for conscientious
objectors who, with respect to taxable years prior to 1992,
make payment of delinquent tax (and interest) to be deposited
into the Peace Tax Fund.


-19-

amounts designated during the fiscal year by individuals of
their Federal income, estate, and gaft tax payments to be
deposited into the. Peace Tax Fund.

Appropriations from the Fund.--H.R. 1870 would require
that, with respect to each fiscal year, the Comptroller
General shall determine the percentage of actual
appropriagijons made by the Federal Government for military
purposes. This percentage would then be used to determine
the portion of the Peace Tax Fund that would be authorized
for appropriatign for certain eligible nonmilitary purposes
under the bill. The remaining portion of amounts in the
Peace Tax Fund (i.e., the surplus amount not appropriated for
nonmilitary purposes under the bill) would then be returned
back to the general fund of the Treasury. H.R. 1870 further
provides that no part of the funds transferred from the Peace
Tax Fund to the general fund could be appropriated for any
expenditure (or otherwise obligated) for a military purpose.

Eligible nonmilitary activities.--Under the bill,
activities eligible to receive funds from the Peace Tax Fund
would include .(but .not be limited to): :{1) .retraining workers

‘displaced. by conversion from military production or

.activities; (2) research directed toward::developing and

37 The bill provides that adjustments would be made in
amounts subsequently transferred to the extent that prior
estimates were in excess of, or less than, the amounts
actually designated by individuals.

The Secretary of the Treasury would be required to report
to Congress each year on the total amount transferred into
the Peace Tax Fund during the preceding fiscal year.

38 For purposes of the bill, the term “military purposes"
means: "any activity or program conducted, administered, or
sponsored by an agency of the Government which affects an
augmentation of military forces, defensive and offensive
intelligence activities, or enhances the capability of any
person or nation to wage war."

The bill defines the term “actual appropriations made for
a military purposes" as including (but not limited to)
amounts appropriated by the United States in connection with:
(a) the Department of Defense; (b) the Central Intelligence
Agency; (c) the National Security Council; (d) the Selective
Service System; (e) activities of the Department of Energy
that have a military purpose; (f) activities of the National
Aeronautics and Space Administration that have a military
purpose; (g) foreign military aid, and foreign economic aid
made available to any country for the purpose of releasing

(Footnote continued)


-21-

Board to make payments from the Peace Tax Fund. Payments
would be made as authorized in advance by appropriation Acts,
by way of grant, loan, or other arrangemegt, under conditions
and terms the Board considers necessary. The Board vould
be required to publish regulations for the submission of
applications for funds by public or private individuals,
corporations, and other entities, and by Federal agencies.
Before approving any such application, the Board would
determine, after a comprehensive review of all the functions
and activities of the entity requesting funds from the Peace
Tax Fund, that such fynctions and activities have a
nonmilitary purpose.

In accordance with rules and procedures established by
the Comptroller General, the Board would be required to
submit a budget to Congress, to report to the President and
Congress annually on the activities of the Board, and to
provide a complete accounting of all funds received and
disbursed from the Peace Tax Fund.

Amnesty program for taxable years ending before 1992

H.R. 1870 would provide that any civil-or criminal
penalty imposed on an individual for failing or refusing to
pay all (or a part of) the taxpayer's income tax liability
would be vacated and set aside if the individual (1) pays the
tax due (with interest), and (2) establishes to the
satisfaction of the Secretary of the Treasury that the
individual was an eligible conscientious objector under the
criteria of the bill (discussed above). Under the bili,
delinquent amounts so paid by eligible individuals would be
deposited into the Peace Tax Fund.

42( continued)

would be appointed, subject to the general rules governing
appointment and compensation of Federal civil service
employees (see chapter 51 and subchapter III of chapter 53 of
title V of the U.S. Code). Members of the Board would be
compensated on a per diem basis at the maximum rate permitted
by law under the General Schedule for Government employees or
consultants, and also would be reimbursed for travel and
subsistence expenses incurred in performance of Board duties
(subject to certain limitations). .

43 Any contract for property or services would be subject to
Federal laws and regulations concerning the acquisition of
property and services by a Federal executive agency.

44 H.R. 1870 specifically provides: “It is the intent of
this Act that the [Peace Tax] Fund shall not operate to
release funds for military expenditures which, were it not
for the existence of the Fund, would otherwise have been
appropriated for nonmilitary expenditures."



-16-
IV. DESCRIPTION OF H.-R. 187029

{Provide that Taxpayers May Elect to Have Tax Payments
Designated for Nonmilitary Purposes and Establish a
Peace Tax Fund)

Present Law

Taxpayers may not designate particular Federal programs
to receive the Federal income, estate, or gift tax payments
for which they are liable. An exception to this rule is that
individuals may designate on their income tax returns that $1
of their tax liability be paid over to the Presidential
Election Campaign Fund (sec. 6096). Other than this one
exception, Federal income, estate, and gift tax payments are
deposited into the general fund of the United States
Treasury, from which amounts are approprigted by law to a
variety of Federal agencies and programs.

The IRS is required to include two pie charts in
individual income tax form instruction booklets (based on
data available for. the most recent fiscal year) depicting
sources :of ;Government revenue and the relative sizes of the
following major outlay categories: (1) defense, veterans, and
foreign affairs, (2) social security, medicare, and other
retirement, (3) physical, human, and community development,
(4) social programs, (5) law enforcement and general
government, and (6) interest on the debt (sec. 7523).

Courts have repeatedly held that taxpayers are not
relieved from paying any portion of their Federal income tax
liability, despite the taxpayers' claim that they are
conscientiously opposed to funding mijitary (or other)
activities of the Federal Government. Taxpayers who refuse
on grounds of conscientious objection to make Federal tax
payments otherwise due are subject to criminal and civil
penalties under chapters 68 and 75 of the Internal Revenue
Code.

30 y.R. 1870 was introduced on April 17, 1991, by Mr.
Jacobs, Mr. Moody, and 31 other Members. In addition, 8
other Members subsequently were added as cosponsors.

31 In contrast, taxpayers who make charitable contributions
to the Federal Government generally may designate particular
Federal agencies or programs to receive the contributions.
(See note 6 supra.)

32 See, e.g., United States v. Douglass, 476 F.2d 260 (5th
Cir. 1973); United States v. Malinowski, 472 F.2d. 850 (3rd
Cir. 1973).



-8-

taxpayers would be entitled to deduct the amount of
overpayment designated (or cash contribution) to the Trust
Fund, regardless of whether the individual taypayer itemizes
deductions or claims the standard deduction. The amount of
the deduction available for any one year under the bill,
however, would be limited by the present-law percentage
limitation (i.e., generally 50 percent of an individual's
AGI) that applies to cash contributions to the United States.
Any excess amount could be carried forward over the five
succeeding taxable years and (subject to the percentage
limitations) deducted in one or more of those succeeding
years, regardless of whether the individual itemizes
deductions at that time.

Effective date

The provisions of the bill would be effective for
taxable years beginning after December 31, 1990.

Issues

As with any.tax deduction or credit, the price of an
‘activity that receives.a:tax incentive is reduced. For
example, for a taxpayer in ‘the .3l-percent tax bracket, a $100
cash gift to charity ‘reduces ‘taxable income by $100 and
thereby reduces tax liability by $31. As a consequence, the
$100 cash gift to charity reduces the taxpayer's after-tax
income by only $69. In this example, economists would say
that the "price of giving" $100 cash to charity is $69.

For individuals who claim the standard deduction rather
than itemize deductions, the proposal would reduce the price
of making charitable contributions to the Federal Government.
A dollar of charitable contributions to the Federal
Government would cost the taxpayer only the amount of the
contribution minus the tax savings from the contribution
(i.e., the cost of giving would be $(1 - taxpayer's marginal
tax rate)). This reduction in the price of giving would be
expected to lead to an increase in donations of this type.
The effect on charitable contributions of other types is
uncertain. The overall effect would depend upon which effect

13 as under present law, corporate taxpayers (as well as
trusts and estates) would be required to claim the charitable
contribution deduction on an itemized basis.

Under the bill, if an individual taxpayer makes a
contribution to the United States at any time other than when
filing his or her income tax return, then such a contribution
would not be within the scope of the bill's provisions and
could be claimed as a deduction only if the taxpayer itemizes
deductions. for the year the contribution is made.


-S-

with your income tax return. Make it payable
to "Bureau of the Public Debt." You may be
able to deduct this gift on your 1992 tax
return if you itemize deductions. Do not add
your gift to any tax you may owe. If you owe
tax, include a separate check for that amoynt
payable to the "Internal Revenue Service."

Thus, current IRS practice and forms do not permit
taxpayers simply to designate on their income tax returns
that overpayment amounts be contributed to the Federal
Government. Instead, taxpayers who wish to make such a gift
are instructed to write a separate check to the "Bureau of
the Public Debt." The Instructions for Form 1040 clarify
that a taxpayer making a gift to the Federal Government when
filing the current year's tax return may claim a charitable
contribution deduction on the tax return filed during the
next year only if the taxpayer itemizes deductions on the
return filed during the next year.

Although not expressly stated in IRS materials,
taxpayers may:make.tax-deductible contributions (assuming the
taxpayer itemizes) to the United States in many forms other
than a direct gift to the Bureau of the Public Debt, provided
that the contribution is made for exclusively public
purposes. Various public laws specifically provide that
contributions (in cash or other property) to various Federal
entities or programs are regarded as gifts to the United
States.

Corporations (as well as trusts and estates) also are
allowed a deduction for Federal income tax purposes, subject
to certain limitations’, for contributions made to qualifying
charitable organizations or Federal, State, or local

5 similar language is contained in the instructions for
Forms 1040A and 1040EZ.

6 For example, the following entities are expressly
authorized to accept gifts on behalf of the United States:
Secretaries of the Army, Navy, and. Air Force, and the
Department of Defense (10 U.S.C. sec. 2601(a)); United States
Army Unit Funds (Rev. Rul. 73-296, 1973-2 C.B. 67); Managing
Trustee of the Federal Old-Age and Survivors Insurance Trust
Fund ("Social Security") (42 U.S.C. sec. 401(i), Rev. Rul.
82-169, 1982-2 C.B. 72); Department of Transportation (P.L.
89-670); Department of Commerce (P.L. 88-611, 1964-2 C.B.
655); Administrative Conference of the Courts (P.L. 92-526);
Department of Health, Education, and Welfare for the benefit
of a government insurance trust fund (P.L. 92-603); National
Foundation on the Arts and Humanities (P.L. 89-209, 1965-2
C.B. 622, as amended by P.L.. 93-133).


-4-

- II. DESCRIPTION OF H.R. 652
("What I Can Do for America Act")
Present Law

For Federal income tax purposes, individual taxpayers
who itemize deductions are allowed a deduction, subject to
certain limitations, for contributions made to qualified
charitable organizations (sec. 170). In addition, an
itemized deduction is allowed for contributions made to
Federal, State, or local governments, provided the
contributiog is made for exclusively public purposes (sec.
170(c)({1)).

No charitable contribution deduction is allowed to
individual taxpayers who,claim the standard deduction rather
than itemize deductions.

IRS publications inform taxpayers that they may make a
gift to the:.Federal. government to reduce the public debt.
Page 29 ‘ofthe Instructions for Form 1040 (1991) states:

You may make a gift to reduce the public debt.
If you wish to do so, enclose a separate check

2 H.R. 65 was introduced on January 3, 1991, by Mr. Bennett
and Mr. Rangel. Mr. Hughes subsequently was added as a
cosponsor.

3° cash contributions made by an individual to a public
charity or governmental unit may be deducted in any one
taxable year (along with other charitable contributions) in
an amount generally up to 50 percent of the taxpayer's
adjusted gross income (AGI) (computed without regard to any
net operating loss carryback) for that year (sec. 170(b)(1)).
Contributions in any one year in excess of the percentage
Limitation may be carried.forward and deducted over the five
succeeding taxable years (subject. to percentage limitations
in those years) (sec. 170(d)(1)).

4 prior to 1982 (as under present law), only taxpayers who
itemized deductions ("itemizers") were allowed a deduction
for charitable contributions. This deduction was extended to
non-itemizers during 1982-1986, subject to differing
limitations during those years. The maximum charitable
deduction for non-itemizers was $25 for 1982 and 1983, and
$75 for 1984. For 1985, 50 percent of the amount contributed
was deductible (without a dollar cap) and, for 1986, 100
percent of the amount contributed was deductible (without a
dollar cap).


ee

-17-

Explanation of the Bill

Designation by individual taxpayers

H.R. 1870 would allow individual taxpayers (other than
nonresident aliens) to designate that their income, estate,
and gift tax payments for any taxable year be paid into a
"United States Peace Tax Fund" (the "Peace Tax Fund") to be
established under the bill. The designation may be made with
respect to a taxable year at the time of filing the return
for that year, or at any other time fhereafter as specified
in Treasury Department regulations. .

Eligible conscientious objectors

Under the bill, taxpayers eligible to make such a
designation would be limited to individuals (1) who by reason
of religious training and belief, are conscientiously opposed
to participation in war in any form, and (2) who have (a)
been exempted or discharged from combat service and training
in.the. United.:States Armed Forces.as a conscientious objggtor

'

cunder ‘section ‘6(j)-of the Military Selective Service Act
Or. prior:;corresponding law, or (b) certified in a statement

ina questionnaire filed with the tax return that they are
conscientiously opposed to participation in war in any form
within the mggning of section 6(j) of the Military Selective
Service Act.

In the questionnaire filed with the taxpayer's return,

33° In the case of an eligible individual filing a joint
income tax return, upon the consent of such individual's
spouse, the joint income tax payment may be designated to the
Peace Tax Fund.

34 section 6(j) of the Military Selective Service Act
provides that a person shall not be subject to combatant
training and service.in the armed forces if that person, by
reason of religious training and belief, is conscientiously
opposed to participation in war in any form. As used in that
provision, the term "religious training and belief" does not
include “essentially political, sociological, or
philosophical views, or a merely personal moral code." (50
U.S.C. App. 456(45)).

Conscientious objector claims under section 6(j) of the
Military Selective Service Act turn on the resolution of
factual questions relating to the nature of the registrant's
beliefs concerning war, basis of the objection in conscience
and religion, and registrant's sincerity. See McGee v.
United States, 402 U.S. 479 (1971).


boeheraic a

-7-

Under the bill, the designation of an overpayment (or
cash contribution) to the Trust Fund could be made only at
the time the taxpayer's income tax return is filed. The
designation would be required to be made on the page of the
return bearing the taxpayer's signature and would be
irrevocable.

Eligible Federal programs.--The designation (or cash
contribution) could be made only with respect to certain
eligible Federal programs listed by the Secretary of the
Treasury under authority granted by the bill. For any
taxable year, a taxpayer could designate no more than two
Federal programs to receive the designated overpayment (or
cash contribution).

Under the bill, a list of Federal programs eligible to
receive payments from the Trust Fund would be published
annually by the Secretary of the Treasury.? The list of
eligible Federal programs must include each department,
agency, and instrumentality of the United States. In
addition, the Secretary of the Treasury would be granted
discretion to include:on ‘the list of ‘eligible Federal
programs any office-within (or program administered by) a
department, agency, ‘or-:instrumentality of the United States.

H.R. 65 further would provide that amounts transferred
to any Federal program under the bill would be under the
control of the applicable department, agency, or
instrumentality of the United States, and would remain
available to such entity for the fiscal year in which the
transfer is made and for the two succeeding fiscal years.

Deduction for nonitemizers

Under the bill, any overpayment designated (or cash
contribution made with the return) to the Trust Fund would be
treated as a charitgble contribution made by the taxpayer to
the United States. In computing taxable income, individual

10 (continued)

transferred before the end of each fiscal year to the
eligible Federal programs designated by contributing
taxpayers.

110 the bill requires that the list of eligible Federal
programs be included in the information made available by the
IRS to taxpayers filing income tax returns.

12 Any overpayment designated under the bill would be
treated as refunded to the taxpayer and contributed to the
United States on the last date prescribed for filing the
return (determined without regard to extensions), or, if
later, the date the return is filed.


-23-

could compel the IRS to operate in an area in which it may
have little expertise.. Certification decisions on
conscientious-objector status for tax purposes could lead to
court battles and could further raise concern about
IRS-taxpayer relations. Administrative costs would result
from processing claims of conscientious-objector status made
by taxpayers and applications filed by private and public
organizations for grants from the Peace Tax Fund. Moreover,
accounting disputes could arise when the Comptroller General
determines for a taxable year the percentage of actual
appropriations made for military purposes, particularly with
respect to appropriations to Federal agencies (e.g., NASA)
that conduct activities that serve both military and
non-military functions (see footnote 38 supra).

Using a prior election by an individual of conscientious
objector status for selective service, military purposes as a
qualification for the Peace Tax Fund may be perceived as
presenting a higher burden of proof for women and those men
who were not required to register for the draft and thus did
not previously need to make an expression of
conscientious-objector status. In addition, it could be
‘difficult to limit the amnesty program provided for by H.R.
1870 to conscientious objectors and not allow other
delinquent taxpayers to avoid civil and criminal penalties
under the bill.

Other administrative issues raised by H.R. 1870 include
the following: It is unclear whether the decision to
contribute to the Peace Tax Fund is irrevocable with respect
to a particular tax return (or amended return). If a
taxpayer elects to pay into the Peace Tax Fund with respect
to a particular return, would the designation also apply to
penalties and interest assessed on an underpayment relating
to that return? Because the bill appears to require that the
election of conscientious-objector status be made on an
annual basis, taxpayers could de facto choose to contribute
to some military activities and not others by deciding
whether to elect such status for a particular taxable year.
In this regard, it may be desirable to deny election of
conscientious-objector status if a taxpayer previously had
elected such status but chose not to elect such status for
one (or more) intervening years. 5

45 However, such a rule might appear harsh in the case of a
taxpayer who inadvertently fails to elect
conscientious-objector status on a particular tax return.



DESCRIPTION OF H.R. 65, H.R. 1733, AND H.R.

Scheduled for a Hearing
Before the
SUBCOMMITTEE ON
SELECT REVENUE MEASURES
of the
HOUSE COMMITTEE ON WAYS AND MEANS

on May 21, 1992

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
May 19, 1992

JCX-18-92

1870


-10-

III. DESCRIPTION OF H.R. 173315
(Provide an Exemption From Income Tax for Certain
Common Investment Funds)

Present Law

Tax-exempt status

Organizations described in section 501(c)(3} (commonly
referred to as "charities") generally are exempt from Federal
income tax and are eligible to receive tax-deductible
contributions. Organizations described in section 501(c)(3)
fall into one of two gategories: (1) public charities, or (2)
private foundations.+ Private foundations typically are
controlled and supported by a single source, such as one
donor, family, or company. Private foundations are governed
by Internal Revenue Code rules that generally are mors
stringent than rules applicable to public charities.

Public charities and private foundations generally are
exempt from Federal: income tax.on income they receive, other
than income from an unrelated trade or business. The
exemption from Federal income tax generally extends to income
derived from passive investment activities (e.g., interest
and dividends), unless derived from debt-financed property
(sec. 512(b)).*8

15 H.R, 1733 was introduced on April 11, 1991, by Messrs.
Jacobs, Vander Jagt, Jenkins, and Gradison. Messrs. Pease,
Dorgan, Guarini, Coyne, Rangel, Russo, and 56 other Members
subsequently were added as cosponsors.

16 A tax-exempt organization described in section 501(c)(3)
is characterized as a "private foundation" unless it
specifically qualifies as a "public charity" under section
509(a). Examples of public charities include: churches,
schools, hospitals, and certain charitable organizations that
normally receive a. substantial part of their support from
governmental units or contributions from the general public
(secs. 509{a)(1) and 170(b)(1)(A)).

17 Private foundations (and their managers) are subject to
penalty excise taxes that may be imposed for certain
transactions, such as self-dealing transactions, failure to
distribute income, excess business holdings, investments
which jeopardize charitable purpose, and making taxable
expenditures (secs. 4941-4945).

18 Although investment income earned by tax-exempt
organizations generally is exempt from Federal income tax,
(Footnote continued)



~9-

is larger: the substitution of charitable contributions to
the Federal Government for other charitable contributions or
the increase in charitable.contributions to private
organizations since donations to the government are less
costly.

For individuals who itemize deductions, the proposal
would not have any effect on the cost of making charitable
contributions to the Federal Government. Any increases in
such contributions would have to occur from the promotional
effect of advertising the donations on the tax form itself
(rather than, as under current practice, simply notifying
taxpayers in the instructions that a separate check can be
written to reduce the public debt).

The proposal could create several administrative
problems. Under the bill, the designation would be
irrevocable and the taxpayer would be treated as having
received a refund on the later of the last date prescribed
for filing the return (without regard to extensions) or the
date the return is filed. Consequently, if it is
subsequently determined on:audit (or the taxpayer files an
amended return showing) :that. the taxpayer was not entitled to
the overpayment amount’ initially claimed and:contributed,
then the taxpayer would-have ‘to :pay that amount to the IRS,
as well as interest and possible penalties. In addition, it
may be difficult to provide the space on the tax forms
required by the proposal. Moreover, it is unclear what the
interaction of the proposal would be with the provisions of
the Code that provide for offsets of tax refunds for certain
past-due child support and unpaid Federal debts.

14 See, Charles Clotfelter, Federal Tax Policy and
Charitable Giving (Chicago: University of Chicago Press),
1985, for a review of the literature.



-6-

governments. A corporation (or trust or estate) making a
charitable contribution will claim an.itemized deduction for
the contribution, because such entities are not allowed a
standard deduction but must claim all deductions on an
itemized basis.

Explanation of the Bill

Designation of tax overpayment or cash contribution to
Federal Program Enhancement Trust Fund

Federal Program Enhancement Trust Fund.--H.R. 65 would
allow taxpayers to designate on their Federal income tax
returns that a portion of any overpayment of tax be
contributed (or a cash contribution made with the tax return)
toa “Paderal Program Enhancement Trust Fund" ("Trust
Fund"). Under the bill, the amount of the overpayment
designated (or cash contribution made) to the Trust Fund
would have to exceed $25 (or, if less, the amount of the
overpayment of tax shown on the return). The bill would
establish .the Trust Fund in-the:Department of the Treasury,
which would distribute funds to eligible Federal departments,
agencies, gpd ‘Programs designated by contributing
taxpayers.

7 Corporations generally may claim a charitable contribution
deduction for the taxable year in an amount up to 10 percent
of their taxable income (computed without regard to
charitable contributions) (sec. 170(b)(2))}. Contributions
that exceed the percentage limitation generally may be
carried forward and deducted over five succeeding taxable
years (sec. 170(d)).-

For Federal income tax purposes, trusts and estates
generally are allowed to deduct charitable contributions up
to any amount of their gross income without limitation,
provided that the contribution is made pursuant to terms of
the instrument governing the trust or estate (sec. 642(c)).

8 the bill provides that, in the case of a joint return
showing an overpayment, each spouse may designate that any
portion of the overpayment be paid to the Trust Pund.

9 echnical modification of the bill May be necessary to
permit taxpayers to contribute the exact overpayment amount
shown on the return.

10 Amounts designated by taxpayers under the bill would be

appropriated to the Trust Fund. Such amounts (minus certain

administrative expenses of the Trust Fund) would be
(Footnote continued)


-20-

evaluating nonmilitary and nonviolent solutions to
international conflict; (3) disarmament efforts; (4) special
projects of the United States Institute of Peace; (5}
international exchanges for peaceful purposes; (6)
improvement of international health, education, and welfare;
and (7) programs for providing information to and education
of the public concerning such activities. 0

Board of Trustees.--The bill would establish a Peace Tax
Fund Board of Trustees (the "Board"). The Board would be
composed of 11 members, nine of whom would be appointed by
the President (not more than five from the same pgfitical
party) with the advice and consent of the Senate. The
remaining two members of the Board (serving in an ex officio
capacity) would be one Member of the Senate appointed by the
President pro tempore of the Senate (upon recommendations of
the majority leader and minority leader) and one member of
the House of Representatives appointed by the Speaker of the
House (upon recommendations of the majority leader and
minority leader). The term of office for a member of the
Board generally would be six years, 494 no member could serve
on the Board for more than 12 years.

Under .the bill, it would be the responsibility of the

38 (continued)

local funds for military activities; and (h) the training,
supplying, or maintaining of military personnel, or the
manufacture, construction, maintenance, or development of
military weapons, installations, or strategies.

39° the percentage of actual appropriations for military
purposes determined by the Comptroller G-neral with respect
to a fiscal year would be multiplied by ail the funds
transferred to the Peace Tax Fund for that year, the product
of which would be authorized for appropriation for the
eligible nonmilitary purposes enumerated in the bill.

40 H.R. 1870 further provides: "Funds nondesignated for the
purpose of research may be directed to governmental or
nongovernmental, national, or international organizations.
Funds for domestic programs involving the providing of goods
and services shall be restricted in distribution to the
United Nations and associated agencies." (Introduced bill at
16.)

41 the bill provides that such members would be selected
from among "individuals who have demonstrated a consistent
commitment to world peace, international friendship, and the
peaceful resolution of international conflict."

42 tn addition, an executive director and staff of the Board

(Footnote continued)



-2-
I. SUMMARY OF BILLS
H.R. 65
Present law

For Federal income tax purposes, individual taxpayers
who itemize deductions are allowed a deduction (subject to
certain limitations) for contributions made to qualified
charitable organizations or to Federal, State, and local
governments. Currently, instructions to IRS income tax forms
inform taxpayers that they may make a gift to the Federal
Government by enclosing with their return a separate check
made payable to the "Bureau of Public Debt." In addition,
various public laws provide that contributions to specific
Federal entities or programs are regarded as gifts to the
United States. Such contributions to the Bureau of Public
Debt and to specific Federal entities or programs are
deductible if the donor itemizes deductions For the year the
contribution is made.

Summary of bill

H.R. 65 would allow taxpayers to. designate on their
Federal income tax returns that a portion of any overpayment
of tax (or a cash contribution made with the return) be
contributed to a "Federal Program Enhancement Trust Fund."
This Trust Fund would distribute funds to certain eligible
Federal departments, agencies, and programs designated by
contributing taxpayers. Overpayments designated (or cash
contributions made with the return) to the Trust Fund would
be deductible in computing taxable income, regardless of
whether the donor itemizes deductions or claims the standard
deduction.

H.R. 1733
Present law

Section 50l1(c)(3) requires that a organization be
organized exclusively for a charitable, educational, or
certain other exempt purposes in order to qualify as a
tax-exempt public charity or private foundation under that
section. Such tax-exempt organizations generally are exempt
from Federal income tax on income they receive (other than
income from an unrelated trade or business), including income
from passive investment activities. An organization
generally does not qualify for tax-exempt status if its
primary purpose is to conduct a trade or business for profit
and turn over the profits to a tax-exempt entity. However,
section 501(£) provides that a common fund organized and
comprised solely of members that are educational institutions
is eligible for tax-exempt status under section 501(c)(3) if
it is organized and operated solely to collectively invest in


-13-

Effective date.--The bill would apply to taxable years
beginning after December 31, 1990.

Issues

Exemption for common investment funds

As discussed above, the Code generally exempts from
Federal income tax the passive investment income of private
foundations. The value of this exemption may be greater for
large foundations than for small foundations because
investment returns often are greater for foundations with
more assets than for foundations with few assets. The
returns may be greater because brokerage costs and advisory
fees often are proportionally smaller for large foundations.
One rationale for a common investment fund for foundations is
to enable small foundations to pool their assets in order to
earn returns comparable to large foundations.

There are, however, a number of different investment
vehicles available under present law for small foundations to
pool their assets with other investors. A foundation could,
for example, invest in a mutual fund (i.e., a regulated
investment company or "RIC"). ‘Alternatively, a group of
small foundations could get ‘together to form their own RIC.

A RIC is, in theory, not a tax-exempt entity but effectively
receives tax-free treatment on income distributed to its
shareholders. (A RIC is allowed to deduct dividends paid to
members and, thus, is taxable only on the portion, if any, of
its taxable income which is not distributed as dividends).
However, a RIC is required to register under the Investment
Company Act of 1940 and to satisfy certain income and
distribution tests (secs. 851 and 852(a)).

Organization and control of the common investment fund

As noted in the present-law discussion, a common
investment fund for educational institutions gyrrently is
provided tax- exempt status by section 501(f). However,
section 501(f£) is limited to organizations formed and
controlled by the investing educational institutions

23 Section 501(f) was enacted in 1974 to permit The Common
Fund to retain its tax-exempt status, which was in danger of
being lost after the expiration of start-up grants to the
organization. As The Common Fund became increasingly reliant
upon payments from member institutions to meet operational
costs, the IRS took the position that the Fund would not be
eligible for tax-exempt status if investment services were no
longer provided to members at a charge substantially below
cost. (See S. Rep. No. 93-888, 93rd Cong., 2d Sess. (1974)
at 2-3.)



-15-

In addition, establishment of a tax-exempt commcn
investment fund for private (and community) foundations could
‘encourage other tax-exempt organizations (e.g., hospitals) to
likewise seek authority to. form tax-exempt investment funds
that would not be subject to requirements under the
Investment Company Act of 1940 nor subject to certain other
income and distribution rules (secs. 851 and 852(a)).

Investment activities of the common investment fund

Another issue presented by the bill is the nature of
the allowable investments of a common fund. Under H.R. 1733,
a common fund must be organized and operated "exclusively" to
hold, commingle, and collectively invest and reinvest in
stocks and securities. By contrast, a section 501(f) common
fund for educational institutions must be organized and
operated "solely" to engage in these investment activities.
As described above, the term "exclusively" generally is
interpreted under section 501 more liberally than is the term
“solely. Here again, the language of H.R. 4210 parallels
the provisions of section 501(f), so that a common fund for
private. foundations ‘would .have:been. required :to be organized
and operated solely". to -invest .in .stocks .and securities.

28 (continued)

ceases to qualify as a tax-exempt private foundation or
community foundation." H. Rept. 102-461, 102nd Cong., 24
Sess., at 601.n.1 (1992).

29° The conference report to H.R. 4210 stated that an
organization would be deemed to be organized and operated
solely to collectively invest in stocks and securities if its
income "is derived solely from investing in stocks and
securities, and ordinary and routine investments in
gonnection with a stock and securities portfolio." Id. at

Ol n.2.


INTRODUCTION

This document, prepared by the staff of the Joint
Committee on Taxation, provides a description of three bills
(H.R. 65, H.R. 1733, and H.R. 1870) scheduled for a hearing
before the Subcommittee on Select Revenue Measures of the
House Committee on Ways and Means on May 21, 1992.

H.R. 65 ("What I Can Do for America Act") would allow
taxpayers to designate on their Federal income tax returns
that a refund otherwise due (or a cash contribution made with
the return) be contributed to a Federal Program Enhancement
Trust Fund for distribution to eligible Federal programs
designated by the taxpayers on their tax returns. H.R. 65
also would allow a deduction from taxable income for
contributions to the Trust Fund by individuals who do not
itemize their deductions (as well as for itemizers). H.R.
1733 would allow tax-exempt private and community foundations
to form tax-exempt cooperative service organizations for
collective investment of their assets in stocks and
securities.

“H.R. 1870 would establish a Peace Tax Fund in the
Treasury to receive tax payments (Federal income, estate, or
gift taxes) designated by taxpayers to be spent only for
nonmilitary purposes. H.R. 1870 also would authorize
appropriations from the Peace Tax Fund for certain
non-military activities approved by a Peace Tax Fund Board of
Trustees, such as for retraining workers who are displaced by
conversion from military production.

Part I is a summary of present law and the bills. Part
II is a description of present law and the provisions of H.R.
65. Part III is a description of present law and the
provisions of H.R. 1733. Part IV is a description of present
law and the provisions of H.R. 1870. Parts II, III, and IV
also include a discussion of issues related to the bills.

.

1 This document may be cited as follows: Joint Committee on
Taxation, Description of H.R. 65, H.R. 1733, and H.R. 1870
(JCX-18-92), May 19, 1992.



- CONTENTS

Page
INTRODUCTION. 0... cee e cece cece eee e eet eeeteteeeeeeee L
I. SUMMARY OF BILLS........e.ecececececeeceeee 2
II. DESCRIPTION OF H.R. 65 ("What I Can ;

Do For America Act")... c cece cece ce we eees

III. DESCRIPTION OF H.R. 1733 (Provide
an Exemption From Income Tax for
Certain Common Investment Funds).........10

IV. DESCRIPTION OF H.R. 1870 (Provide
That Taxpayers May Elect to Have
Tax Payments Designated for Nonmilitary
Purposes and Establish a Peace Tax
FUNG) ccc cece ccc ccc reece eee e cece ces e eee e lb



-1ll-

Sectisn 501(c)(3) requires that an organization be
organized exclusively for a charitable, educational, or other
exempt purpose listed in section 501(c)(3) in order to
qualify for tax-exempt status under that section. An
organization generally does not qualify for tax-exempt status
if it is a so-called "feeder" organization, the primary
purpose of which is to conduct a trade or business for profit
and tuga over the profits to a tax-exempt entity (sec.

502).

Common Fund for. educational organizations

Section 501(f) provides a special rule that an
organization is treated as organized and operated exclusively
for charitable purposes (and, thus eligible for tax-exempt
status under section 501(c)(3)) if it is (1) organized and
controlled by one or more members that are educational
institutions, (2) comprised solely of members that are
educational institutions, and (3) organized and operated
solely to hold, commingle, and collectively invest (including
arranging for investment services by independent contractors)
in. stocks .and:.securities,.the monies..contributed :thereto by
members,«.and :to':collect :income ‘therefrom and turn over the
entire :amount. thereof,.less expenses, to. such members. The
only :known active 501(f): organization is "The Common Fund."

Explanation of the Bill

H.R. 1733 would provide that an organization comprised
exclusively of members that are tax-gxempt private
foundations or community foundations shall be treated as

18 (continued)

private foundations are subject to a two-percent excise tax
on their net. investment income (sec. 4940). In contrast,
public charities are not subject to an excise tax on their
net investment income.

19 However, the Code does provide tax-exempt status to
certain title-holding companies described in section
501(c)(2) (i.e., corporations organized for the exclusive
purpose of holding title to property and turning over.income
therefrom to one or more related tax-exempt organizations)
and section 501(c)(25) (i.e., corporations that hold title to
real property on behalf of no more than 35 qualified
tax-exempt shareholders).

20 "Community foundations" are a form of charitable trust or
fund (generally established to attract large contributions of
a capital or endowment nature for the benefit of a particular
community or area) which, technically, qualify as a public
charity--not a private foundation--under sections 509(a)(1)
and 170(b)(1)(A)(vi). See Treas. Reg. sec. 1.170A-9(e)(10).


-14-

themselves and does not apply to any organization formed to
promote the furnishing of investment services by private
interests, even though those serviggs. might be made available
only to educational organizations. In contrast, under H.R.
1733, there is no requirement that a common fund for private
foundations be formed or controlleg by one or more of the
participating private foundations. 5 Thus, H.R. 1733 would
permit a tax-exempt common fund for private foundations to be
organized (and effectively controlled) by entities formed to
promote the furnishing of investment services by private
interests. The bill does require, however, that the common
fund's members must be permitted to dismiss the fund's
investment advisor, following reasonable notice, upon a vote
of the members holding a majority of interest in the fund.

Membership in the common investment fund

Another issue raised by the bill is the permissible
membership of a common fund. H.R. 1733 requires that a
common fund be comprised “exclusively” of private foundations
and certain community foundations. By contrast, a common
.fund. for..educational. institutions under. present-law section
501(f):.must.be comprised "solely" of members that are
educational institutions. The term "exclusively" is
interpreted by.the IRS to:mean primarily, or substantially,
for purposes of section 501(c)(3), whereas the term "solely"
is interprgfed literally as not allowing 3 de minimis
exception. For this reason, H.R. 4210,2” which contained
similar provisions granting tax-exempt status to private
foundation common funds, required that such a common fund be
comprised "sgpely" of private foundations and community
foundations.

24 see id at 3.

25 HVR. 1733 specifically provides that the common fund
cannot be controlled by any one member.

26 See G.C.M. 36378 (May 21, 1976).

27 H.R. 4210 {as reported by the committee of conference)
was passed by the House of Representatives and the Senate on
March 20, 1992, but was vetoed by the President on that date.

28 the conference report to H.R. 4210 stated: "It is
expected that members will present the organization with
verification of their status as tax-exempt private
foundations or community foundations at the time they become
members (i.e., when they make an initial investment).
Further, it is intended that a reasonable time period should
be allowed for withdrawal by a member that subsequently
(Footnote continued)