19–006

108TH CONGRESS REPT. 108–270 " HOUSE OF REPRESENTATIVES ! 1st Session Part 1

CHARITABLE GIVING ACT OF 2003

SEPTEMBER 16, 2003.—Committed to the Committee of the Whole House on the 

State of the Union and ordered to be printed 

Mr. THOMAS, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

[To accompany H.R. 7] 

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to whom was referred the 

bill (H.R. 7) to amend the Internal Revenue Code of 1986 to provide incentives for charitable contributions by individuals and businesses, and for other purposes, having considered the same, report 

favorably thereon with an amendment and recommend that the bill 

as amended do pass.

CONTENTS 

Page 

I. Summary and Background .............................................................................. 19

A. Purpose and Summary ........................................................................ 19

B. Background and Need for Legislation ................................................ 20 

C. Legislative History .............................................................................. 20 

II. Explanation of the Bill ..................................................................................... 20 

Title I. Charitable Giving Incentives .............................................................. 3

A. Charitable Deduction for Nonitemizers (sec. 101 of the bill and 

secs. 63 and 170 of the Code) ............................................................ 3

B. Tax-Free Distributions From IRAs for Charitable Purposes (sec. 

102 of the bill and secs. 408 and 6034 of the Code) ........................ 4

C. Increase Percentage Limitation for Corporate Charitable Contributions (sec. 103 of the bill and sec. 170 of the Code) ................ 6

D. Charitable Deduction for Contributions of Food Inventory (sec. 

104 of the bill and sec. 170 of the Code) .......................................... 6

E. Reform of Excise Tax Based on Net Investment Income of Private 

Foundations (sec. 105 of the bill and sec. 4940 of the Code) .......... 6

F. Reform of Excise Taxes for Minimum Payout and Self Dealing 

(sec. 105 of the bill and secs. 4941 and 4942 of the Code) .............. 6

G. Modify Tax on Unrelated Business Taxable Income of Charitable 

Remainder Trusts (sec. 106 of the bill and sec. 664 of the Code) .. 7

2

H. Expand Charitable Contribution Allowed for Scientific Property 

Used for Research and for Computer Technology and Equipment 

(sec. 107 of the bill and sec. 170 of the Code) .................................. 8

I. Basis Adjustment to Stock of S Corporation Contributing Property 

(sec. 108 of the bill and sec. 1367 of the Code) ................................ 8

J. Charitable Organizations Permitted To Make Certain Collegiate 

Housing Grants (sec. 109 of the bill and sec. 501 of the Code) ...... 8

K. Proceeds From Certain Games of Chance Treated as Income Related to Exempt Purposes (sec. 110 of the bill and sec. 513 

of the Code) ......................................................................................... 9

L. Excise Taxes Exemption for Blood Collector Organizations (sec. 

111 of the bill and secs. 4041, 4221, 4253, 6416, and 7701 of 

the Code) ............................................................................................. 9

M. Nonrecognition of Gain on the Sale of Property Used in the 

Performance of an Exempt Function (sec. 112 of the bill and 

sec. 512 of the Code) .......................................................................... 10

N. Qualified 501(c)(3) Bonds for Nursing Homes Exempt From Federal Guarantee Prohibition (sec. 113 of the bill) ............................. 11

Title II. Tax Reform and Improvements Relating to Charitable Organizations and Programs ....................................................................................... 11

A. Suspension of Tax-Exempt Status of Terrorist Organizations (sec. 

201 of the bill and sec. 501 of the Code) .......................................... 11

B. Clarification of Definition of Church Tax Inquiry (sec. 202 of 

the bill and sec. 7611 of the Code) .................................................... 12

C. Extension of Declaratory Judgment Procedures to Non–501(c)(3) 

Tax-Exempt Organizations (sec. 203 of the bill and sec. 7428 

of the Code) ......................................................................................... 12

D. Exclusion From Income of Certain Landowner Initiatives Program 

Payments (sec. 204 of the bill and sec. 126 of the Code) ................ 13

E. Modify Tax Treatment of Certain Payments to Controlling Exempt Organizations (sec. 205 of the bill and sec. 512 of the 

Code) ................................................................................................... 13

F. Simplification of Lobbying Expenditure Limitation (sec. 206 of 

the bill and secs. 501 and 4911 of the Code) ................................... 13

G. Pilot Project for Forest Conservation Activities (sec. 207 of the 

bill) ...................................................................................................... 114

Title III. Other Provisions ............................................................................... 16

A. Compassion Capital Fund (sec. 301 of the bill) ................................. 16

B. Individual Development Accounts (sec. 302 of the bill) .................... 17

C. Maternity Group Homes (sec. 304 of the bill) ................................... 18

D. Transfers From the Temporary Assistance for Needy Families 

Block Grant to the Social Services Block Grant (sec. 305 of 

the bill) ................................................................................................ 19

III. Votes of the Committee .................................................................................... 71

IV. Budget Effects of the Bill ................................................................................. 72

A. Committee Estimate of Budgetary Effects ........................................ 72

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority ...................................................................... 75

C. Cost Estimate Prepared by the Congressional Budget Office .......... 75

D. Macroeconomic Impact Analysis ........................................................ 75

V. Other Matters To Be Discussed Under the Rules of the House ................... 79

A. Committee Oversight Findings and Recommendations .................... 79

B. Statement of General Performance Goals and Objectives ................ 80

C. Constitutional Authority Statement .................................................. 80

D. Information Relating to Unfunded Mandates ................................... 80

E. Applicability of House Rule XXI 5(b) ................................................. 80

F. Tax Complexity Analysis ..................................................................... 80

VI. Changes in Existing Law Made by the Bill, as Reported ............................. 83

The amendment is as follows: 

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; ETC. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Charitable Giving Act of 2003’’. 

(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment 

to, or repeal of, a section or other provision, the reference shall be considered to be 

made to a section or other provision of the Internal Revenue Code of 1986. 

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(c) TABLE OF CONTENTS.—

Sec. 1. Short title; etc. 

TITLE I—CHARITABLE GIVING INCENTIVES 

Sec. 101. Deduction for portion of charitable contributions to be allowed to individuals who do not itemize deductions. 

Sec. 102. Tax-free distributions from individual retirement plans for charitable purposes. 

Sec. 103. Increase in cap on corporate charitable contributions. 

Sec. 104. Charitable deduction for contributions of food inventory. 

Sec. 105. Reform of certain excise taxes related to private foundations. 

Sec. 106. Excise tax on unrelated business taxable income of charitable remainder trusts. 

Sec. 107. Expansion of charitable contribution allowed for scientific property used for research and for computer 

technology and equipment used for educational purposes. 

Sec. 108. Adjustment to basis of S corporation stock for certain charitable contributions. 

Sec. 109. Charitable organizations permitted to make collegiate housing and infrastructure grants. 

Sec. 110. Conduct of certain games of chance not treated as unrelated trade or business. 

Sec. 111. Excise taxes exemption for blood collector organizations. 

Sec. 112. Nonrecognition of gain on the sale of property used in performance of an exempt function. 

Sec. 113. Exemption of qualified 501(c)(3) bonds for nursing homes from Federal guarantee prohibitions. 

TITLE II—TAX REFORM AND IMPROVEMENTS RELATING TO CHARITABLE ORGANIZATIONS AND 

PROGRAMS 

Sec. 201. Suspension of tax-exempt status of terrorist organizations. 

Sec. 202. Clarification of definition of church tax inquiry. 

Sec. 203. Extension of declaratory judgment remedy to tax-exempt organizations. 

Sec. 204. Landowner incentives programs. 

Sec. 205. Modifications to section 512(b)(13). 

Sec. 206. Simplification of lobbying expenditure limitation. 

Sec. 207. Pilot project for forest conservation activities. 

TITLE III—OTHER PROVISIONS 

Sec. 301. Compassion capital fund. 

Sec. 302. Reauthorization of assets for independence demonstration. 

Sec. 303. Sense of the Congress regarding corporate contributions to faith-based organizations, etc. 

Sec. 304. Maternity group homes. 

Sec. 305. Authority of States to use 10 percent of their TANF funds to carry out social services block grant 

programs.

TITLE I—CHARITABLE GIVING INCENTIVES 

SEC. 101. DEDUCTION FOR PORTION OF CHARITABLE CONTRIBUTIONS TO BE ALLOWED TO 

INDIVIDUALS WHO DO NOT ITEMIZE DEDUCTIONS. 

(a) IN GENERAL.—Section 170 (relating to charitable, etc., contributions and gifts) 

is amended by redesignating subsection (m) as subsection (n) and by inserting after 

subsection (l) the following new subsection:

‘‘(m) DEDUCTION FOR INDIVIDUALS NOT ITEMIZING DEDUCTIONS.—

‘‘(1) IN GENERAL.—In the case of an individual who does not itemize deductions for a taxable year, there shall be taken into account as a direct charitable 

deduction under section 63 an amount equal to the amount allowable under 

subsection (a) for the taxable year for cash contributions (determined without 

regard to any carryover), to the extent that such contributions exceed $250 

($500 in the case of a joint return) but do not exceed $500 ($1,000 in the case 

of a joint return). 

‘‘(2) TERMINATION.—Paragraph (1) shall not apply to any taxable year beginning after December 31, 2005.’’. 

(b) DIRECT CHARITABLE DEDUCTION.—

(1) IN GENERAL.—Subsection (b) of section 63 (defining taxable income) is 

amended by striking ‘‘and’’ at the end of paragraph (1), by striking the period 

at the end of paragraph (2) and inserting ‘‘, and’’, and by adding at the end the 

following new paragraph: 

‘‘(3) the direct charitable deduction.’’. 

(2) DEFINITION.—Section 63 is amended by redesignating subsection (g) as 

subsection (h) and by inserting after subsection (f) the following new subsection: 

‘‘(g) DIRECT CHARITABLE DEDUCTION.—For purposes of this section, the term ‘direct charitable deduction’ means that portion of the amount allowable under section 

170(a) which is taken as a direct charitable deduction for the taxable year under 

section 170(m).’’. 

(3) CONFORMING AMENDMENT.—Subsection (d) of section 63 is amended by 

striking ‘‘and’’ at the end of paragraph (1), by striking the period at the end 

of paragraph (2) and inserting ‘‘, and’’, and by adding at the end the following 

new paragraph: 

‘‘(3) the direct charitable deduction.’’. 

(c) STUDY.—

(1) IN GENERAL.—The Secretary of the Treasury shall study the effect of the 

amendments made by this section on increased charitable giving and taxpayer 

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compliance, including a comparison of taxpayer compliance between taxpayers 

who itemize their charitable contributions and taxpayers who claim a direct 

charitable deduction. 

(2) REPORT.—Not later than December 31, 2006, the Secretary of the Treasury shall report on the study required under paragraph (1) to the Committee 

on Finance of the Senate and the Committee on Ways and Means of the House 

of Representatives. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2003. 

SEC. 102. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR CHARITABLE PURPOSES. 

(a) IN GENERAL.—Subsection (d) of section 408 (relating to individual retirement 

accounts) is amended by adding at the end the following new paragraph: 

‘‘(8) DISTRIBUTIONS FOR CHARITABLE PURPOSES.—

‘‘(A) IN GENERAL.—No amount shall be includible in gross income by reason of a qualified charitable distribution. 

‘‘(B) QUALIFIED CHARITABLE DISTRIBUTION.—For purposes of this paragraph, the term ‘qualified charitable distribution’ means any distribution 

from an individual retirement plan other than a plan described in subsection (k) or (p) of section 408—

‘‘(i) which is made on or after the date that the individual for whose 

benefit the plan is maintained has attained age 70 1⁄2, and 

‘‘(ii) which is made directly by the trustee—

‘‘(I) to an organization described in section 170(c), or 

‘‘(II) to a split-interest entity. 

A distribution shall be treated as a qualified charitable distribution only to 

the extent that the distribution would be includible in gross income without 

regard to subparagraph (A) and, in the case of a distribution to a split-interest entity, only if no person holds an income interest in the amounts in 

the split-interest entity attributable to such distribution other than one or 

more of the following: the individual for whose benefit such plan is maintained, the spouse of such individual, or any organization described in section 170(c). 

‘‘(C) CONTRIBUTIONS MUST BE OTHERWISE DEDUCTIBLE.—For purposes of 

this paragraph—

‘‘(i) DIRECT CONTRIBUTIONS.—A distribution to an organization described in section 170(c) shall be treated as a qualified charitable distribution only if a deduction for the entire distribution would be allowable under section 170 (determined without regard to subsection (b) 

thereof and this paragraph). 

‘‘(ii) SPLIT-INTEREST GIFTS.—A distribution to a split-interest entity 

shall be treated as a qualified charitable distribution only if a deduction for the entire value of the interest in the distribution for the use 

of an organization described in section 170(c) would be allowable under 

section 170 (determined without regard to subsection (b) thereof and 

this paragraph). 

‘‘(D) APPLICATION OF SECTION 72.—Notwithstanding section 72, in determining the extent to which a distribution is a qualified charitable distribution, the entire amount of the distribution shall be treated as includible in 

gross income without regard to subparagraph (A) to the extent that such 

amount does not exceed the aggregate amount which would have been so 

includible if all amounts distributed from all individual retirement plans 

were treated as 1 contract under paragraph (2)(A) for purposes of determining the inclusion of such distribution under section 72. Proper adjustments shall be made in applying section 72 to other distributions in such 

taxable year and subsequent taxable years. 

‘‘(E) SPECIAL RULES FOR SPLIT-INTEREST ENTITIES.—

‘‘(i) CHARITABLE REMAINDER TRUSTS.—Notwithstanding section 

664(b), distributions made from a trust described in subparagraph 

(G)(i) shall be treated as ordinary income in the hands of the beneficiary to whom is paid the annuity described in section 664(d)(1)(A) or 

the payment described in section 664(d)(2)(A). 

‘‘(ii) POOLED INCOME FUNDS.—No amount shall be includible in the 

gross income of a pooled income fund (as defined in subparagraph 

(G)(ii)) by reason of a qualified charitable distribution to such fund, and 

all distributions from the fund which are attributable to qualified charitable distributions shall be treated as ordinary income to the beneficiary. 

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‘‘(iii) CHARITABLE GIFT ANNUITIES.—Qualified charitable distributions 

made for a charitable gift annuity shall not be treated as an investment 

in the contract. ‘‘(F) DENIAL OF DEDUCTION.—Qualified charitable distributions shall not 

be taken into account in determining the deduction under section 170. ‘‘(G) SPLIT-INTEREST ENTITY DEFINED.—For purposes of this paragraph, 

the term ‘split-interest entity’ means— ‘‘(i) a charitable remainder annuity trust or a charitable remainder 

unitrust (as such terms are defined in section 664(d)) which must be 

funded exclusively by qualified charitable distributions, ‘‘(ii) a pooled income fund (as defined in section 642(c)(5)), but only 

if the fund accounts separately for amounts attributable to qualified 

charitable distributions, and ‘‘(iii) a charitable gift annuity (as defined in section 501(m)(5)).’’. (b) MODIFICATIONS RELATING TO INFORMATION RETURNS BY CERTAIN TRUSTS.— (1) RETURNS.—Section 6034 (relating to returns by trusts described in section 

4947(a)(2) or claiming charitable deductions under section 642(c)) is amended 

to read as follows: 

‘‘SEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(a)(2) OR CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 642(c). 

‘‘(a) TRUSTS DESCRIBED IN SECTION 4947(a)(2).—Every trust described in section 

4947(a)(2) shall furnish such information with respect to the taxable year as the 

Secretary may by forms or regulations require. ‘‘(b) TRUSTS CLAIMING A CHARITABLE DEDUCTION UNDER SECTION 642(c).— ‘‘(1) IN GENERAL.—Every trust not required to file a return under subsection 

(a) but claiming a deduction under section 642(c) for the taxable year shall furnish such information with respect to such taxable year as the Secretary may 

by forms or regulations prescribe, including— ‘‘(A) the amount of the deduction taken under section 642(c) within such 

year, ‘‘(B) the amount paid out within such year which represents amounts for 

which deductions under section 642(c) have been taken in prior years, ‘‘(C) the amount for which such deductions have been taken in prior years 

but which has not been paid out at the beginning of such year, ‘‘(D) the amount paid out of principal in the current and prior years for 

the purposes described in section 642(c), ‘‘(E) the total income of the trust within such year and the expenses attributable thereto, and ‘‘(F) a balance sheet showing the assets, liabilities, and net worth of the 

trust as of the beginning of such year. ‘‘(2) EXCEPTIONS.—Paragraph (1) shall not apply to a trust for any taxable 

year if—

‘‘(A) all the net income for such year, determined under the applicable 

principles of the law of trusts, is required to be distributed currently to the 

beneficiaries, or ‘‘(B) the trust is described in section 4947(a)(1).’’. (2) INCREASE IN PENALTY RELATING TO FILING OF INFORMATION RETURN BY

SPLIT-INTEREST TRUSTS.—Paragraph (2) of section 6652(c) (relating to returns by 

exempt organizations and by certain trusts) is amended by adding at the end 

the following new subparagraph: ‘‘(C) SPLIT-INTEREST TRUSTS.—In the case of a trust which is required to 

file a return under section 6034(a), subparagraphs (A) and (B) of this paragraph shall not apply and paragraph (1) shall apply in the same manner 

as if such return were required under section 6033, except that— ‘‘(i) the 5 percent limitation in the second sentence of paragraph 

(1)(A) shall not apply, ‘‘(ii) in the case of any trust with gross income in excess of $250,000, 

the first sentence of paragraph (1)(A) shall be applied by substituting 

‘$100’ for ‘$20’, and the second sentence thereof shall be applied by substituting ‘$50,000’ for ‘$10,000’, and ‘‘(iii) the third sentence of paragraph (1)(A) shall be disregarded. 

In addition to any penalty imposed on the trust pursuant to this subparagraph, if the person required to file such return knowingly fails to file the 

return, such penalty shall also be imposed on such person who shall be personally liable for such penalty.’’. 

(3) CONFIDENTIALITY OF NONCHARITABLE BENEFICIARIES.—Subsection (b) of 

section 6104 (relating to inspection of annual information returns) is amended 

by adding at the end the following new sentence: ‘‘In the case of a trust which 

is required to file a return under section 6034(a), this subsection shall not apply 

6

to information regarding beneficiaries which are not organizations described in 

section 170(c).’’. (c) EFFECTIVE DATES.— (1) SUBSECTION (a).—The amendment made by subsection (a) shall apply to 

distributions made after December 31, 2003. 

(2) SUBSECTION (b).—The amendments made by subsection (b) shall apply to 

returns for taxable years beginning after December 31, 2003. 

SEC. 103. INCREASE IN CAP ON CORPORATE CHARITABLE CONTRIBUTIONS. 

(a) IN GENERAL.—Paragraph (2) of section 170(b) (relating to corporations) is 

amended by striking ‘‘10 percent’’ and inserting ‘‘the applicable percentage’’. (b) APPLICABLE PERCENTAGE.—Subsection (b) of section 170 is amended by adding 

at the end the following new paragraph: ‘‘(3) APPLICABLE PERCENTAGE DEFINED.—For purposes of paragraph (2), the 

applicable percentage shall be determined in accordance with the following 

table:

‘‘For taxable years beginning The applicable 

in calendar year— percentage is— 2004 ................................................................................................................................................ 11 2005 ................................................................................................................................................ 12 2006 ................................................................................................................................................ 13 2007 ................................................................................................................................................ 14 2008 through 2011 ........................................................................................................................ 15 2012 and thereafter ...................................................................................................................... 20.’’.

(c) CONFORMING AMENDMENTS.— (1) Sections 512(b)(10) and 805(b)(2)(A) are each amended by striking ‘‘10 percent’’ each place it occurs and inserting ‘‘the applicable percentage (determined 

under section 170(b)(3))’’. (2) Sections 545(b)(2) and 556(b)(2) are each amended by striking ‘‘10-percent 

limitation’’ and inserting ‘‘applicable percentage limitation’’. (d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2003. 

SEC. 104. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY. 

(a) IN GENERAL.—Paragraph (3) of section 170(e) (relating to special rule for certain contributions of inventory and other property) is amended by redesignating 

subparagraph (C) as subparagraph (D) and by inserting after subparagraph (B) the 

following new subparagraph: ‘‘(C) SPECIAL RULE FOR CONTRIBUTIONS OF FOOD INVENTORY.— ‘‘(i) GENERAL RULE.—In the case of a charitable contribution of food 

from any trade or business (or interest therein) of the taxpayer, this 

paragraph shall be applied— ‘‘(I) without regard to whether the contribution is made by a C 

corporation, and ‘‘(II) only to food that is apparently wholesome food. ‘‘(ii) LIMITATION.—In the case of a taxpayer other than a C corporation, the aggregate amount of such contributions for any taxable year 

which may be taken into account under this section shall not exceed 

the applicable percentage (within the meaning of subsection (b)(3)) of 

the taxpayer’s aggregate net income for such taxable year from all 

trades or businesses from which such contributions were made for such 

year, computed without regard to this section. ‘‘(iii) DETERMINATION OF FAIR MARKET VALUE.—In the case of a qualified contribution of apparently wholesome food to which this paragraph 

applies and which, solely by reason of internal standards of the taxpayer or lack of market, cannot or will not be sold, the fair market 

value of such food shall be determined by taking into account the price 

at which the same or substantially the same food items (as to both type 

and quality) are sold by the taxpayer at the time of the contribution 

(or, if not so sold at such time, in the recent past). 

‘‘(iv) APPARENTLY WHOLESOME FOOD.—For purposes of this subparagraph, the term ‘apparently wholesome food’ has the meaning given to 

such term by section 22(b)(2) of the Bill Emerson Good Samaritan Food 

Donation Act (42 U.S.C. 1791(b)(2)), as in effect on the date of the enactment of this subparagraph.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2003. 

SEC. 105. REFORM OF CERTAIN EXCISE TAXES RELATED TO PRIVATE FOUNDATIONS. 

(a) REDUCTION OF TAX ON NET INVESTMENT INCOME.—Section 4940(a) (relating to 

tax-exempt foundations) is amended by striking ‘‘2 percent’’ and inserting ‘‘1 percent’’. 

7

(b) REPEAL OF REDUCTION IN TAX WHERE PRIVATE FOUNDATION MEETS CERTAIN

DISTRIBUTION REQUIREMENTS.—Section 4940 (relating to excise tax based on investment income) is amended by striking subsection (e). 

(c) MODIFICATION OF EXCISE TAX ON SELF-DEALING.—The second sentence of section 4941(a)(1) (relating to initial excise tax imposed on self-dealer) is amended by 

striking ‘‘5 percent’’ and inserting ‘‘25 percent’’. 

(d) MODIFICATION OF EXCISE TAX ON FAILURE TO DISTRIBUTE INCOME.—

(1) CERTAIN ADMINISTRATIVE EXPENSES NOT TREATED AS DISTRIBUTIONS.—Section 4942(g) is amended by striking paragraph (4) and inserting the following 

new paragraphs: 

‘‘(4) LIMITATION ON ADMINISTRATIVE EXPENSES TREATED AS DISTRIBUTIONS.—

‘‘(A) IN GENERAL.—For purposes of paragraph (1)(A), the following administrative expenses shall not be treated as qualifying distributions: 

‘‘(i) Any administrative expense which is not directly attributable to 

direct charitable activities, grant selection activities, grant monitoring 

and administration activities, compliance with applicable Federal, 

State, or local law, or furthering public accountability of the private 

foundation. 

‘‘(ii) Any compensation paid to a disqualified person to the extent 

that such compensation exceeds an annual rate of $100,000. 

‘‘(iii) Any expense incurred for transportation by air unless such 

transportation is regularly-scheduled commercial air transportation. 

‘‘(iv) Any expense incurred for regularly-scheduled commercial air 

transportation to the extent that such expense exceeds the cost of such 

transportation in coach-class accommodations. 

‘‘(B) ADJUSTMENT FOR INFLATION.—In the case of a taxable year beginning after December 31, 2004, the $100,000 amount in subparagraph (A)(ii) 

shall be increased by an amount equal to—

‘‘(i) such dollar amount, multiplied by 

‘‘(ii) the cost-of-living adjustment determined under section 1(f)(3) for 

the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2003’ for ‘calendar year 1992’ in subparagraph 

(B) thereof. 

If any amount as increased under the preceding sentence is not a multiple 

of $50, such amount shall be rounded to the next lowest multiple of $50. 

‘‘(5) REGULATIONS.—The Secretary shall prescribe such regulations as may be 

necessary to carry out the purposes of paragraph (4). Such regulations shall provide that administrative expenses which are excluded from qualifying distributions solely by reason of the limitations in paragraph (4) shall not for such reason subject a private foundation to any other excise taxes imposed by this subchapter.’’. 

(2) DISALLOWANCE NOT TO APPLY TO CERTAIN PRIVATE FOUNDATIONS.—

(A) IN GENERAL.—Section 4942(j)(3) (defining operating foundation) is 

amended—

(i) by striking ‘‘(within the meaning of paragraph (1) or (2) of subsection (g))’’ each place it appears, and 

(ii) by adding at the end the following new sentence: ‘‘For purposes 

of this paragraph, the term ‘qualifying distributions’ means qualifying 

distributions within the meaning of paragraph (1) or (2) of subsection 

(g) (determined without regard to subsection (g)(4)).’’. 

(B) CONFORMING AMENDMENT.—Section 4942(f)(2)(C)(i) is amended by inserting ‘‘(determined without regard to subsection (g)(4))’’ after ‘‘within the 

meaning of subsection (g)(1)(A)’’. 

(e) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2003. 

SEC. 106. EXCISE TAX ON UNRELATED BUSINESS TAXABLE INCOME OF CHARITABLE REMAINDER TRUSTS. 

(a) IN GENERAL.—Subsection (c) of section 664 (relating to exemption from income 

taxes) is amended to read as follows: 

‘‘(c) TAXATION OF TRUSTS.—

‘‘(1) INCOME TAX.—A charitable remainder annuity trust and a charitable remainder unitrust shall, for any taxable year, not be subject to any tax imposed 

by this subtitle. 

‘‘(2) EXCISE TAX.—

‘‘(A) IN GENERAL.—In the case of a charitable remainder annuity trust or 

a charitable remainder unitrust that has unrelated business taxable income 

(within the meaning of section 512, determined as if part III of subchapter 

F applied to such trust) for a taxable year, there is hereby imposed on such 

8

trust or unitrust an excise tax equal to the amount of such unrelated business taxable income. ‘‘(B) CERTAIN RULES TO APPLY.—The tax imposed by subparagraph (A) 

shall be treated as imposed by chapter 42 for purposes of this title other 

than subchapter E of chapter 42. ‘‘(C) CHARACTER OF DISTRIBUTIONS AND COORDINATION WITH DISTRIBUTION

REQUIREMENTS.—The amounts taken into account in determining unrelated 

business taxable income (as defined in subparagraph (A)) shall not be taken 

into account for purposes of— ‘‘(i) subsection (b), 

‘‘(ii) determining the value of trust assets under subsection (d)(2), and 

‘‘(iii) determining income under subsection (d)(3). ‘‘(D) TAX COURT PROCEEDINGS.—For purposes of this paragraph, the references in section 6212(c)(1) to section 4940 shall be deemed to include references to this paragraph.’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2003. 

SEC. 107. EXPANSION OF CHARITABLE CONTRIBUTION ALLOWED FOR SCIENTIFIC PROPERTY 

USED FOR RESEARCH AND FOR COMPUTER TECHNOLOGY AND EQUIPMENT USED 

FOR EDUCATIONAL PURPOSES. 

(a) SCIENTIFIC PROPERTY USED FOR RESEARCH.— (1) IN GENERAL.—Clause (ii) of section 170(e)(4)(B) (defining qualified research contributions) is amended by inserting ‘‘or assembled’’ after ‘‘con- structed’’. (2) CONFORMING AMENDMENT.—Clause (iii) of section 170(e)(4)(B) is amended 

by inserting ‘‘or assembling’’ after ‘‘construction’’. (b) COMPUTER TECHNOLOGY AND EQUIPMENT FOR EDUCATIONAL PURPOSES.— (1) IN GENERAL.—Clause (ii) of section 170(e)(6)(B) is amended by inserting ‘‘or assembled’’ after ‘‘constructed’’ and ‘‘or assembling’’ after ‘‘construction’’. (2) SPECIAL RULE MADE PERMANENT.—Section 170(e)(6) is amended by striking 

subparagraph (G). 

(3) CONFORMING AMENDMENTS.—Subparagraph (D) of section 170(e)(6) is 

amended by inserting ‘‘or assembled’’ after ‘‘constructed’’ and ‘‘or assembling’’ after ‘‘construction’’. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2003. 

SEC. 108. ADJUSTMENT TO BASIS OF S CORPORATION STOCK FOR CERTAIN CHARITABLE 

CONTRIBUTIONS. 

(a) IN GENERAL.—Paragraph (2) of section 1367(a) (relating to adjustments to 

basis of stock of shareholders, etc.) is amended by adding at the end the following 

new flush sentence: ‘‘The decrease under subparagraph (B) by reason of a charitable contribution (as 

defined in section 170(c)) of property shall be the amount equal to the shareholder’s pro rata share of the adjusted basis of such property.’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable 

years beginning after December 31, 2003. 

SEC. 109. CHARITABLE ORGANIZATIONS PERMITTED TO MAKE COLLEGIATE HOUSING AND INFRASTRUCTURE GRANTS. 

(a) IN GENERAL.—Section 501 (relating to exemption from tax on corporations, certain trusts, etc.), as amended by section 201, is further amended by redesignating 

subsection (q) as subsection (r) and by inserting after subsection (p) the following 

new subsection: 

‘‘(q) TREATMENT OF ORGANIZATIONS MAKING COLLEGIATE HOUSING AND INFRASTRUCTURE IMPROVEMENT GRANTS.—

‘‘(1) IN GENERAL.—For purposes of subsection (c)(3) and sections 170(c)(2)(B), 

2055(a), and 2522(a)(2), an organization shall not fail to be treated as organized 

and operated exclusively for charitable or educational purposes solely because 

such organization makes collegiate housing and infrastructure grants to an organization described in subsection (c)(7), so long as, at the time of the grant, 

substantially all of the active members of the recipient organization are fulltime students at the college or university with which such recipient organization is associated. 

‘‘(2) HOUSING AND INFRASTRUCTURE GRANTS.—For purposes of paragraph (1), 

collegiate housing and infrastructure grants are grants to provide, improve, operate, or maintain collegiate housing that may involve more than incidental social, recreational, or private purposes, so long as such grants are for purposes 

that would be permissible for a dormitory of the college or university referred 

to in paragraph (1). A grant shall not be treated as a collegiate housing and 

9

infrastructure grant for purposes of paragraph (1) to the extent that such grant 

is used to provide physical fitness equipment. ‘‘(3) GRANTS TO CERTAIN ORGANIZATIONS HOLDING TITLE TO PROPERTY, ETC.— For purposes of this subsection, a collegiate housing and infrastructure grant 

to an organization described in subsection (c)(2) or (c)(7) holding title to property exclusively for the benefit of an organization described in subsection (c)(7) 

shall be considered a grant to the organization described in subsection (c)(7) for 

whose benefit such property is held.’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to grants 

made after December 31, 2003. 

SEC. 110. CONDUCT OF CERTAIN GAMES OF CHANCE NOT TREATED AS UNRELATED TRADE 

OR BUSINESS. 

(a) IN GENERAL.—Paragraph (1) of section 513(f) (relating to certain bingo games) 

is amended to read as follows: ‘‘(1) IN GENERAL.—The term ‘unrelated trade or business’ does not include— ‘‘(A) any trade or business which consists of conducting bingo games, and 

‘‘(B) any trade or business which consists of conducting qualified games 

of chance if the net proceeds from such trade or business are paid or set 

aside for payment for purposes described in section 170(c)(2)(B), for the promotion of social welfare (within the meaning of section 501(c)(4)), or for a 

purpose for which State law specifically authorizes the expenditure of such 

proceeds.’’. (b) QUALIFIED GAMES OF CHANCE.—Subsection (f) of section 513 is amended by 

adding at the end the following new paragraph: ‘‘(3) QUALIFIED GAMES OF CHANCE.—For purposes of paragraph (1), the term ‘qualified game of chance’ means any game of chance (other than bingo) conducted by an organization if— ‘‘(A) such organization is licensed pursuant to State law to conduct such 

game, ‘‘(B) only organizations which are organized as nonprofit corporations or 

are exempt from tax under section 501(a) may be so licensed to conduct 

such game within the State, and 

‘‘(C) the conduct of such game does not violate State or local law.’’

(c) CLERICAL AMENDMENT.—The subsection heading of section 513(f) is amended 

by striking ‘‘BINGO GAMES’’ and inserting ‘‘GAMES OF CHANCE’’. 

(d) EFFECTIVE DATE.— The amendments made by this section shall apply to 

games conducted after December 31, 2003.

SEC. 111. EXCISE TAXES EXEMPTION FOR BLOOD COLLECTOR ORGANIZATIONS. 

(a) EXEMPTION FROM IMPOSITION OF SPECIAL FUELS TAX.—Section 4041(g) (relating to other exemptions) is amended by striking ‘‘and’’ at the end of paragraph (3), 

by striking the period in paragraph (4) and inserting ‘‘; and’’, and by inserting after 

paragraph (4) the following new paragraph: 

‘‘(5) with respect to the sale of any liquid to a qualified blood collector organization (as defined in section 7701(a)(48)) for such organization’s exclusive use, 

or with respect to the use by a qualified blood collector organization of any liquid as a fuel.’’. 

(b) EXEMPTION FROM MANUFACTURERS EXCISE TAX.—

(1) IN GENERAL.—Section 4221(a) (relating to certain tax-free sales) is amended by striking ‘‘or’’ at the end of paragraph (4), by adding ‘‘or’’ at the end of 

paragraph (5), and by inserting after paragraph (5) the following new paragraph: 

‘‘(6) to a qualified blood collector organization (as defined in section 

7701(a)(48)) for such organization’s exclusive use,’’. 

(2) CONFORMING AMENDMENTS.—

(A) The second sentence of section 4221(a) is amended by striking ‘‘Paragraphs (4) and (5)’’ and inserting ‘‘Paragraphs (4), (5), and (6)’’. 

(B) Section 6421(c) is amended by striking ‘‘or (5)’’ and inserting ‘‘(5), or 

(6)’’. 

(c) EXEMPTION FROM COMMUNICATION EXCISE TAX.—

(1) IN GENERAL.—Section 4253 (relating to exemptions) is amended by redesignating subsection (k) as subsection (l) and inserting after subsection (j) the following new subsection: 

‘‘(k) EXEMPTION FOR QUALIFIED BLOOD COLLECTOR ORGANIZATIONS.—Under regulations provided by the Secretary, no tax shall be imposed under section 4251 on 

any amount paid by a qualified blood collector organization (as defined in section 

7701(a)(48)) for services or facilities furnished to such organization.’’. 

(2) CONFORMING AMENDMENT.—Section 4253(l), as redesignated by paragraph 

(1), is amended by striking ‘‘or (j)’’ and inserting ‘‘(j), or (k)’’. 

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(d) CREDIT FOR REFUND FOR CERTAIN TAXES ON SALES AND SERVICES.—

(1) DEEMED OVERPAYMENT.—

(A) IN GENERAL.—Section 6416(b)(2) is amended by redesignating subparagraphs (E) and (F) as subparagraphs (F) and (G), respectively, and by 

inserting after subparagraph (D) the following new subparagraph: 

‘‘(E) sold to a qualified blood collector organization (as defined in section 

7701(a)(48)) for such organization’s exclusive use;’’. 

(B) CONFORMING AMENDMENTS.—Section 6416(b)(2) is amended—

(i) by striking ‘‘Subparagraphs (C) and (D)’’ and inserting ‘‘Subparagraphs (C), (D), and (E)’’, and 

(ii) by striking ‘‘(C), and (D)’’ and inserting ‘‘(C), (D), and (E)’’. 

(2) SALES OF TIRES.—Clause (ii) of section 6416(b)(4)(B) is amended by inserting ‘‘sold to a qualified blood collector organization (as defined in section 

7701(a)(48)) for its exclusive use,’’ after ‘‘for its exclusive use,’’. 

(e) DEFINITION OF QUALIFIED BLOOD COLLECTOR ORGANIZATION.—Section 7701(a) 

is amended by inserting at the end the following new paragraph: 

‘‘(48) QUALIFIED BLOOD COLLECTOR ORGANIZATION.—The term ‘qualified blood 

collector organization’ means an organization which is—

‘‘(A) described in section 501(c)(3) and exempt from tax under section 

501(a), 

‘‘(B) registered by the Food and Drug Administration to collect blood, and 

‘‘(C) primarily engaged in the activity of the collection of blood.’’. 

(f) EFFECTIVE DATE.—The amendments made by this section shall take effect on 

January 1, 2004.

SEC. 112. NONRECOGNITION OF GAIN ON THE SALE OF PROPERTY USED IN PERFORMANCE 

OF AN EXEMPT FUNCTION. 

(a) IN GENERAL.—Subparagraph (D) of section 512(a)(3) is amended to read as follows: 

‘‘(D) NONRECOGNITION OF GAIN.—

‘‘(i) IN GENERAL.—If property used directly in the performance of the 

exempt function of an organization described in paragraph (7), (9), (17), 

or (20) of section 501(c) is sold by such organization, and within a period beginning 1 year before the date of such sale, and ending 3 years 

(10 years, in the case of an organization described in section 501(c)(7)) 

after such date, other property is purchased and used by such organization directly in the performance of its exempt function, gain (if any) 

from such sale shall be recognized only to the extent that such organization’s sales price of the old property exceeds the organization’s cost 

of purchasing the other property. 

‘‘(ii) STATUTE OF LIMITATIONS.—If an organization described in section 

501(c)(7) sells property on which gain is not recognized, in whole or in 

part, by reason of clause (i), then the statutory period for the assessment of any deficiency attributable to such gain shall not expire until 

the end of the 3-year period beginning on the date that the Secretary 

is notified by such organization (in such manner as the Secretary may 

prescribe) that—

‘‘(I) the organization has met the requirements of clause (i) with 

respect to gain which was not recognized, 

‘‘(II) the organization does not intend to meet such requirements, 

or 

‘‘(III) the organization failed to meet such requirements within 

the prescribed period. 

For the purposes of this clause, any deficiency may be assessed before 

the expiration of such 3-year period notwithstanding the provisions of 

any other law or rule of law which would otherwise prevent such assessment. 

‘‘(iii) DESTRUCTION AND LOSS.—For purposes of this subparagraph, 

the destruction in whole or in part, theft, seizure, requisition, or condemnation of property, shall be treated as the sale of such property, 

and rules similar to the rules provided by subsections (b), (c), (e), and 

(j) of section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) shall apply.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply with respect to the sale of any property for which the 3-year period for offsetting gain by 

purchasing other property under subparagraph (D) of section 512(a)(3) of the Internal Revenue Code (as in effect on the day before the date of the enactment of this 

Act) had not expired as of January 1, 2001.

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SEC. 113. EXEMPTION OF QUALIFIED 501(c)(3) BONDS FOR NURSING HOMES FROM FEDERAL 

GUARANTEE PROHIBITIONS. 

(a) IN GENERAL.—For purposes of section 149(b)(1) of the Internal Revenue Code 

of 1986, any qualified 501(c)(3) bond (as defined in section 145 of such Code) shall 

not be treated as federally guaranteed solely because such bond is part of an issue 

supported by a letter of credit, if such bond— (1) is issued after December 31, 2003, and before the date which is 1 year 

after the date of the enactment of this Act, and 

(2) is part of an issue 95 percent or more of the net proceeds of which are 

to be used to finance 1 or more of the following facilities primarily for the benefit of the elderly: 

(A) Licensed nursing home facility. 

(B) Licensed or certified assisted living facility. 

(C) Licensed personal care facility. 

(D) Continuing care retirement community. 

(b) LIMITATION ON ISSUER.—Subsection (a) shall not apply to any bond described 

in such subsection if the aggregate authorized face amount of the issue of which 

such bond is a part, when increased by the outstanding amount of such bonds 

issued by the issuer during the period described in subsection (a)(1) exceeds 

$15,000,000. 

(c) LIMITATION ON BENEFICIARY.—Rules similar to the rules of section 144(a)(10) 

of the Internal Revenue Code of 1986 shall apply for purposes of this section, except 

that—(1) ‘‘$15,000,000’’ shall be substituted for ‘‘$40,000,000’’ in subparagraph (A) 

thereof, and 

(2) such rules shall be applied— (A) only with respect to bonds described in this section, and 

(B) with respect to the aggregate authorized face amount of all issues of 

such bonds which are allocable to the beneficiary. 

(d) CONTINUING CARE RETIREMENT COMMUNITY.—For purposes of this section, the 

term ‘‘continuing care retirement community’’ means a community which provides, 

on the same campus, a consortium of residential living options and support services 

to persons at least 60 years of age under a written agreement. For purposes of the 

preceding sentence, the residential living options shall include independent living 

units, nursing home beds, and either assisted living units or personal care beds. 

TITLE II—TAX REFORM AND IMPROVEMENTS 

RELATING TO CHARITABLE ORGANIZATIONS 

AND PROGRAMS 

SEC. 201. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS. 

(a) IN GENERAL.—Section 501 (relating to exemption from tax on corporations, certain trusts, etc.) is amended by redesignating subsection (p) as subsection (q) and 

by inserting after subsection (o) the following new subsection: ‘‘(p) SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.— ‘‘(1) IN GENERAL.—The exemption from tax under subsection (a) with respect 

to any organization described in paragraph (2), and the eligibility of any organization described in paragraph (2) to apply for recognition of exemption under 

subsection (a), shall be suspended during the period described in paragraph (3). ‘‘(2) TERRORIST ORGANIZATIONS.—An organization is described in this paragraph if such organization is designated or otherwise individually identified— ‘‘(A) under section 212(a)(3)(B)(vi)(II) or 219 of the Immigration and Nationality Act as a terrorist organization or foreign terrorist organization, 

‘‘(B) in or pursuant to an Executive order which is related to terrorism 

and issued under the authority of the International Emergency Economic 

Powers Act or section 5 of the United Nations Participation Act of 1945 for 

the purpose of imposing on such organization an economic or other sanction, or 

‘‘(C) in or pursuant to an Executive order issued under the authority of 

any Federal law if—

‘‘(i) the organization is designated or otherwise individually identified 

in or pursuant to such Executive order as supporting or engaging in 

terrorist activity (as defined in section 212(a)(3)(B) of the Immigration 

and Nationality Act) or supporting terrorism (as defined in section 

140(d)(2) of the Foreign Relations Authorization Act, Fiscal Years 1988 

and 1989); and 

‘‘(ii) such Executive order refers to this subsection. 

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‘‘(3) PERIOD OF SUSPENSION.—With respect to any organization described in 

paragraph (2), the period of suspension— ‘‘(A) begins on the later of— ‘‘(i) the date of the first publication of a designation or identification 

described in paragraph (2) with respect to such organization, or ‘‘(ii) the date of the enactment of this subsection, and ‘‘(B) ends on the first date that all designations and identifications described in paragraph (2) with respect to such organization are rescinded 

pursuant to the law or Executive order under which such designation or 

identification was made. ‘‘(4) DENIAL OF DEDUCTION.—No deduction shall be allowed under section 170, 

545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for any contribution to an 

organization described in paragraph (2) during the period described in paragraph (3). ‘‘(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL CHALLENGE OF SUSPENSION OR

DENIAL OF DEDUCTION.—Notwithstanding section 7428 or any other provision of 

law, no organization or other person may challenge a suspension under paragraph (1), a designation or identification described in paragraph (2), the period 

of suspension described in paragraph (3), or a denial of a deduction under paragraph (4) in any administrative or judicial proceeding relating to the Federal 

tax liability of such organization or other person. ‘‘(6) ERRONEOUS DESIGNATION.— ‘‘(A) IN GENERAL.—If— ‘‘(i) the tax exemption of any organization described in paragraph (2) 

is suspended under paragraph (1), ‘‘(ii) each designation and identification described in paragraph (2) 

which has been made with respect to such organization is determined 

to be erroneous pursuant to the law or Executive order under which 

such designation or identification was made, and ‘‘(iii) the erroneous designations and identifications result in an overpayment of income tax for any taxable year by such organization, 

credit or refund (with interest) with respect to such overpayment shall be 

made. 

‘‘(B) WAIVER OF LIMITATIONS.—If the credit or refund of any overpayment 

of tax described in subparagraph (A)(iii) is prevented at any time by the 

operation of any law or rule of law (including res judicata), such credit or 

refund may nevertheless be allowed or made if the claim therefor is filed 

before the close of the 1-year period beginning on the date of the last determination described in subparagraph (A)(ii). 

‘‘(7) NOTICE OF SUSPENSIONS.—If the tax exemption of any organization is suspended under this subsection, the Internal Revenue Service shall update the 

listings of tax-exempt organizations and shall publish appropriate notice to taxpayers of such suspension and of the fact that contributions to such organization are not deductible during the period of such suspension.’’.

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to designations made before, on, or after the date of the enactment of this Act. 

SEC. 202. CLARIFICATION OF DEFINITION OF CHURCH TAX INQUIRY. 

Subsection (i) of section 7611 (relating to section not to apply to criminal investigations, etc.) is amended by striking ‘‘or’’ at the end of paragraph (4), by striking 

the period at the end of paragraph (5) and inserting ‘‘, or’’, and by inserting after 

paragraph (5) the following: 

‘‘(6) information provided by the Secretary related to the standards for exemption from tax under this title and the requirements under this title relating to 

unrelated business taxable income.’’. 

SEC. 203. EXTENSION OF DECLARATORY JUDGMENT REMEDY TO TAX-EXEMPT ORGANIZATIONS. 

(a) IN GENERAL.—Paragraph (1) of section 7428(a) (relating to creation of remedy) 

is amended—

(1) in subparagraph (B) by inserting after ‘‘509(a))’’ the following: ‘‘or as a private operating foundation (as defined in section 4942(j)(3))’’; and 

(2) by amending subparagraph (C) to read as follows: 

‘‘(C) with respect to the initial qualification or continuing qualification of 

an organization as an organization described in subsection (c) (other than 

paragraph (3)) or (d) of section 501 which is exempt from tax under section 

501(a), or’’. 

(b) COURT JURISDICTION.—Subsection (a) of section 7428 is amended in the material following paragraph (2) by striking ‘‘United States Tax Court, the United States 

Claims Court, or the district court of the United States for the District of Columbia’’

13

and inserting the following: ‘‘United States Tax Court (in the case of any such determination or failure) or the United States Claims Court or the district court of the 

United States for the District of Columbia (in the case of a determination or failure 

with respect to an issue referred to in subparagraph (A) or (B) of paragraph (1)),’’. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to pleadings filed with respect to determinations (or requests for determinations) made after 

the date of the enactment of this Act. 

SEC. 204. LANDOWNER INCENTIVES PROGRAMS. 

(a) IN GENERAL.—Subsection (a) of section 126 is amended by redesignating paragraph (10) as paragraph (11) and by inserting after paragraph (9) the following new 

paragraph: 

‘‘(10) Landowner initiatives programs to conserve threatened, endangered, or 

imperiled species, or protect or restore habitat carried out under—

‘‘(A) the Fish and Wildlife Coordination Act (16 U.S.C. 661 et seq.), 

‘‘(B) the Fish and Wildlife Act of 1956 (16 U.S.C. 742f), or 

‘‘(C) section 6 of the Endangered Species Act (16 U.S.C. 11531 et seq.).’’. 

(b) EXCLUDABLE PORTION.—Subparagraph (A) of section 126(b)(1) is amended by 

inserting after ‘‘Secretary of Agriculture’’ the following: ‘‘(the Secretary of the Interior, in the case of the landowner incentives programs described in subsection 

(a)(10) and the programs described in subsection (a)(11) that are implemented by 

the Department of the Interior)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts received after December 31, 2003, in taxable years ending after such date. 

SEC. 205. MODIFICATIONS TO SECTION 512(b)(13). 

(a) IN GENERAL.—Paragraph (13) of section 512(b) (relating to special rules for 

certain amounts received from controlled entities) is amended by redesignating subparagraph (E) as subparagraph (F) and by inserting after subparagraph (D) the following new subparagraph: 

‘‘(E) PARAGRAPH TO APPLY ONLY TO EXCESS PAYMENTS.—

‘‘(i) IN GENERAL.—Subparagraph (A) shall apply only to the portion 

of a specified payment received or accrued by the controlling organization that exceeds the amount which would have been paid or accrued 

if such payment met the requirements prescribed under section 482. 

‘‘(ii) ADDITION TO TAX FOR VALUATION MISSTATEMENTS.—The tax imposed by this chapter on the controlling organization shall be increased 

by an amount equal to 20 percent of the larger of—

‘‘(I) such excess determined without regard to any amendment or 

supplement to a return of tax, or 

‘‘(II) such excess determined with regard to all such amendments 

and supplements.’’. 

(b) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendment made by this section shall apply to payments received or accrued after December 31, 2003. 

(2) PAYMENTS SUBJECT TO BINDING CONTRACT TRANSITION RULE.—If the 

amendments made by section 1041 of the Taxpayer Relief Act of 1997 did not 

apply to any amount received or accrued in the first 2 taxable years beginning 

on or after the date of the enactment of the Taxpayer Relief Act of 1997 under 

any contract described in subsection (b)(2) of such section, such amendments 

also shall not apply to amounts received or accrued under such contract before 

January 1, 2001. 

SEC. 206. SIMPLIFICATION OF LOBBYING EXPENDITURE LIMITATION. 

(a) REPEAL OF GRASSROOTS EXPENDITURE LIMIT.—Paragraph (1) of section 501(h) 

(relating to expenditures by public charities to influence legislation) is amended to 

read as follows: 

‘‘(1) GENERAL RULE.—In the case of an organization to which this subsection 

applies, exemption from taxation under subsection (a) shall be denied because 

a substantial part of the activities of such organization consists of carrying on 

propaganda, or otherwise attempting, to influence legislation, but only if such 

organization normally makes lobbying expenditures in excess of the lobbying 

ceiling amount for such organization for each taxable year.’’. 

(b) EXCESS LOBBYING EXPENDITURES.—Section 4911(b) is amended to read as follows: 

‘‘(b) EXCESS LOBBYING EXPENDITURES.—For purposes of this section, the term ‘excess lobbying expenditures’ means, for a taxable year, the amount by which the lobbying expenditures made by the organization during the taxable year exceed the lobbying nontaxable amount for such organization for such taxable year.’’. 

(c) CONFORMING AMENDMENTS.—

14

(1) Section 501(h)(2) is amended by striking subparagraphs (C) and (D). 

(2) Section 4911(c) is amended by striking paragraphs (3) and (4). 

(3) Paragraph (1)(A) of section 4911(f) is amended by striking ‘‘limits of section 501(h)(1) have’’ and inserting ‘‘limit of section 501(h)(1) has’’. 

(4) Paragraph (1)(C) of section 4911(f) is amended by striking ‘‘limits of section 501(h)(1) are’’ and inserting ‘‘limit of section 501(h)(1) is’’. 

(5) Paragraphs (4)(A) and (4)(B) of section 4911(f) are each amended by striking ‘‘limits of section 501(h)(1)’’ and inserting ‘‘limit of section 501(h)(1)’’. 

(6) Paragraph (8) of section 6033(b) (relating to certain organizations described in section 501(c)(3)) is amended by inserting ‘‘and’’ at the end of subparagraph (A) and by striking subparagraphs (C) and (D). 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2003. 

SEC. 207. PILOT PROJECT FOR FOREST CONSERVATION ACTIVITIES. 

(a) TAX-EXEMPT BOND FINANCING.—

(1) IN GENERAL.—For purposes of the Internal Revenue Code of 1986, any 

qualified forest conservation bond shall be treated as an exempt facility bond 

under section 142 of such Code. 

(2) QUALIFIED FOREST CONSERVATION BOND.—For purposes of this section, the 

term ‘‘qualified forest conservation bond’’ means any bond issued as part of an 

issue if—

(A) 95 percent or more of the net proceeds (as defined in section 150(a)(3) 

of such Code) of such issue are to be used for qualified project costs, 

(B) such bond is an obligation of the State of Washington or any political 

subdivision thereof, and 

(C) such bond is issued for a qualified organization before December 31, 

2006. 

(3) LIMITATION ON AGGREGATE AMOUNT ISSUED.—The maximum aggregate 

face amount of bonds which may be issued under this subsection shall not exceed $250,000,000. 

(4) QUALIFIED PROJECT COSTS.—For purposes of this subsection, the term 

‘‘qualified project costs’’ means the sum of—

(A) the cost of acquisition by the qualified organization from an unrelated 

person of forests and forest land located in the State of Washington which 

at the time of acquisition or immediately thereafter are subject to a conservation restriction described in subsection (c)(2), 

(B) interest on the qualified forest conservation bonds for the 3-year period beginning on the date of issuance of such bonds, and 

(C) credit enhancement fees which constitute qualified guarantee fees 

(within the meaning of section 148 of such Code). 

(5) SPECIAL RULES.—In applying the Internal Revenue Code of 1986 to any 

qualified forest conservation bond, the following modifications shall apply: 

(A) Section 146 of such Code (relating to volume cap) shall not apply. 

(B) For purposes of section 147(b) of such Code (relating to maturity may 

not exceed 120 percent of economic life), the land and standing timber acquired with proceeds of qualified forest conservation bonds shall have an 

economic life of 35 years. 

(C) Subsections (c) and (d) of section 147 of such Code (relating to limitations on acquisition of land and existing property) shall not apply. 

(D) Section 57(a)(5) of such Code (relating to tax-exempt interest) shall 

not apply to interest on qualified forest conservation bonds. 

(6) TREATMENT OF CURRENT REFUNDING BONDS.—Paragraphs (2)(C) and (3) 

shall not apply to any bond (or series of bonds) issued to refund a qualified forest conservation bond issued before December 31, 2006, if—

(A) the average maturity date of the issue of which the refunding bond 

is a part is not later than the average maturity date of the bonds to be refunded by such issue, 

(B) the amount of the refunding bond does not exceed the outstanding 

amount of the refunded bond, and 

(C) the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the 

refunding bond. 

For purposes of subparagraph (A), average maturity shall be determined in accordance with section 147(b)(2)(A) of such Code. 

(7) EFFECTIVE DATE.—This subsection shall apply to obligations issued on or 

after the date of enactment of this Act. 

(b) ITEMS FROM QUALIFIED HARVESTING ACTIVITIES NOT SUBJECT TO TAX OR

TAKEN INTO ACCOUNT.—

15

(1) IN GENERAL.—Income, gains, deductions, losses, or credits from a qualified 

harvesting activity conducted by a qualified organization shall not be subject to 

tax or taken into account under subtitle A of the Internal Revenue Code of 

1986. 

(2) LIMITATION.—The amount of income excluded from gross income under 

paragraph (1) for any taxable year shall not exceed the amount used by the 

qualified organization to make debt service payments during such taxable year 

for qualified forest conservation bonds. 

(3) QUALIFIED HARVESTING ACTIVITY.—For purposes of paragraph (1)— (A) IN GENERAL.—The term ‘‘qualified harvesting activity’’ means the 

sale, lease, or harvesting, of standing timber— (i) on land owned by a qualified organization which was acquired 

with proceeds of qualified forest conservation bonds, and 

(ii) pursuant to a qualified conservation plan adopted by the qualified 

organization. 

(B) EXCEPTIONS.— (i) CESSATION AS QUALIFIED ORGANIZATION.—The term ‘‘qualified harvesting activity’’ shall not include any sale, lease, or harvesting for any 

period during which the organization ceases to qualify as a qualified organization. 

(ii) EXCEEDING LIMITS ON HARVESTING.—The term ‘‘qualified harvesting activity’’ shall not include any sale, lease, or harvesting of 

standing timber on land acquired with proceeds of qualified forest conservation bonds to the extent that—

(I) the average annual area of timber harvested from such land 

exceeds 2.5 percent of the total area of such land, or 

(II) the quantity of timber removed from such land exceeds the 

quantity which can be removed from such land annually in perpetuity on a sustained-yield basis with respect to such land. 

The limitations under subclauses (I) and (II) shall not apply to postfire restoration and rehabilitation or sanitation harvesting of timber 

stands which are substantially damaged by fire, windthrow, or other 

catastrophes, or which are in imminent danger from insect or disease 

attack. 

(4) TERMINATION.—This subsection shall not apply to any qualified harvesting 

activity occurring after the date on which there is no outstanding qualified forest conservation bond or any such bond ceases to be a tax-exempt bond. 

(5) PARTIAL RECAPTURE OF BENEFITS IF HARVESTING LIMIT EXCEEDED.—If, as 

of the date that this subsection ceases to apply under paragraph (4), the average annual area of timber harvested from the land exceeds the requirement of 

paragraph (3)(B)(ii)(I), the tax imposed by chapter 1 of such Code shall be increased, under rules prescribed by the Secretary of the Treasury, by the sum 

of the tax benefits attributable to such excess and interest at the underpayment 

rate under section 6621 of such Code for the period of the underpayment. 

(c) DEFINITIONS.—For purposes of this section—

(1) QUALIFIED CONSERVATION PLAN.—The term ‘‘qualified conservation plan’’

means a multiple land use program or plan which—

(A) is designed and administered primarily for the purposes of protecting 

and enhancing wildlife and fish, timber, scenic attributes, recreation, and 

soil and water quality of the forest and forest land, 

(B) mandates that conservation of forest and forest land is the singlemost significant use of the forest and forest land, and 

(C) requires that timber harvesting be consistent with—

(i) restoring and maintaining reference conditions for the region’s 

ecotype, 

(ii) restoring and maintaining a representative sample of young, mid, 

and late successional forest age classes, 

(iii) maintaining or restoring the resources’ ecological health for purposes of preventing damage from fire, insect, or disease, 

(iv) maintaining or enhancing wildlife or fish habitat, or 

(v) enhancing research opportunities in sustainable renewable resource uses. 

(2) CONSERVATION RESTRICTION.—The conservation restriction described in 

this paragraph is a restriction which—

(A) is granted in perpetuity to an unrelated person which is described in 

section 170(h)(3) of such Code and which, in the case of a nongovernmental 

unit, is organized and operated for conservation purposes, 

(B) meets the requirements of clause (ii) or (iii)(II) of section 170(h)(4)(A) 

of such Code, 

16

(C) obligates the qualified organization to pay the costs incurred by the 

holder of the conservation restriction in monitoring compliance with such 

restriction, and 

(D) requires an increasing level of conservation benefits to be provided 

whenever circumstances allow it. 

(3) QUALIFIED ORGANIZATION.—The term ‘‘qualified organization’’ means an 

organization—

(A) which is a nonprofit organization substantially all the activities of 

which are charitable, scientific, or educational, including acquiring, protecting, restoring, managing, and developing forest lands and other renewable resources for the long-term charitable, educational, scientific and public benefit, 

(B) more than half of the value of the property of which consists of forests 

and forest land acquired with the proceeds from qualified forest conservation bonds, 

(C) which periodically conducts educational programs designed to inform 

the public of environmentally sensitive forestry management and conservation techniques, 

(D) which has at all times a board of directors—

(i) at least 20 percent of the members of which represent the holders 

of the conservation restriction described in paragraph (2), 

(ii) at least 20 percent of the members of which are public officials, 

and 

(iii) not more than one-third of the members of which are individuals 

who are or were at any time within 5 years before the beginning of a 

term of membership on the board, an employee of, independent contractor with respect to, officer of, director of, or held a material financial interest in, a commercial forest products enterprise with which the 

qualified organization has a contractual or other financial arrangement, 

(E) the bylaws of which require at least two-thirds of the members of the 

board of directors to vote affirmatively to approve the qualified conservation 

plan and any change thereto, and 

(F) upon dissolution, is required to dedicate its assets to—

(i) an organization described in section 501(c)(3) of such Code which 

is organized and operated for conservation purposes, or 

(ii) a governmental unit described in section 170(c)(1) of such Code. 

(4) UNRELATED PERSON.—The term ‘‘unrelated person’’ means a person who 

is not a related person. 

(5) RELATED PERSON.—A person shall be treated as related to another person 

if—

(A) such person bears a relationship to such other person described in 

section 267(b) (determined without regard to paragraph (9) thereof), or 

707(b)(1), of such Code, determined by substituting ‘‘25 percent’’ for ‘‘50 percent’’ each place it appears therein, and 

(B) in the case such other person is a nonprofit organization, if such person controls directly or indirectly more than 25 percent of the governing 

body of such organization.

(d) REPORT.—

(1) IN GENERAL.—The Comptroller General of the United States shall conduct 

a study on the pilot project for forest conservation activities under this section. 

Such study shall examine the extent to which forests and forest lands were 

managed during the 5-year period beginning on the date of the enactment of 

this Act to achieve the goals of such project. 

(2) SUBMISSION OF REPORT TO CONGRESS.—Not later than six years after the 

date of the enactment of this Act, the Comptroller General shall submit a report 

of such study to the Committee on Ways and Means and the Committee on Resources of the House of Representatives and the Committee on Finance and the 

Committee on Energy and Natural Resources of the Senate. 

TITLE III—OTHER PROVISIONS 

SEC. 301. COMPASSION CAPITAL FUND. 

Title IV of the Social Security Act (42 U.S.C. 601–679b) is amended by adding at 

the end the following: 

17

‘‘PART F—COMPASSION CAPITAL FUND 

‘‘SEC. 481. SECRETARY’S FUND TO SUPPORT AND REPLICATE PROMISING SOCIAL SERVICE 

PROGRAMS. 

‘‘(a) GRANT AUTHORITY.— ‘‘(1) IN GENERAL.—The Secretary may make grants to support any private entity that operates a promising social services program. ‘‘(2) APPLICATIONS.—An entity desiring to receive a grant under paragraph (1) 

shall submit to the Secretary an application for the grant, which shall contain 

such information as the Secretary may require. ‘‘(b) CONTRACT AUTHORITY, ETC.—The Secretary may enter into a grant, contract, 

or cooperative agreement with any entity under which the entity would provide 

technical assistance to another entity to operate a social service program that assists persons and families in need, including by— ‘‘(1) providing the other entity with— ‘‘(A) technical assistance and information, including legal assistance and 

other business assistance; ‘‘(B) information on capacity-building; 

‘‘(C) information and assistance in identifying and using best practices for 

serving persons and families in need; or ‘‘(D) assistance in replicating programs with demonstrated effectiveness 

in assisting persons and families in need; or ‘‘(2) supporting research on the best practices of social service organizations. ‘‘(c) GUIDANCE AND TECHNICAL ASSISTANCE.—The Secretary may use not more 

than 25 percent of the amount appropriated under this section for a fiscal year to 

provide guidance and technical assistance to States and political subdivisions of 

States with respect to the implementation of any social service program. ‘‘(d) SOCIAL SERVICES PROGRAM DEFINED.—In this section, the term ‘social services program’ means a program that provides benefits or services of any kind to persons and families in need. ‘‘(e) LIMITATIONS ON AUTHORIZATION OF APPROPRIATIONS.—To carry out this sec- tion, there are authorized to be appropriated to the Secretary $150,000,000 for fiscal 

year 2004, and such sums as may be necessary for fiscal years 2005 through 2008.’’. 

SEC. 302. REAUTHORIZATION OF ASSETS FOR INDEPENDENCE DEMONSTRATION. 

(a) IN GENERAL.—Section 416 of the Assets for Independence Act (title IV of Public Law 105–285; 42 U.S.C. 604 note) is amended by striking ‘‘and 2003’’ and inserting ‘‘2003, 2004, 2005, 2006, 2007, and 2008’’. (b) REMOVAL OF ECONOMIC LITERACY ACTIVITIES FROM LIMITATION ON USE OF

AMOUNTS IN THE RESERVE FUND.—Section 407(c)(3) of such Act (title IV of Public 

Law 105–285; 42 U.S.C. 604 note) is amended by adding at the end the following: ‘‘The preceding sentences of this paragraph shall not apply to amounts used by an 

entity for any activity described in paragraph (1)(A).’’. 

(c) ELIGIBILITY EXPANDED TO INCLUDE INDIVIDUALS IN HOUSEHOLDS WITH INCOME

NOT EXCEEDING 50 PERCENT OF AREA MEDIAN INCOME.—Section 408(a)(1) of such 

Act (title IV of Public Law 105–285; 42 U.S.C. 604 note) is amended to read as follows: 

‘‘(1) INCOME TEST.—The adjusted gross income of the household—

‘‘(A) does not exceed 200 percent of the poverty line (as determined by the 

Office of Management and Budget) or the earned income amount described 

in section 32 of the Internal Revenue Code of 1986 (taking into account the 

size of the household); or 

‘‘(B) does not exceed 50 percent of the area median income (as determined 

by the Secretary of Housing and Urban Development) for the area in which 

the household is located.’’. 

(d) EXTENSION OF TIME FOR ACCOUNT HOLDERS TO ACCESS FEDERAL FUNDS.—Section 407(d) of such Act (title IV of Public Law 105–285; 42 U.S.C. 604 note) is 

amended—

(1) in the subsection heading, by striking ‘‘WHEN PROJECT TERMINATES’’; and 

(2) by striking ‘‘upon’’ and inserting ‘‘on the date that is 6 months after’’. 

(e) VERIFICATION OF POSTSECONDARY EDUCATION EXPENSES.—Section 404(8)(A) of 

such Act (title IV of Public Law 105–285; 42 U.S.C. 604 note) is amended in the 

1st sentence by inserting ‘‘or a vendor, but only to the extent that the expenses are 

described in a document which explains the educational items to be purchased, and 

the document and the expenses are approved by the qualified entity’’ before the period. 

(f) AUTHORITY TO USE EXCESS INTEREST TO FUND OTHER INDIVIDUAL DEVELOPMENT ACCOUNTS.—Section 410 of such Act (title IV of Public Law 105–285; 42 

U.S.C. 604 note) is amended—

18

(1) in subsection (a)(3)— (A) by striking ‘‘any interest that has accrued’’ and inserting ‘‘interest 

that has accrued during that period’’; and 

(B) by striking the period and inserting ‘‘, but only to the extent that the 

amount of the interest does not exceed the amount of interest that has accrued during that period on amounts deposited in the account by that individual.’’; and 

(2) by adding at the end the following: ‘‘(f) USE OF EXCESS INTEREST TO FUND OTHER INDIVIDUAL DEVELOPMENT AC- COUNTS.—To the extent that a qualified entity has an amount that, but for the limitation in subsection (a)(3), would be required by that subsection to be deposited into 

the individual development account of an individual or into a parallel account maintained by the qualified entity, the qualified entity may deposit the amount into the 

individual development account of any individual or into any such parallel account 

maintained by the qualified entity.’’. 

SEC. 303. SENSE OF THE CONGRESS REGARDING CORPORATE CONTRIBUTIONS TO FAITHBASED ORGANIZATIONS, ETC. 

(a) FINDINGS.—The Congress finds as follows: 

(1) America’s community of faith has long played a leading role in dealing 

with difficult societal problems that might otherwise have gone unaddressed. 

(2) President Bush has called upon Americans ‘‘to revive the spirit of citizenship . . . to marshal the compassion of our people to meet the continuing needs 

of our Nation’’. (3) Although the work of faith-based organizations should not be used by government as an excuse for backing away from its historic and rightful commitment to help those who are disadvantaged and in need, such organizations can 

and should be seen as a valuable partner with government in meeting societal 

challenges. 

(4) Every day faith-based organizations in the United States help people recover from drug and alcohol addiction, provide food and shelter for the homeless, rehabilitate prison inmates so that they can break free from the cycle of 

recidivism, and teach people job skills that will allow them to move from poverty to productivity. 

(5) Faith-based organizations are often more successful in dealing with difficult societal problems than government and non-sectarian organizations. 

(6) As President Bush has stated, ‘‘It is not sufficient to praise charities and 

community groups; we must support them. And this is both a public obligation 

and a personal responsibility.’’. 

(7) Corporate foundations contribute billions of dollars each year to a variety 

of philanthropic causes. 

(8) According to a study produced by the Capital Research Center, the 10 

largest corporate foundations in the United States contributed $1,900,000,000 

to such causes. 

(9) According to the same study, faith-based organizations only receive a 

small fraction of the contributions made by corporations in the United States, 

and 6 of the 10 corporations that give the most to philanthropic causes explicitly ban or restrict contributions to faith-based organizations. 

(b) CORPORATIONS ENCOURAGED TO CONTRIBUTE TO FAITH-BASED ORGANIZATIONS.—The Congress calls on corporations in the United States, in the words of the 

President, ‘‘to give more and to give better’’ by making greater contributions to 

faith-based organizations that are on the front lines battling some of the great societal challenges of our day. 

(c) SENSE OF THE CONGRESS.—It is the sense of Congress that—

(1) corporations in the United States are important partners with government 

in efforts to overcome difficult societal problems; and 

(2) no corporation in the United States should adopt policies that prohibit the 

corporation from contributing to an organization that is successfully advancing 

a philanthropic cause merely because such organization is faith based. 

SEC. 304. MATERNITY GROUP HOMES. 

(a) PERMISSIBLE USE OF FUNDS.—Section 322 of the Runaway and Homeless 

Youth Act (42 U.S.C. 5714–2) is amended—

(1) in subsection (a)(1), by inserting ‘‘(including maternity group homes)’’ after 

‘‘group homes’’; and 

(2) by adding at the end the following: 

‘‘(c) MATERNITY GROUP HOME.—In this part, the term ‘maternity group home’

means a community-based, adult-supervised group home that provides—

‘‘(1) young mothers and their children with a supportive and supervised living 

arrangement in which such mothers are required to learn parenting skills, inVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00018 Fmt 6659 Sfmt 6621 E:\HR\OC\HR270P1.XXX HR270P1
19

cluding child development, family budgeting, health and nutrition, and other 

skills to promote their long-term economic independence and the well-being of 

their children; and 

‘‘(2) pregnant women with—

‘‘(A) information regarding the option of placing children for adoption 

through licensed adoption service providers; 

‘‘(B) assistance with prenatal care and child birthing; and 

‘‘(C) pre- and post-placement adoption counseling.’’. 

(b) CONTRACT FOR EVALUATION.—Part B of the Runaway and Homeless Youth Act 

(42 U.S.C. 5701 et seq.) is amended by adding at the end the following: 

‘‘SEC. 323. CONTRACT FOR EVALUATION. 

‘‘(a) IN GENERAL.—The Secretary shall enter into a contract with a public or private entity for an evaluation of the maternity group homes that are supported by 

grant funds under this Act. 

‘‘(b) INFORMATION.—The evaluation described in subsection (a) shall include the 

collection of information about the relevant characteristics of individuals who benefit from maternity group homes such as those that are supported by grant funds 

under this Act and what services provided by those maternity group homes are most 

beneficial to such individuals. 

‘‘(c) REPORT.—Not later than 2 years after the date on which the Secretary enters 

into a contract for an evaluation under subsection (a), and biennially thereafter, the 

entity conducting the evaluation under this section shall submit to Congress a report on the status, activities, and accomplishments of maternity group homes that 

are supported by grant funds under this Act.’’. 

(c) AUTHORIZATION OF APPROPRIATIONS.—Section 388 of the Runaway and Homeless Youth Act (42 U.S.C. 5751) is amended—

(1) in subsection (a)(1)—

(A) by striking ‘‘There’’ and inserting the following: 

‘‘(A) IN GENERAL.—There’’; 

(B) in subparagraph (A), as redesignated, by inserting ‘‘and the purpose 

described in subparagraph (B)’’ after ‘‘other than part E’’; and 

(C) by adding at the end the following: 

‘‘(B) MATERNITY GROUP HOMES.—There is authorized to be appropriated, 

for maternity group homes eligible for assistance under section 322(a)(1)—

‘‘(i) $33,000,000 for fiscal year 2003; and 

‘‘(ii) such sums as may be necessary for fiscal year 2004.’’; and 

(2) in subsection (a)(2)(A), by striking ‘‘paragraph (1)’’ and inserting ‘‘paragraph (1)(A)’’.

SEC. 305. AUTHORITY OF STATES TO USE 10 PERCENT OF THEIR TANF FUNDS TO CARRY OUT 

SOCIAL SERVICES BLOCK GRANT PROGRAMS. 

Section 404(d)(2) of the Social Security Act (42 U.S.C. 604(d)(2)) is amended to 

read as follows: 

‘‘(2) LIMITATION ON AMOUNT TRANSFERABLE TO TITLE XX PROGRAMS.—A State 

may use not more than 10 percent of the amount of any grant made to the State 

under section 403(a) for a fiscal year to carry out State programs pursuant to 

title XX.’’.

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

The bill, H.R. 7, as amended, provides incentives for charitable 

giving, implements tax reform and improvements relating to charitable organizations and programs, and authorizes appropriations 

for important social service programs. 

The bill provides a charitable contribution deduction for individuals taking the standard deduction, facilitates transfers to charity 

from individual retirement arrangements, increases the percentage 

limitation on corporate charitable contributions, encourages charitable contributions of food inventory, scientific property used for research, and computer technology and equipment used for educational purposes, reforms certain private foundation excise taxes 

leaving such foundations with more funds to spend on charitable 

activities, and provides a more appropriate remedy on charitable 

20

1 All section references are to the Internal Revenue Code of 1986, unless otherwise indicated. 

remainder trusts that have unrelated business income. The bill 

makes certain charitable contributions by S corporations more attractive, permits charities to make collegiate housing grants, treats 

proceeds of certain games of chance like bingo proceeds for purposes of the unrelated business income tax, provides excise tax relief for certain blood collection organizations, extends the nonrecognition period for certain property sales by social clubs, and exempts qualified 501(c)(3) bonds for nursing homes from the Federal 

guarantee prohibition. In addition, the bill suspends the tax-exempt status of terrorist organizations, clarifies the definition of a 

church tax inquiry, extends the declaratory judgment procedures to 

non charitable exempt organizations, provides an exclusion for payments from certain landowner incentives programs, modifies the 

treatment of payments by a controlled entity to a tax-exempt parent, simplifies the grass-roots lobbying expenditure limitation, and 

initiates a pilot project for forest conservation activities. Finally, 

the bill authorizes funding for the compassion capital fund, reauthorizes appropriations for the Individual Development Account 

matched savings program, affords pregnant and parenting mothers 

access to transitional living opportunities, and allows States to 

transfer up to 10 percent of their annual Federal Temporary Assistance for Needy Families block grant funds to the Social Services 

Block Grant. 

B. BACKGROUND AND NEED FOR LEGISLATION

The provisions approved by the Committee will stimulate charitable giving and therefore provide more funds to charitable organizations, many of which will perform activities that otherwise would 

have to be performed by the Federal government. 

C. LEGISLATIVE HISTORY

The House Committee on Ways and Means marked up the Charitable Giving Act of 2003 on September 9, 2003, and ordered the 

bill, as amended, favorably reported by a voice vote (with a quorum 

being present). The House Committee on Ways and Means marked 

up a similar bill, the Community Solutions Act of 2001, on July 11, 

2001, and reported the provisions, as amended, by a rollcall vote 

of 23 yeas and 16 nays (with a quorum being present). 

II. EXPLANATION OF THE BILL 

TITLE I. CHARITABLE GIVING INCENTIVES 

A. CHARITABLE DEDUCTION FOR NONITEMIZERS

(Sec. 101 of the bill and secs. 63 and 170 of the Code) 

PRESENT LAW

An individual taxpayer who itemizes deductions generally is allowed to deduct the amount of cash and up to the fair market value 

of property contributed to a charity described in section 501(c)(3),1

to certain veterans’ organizations, fraternal societies, and cemetery 

21

2Secs. 170(c)(3)–(5). 3Sec. 170(c)(1). 

4Secs. 170(b) and (e). 

5Sec. 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, 50 percent of the amount of the contribution 

for 1985, and 100 percent of the amount of the contribution for 1986. The nonitemizer deduction 

terminated for contributions made after 1986. 6Sec. 170(f)(8). 

7Sec. 6115. 

companies,2 or to a Federal, State, or local governmental entity for 

exclusively public purposes.3 The deduction also is allowed for purposes of calculating alternative minimum taxable income. 

The amount of the charitable deduction allowable for a taxable 

year with respect to a 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.4

A taxpayer who takes the standard deduction (i.e., who does not 

itemize deductions) may not take a separate deduction for charitable contributions.5

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.6 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.7

REASONS FOR CHANGE

The Committee believes that allowing a charitable deduction to 

taxpayers who do not itemize deductions will stimulate charitable 

giving, thereby providing more funds for worthwhile nonprofit organizations, many of which provide services that otherwise might 

have to be provided by the Federal government. The provision is 

for a two-year period. To provide Congress adequate information in 

considering extending the provision, the Committee requires the 

Secretary of the Treasury to submit a report on the effectiveness 

of the provision. The report should consider the extent to which 

charitable giving has increased, the burdens of complexity to taxpayers, and the impact on tax compliance. 

22

8The provision does not alter present-law rules regarding the carryover of contributions to or 

from a taxable year, including a taxable year in which the taxpayer elects the standard deduction. 

EXPLANATION OF PROVISION

In the case of an individual taxpayer who does not itemize deductions, the provision allows a ‘‘direct charitable deduction’’ from adjusted gross income for charitable contributions paid in cash during 

the taxable year. This deduction is allowed in addition to the 

standard deduction. The deduction is allowed only for that portion 

of contributions actually made during the year that in the aggregate exceed $250 ($500 in the case of a joint return). The maximum 

deduction is $250 ($500 in the case of a joint return). Thus, under 

the provision, an individual who does not file a joint return is not 

entitled to a charitable deduction for the first $250 of cash contributions made during the tax year, is entitled to a deduction on 

a dollar-for-dollar basis for contributions of $251 to $500 (e.g., a $1 

contribution deduction in the case of $251 of contributions, and a 

$250 deduction in the case of $500 of contributions), and is not entitled to a deduction for contributions exceeding $500. Contributions may not be carried over for purposes of a subsequent taxable 

year’s calculation of the direct charitable deduction.8

The direct charitable deduction generally is subject to the tax 

rules normally governing charitable contribution deductions, such 

as the substantiation requirements. The deduction is allowed in 

computing alternative minimum taxable income. 

The provision requires the Secretary of the Treasury to complete 

a study by December 31, 2006, of the effect of the provision on increased charitable giving, and of taxpayer compliance, for example, 

by comparing compliance by taxpayers who itemize their charitable 

contributions with compliance by those who claim the direct charitable deduction. The Secretary shall report on the study to the 

Committee on Finance of the Senate and the Committee on Ways 

and Means of the House of Representatives. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003, and before January 1, 2006. 

B. TAX-FREE DISTRIBUTIONS FROM IRAS FOR CHARITABLE PURPOSES

(Sec. 102 of the bill and secs. 408 and 6034 of the Code) 

PRESENT LAW

In general 

If an amount withdrawn from a traditional individual retirement 

arrangement (‘‘IRA’’) or a Roth IRA is donated to a charitable organization, the rules relating to the tax treatment of withdrawals 

from IRAs apply to the amount withdrawn and the charitable contribution is subject to the normally applicable limitations on deductibility of such contributions. 

Charitable contributions 

In computing taxable income, an individual taxpayer who 

itemizes deductions generally is allowed to deduct the amount of 

23

9Secs. 170(c)(3)–(5). 10Sec. 170(c)(1). 11Secs. 170(b) and (e). 

cash and up to the fair market value of property contributed to a 

charity described in section 501(c)(3), to certain veterans’ organizations, fraternal societies, and cemetery companies,9 or to a Federal, 

State, or local governmental entity for exclusively public purposes.10 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.11

Under present law, total deductible contributions of an individual 

taxpayer to public charities, private operating foundations, and certain types of private nonoperating foundations 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). Contributions of capital gain property to 

public charities, and 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. 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. 

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. The threshold 

amount for 2003 is $139,500 ($69,750 for married individuals filing 

separate returns). For those deductions that are subject to the 

limit, the total amount of itemized deductions is reduced by three 

percent of adjusted gross income over the threshold amount, but 

not by more than 80 percent of itemized deductions subject to the 

limit. Beginning in 2006, the overall limitation on itemized deductions phases-out for all taxpayers. The overall limitation on 

itemized deductions is reduced by one-third in taxable years beginning in 2006 and 2007, and by two-thirds in taxable years beginning in 2008 and 2009. The overall limitation on itemized deductions is eliminated for taxable years beginning after December 31, 

2009; however, this elimination of the limitation sunsets on December 31, 2010. 

In general, a charitable deduction is not allowed for income, estate, or gift tax purposes if the donor transfers an interest in property to a charity (e.g., a remainder) while also either retaining an 

interest in that property (e.g., an income interest) or transferring 

an interest in that property to a noncharity for less than full and 

24

12Secs. 170(f), 2055(e)(2), and 2522(c)(2). 13Sec. 170(f)(2). 14Minimum distribution rules also apply in the case of distributions after the death of the 

IRA owner. 15 Conversion contributions refer to conversions of amounts in a traditional IRA to a Roth IRA. 

adequate consideration.12 Exceptions to this general rule are provided for, among other interests, remainder interests in charitable 

remainder annuity trusts, charitable remainder unitrusts, and 

pooled income funds, and present interests in the form of a guaranteed annuity or a fixed percentage of the annual value of the property.13 For such interests, a charitable deduction is allowed to the 

extent of the present value of the interest transferred to a charitable organization. 

IRA rules 

Within limits, individuals may make deductible and nondeductible contributions to a traditional 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 also may 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 591⁄2 are subject 

to an additional 10-percent early withdrawal tax, unless an exception applies. Under present law, minimum distributions are required to be made from tax-favored retirement vehicles, including 

IRAs. Minimum required distributions from an IRA must generally 

begin by the April 1 of the calendar year following the year in 

which the IRA owner attains age 701⁄2.14

If an individual has made nondeductible contributions to a traditional IRA, a portion of each distribution from an IRA is nontaxable, until the total amount of nondeductible contributions has 

been received. In general, the amount of a distribution that is nontaxable is determined by multiplying the amount of the distribution by the ratio of the remaining nondeductible contributions to 

the account balance. In making the calculation, all traditional IRAs 

of an individual are treated as a single IRA, all distributions during any taxable year are treated as a single distribution, and the 

value of the contract, income on the contract, and investment in 

the contract are computed as of the close of the calendar year. 

In the case of a distribution from a Roth IRA that is not a qualified distribution, in determining the portion of the distribution attributable to earnings, contributions and distributions are deemed 

to be distributed in the following order: (1) Regular Roth IRA contributions; (2) taxable conversion contributions;15 (3) nontaxable 

conversion contributions; and (4) earnings. In determining the 

amount of taxable distributions from a Roth IRA, all Roth IRA distributions in the same taxable year are treated as a single distribution, all regular Roth IRA contributions for a year are treated as 

a single contribution, and all conversion contributions during the 

year are treated as a single contribution. 

Distributions from an IRA (other than a Roth IRA) are generally 

subject to withholding, unless the individual elects not to have 

25

16Sec. 3405. 17Sec. 6034. This requirement applies to all split-interest trusts described in section 

4947(a)(2). 18Secs. 642(c) and 6034. 19Sec. 6104(b). 20Sec. 6011; Treas. Reg. sec. 53.6011–1(d).

withholding apply.16 Elections not to have withholding apply are to 

be made in the time and manner prescribed by the Secretary. 

Split-interest trust filing requirements 

Split-interest trusts, including charitable remainder annuity 

trusts, charitable remainder unitrusts, and pooled income funds, 

are required to file an annual information return 17 (Form 1041–A). 

Trusts that are not split-interest trusts but that claim a charitable 

deduction for amounts permanently set aside for a charitable purpose also are required to file Form 1041–A.18 The returns are required to be made publicly available.19 A trust that is required to 

distribute all trust net income currently to trust beneficiaries in a 

taxable year is exempt from this return requirement for such taxable year. A failure to file the required return may result in a penalty on the trust of $10 a day for as long as the failure continues, 

up to a maximum of $5,000 per return. 

In addition, split-interest trusts are required to file annually 

Form 5227.20 Form 5227 requires disclosure of information regarding a trust’s noncharitable beneficiaries. The penalty for failure to 

file this return is calculated based on the amount of tax owed. A 

split-interest trust generally is not subject to tax and therefore, a 

penalty generally may not be imposed for the failure to file Form 

5227. Form 5227 is not required to be made publicly available. 

REASONS FOR CHANGE

Under present law, an individual who wants to use IRA proceeds 

to make charitable contributions must treat the IRA distribution as 

a withdrawal subject to IRA income recognition rules and is subject 

to deduction limitation provisions on the contributions made to the 

charity. In some cases, due to the limitations on charitable contributions, this can result in taxable income even though the individual used the entire IRA distribution to make the charitable contribution. The Committee believes that taxpayers who want to 

make charitable contributions from IRAs generally should be permitted to do so without recognizing income because of the distribution from the IRA, whether such contribution is made directly to 

the charitable organization or indirectly through the use of a splitinterest entity. The Committee believes that facilitating charitable 

contributions from IRAs will help increase giving to charitable organizations. The Committee believes that the tax-free treatment for 

charitable contributions from IRAs should be limited to distributions after age 701⁄2, i.e., distributions after the minimum distribution rules apply, to prevent erosion of funds that may be needed 

for retirement income. 

EXPLANATION OF PROVISION

Qualified charitable distributions from IRAs 

The provision provides an exclusion from gross income for otherwise taxable IRA distributions from a traditional or a Roth IRA in 

26

21The provision does not apply to distributions from employer sponsored retirement plans, including SIMPLE IRAs and simplified employee pensions (‘‘SEPs’’). 

the case of qualified charitable distributions.21 Special rules apply 

in determining the amount of an IRA distribution that is otherwise 

taxable. The present-law rules regarding taxation of IRA distributions and the deduction of charitable contributions continue to 

apply to distributions from an IRA that are not qualified charitable 

distributions. Qualified charitable distributions are taken into account for purposes of the minimum distribution rules applicable to 

IRAs to the same extent the distribution would have been taken 

into account under such rules had the distribution not been directly 

distributed under the provision. An IRA does not fail to qualify as 

an IRA merely because qualified charitable distributions have been 

made from the IRA. It is intended that the Secretary will prescribe 

rules under which IRA owners are deemed to elect out of withholding if they designate that a distribution is intended to be a 

qualified charitable distribution. 

A qualified charitable distribution is defined as any distribution 

from an IRA that is made directly by the IRA trustee either to (1) 

an organization to which deductible contributions can be made (a 

‘‘direct distribution’’) or (2) a ‘‘split-interest entity.’’ A split-interest 

entity means a charitable remainder annuity trust or charitable remainder unitrust (together referred to as a ‘‘charitable remainder 

trust’’), a pooled income fund, or a charitable gift annuity. Distributions are eligible for the exclusion only if made on or after the date 

the IRA owner attains age 701⁄2, to correspond with the time at 

which minimum distributions must begin. In the case of split-interest distributions, no person may hold an income interest in the 

amounts in the split-interest entity attributable to the charitable 

distribution other than the IRA owner, the IRA owner’s spouse, or 

a charitable organization. 

The exclusion applies to direct distributions only if a charitable 

contribution deduction for the entire distribution otherwise would 

be allowable, determined without regard to the generally applicable 

percentage limitations. Thus, for example, if the deductible amount 

is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient 

substantiation, the exclusion is not available with respect to any 

part of the IRA distribution. Similarly, the exclusion applies in the 

case of a distribution directly to a split-interest entity only if a 

charitable contribution deduction for the entire present value of the 

charitable interest (for example, a remainder interest) otherwise 

would be allowable, determined without regard to the generally applicable percentage limitations. 

If the IRA owner has any IRA that includes nondeductible contributions, a special rule applies in determining the portion of a 

distribution that is includible in gross income (but for the provision) and thus is eligible for qualified charitable distribution treatment. In such case, the IRA owner aggregates all IRAs to determine eligibility for the exclusion. Under the special rule, the distribution is treated as consisting of income first, up to the aggregate amount that would be includible in gross income (but for the 

provision) if the aggregate balance of all IRAs having the same 

owners were distributed during the same year. In determining the 

27

amount of subsequent IRA distributions includible in income, proper adjustments are made to reflect the amount treated as a qualified charitable distribution under the special rule. 

Special rules apply for distributions to split-interest entities. For 

distributions to charitable remainder trusts, the provision provides 

that subsequent distributions from the charitable remainder trust 

are treated as ordinary income in the hands of the beneficiary, notwithstanding how such amounts normally are treated under section 664(b). In addition, for a charitable remainder trust to be eligible to receive qualified charitable distributions, the charitable remainder trust has to be funded exclusively by such distributions. 

For example, an IRA owner may not make qualified charitable distributions to an existing charitable remainder trust any part of 

which was funded with assets that were not qualified charitable 

distributions. 

Under the provision, a pooled income fund is eligible to receive 

qualified charitable distributions only if the fund accounts separately for amounts attributable to such distributions. In addition, 

all distributions from the pooled income fund that are attributable 

to qualified charitable distributions are treated as ordinary income 

to the beneficiary. Qualified charitable distributions to a pooled income fund are not includible in the fund’s gross income. 

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 portion of the distribution from the IRA used to purchase the annuity is not an investment in the annuity contract. 

Any amount excluded from gross income by reason of the provision is not taken into account in determining the deduction for 

charitable contributions under section 170.

Qualified charitable distribution examples 

The following examples illustrate the determination of the portion of an IRA distribution that is a qualified charitable distribution and the application of the special rules for a qualified charitable distribution to a split-interest entity. In each example, it is 

assumed that the requirements for qualified charitable distribution 

treatment are otherwise met (e.g., the applicable age requirement 

and the requirement that contributions are otherwise deductible) 

and that no other IRA distributions occur during the year. 

Example 1.—Individual A has a traditional IRA with a balance 

of $100,000, consisting solely of deductible contributions and earnings. Individual A has no other IRA. The entire IRA balance is distributed in a direct distribution to a charitable organization. Under 

present law, the entire distribution of $100,000 would be includible 

in Individual A’s income. Accordingly, under the provision, the entire distribution of $100,000 is a qualified charitable distribution. 

As a result, no amount is included in Individual A’s income as a 

result of the distribution and the distribution is not taken into account in determining the amount of Individual A’s charitable deduction for the year. 

Example 2.—The facts are the same as in Example 1, except that 

the entire IRA balance of $100,000 is distributed to a charitable remainder unitrust, which contains no other assets and which must 

be funded exclusively by qualified charitable distributions. Under 

28

the terms of the trust, Individual A is entitled to receive five percent of the value of the trust each year. As explained in Example 

1, the entire $100,000 distribution is a qualified charitable distribution, no amount is included in Individual A’s income as a result of the distribution, and the distribution is not taken into account in determining the amount of Individual A’s charitable deduction for the year. In addition, under a special rule in the provision for charitable remainder trusts, any distribution from the 

charitable remainder unitrust to Individual A is includible in gross 

income as ordinary income, regardless of the character of the distribution under the usual rules for the taxation of distributions 

from such a trust. 

Example 3.—Individual B has a traditional IRA with a balance 

of $100,000, consisting of $20,000 of nondeductible contributions 

and $80,000 of deductible contributions and earnings. Individual B 

has no other IRA. In a direct distribution to a charitable organization, $80,000 is distributed from the IRA. Under present law, a portion of the distribution from the IRA would be treated as a nontaxable return of nondeductible contributions. The nontaxable portion of the distribution would be $16,000, determined by multiplying the amount of the distribution ($80,000) by the ratio of the 

nondeductible contributions to the account balance ($20,000/

$100,000). Accordingly, under present law, $64,000 of the distribution ($80,000 minus $16,000) would be includible in Individual B’s 

income. 

Under the provision, notwithstanding the present-law tax treatment of IRA distributions, the distribution is treated as consisting 

of income first, up to the total amount that would be includible in 

gross income (but for the provision) if all amounts were distributed 

from all IRAs otherwise taken into account in determining the 

amount of IRA distributions. The total amount that would be includible in income if all amounts were distributed from the IRA is 

$80,000. Accordingly, under the provision, the entire $80,000 distributed to the charitable organization is treated as includible in 

income (before application of the provision) and is a qualified charitable distribution. As a result, no amount is included in Individual 

B’s income as a result of the distribution and the distribution is not 

taken into account in determining the amount of Individual B’s 

charitable deduction for the year. In addition, for purposes of determining the tax treatment of other distributions from the IRA, 

$20,000 of the amount remaining in the IRA is treated as Individual B’s nondeductible contributions (i.e., not subject to tax upon 

distribution). 

Split-interest trust filing requirements 

The provision increases the penalty on split-interest trusts for 

failure to: (1) File a return; (2) include any of the information required to be shown on such return; and (3) show the correct information on the return. The penalty for each return is $20 for each 

day the failure continues up to a maximum of $10,000. In the case 

of a split-interest trust with gross income in excess of $250,000, the 

penalty is $100 for each day the failure continues up to a maximum of $50,000. In addition, if a person (meaning any officer, director, trustee, employee, or other individual who is under a duty 

29

22Sec. 6652(c)(4)(C). 23Sec. 170(b)(2). 

to file the return or include required information) 22 knowingly 

failed to file the return or include required information, then that 

person is personally liable for such a penalty, which would be imposed in addition to the penalty that is paid by the organization. 

Information regarding beneficiaries that are not charitable organizations as described in section 170(c) is exempt from the requirement to make information publicly available. In addition, the provision repeals the present-law exception to the filing requirement for 

split-interest trusts that are required in a taxable year to distribute all net income currently to beneficiaries. Such exception remains available to trusts other than split-interest trusts that are 

otherwise subject to the filing requirement. 

EFFECTIVE DATE

The qualified charitable distribution provision is effective for distributions made after December 31, 2003. The provision relating to 

information returns of split-interest trusts is effective for returns 

for taxable years beginning after December 31, 2003.

C. INCREASE PERCENTAGE LIMITATION FOR CORPORATE CHARITABLE

CONTRIBUTIONS

(Sec. 103 of the bill and sec. 170 of the Code) 

PRESENT LAW

Under present law, a corporation is allowed to deduct charitable 

contributions up to 10 percent of the corporation’s modified taxable 

income for the year. For this purpose, taxable income is determined 

without regard to (1) the charitable contributions deduction, (2) any 

net operating loss carryback, (3) deductions for dividends received, 

and (4) any capital loss carryback for the taxable year.23 Any charitable contribution by a corporation that is not currently deductible 

because of the percentage limitation may be carried forward for up 

to five taxable years. 

REASONS FOR CHANGE

The Committee believes that increasing the annual limitation on 

the allowable corporate charitable contribution deduction will encourage more charitable giving by corporations. 

EXPLANATION OF PROVISION

The provision increases the percentage limitation on corporate 

charitable deductions from 10 percent to 20 percent. The provision 

is phased-in, beginning in taxable years beginning after December 

31, 2003. The percentage limitation on corporate charitable deductions is determined in accordance with the following table:

Taxable years beginning in calendar year Applicable percentage 

2004 ................................................................................................... 11 

2005 ................................................................................................... 12 

2006 ................................................................................................... 13 

2007 ................................................................................................... 14 

2008 through 2011 ........................................................................... 15 

2012 and thereafter .......................................................................... 20

30

24Sec. 170(e)(3). In general, a C corporation’s charitable contribution deduction for a year may 

not exceed 10 percent of the corporation’s taxable income. Sec. 170(b)(2). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003. 

D. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD

INVENTORY

(Sec. 104 of the bill and sec. 170 of the Code) 

PRESENT LAW

Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis 

(typically, cost) in the inventory. 

However, for certain contributions of inventory, C corporations 

may claim an enhanced deduction 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 in excess of basis) or (2) two times basis.24

To be eligible for the enhanced deduction, the contributed property 

generally must be inventory of the taxpayer, contributed to a charitable organization described in section 501(c)(3) (except for private 

nonoperating foundations), and the donee must (1) use the property 

consistent with the donee’s exempt purpose and solely for the care 

of the ill, the needy, or infants, (2) not transfer the property in exchange for money, other property, or services, and (3) provide the 

taxpayer a written statement that the donee’s use of the property 

will be consistent with such requirements. In the case of contributed property subject to the Federal Food, Drug, and Cosmetic Act, 

the property must satisfy the applicable requirements of such Act 

on the date of transfer and for 180 days prior to the transfer. To 

use the enhanced deduction, the taxpayer must establish that the 

fair market value of the donated item exceeds basis. 

REASONS FOR CHANGE

The Committee believes that more should be done to encourage 

contributions of food inventory to charitable organizations that provide food for the hungry. The Committee believes that extending 

the availability of the enhanced deduction for contributions of food 

inventory to any taxpayer engaged in a trade or business will increase donations of food inventory and thereby help nourish more 

of our nation’s underprivileged. The Committee also recognizes that 

the growing population of senior citizens with unique dietary and 

nutritional food needs who receive meals through government sponsored meal programs necessitates creative solutions, and that the 

policies set forth in the bill are designed to encourage the nation’s 

food sector, working together with such meal programs, to utilize 

innovative approaches to supplement the limited funds that may be 

available in the future to meet such critical demands. 

EXPLANATION OF PROVISION

Under the provision, any taxpayer, whether or not a C corporation, engaged in a trade or business is eligible to claim an enhanced deduction for donations of food inventory. Under the proviVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00030 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
31

25 Under a separate provision, the applicable percentage is 11 percent for taxable years beginning in 2004, 12 percent for taxable years beginning in 2005, 13 percent for taxable years beginning in 2006, 14 percent for taxable years beginning in 2007, 15 percent for taxable years beginning in 2008 through 2011, and 20 percent for taxable years beginning in 2012 and thereafter. 

sion, an enhanced deduction for food inventory is available only for 

food that qualifies as ‘‘apparently wholesome food.’’ For taxpayers 

other than C corporations, the total deduction for donations of food 

inventory in a taxable year generally may not exceed the applicable 

percentage of the taxpayer’s aggregate net income for such taxable 

year from all sole proprietorships, S corporations, or partnerships 

from which contributions of apparently wholesome food are made.

The applicable percentage equals the percentage limitation on corporate charitable contributions.25 For example, assuming an applicable percentage of 11 percent, a taxpayer who is a sole proprietor, 

a shareholder in an S corporation, and a partner in a partnership, 

and who makes charitable contributions of food inventory from 

each, the taxpayer’s deduction for donations of food inventory is 

limited to 11 percent 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 11 percent of the net income 

of the sole proprietorship and the S corporation, but not the partnership. 

The percentage limitation does not affect the application of the 

generally applicable percentage limitations. For example, if the applicable percentage is 11 percent, and 11 percent of a sole proprietor’s net income from the sole proprietorship was greater than 50 

percent of the proprietor’s contribution base, the available deduction for the taxable year (with respect to contributions to public 

charities) would be 50 percent of the proprietor’s contribution base. 

Consistent with present law, such contributions may be carried forward because they exceed the 50 percent limitation. Contributions 

of food inventory by a taxpayer that is not a C corporation that exceed the applicable percentage but not the 50 percent limitation 

could not be carried forward. 

‘‘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 provides that the fair market value of donated apparently wholesome food that cannot or will not be sold solely due 

to internal standards of the taxpayer or lack of market is determined by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold 

by the taxpayer at the time of the contribution or, if not so sold 

at such time, in the recent past. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003. 

32

26Secs. 509(a) and 501(c)(3). 27Sec. 4940(a). Net investment income is determined under the principles of Subtitle A of the 

Code, except to the extent those principles are inconsistent with section 4940. Net investment 

income is defined as the amount by which the sum of gross investment income and capital gain 

net income exceeds the deductions relating to the production of gross investment income. Net 

investment income also is determined by applying section 103 (generally providing an exclusion 

for interest on certain State and local bonds) and section 265 (generally disallowing the deduction for interest and certain other expenses with respect to tax-exempt income). Special definitions of gross investment income and capital gain net income are provided for purposes of the 

excise tax. Sec. 4940(c). 28Secs. 4940(b) and 4947. 29Sec. 4940(e). 30Sec. 4942(g). 31Sec. 4940(e). 32Treas. Reg. sec. 1.6302–1. 33Sec. 4940(d)(1). To be an exempt operating foundation, an organization must (1) be an operating foundation (as defined in section 4942(j)(3)), (2) be publicly supported for at least 10 taxable years, (3) have a governing body no more than 25 percent of whom are disqualified persons 

and that is broadly representative of the general public, and (4) have no officers who are disqualified persons. Sec. 4940(d)(2). Exempt operating foundations generally include organizations 

such as museums or libraries that devote their assets to operating charitable programs but have 

E. REFORM OF EXCISE TAX BASED ON NET INVESTMENT INCOME OF

PRIVATE FOUNDATIONS

(Sec. 105 of the bill and sec. 4940 of the Code) 

PRESENT LAW

In general 

In general, a private foundation is an organization organized and 

operated exclusively for charitable purposes.26 Private foundations 

that are recognized as exempt from Federal income tax under section 501 (a) of the Code are subject to a two-percent excise tax on 

their net investment income.27 Private foundations that are not exempt from tax, such as certain charitable trusts, also are subject 

to an excise tax.28

The two-percent rate of tax is reduced to one-percent if certain 

requirements are met in a taxable year.29 The requirements are 

that the foundation must make a certain minimum amount of 

qualifying distributions (generally, amounts paid to accomplish exempt purposes) 30 and the foundation cannot have been subject to 

tax for failure to make sufficient qualifying distributions for any of 

the five years preceding the taxable year (the ‘‘base period’’). The 

required amount of qualifying distributions is the sum of two elements: (1) The amount of the foundation’s assets for the taxable 

year multiplied by the average over the base period of the percentage of assets distributed as qualifying distributions in a year divided by the assets of the foundation for the year (the ‘‘average percentage payout for the base period’’) plus (2) one percent of the net 

investment income of the foundation for the taxable year.31

The tax on taxable private foundations is equal to the excess of 

the sum of the excise tax that would have been imposed if the foundation were tax exempt and the amount of the unrelated business 

income tax that would have been imposed if the foundation were 

tax exempt, over the income tax imposed on the foundation under 

subtitle A of the Code. 

Private foundations (taxable and tax exempt) are required to pay 

estimated taxes of the section 4940 tax in quarterly installments 

in the same manner as corporate estimated tax payments.32 Exempt operating foundations are exempt from the section 4940 

tax.33

33

difficulty meeting the ‘‘public support’’ tests necessary not to be classified as a private foundation. For an organization to qualify as an exempt operating foundation it must obtain a ruling 

letter from the IRS. IRS Announcement 85–88. 34Sec. 4942(d)(2). 35Sec. 4942(a) and (b). 36Sec. 4942(g)(1)(A). 

The amount of tax paid under section 4940 reduces a foundation’s distributable amount under section 4942.34 Accordingly, the 

minimum amount of qualifying distributions a foundation must 

make to avoid tax under section 4942 is reduced by the amount of 

section 4940 excise taxes paid. 

REASONS FOR CHANGE

The Committee believes that reforming the excise tax based on 

the investment income of private foundations will result in increased charitable activity and simplify the tax laws. The reduction 

in the rate of tax will increase the required minimum charitable 

distributions for many private foundations, leading private foundations to increase their charitable activity. In addition, elimination 

of the two-tiered nature of the tax will simplify the Code and reduce the compliance burden for private foundations. 

EXPLANATION OF PROVISION

The provision replaces the two rates of tax under present law 

with a single rate of tax based on net investment income and establishes such rate of tax at one percent. Thus, a taxexempt private 

foundation is subject to tax on one percent of net investment income and does not have to calculate its average percentage payout 

for the base period to determine eligibility for a different rate of 

tax. A taxable private foundation is subject to tax on the excess of 

the sum of one percent of net investment income and the amount 

of the unrelated business income tax (both calculated as if the 

foundation were tax-exempt) over the income tax imposed on the 

foundation under subtitle A of the Code. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003.

F. REFORM OF EXCISE TAXES FOR MINIMUM PAYOUT AND SELF

DEALING

Sec. 105 of the bill and secs. 4941 and 4942 of the Code) 

PRESENT LAW

Private nonoperating foundations 

Private nonoperating foundations are required to pay out a minimum amount each year as qualifying distributions. Failure to pay 

out the minimum results in an excise tax of up to 100 percent of 

the undistributed amount.35 In general, a qualifying distribution 

means any amount paid to accomplish one or more of the organization’s exempt purposes, including that portion of reasonable and 

necessary administrative expenses.36 Thus, under present law, a 

foundation may include as a qualifying distribution the salaries, occupancy expenses, travel costs, and other reasonable and necessary 

34

37Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an organization is permitted to adjust the distributable amount in those cases where distributions during the five preceding years have exceeded the payout requirements. Sec. 4942(i). 38Sec. 4942(j)(3)(A). The Treasury regulations use slightly different words from that of the 

Code, and describe when distributions are made ‘‘directly for the active conduct of the activities 

constituting its charitable, educational or similar exempt purpose.’’ Treas. Reg. sec. 53.4942(b)– 1(b)(1). The instructions to IRS Form 990–PF use the term ‘‘direct charitable activity’’ to implement, for reporting purposes, the provisions of the Code and regulations. 39This is the case regardless of whether the exempt activities of the grantee organization may 

assist the grantor foundation in carrying out its own exempt activities. Treas. Reg. 53.4942(b)– 1(b)(1)(1). 40 A charitable contribution by an individual to a private nonoperating foundation that is not 

a conduit foundation is subject to a limitation of 30 percent of the donor’s contribution base for 

the taxable year; whereas, a charitable contribution by an individual to a conduit foundation 

is subject to a limitation of 50 percent of the donor’s contribution base for the taxable year. Secs. 

170(b)(1)(B) and 170(b)(1)(A)(vii). Contributions by a corporation are subject to a 10 percent of 

modified taxable income limitation, irrespective of the classification of the donee. Sec. 170(b)(2). 41Sec. 4941. 

administrative expenses that the foundation incurs in operating a 

grant program. A qualifying distribution also includes any amount 

paid to acquire an asset used (or held for use) directly in carrying 

out one or more of the organization’s exempt purposes and certain 

amounts set-aside for exempt purposes.37

Private operating foundations 

Private operating foundations are not subject to the payout requirements. However, private operating foundations use the definition of a qualifying distribution in order to meet the ‘‘income test,’’ pursuant to which a foundation qualifies as an operating foundation. The income test requires that a certain portion of the foundation’s qualifying distributions (defined the same as for nonoperating foundations) must be made directly for the active conduct 

of the activities constituting the purpose or function for which the 

organization is organized and operated,38 i.e., for a ‘‘direct charitable activity.’’ For this purpose, a direct charitable activity means 

the active conduct of an activity constituting the organization’s 

charitable, educational, or other similar exempt purpose, and does 

not include the making of grants to other organizations to assist 

such organizations in conducting activities that help to accomplish 

the exempt purposes of the grantee organization.39

Conduit foundations 

Private foundations described in section 170(b)(1)(E)(ii) (sometimes referred to as ‘‘conduit foundations’’) must make each year, 

in general, qualifying distributions equal to the amount of contributions received. Non corporate donors to a conduit foundation are 

subject to more favorable percentage limitations for charitable contributions than are non corporate donors to a nonoperating foundation that is not a conduit foundation.40 A foundation that qualifies 

as a conduit foundation may elect each year to be treated as a conduit foundation. 

Self-dealing 

Excise taxes are imposed on acts of self-dealing between a disqualified person (as defined in section 4946(a)) and a private foundation.41 An initial tax of 5 percent of the amount involved with 

respect to the act of self-dealing is imposed on any disqualified person (other than a foundation manager acting only as such) who 

participates in the act of self-dealing. The tax is imposed for each 

35

42 As used in the provision, the term ‘‘direct charitable activity’’ has the same meaning as 

under present law, i.e., the direct active conduct of activities constituting the purpose or function 

for which the organization is organized and operated. Sec. 4942(j)(3)(A); Treas. Reg. sec. 

53.4942(b)–1(b)(1). See also Instructions to Form 990–PF (2002), at 20–21. 

year in the taxable period, which begins on the date the act of selfdealing occurs and ends on the earliest of the date of mailing of a 

notice of deficiency for the tax, the date on which the tax is assessed, or the date on which correction of the act of self-dealing is 

completed. A government official (as defined in section 4946(c)) is 

subject to such initial tax only if the official participates in the act 

of self-dealing knowing it is such an act. 

REASONS FOR CHANGE

The Committee believes that it is appropriate to strengthen the 

minimum charitable payout requirement of private foundations to 

ensure that a distribution that qualifies as a charitable payment 

actually is used directly in the performance of a charitable function. Accordingly, the Committee believes that, in general, only 

those expenses that are directly attributable to charitable activities 

should qualify for purposes of meeting the payout requirement. In 

addition, the Committee believes that compensation to disqualified 

persons above a certain threshold, and certain travel expenses, 

should not be considered as charitable payments under any circumstances. The Committee also believes that it is appropriate to 

increase the initial tax on self-dealers to further discourage selfdealing with private foundations. 

EXPLANATION OF PROVISION

Modification of excise tax on failure to distribute income 

The provision modifies the definition of qualifying distributions 

of private foundations, including nonoperating foundations and conduit foundations, by excluding certain administrative expenses. The 

provision does not alter the treatment of qualifying distributions 

made by private operating foundations, or change the meaning of 

qualifying distributions with respect to amounts paid to acquire an 

asset used (or held for use) directly in carrying out one or more of 

the foundation’s exempt purposes, or with respect to amounts setaside for the foundation’s exempt purposes. 

The provision provides that qualifying distributions include that 

portion of reasonable and necessary administrative expenses that 

are directly attributable to direct charitable activities,42 grant selection activities, grant monitoring and administration activities, 

compliance with applicable Federal, State, or local law, or furthering public accountability of the private foundation. Expenses 

that relate to multiple activities must be allocated to each activity. 

No specific method of allocation is required. However, the method 

used must be reasonable and used consistently by the organization. 

The provision provides that the following administrative expenses shall not be treated as qualifying distributions even if they 

are directly attributable to one or more of the activities described 

above: (1) Compensation paid to persons who are disqualified persons within the meaning of section 4946(a), to the extent such compensation exceeds an annual rate of $100,000 (indexed for inflation); (2) air transportation expenses unless such transportation is 

36

43Treas. Reg. sec. 1.664–1(d)(2). 44Sec. 664(b). 

regularly-scheduled commercial air transportation; and (3) air 

transportation expenses incurred for regularly-scheduled commercial air transportation to the extent that such expenses exceed the 

cost of such transportation for coach class accommodations. Actual 

cost for ground travel is allowed. 

The provision provides that the Secretary of the Treasury shall 

prescribe regulations as may be necessary to carry out the purposes 

of the provision. Such regulations shall provide that administrative 

expenses that are excluded from qualifying distributions solely by 

reason of the limitations imposed by the provision shall not for 

such reason subject a private foundation to any other excise taxes 

imposed by Subchapter A of Chapter 42 of the Code (i.e., sections 

4940 through 4948). 

Modification of excise tax on self-dealing 

The provision increases the initial excise tax imposed on a selfdealer from five percent to 25 percent of the amount involved with 

respect to the act of self-dealing for each year (or part thereof) in 

the taxable period. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003. 

G. MODIFY TAX ON UNRELATED BUSINESS TAXABLE INCOME OF

CHARITABLE REMAINDER TRUSTS

(Sec. 106 of the bill and sec. 664 of the Code) 

PRESENT LAW

Charitable remainder annuity trusts and charitable remainder 

unitrusts are exempt from Federal income tax for a tax year unless 

the trust has any unrelated business taxable income for the year 

(including certain debt financed income). A charitable remainder 

trust that loses its exemption from income tax for a taxable year 

is taxed as a complex trust. As such, the trust is allowed a deduction in computing taxable income for amounts required to be distributed in a taxable year, not to exceed the amount of the trust’s 

distributable net income for the year. Taxes imposed on the trust 

are required to be allocated to corpus.43

Distributions from a charitable remainder annuity trust or charitable remainder unitrust are treated in the following order as: (1) 

ordinary income to the extent of the trust’s current and previously 

undistributed ordinary income for the trust’s year in which the distribution occurred, (2) capital gains to the extent of the trust’s current capital gain and previously undistributed capital gain for the 

trust’s year in which the distribution occurred, (3) other income 

(e.g., tax-exempt income) to the extent of the trust’s current and 

previously undistributed other income for the trust’s year in which 

the distribution occurred, and (4) corpus.44

In general, distributions to the extent they are characterized as 

income are includible in the income of the beneficiary for the year 

that the annuity or unitrust amount is required to be distributed 

37

45Treas. Reg. sec. 1.664–1(d)(4). 46Sec. 664(d). 47See Treas. Reg. sec. 1.664–3(a)(iv), which requires that all assets and liabilities of the trust 

are taken into account in determining their net fair market value. 

even though the annuity or unitrust amount is not distributed 

until after the close of the trust’s taxable year.45

A charitable remainder annuity trust is a trust that is required 

to pay, at least annually, a fixed dollar amount of at least five percent of the initial value of the trust to a noncharity for the life of 

an individual or for a period of 20 years or less, with the remainder 

passing to charity. A charitable remainder unitrust is a trust that 

generally is required to pay, at least annually, a fixed percentage 

of at least five percent of the fair market value of the trust’s assets 

determined at least annually to a noncharity for the life of an individual or for a period of 20 years or less, with the remainder passing to charity.46

A trust does not qualify as a charitable remainder annuity trust 

if the annuity for a year is greater than 50 percent of the initial 

fair market value of the trust’s assets. A trust does not qualify as 

a charitable remainder unitrust if the percentage of assets that are 

required to be distributed at least annually is greater than 50 percent. A trust does not qualify as a charitable remainder annuity 

trust or a charitable remainder unitrust unless the value of the remainder interest in the trust is at least 10 percent of the value of 

the assets contributed to the trust. 

REASONS FOR CHANGE

The Committee believes that in years that a charitable remainder trust has unrelated business income, an excise tax of 100 percent on such income is a more appropriate remedy than loss of tax 

exemption for the year. 

EXPLANATION OF PROVISION

Under the provision, in lieu of removing the income tax exemption of a charitable remainder trust for any taxable year in which 

the trust has any unrelated business taxable income, a 100-percent 

excise tax is imposed on the unrelated business taxable income of 

the trust. Because the effect of the excise tax is the same as if the 

unrelated business taxable income was not incurred by the charitable remainder annuity trust or charitable remainder unitrust, the 

provision excludes such income from the determination of (1) the 

value of a charitable remainder unitrust’s assets,47 (2) the amount 

of charitable remainder unitrust income for purposes of determining the unitrust’s required distributions, and (3) the effect on 

the income character of any distributions to beneficiaries by a charitable remainder annuity trust or charitable remainder unitrust. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003. 

38

48Sec. 170(e)(1). 49Secs. 170(e)(4) and 170(e)(6). 

H. EXPAND CHARITABLE CONTRIBUTION ALLOWED FOR SCIENTIFIC

PROPERTY USED FOR RESEARCH AND FOR COMPUTER TECHNOLOGY

AND EQUIPMENT

(Sec. 107 of the bill and sec. 170 of the Code) 

PRESENT LAW

In the case of a charitable contribution of inventory or other ordinary-income or short-term capital gain property, the amount of the 

charitable deduction generally 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.48

Under present law, a taxpayer’s deduction for charitable contributions of scientific property used for research and for contributions of computer technology and equipment generally is limited to 

the taxpayer’s basis (typically, cost) in the property. However, certain corporations may claim a deduction in excess of basis for a 

‘‘qualified research contribution’’ or a ‘‘qualified computer contribution.’’ 49 This enhanced 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. The 

enhanced deduction for qualified computer contributions expires for 

any contribution made during any taxable year beginning after December 31, 2003. 

A qualified research contribution means a charitable contribution 

of inventory that is tangible personal property and that satisfies 

other requirements. The contribution must be to a qualified educational or scientific organization and be made not later than two 

years after construction of the property is substantially completed. 

The original use of the property must be by the donee, and the 

property must be used substantially for research or experimentation, or for research training, in the U.S. in the physical or biological sciences. The property must be scientific equipment or apparatus, constructed by the taxpayer, and may not be transferred by 

the donee in exchange for money, other property, or services. The 

donee must provide the taxpayer with a written statement representing that it will use the property in accordance with the conditions for the deduction. For purposes of the enhanced deduction, 

property is considered constructed by the taxpayer only if the cost 

of the parts used in the construction of the property (other than 

parts manufactured by the taxpayer or a related person) do not exceed 50 percent of the taxpayer’s basis in the property. 

A qualified computer contribution means a charitable contribution of any computer technology or equipment, which meets standards of functionality and suitability as established by the Secretary 

of the Treasury. The contribution must be to certain educational organizations or public libraries and made not later than three years 

after the taxpayer acquired the property or, if the taxpayer conVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00038 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
39

50 If the taxpayer constructed the property and reacquired such property, the contribution 

must be within three years of the date the original construction was substantially completed. 

Sec. 170(e)(6)(D)(i). 51This requirement does not apply if the property was reacquired by the manufacturer and 

contributed. Sec. 170(e)(6)(D)(ii). 52Sec. 170(e)(6)(C). 53Sec. 1366(a)(1)(A). 54Sec. 1367(a)(2)(B). 

structed the property, not later than the date construction of the 

property is substantially completed.50 The original use of the property must be by the donor or the donee,51 and in the case of the 

donee, the property must be used substantially for educational purposes related to the function or purpose of the donee. The property 

must fit productively into the donee’s education plan. The donee 

may not transfer the property in exchange for money, other property, or services, except for shipping, installation, and transfer 

costs. To determine whether property is constructed by the taxpayer, the rules applicable to qualified research contributions 

apply. Contributions may be made to private foundations under 

certain conditions.52

REASONS FOR CHANGE

The Committee believes that extension of the enhanced deduction to include property assembled by the taxpayer will lead to increased charitable contributions of scientific property used for research and computer technology and equipment and will help to 

eliminate confusion in determining whether property is ‘‘constructed’’ or ‘‘assembled’’ for purposes of claiming the enhanced deduction. The Committee believes it is appropriate to make permanent the enhanced deduction for qualified computer contributions. 

EXPLANATION OF PROVISION

Under the provision, property assembled by the taxpayer, in addition to property constructed by the taxpayer, is eligible for either 

enhanced deduction. 

The provision makes permanent the enhanced deduction for 

qualified computer contributions. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003. 

I. BASIS ADJUSTMENT TO STOCK OF S CORPORATION CONTRIBUTING

PROPERTY

(Sec. 108 of the bill and sec. 1367 of the Code) 

PRESENT LAW

Under present law, if an S corporation contributes money or 

other property to a charity, each shareholder takes into account the 

shareholder’s pro rata share of the contribution in determining its 

own income tax liability.53 A shareholder of an S corporation reduces the basis in the stock of the S corporation by the amount of 

the charitable contribution that flows through to the shareholder.54

40

55See Rev. Rul. 96–11 (1996–1 C.B. 140) for a rule reaching a similar result in the case of 

charitable contributions made by a partnership. 56Sec. 501(c)(7); Treas. Reg. sec. 1.501(a)–1(c). 57 Rev. Rul. 69–573, 1969–2 C.B. 125; Rev. Rul. 64–118, 1964–1 C.B. (Part 1) 182. 

REASONS FOR CHANGE

Under present law, if an S corporation makes a charitable contribution of appreciated property, the shareholder may be taxed on 

an amount equal to the appreciation in the contributed property 

when the S corporation stock is sold. Thus, under present law, a 

charitable contribution of appreciated property made by an S corporation receives less favorable tax treatment than other contributions of appreciated property. 

The Committee wishes to preserve the benefit of providing a 

charitable contribution deduction for contributions of property by 

an S corporation with a fair market value in excess of its adjusted 

basis. Thus, the bill provides that the basis adjustment to the stock 

of an S corporation for charitable contributions made by the corporation will be in an amount equal to the shareholder’s pro rata 

share of the adjusted basis of the property contributed. This adjustment will prevent the later recognition of gain attributable to the 

appreciation in the contributed property on the disposition of the 

S corporation stock. 

EXPLANATION OF PROVISION

The provision provides that the amount of a shareholder’s basis 

reduction in the stock of an S corporation by reason of a charitable 

contribution made by the corporation equals the shareholder’s pro 

rata share of the adjusted basis of the contributed property.55

Thus, for example, assume an S corporation with one individual 

shareholder makes a charitable contribution of stock with a basis 

of $200 and a fair market value of $500. The shareholder is treated 

as having made a $500 charitable contribution (or a lesser amount 

if the special rules of section 170(e) apply), and reduces the basis 

of the S corporation stock by $200. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003.

J. CHARITABLE ORGANIZATIONS PERMITTED TO MAKE CERTAIN

COLLEGIATE HOUSING GRANTS

(Sec. 109 of the bill and sec. 501 of the Code) 

PRESENT LAW

Social clubs described in section 501(c)(7) are organizations generally exempt from tax that are organized for pleasure, recreation, 

and other nonprofitable purposes, substantially all of the activities 

of which are for such purposes and no part of the net earnings of 

which inures to the benefit of any person having a personal and 

private interest in the activities of the organization.56 In general, 

fraternities and sororities provide fraternal, recreational, and social 

activities for their members who are students that attend a college 

or university and qualify as exempt social clubs.57

41

58 Rev. Rul. 69–573, 1969–2 C.B. 125 (noting that although the typical college fraternity does 

in some degree contribute to the cultural and educational growth of its members during their 

student years, this is not its primary purpose, which is fraternal, recreational and social in nature). 59Sec. 170(c)(2). 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. Secs. 170(b) and (e). 60Secs. 2055(a)(2) and 2522(a)(2). 

Under present law, a charitable organization described in section 

501(c)(3) may provide, consistent with its exempt purposes, financial assistance to support the charitable and educational purposes 

of social clubs, such as fraternities and sororities. Social and recreational purposes of a fraternity or sorority, however, are not 

charitable or educational purposes within the meaning of section 

501(c)(3).58

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 an organization described 

in section 501(c)(3).59 Within certain limitations, donors also are 

entitled to deduct their contributions to section 501(c)(3) organizations for Federal estate and gift tax purposes.60

REASONS FOR CHANGE

Under present law, taxpayers generally may deduct charitable 

contributions to colleges and universities, that, consistent with 

their exempt purposes, may use such contributions for student facilities such as dormitories, dining halls, study areas, libraries, 

computers, laundry facilities, physical fitness facilities, and social 

or recreational areas. The Committee recognizes that colleges and 

universities do not, and cannot, provide all of the housing and related student facilities for their student bodies, and that collegiate 

organizations such as student associations and organizations that 

are exempt from tax as social clubs (including fraternities and sororities), rather than as charitable or educational organizations, 

provide a significant portion of the required collegiate housing and 

related facilities. The Committee believes that making grants to 

such student organizations to provide housing and related student 

facilities furthers charitable and educational purposes, even though 

doing so may involve more than incidental social, recreational, or 

private purposes, provided that the grants are used for purposes 

that would be permissible for a college or university that is described in section 501(c)(3). 

EXPLANATION OF PROVISION

The provision provides that for purposes of sections 501(c)(3), 

170(c)(2)(B), 2055(a), and 2522(a)(2), an organization shall not fail 

to be treated as organized and operated exclusively for charitable 

or educational purposes solely because such organization makes 

certain collegiate housing and infrastructure grants to qualifying 

recipient organizations. The provision applies to grants to provide, 

improve, operate, or maintain collegiate housing that may involve 

more than incidental social, recreational, or private purposes, so 

long as the grants are to be used by the recipient organization for 

purposes that would be permissible for a dormitory of the college 

42

61The provision does not apply to the portion of a grant made for use by the recipient organization for physical fitness equipment. 62Sec. 511. 63Sec. 513(f). 64 87 T.C. 168 (1986), acq. in result, 1987–2 C.B. 1. 65See, e.g., Women of the Motion Picture Indus. v. Commissioner, T.C. Memo 1997–518. 

or university described in section 501(c)(3) with which such organization is associated.61 The grant recipient must be an organization 

described in section 501(c)(7), or a title holding company described 

in section 501(c)(2) that holds property exclusively for the benefit 

of an organization described in section 501(c)(7). Further, at the 

time the grant is made, substantially all of the active members of 

the recipient organization (or, if the recipient is a title holding company, the affiliated social club) must be full-time students at the 

college or university with which such organization is associated. 

EFFECTIVE DATE

The provision is effective for grants made after December 31, 

2003.

K. PROCEEDS FROM CERTAIN GAMES OF CHANCE TREATED AS

INCOME RELATED TO EXEMPT PURPOSES

(Sec. 110 of the bill and sec. 513 of the Code) 

PRESENT LAW

Charitable and other organizations generally exempt from tax 

are subject to tax on their unrelated business taxable income.62 In 

general, unrelated business taxable income is the gross income derived from an unrelated trade or business regularly carried on by 

the organization, less deductions that are directly connected with 

carrying on the business. An unrelated trade or business does not 

include any trade or business that consists of conducting bingo 

games.63 A bingo game is any game of bingo of a type in which 

usually: (1) The wagers are placed, the winners are determined, 

and the distribution of prizes or other property is made in the presence of all persons placing wagers in such game; (2) the conducting 

of which is not an activity ordinarily carried out on a commercial 

basis; (3) and the conducting of which does not violate any State 

or local law. 

Gaming activities other than bingo generally are treated as an 

unrelated trade or business and the proceeds therefore are subject 

to the unrelated business income tax. However, consistent with the 

IRS’s acquiescence in the result of South End Italian Independent 

Club, Inc. v. Commissioner,64 organizations may under present law 

deduct certain expenditures of gaming proceeds in calculating unrelated business income tax liability, thus enabling organizations to 

reduce, and in some cases eliminate, unrelated business income tax 

liability. Deductible expenditures generally do not include gaming 

proceeds that are accumulated for future use or transferred to the 

organization’s general fund,65 but do include amounts disbursed to 

further charitable purposes that are required by State law as a 

condition of conducting the gaming activity. 

43

66See 36 U.S.C. sec. 300102. 67 American Red Cross, Frequently Asked Questions http://www.redcross.org/sys/search/

fanew.asp (April 11, 2003). 

REASONS FOR CHANGE

The Committee believes that certain games of chance should be 

treated the same as bingo for purposes of the unrelated business 

income tax, as long as the net proceeds from such games are paid 

(or set aside for payment) by the organization for charitable or social welfare purposes, or purposes authorized by State law with respect to such proceeds. 

EXPLANATION OF PROVISION

The provision provides that any trade or business that consists 

of conducting qualifying games of chance is not an unrelated trade 

or business, so long as the net proceeds from the games of chance 

are paid or set aside for payment for purposes described in section 

170(c)(2)(B), the promotion of social welfare as described in section 

501(c)(4), or for a purpose for which State law specifically authorizes the expenditure of such proceeds. A qualified game of chance 

means any game of chance (other than bingo) conducted by an organization if: (1) Such organization is licensed pursuant to State 

law to conduct such game; (2) only organizations that are organized 

as nonprofit corporations or are exempt from tax under section 501 

(a) may be so licensed to conduct such game within the State; and 

(3) the conduct of such game does not violate State or local law. 

EFFECTIVE DATE

The provision is effective for games conducted after December 31, 

2003.

L. EXCISE TAXES EXEMPTION FOR BLOOD COLLECTOR

ORGANIZATIONS

(Sec. 111 of the bill and secs. 4041, 4221, 4253, 6416, and 7701 of 

the Code) 

PRESENT LAW

American National Red Cross 

The American National Red Cross (‘‘Red Cross’’) is a Congressionally chartered corporation. It is responsible for giving aid to 

members of the U.S. Armed Forces, to disaster victims in the 

United States and abroad to help people prevent, prepare for, and 

respond to emergencies.66 The Red Cross is responsible for half of 

the nation’s blood supply and blood products.67

Exemption from certain retail and manufacturers excise taxes 

The Code permits the Secretary to exempt from excise tax certain articles and services to be purchased for the exclusive use of 

the United States. This authority is conditioned upon the Secretary 

determining (1) that the imposition of such taxes will cause substantial burden or expense which can be avoided by granting tax 

exemption and (2) that full benefit of such exemption, if granted, 

will accrue to the United States. 

44

68Department of the Treasury, Notice-Manufacturers and Retailers Excise Taxes—Exemption 

from Tax of Sales of Certain Articles to the American Red Cross, 44 F.R. 23407, 1979–1 C.B. 

478 (1979). At the time the notice was issued the following taxes were covered in Chapters 31 

and 32: special fuels, automotive and related items (motor vehicles, tires and tubes, petroleum 

products, coal, and recreational equipment (sporting goods and firearms). Chapter 32 now covers 

aviation fuel taxes under section 4091 and the taxes under section 4041(c) serve today as a 

backup tax. 69 Under present law, there is no longer a tax on inner tubes. 70 Id. The Treasury notice also exempts the Red Cross from tax on aircraft tires and tubes, 

however, present law currently limits the tax to highway vehicle tires (sec. 4071(a)). 

On April 18, 1979, the Secretary exercised this authority to exempt, with limited exceptions, the Red Cross from the taxes imposed by chapters 31 and 32 of the Code with respect to articles 

sold to the Red Cross for its exclusive use.68 An exemption is also 

authorized from the taxes imposed with respect to tires and inner 

tubes if such tire or inner tube is sold by any person on or in connection with the sale of any article to the American National Red 

Cross, for its exclusive use.69 No exemption is provided from the 

gas guzzler tax (sec. 4064), and the taxes imposed on aviation fuel, 

on fuel used on inland waterways (sec. 4042), and on coal (sec. 

4121).70 The exemption is subject to registration requirements for 

tax-free sales contained in Treasury regulations. Credit and refund 

of tax is subject to the requirements set forth is section 6416 relating to the exemption for taxable articles sold for the exclusive use 

of State and local governments. 

Exemption from heavy highway motor vehicle use tax 

An annual use tax is imposed on highway motor vehicles, at the 

rates below (sec. 4481).

Under 55,000 pounds .............. No tax. 

55,000–75,000 pounds ............. $100 plus $22 per 1,000 pounds over 55,000. 

Over 75,000 pounds ................. $550. 

The Code provides that the Secretary may authorize exemption 

from the heavy highway vehicle use tax as to the use by the United 

States of any particular highway motor vehicle or class of highway 

motor vehicles if the Secretary determines that the imposition of 

such tax with respect to such use will cause substantial burden or 

expense which can be avoided by granting tax exemption and that 

the full benefit of such exemption, if granted will accrue to the 

United States (sec. 4483(b)). The IRS has ruled that the Red Cross 

comes within the term ‘‘United States’’ for purposes of the exemption from the heavy highway motor vehicle use tax (Rev. Rul. 76– 510). 

Exemption from communications excise tax 

The Code imposes a three-percent tax on amounts paid for local 

telephone service; toll telephone service and teletypewriter exchange service (sec. 4251). These taxes do not apply to amounts 

paid for services furnished to the Red Cross (sec. 4253(c)). 

Certain other tax-free sales 

Exemption from certain manufacturer and retail sale excise 

taxes 

The following sales generally are exempt from certain manufacturer and retail sale excise taxes: (1) For use by the purchaser for 

45

71The tax imposed by subchapter A of chapter 31 (relating to luxury passenger vehicles) are 

also exempt pursuant to this provision, however, this tax expired on December 31, 2002. (sec. 

4001(g).) 

further manufacture, or for resale to a second purchaser in further 

manufacture; (2) for export or for resale to a second purchaser for 

export; (3) for use by the purchaser as supplies for vessels or aircraft; (4) to a State or local government for the exclusive use of a 

State or local government; and (5) to a nonprofit educational organization for its exclusive use (sec. 4221). The exemption generally 

applies to manufacturers taxes imposed by chapter 32 of the Code 

(the gas guzzlers tax, and the taxes imposed on tires, certain vaccines, and recreational equipment) and the tax on retail sales of 

heavy trucks and trailers.71

The manufacturers excise taxes on coal (sec. 4121), on gasoline, 

diesel fuel, and kerosene (sec. 4081) and on aviation fuel (sec. 4091) 

are not covered by the exemption. The exemption for a sale to a 

State or local government for their exclusive use and the exemption 

for sales to a nonprofit educational organization does not apply to 

the gas guzzlers tax, and the tax on vaccines. In addition, the exemption of sales for use as supplies for vessels and aircraft does 

not apply to the vaccine tax. 

Exempt sales of special fuels 

A retail excise tax is imposed on special fuels such as propane, 

compressed natural gas, and certain alcohol mixtures (sec. 4041). 

No tax is imposed on these fuels: (1) Sold for use or used as supplies for vessels or aircraft, (2) sold for the exclusive use of any 

State, any political subdivision of a State, or the District of Columbia or is used by such entity as fuel, (3) sold for export, or for shipment to a possession of the United States and is actually exported 

or shipped, (4) sold to a nonprofit educational organization for its 

exclusive use, or used by such entity as fuel (sec. 4041(g)). 

Credits and refunds 

In general 

A credit or refund is allowed for overpayment of manufacturers 

or retail excise taxes (sec. 6416). Overpayments include (1) certain 

uses and resales, (2) price adjustments, and (3) further manufacture. 

Specified uses and resales 

The special fuel taxes, the retail tax on heavy trucks and trailers, 

and any of the manufacturers excise taxes paid on any article will 

be a deemed overpayment subject to credit or refund if sold for certain specified uses (sec. 6416(b)(2)). These uses are (1) export, (2) 

used or sold for use as supplies for vessels or aircraft, (3) sold to 

a State or local government for the exclusive use of a State or local 

government, (4) sold to a nonprofit educational organization for its 

exclusive use; (5) taxable tires sold to any person for use in connection with a qualified bus, or (6) the case of gasoline used or sold 

for use in the production of a special fuel. Certain exceptions apply 

in that this deemed overpayment rule does not apply to diesel fuel 

(sec. 4041(a)(1)), kerosene (sec. 4081), aviation fuel (sec. 4091), and 

coal taxes (sec. 4121). Additionally, the deemed overpayment rule 

46

does not apply to the gas guzzler tax in the case of an article sold 

to a state or local government for its exclusive use or sold to an 

educational organization for its exclusive use. 

Special rule for tires sold in connection with other articles 

If the tax imposed on tires (sec. 4071) has been paid with respect 

to the sale of any tire by the manufacturer, producer, or importer, 

and such tire is sold by any person in connection with the sale of 

any other article, such tax will be deemed an overpayment by person if such other article (1) is an automobile bus chassis or an automobile bus body, or (2) is by any person exported, sold to a State 

or local government for exclusive use of a State or local government, sold to a nonprofit educational organization for its exclusive 

use, or used or sold for use as supplies for vessels or aircraft (sec. 

6416(b)(4)). 

Gasoline used for exempt purposes 

If gasoline is sold to any person for certain specified purposes, 

the Secretary is required to pay (without interest) to such person 

an amount equal to the product of the number of gallons of gasoline so sold multiplied by the rate at which tax was imposed on 

such gasoline under section 4081 (sec. 6421(c)). Under this provision, the specified purposes are (1) for export or for resale to a second purchaser for export; (2) for use by the purchaser as supplies 

for vessels or aircraft; (3) to a State or local government for exclusive use of a State or local government; and (4) to a nonprofit educational organization for its exclusive use (sec. 4221(a), 6421(c)). 

Diesel fuel, kerosene and aviation fuel used in a nontaxable 

use 

If diesel fuel, kerosene, or aviation fuel, upon which tax has been 

imposed is used by any person in a nontaxable use, the Code authorizes the Secretary to pay (without interest) to the ultimate purchaser of such fuel an amount equal to the aggregate amount of tax 

imposed on such fuel (sec. 6427(1)). Nontaxable uses include any 

exemption under the rules governing special fuels (except prior taxation). 

REASONS FOR CHANGE

The Red Cross is given an exemption from certain excise taxes 

generally because the full benefit of the exemption accrues to the 

United States. The Red Cross performs several functions that benefit the United States, including giving aid to the U.S. Armed 

Forces and assisting disaster victims. In addition, a major function 

of the Red Cross is to collect blood. The Committee believes it is 

appropriate to extend similar tax exemption to registered 501(c)(3) 

entities primarily engaged in the collection of blood. 

EXPLANATION OF PROVISION

The provision exempts qualified blood collector organizations 

from certain retail and manufacturers excise taxes to the extent 

such items are for the exclusive use of such an organization. A 

qualified blood collector organization means an organization that is 

(1) described in section 501(c)(3) and exempt from tax under section 

501(a), (2) registered by the Food and Drug Administration to colVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00046 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
47

72Such organizations are also exempt from the expired retail excise tax on luxury passenger 

vehicles. No exemption is provided from the gas guzzler tax (sec. 4064), and the taxes imposed 

on fuel used on inland waterways (sec. 4042), and on coal (sec. 4121). 73Sec. 512(a)(3). Present law refers to section 510(c)(20) organizations (group legal services 

plans). Section 501(c)(20) is not effective for taxable years beginning after June 30, 1992. 74Subject to certain limitations, the investment income of organizations described in section 

501(c)(17) generally is not taxed if it is set aside to provide for the payment of life, sick, accident, 

or other benefits. Secs. 512(a)(3)(B)(ii) and 512(a)(3)(E). 75Sec. 512(a)(3)(D). 

lect blood, and (3) primarily engaged in the activity of the collection 

of blood. 

Under the provision, qualified blood collector organizations are 

exempt from the communications excise tax as provided by Treasury regulations. The provision also provides an exemption from the 

special fuels tax, and certain taxes imposed by chapter 32 and subchapter A and C of chapter 31 of the Code (i.e., the retail excise 

tax on heavy trucks and trailers, and the manufacturers excise 

taxes on tires, vaccines, and recreational equipment (sport fishing 

equipment, bows, arrow components, and firearms)).72 The provision also makes conforming amendments to allow for the credit or 

refund of these taxes and any tax paid on gasoline for the exclusive 

use of the blood collector organization. The provision also permits 

a refund of tax for diesel fuel, kerosene or aviation fuel used by a 

qualified blood collector organization. 

EFFECTIVE DATE

The provision is effective on January 1, 2004.

M. NONRECOGNITION OF GAIN ON THE SALE OF PROPERTY USED IN

THE PERFORMANCE OF AN EXEMPT FUNCTION

(Sec. 112 of the bill and sec. 512 of the Code) 

PRESENT LAW

The unrelated business taxable income of organizations described 

in sections 501(c)(7) (social clubs), 501(c)(9) (voluntary employees’ beneficiary associations), and 501(c)(17) (supplemental unemployment compensation benefit organizations) includes all gross income, less deductions directly connected with producing that income, but not including exempt function income.73 For this purpose, exempt function income is gross income from dues, fees, 

charges, or similar items paid by members to an organization for 

the purposes for which exempt status was granted to such organization. Investment income of such organizations generally is not 

taxed if set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to 

children or animals.74

Gain on the sale of property by an organization described in sections 501(c)(7), 501(c)(9), or 501(c)(17) that was used directly in 

performing an exempt function of the organization generally is 

taxed as unrelated business taxable income. An organization may 

reduce the amount of gain to be recognized from such sales, however, if the organization purchases other property that is used directly in performing an exempt function.75 In such cases, gain is 

recognized only to the extent that the sales price of the sold property exceeds the cost of purchasing the replacement property. The 

replacement property must be acquired by the organization within 

48

the period beginning one year before, and ending three years after, 

the date of sale of the sold property. For these purposes, a sale of 

property includes the property’s destruction in whole or in part, 

theft, seizure, requisition, or condemnation. 

REASONS FOR CHANGE

The Committee believes that the present-law replacement period 

often does not provide social clubs that are described in section 

501(c)(7) sufficient time to explore and acquire suitable replacement property that will best further the organization’s exempt purposes. 

EXPLANATION OF PROVISION

The provision extends the replacement period for acquisitions of 

replacement property from four years to eleven years with respect 

to the sales of property by social clubs described in section 

501(c)(7). A social club that sells property used directly in the performance of its exempt function recognizes gain from such a sale 

only to the extent that the organization’s sales price of such property exceeds the organization’s cost of purchasing other property, 

during a period beginning one year before the date of sale and ending ten years after such date, that is used directly in the performance of the exempt function of the organization. 

The provision provides an extended limitations period with respect to the assessment of a deficiency in such cases. 

EFFECTIVE DATE

The provision is effective for the sale of property for which the 

three-year period for offsetting gain by purchasing other property 

under section 512(a)(3)(D) (as in effect on the day before the date 

of enactment of the provision) had not expired as of January 1, 

2001.

N. QUALIFIED 501(c)(3) BONDS FOR NURSING HOMES EXEMPT FROM

FEDERAL GUARANTEE PROHIBITION

(Sec. 113 of the bill) 

PRESENT LAW

Qualified 501(c)(3) bonds 

Interest on State or local government bonds is tax-exempt when 

the proceeds of the bonds are used to finance activities carried out 

by or paid for by those governmental units. Interest on bonds 

issued by State or local governments acting as conduit borrowers 

for private businesses is taxable unless a specific exception is included in the Code. One such exception allows taxexempt bonds to 

be issued to finance activities of non-profit organizations described 

in section 501(c)(3) (‘‘qualified 501(c)(3) bonds’’). A 501(c)(3) organization could provide, among other things, low-income housing facilities, assisted living facilities, nursing homes, hospitals, and 

homes for the aged. 

For a bond to be a qualified 501(c)(3) bond, the bond must meet 

certain requirements. The property that is to be provided by the 

net proceeds of the issue must be owned by a 501(c)(3) organizaVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00048 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
49

tion, or by a government unit. In addition, a bond failing both a 

modified private business use test and a modified private security 

or payment test would not be a qualified 501(c)(3) bond. Under the 

modified private business use test at least 95 percent of the net 

proceeds of the bond must be used by a 501(c)(3) organization in 

furtherance of its exempt purpose. Under a modified private security or payment test, the debt service on not more than 5 percent 

of the net proceeds of the bond issue can be (1) secured by an interest in property, or payments in respect of property, used by a 

501(c)(3) organization in furtherance of an unrelated trade or business or by a private user, or (2) derived from payments in respect 

of property, or borrowed money, used by a 501(c)(3) organization in 

furtherance of an unrelated trade or business or by a private user. 

Federal guarantee prohibition 

Subject to exceptions for certain Federal programs in existence 

before 1984, interest on any obligation is not tax-exempt if the obligation is Federally guaranteed. An obligation is treated as Federally guaranteed if (1) the payment of the principal or interest on 

the obligation is guaranteed (directly or indirectly), in whole or in 

part, by the United States or any agency or instrumentality thereof, or (2) five percent or more of the proceeds of the issue of which 

the obligation is a part is to be (i) used in making loans the payment of principal or interest on which are guaranteed in whole or 

in part by the United States or any agency or instrumentality 

thereof or, (ii) invested, directly or indirectly, in Federally insured 

deposits or accounts in a financial institution. 

The Code provides exceptions to the Federal guarantee prohibition for certain insurance programs. Specifically, a bond is not 

treated as Federally guaranteed by reason of any guarantee by the 

Federal Housing Administration, the Veterans’ Administration, the 

Federal National Mortgage Association, the Federal Home Loan 

Mortgage Corporation, or the Government National Mortgage Association, any guarantee of student loans and any guarantee by the 

Student Loan Marketing Association to finance student loans, or 

any guarantee by the Bonneville Power Authority pursuant to the 

Northwest Power Act (16 U.S.C. 839d) as in effect on the date of 

the enactment of the Tax Reform Act of 1984. 

The Code also excludes certain housing-related bond issues, proceeds invested for an initial temporary period until needed for the 

purpose for which such issue was issued, bona fide debt service 

fund investments, investments in a reasonably required reserve 

fund, investments in United States Treasury obligations, and other 

investments permitted by regulation. 

REASONS FOR CHANGE

The present-law Federal guarantee prohibition on tax-exempt 

bonds serves the important policy objective of denying Federal income tax-exemption to interest on debt issued by State or local governments when such debt enjoys a direct or indirect Federal guarantee. Absent this prohibition, State and local Federally guaranteed tax-exempt debt would hold an unfair advantage over debt instruments issued directly by the Federal government and its instrumentalities. While some grandfathered exceptions to the prohibition on Federal guarantees for State and local issues exist, the 

50

Congress has a long-standing concern about creating any new exceptions to the Federal guarantee prohibition. In this instance, 

given the limited nature of the exception and a degree of uncertainty regarding the status of certain letters of credit under present 

law, the Committee feels that a short-term exception is appropriate 

in order to provide time for review and clarification of the rules regarding such letters of credit. 

EXPLANATION OF PROVISION

Under the provision, the Federal guarantee prohibition will not 

apply to qualified 501(c)(3) bonds supported by a letter of credit 

and issued for the benefit of an organization described in subsection 501(c)(3), if such bonds are part of an issue, the proceeds 

of which are used to finance one or more of the following facilities 

primarily for the benefit of the elderly: (1) licensed nursing home 

facilities, (2) licensed or certified assisted living facilities, (3) licensed personal care facilities, or (4) continuing care retirement 

communities. The provision is limited to $15 million or less of aggregate bond issuance per issuer per calendar year. Also, no more 

than $15 million of eligible debt may be outstanding per user under 

this provision. 

‘‘Continuing care retirement community’’ means a community 

that provides, on the same campus, a continuum of residential living options and support services to persons sixty (60) years of age 

or older under a written agreement. The residential living options 

shall include independent living units, nursing home beds, and either assisted living units or personal care beds. 

EFFECTIVE DATE

The provision is effective for bonds issued after December 31, 

2003, and before the date which is one year after the date of enactment.

TITLE II. TAX REFORM AND IMPROVEMENTS RELATING TO 

CHARITABLE ORGANIZATIONS AND PROGRAMS 

A. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST

ORGANIZATIONS

(Sec. 201 of the bill and sec. 501 of the Code) 

PRESENT LAW

Under present law, the Internal Revenue Service generally issues 

a letter revoking recognition of an organization’s tax-exempt status 

only after (1) conducting an examination of the organization, (2) 

issuing a letter to the organization proposing revocation, and (3) allowing the organization to exhaust the administrative appeal rights 

that follow the issuance of the proposed revocation letter. In the 

case of an organization described in section 501(c)(3), the revocation letter immediately is subject to judicial review under the declaratory judgment procedures of section 7428. To sustain a revocation of tax-exempt status under section 7428, the IRS must demonstrate that the organization is no longer entitled to exemption. 

There is no procedure under current law for the IRS to suspend the 

tax-exempt status of an organization. 

51

To combat terrorism, the Federal government has designated a 

number of organizations as terrorist organizations or supporters of 

terrorism under the Immigration and Nationality Act, the International Emergency Economic Powers Act, and the United Nations 

Participation Act of 1945. 

REASONS FOR CHANGE

An organization that has been designated or otherwise identified 

by the Federal government as a terrorist organization pursuant to 

certain authority should not be exempt from Federal income tax 

and contributions to such organizations should not be deductible 

for Federal income tax purposes. The Committee believes that the 

Federal government’s designation or identification of an organization as a terrorist organization is ground for suspension of tax-exempt status, and that in such cases a separate investigation of the 

organization by the Internal Revenue Service is not necessary. Further, because a terrorist organization may challenge the Federal 

government’s designation or identification of the organization 

under the law authorizing the designation or identification, recourse to the declaratory judgment procedures of the Internal Revenue Code to challenge the suspension of tax-exemption is not appropriate. 

EXPLANATION OF PROVISION

The provision suspends the tax-exempt status of an organization 

that is exempt from tax under section 501(a) for any period during 

which the organization is designated or identified by U.S. Federal 

authorities as a terrorist organization or supporter of terrorism. 

The provision also makes such an organization ineligible to apply 

for tax exemption under section 501(a). The period of suspension 

runs from the date the organization is first designated or identified 

(or from the date of enactment of the provision, whichever is later) 

to the date when all designations or identifications with respect to 

the organization have been rescinded pursuant to the law or Executive order under which the designation or identification was made. 

The provision describes a terrorist organization as an organization that has been designated or otherwise individually identified 

(1) as a terrorist organization or foreign terrorist organization 

under the authority of section 212(a)(3)(B)(vi)(II) or section 219 of 

the Immigration and Nationality Act; (2) in or pursuant to an Executive order that is related to terrorism and issued under the authority of the International Emergency Economic Powers Act or 

section 5 of the United Nations Participation Act for the purpose 

of imposing on such organization an economic or other sanction; or 

(3) in or pursuant to an Executive order that refers to the provision 

and is issued under the authority of any Federal law if the organization is designated or otherwise individually identified in or pursuant to such Executive order as supporting or engaging in terrorist activity (as defined in section 212(a)(3)(B) of the Immigration 

and Nationality Act) or supporting terrorism (as defined in section 

140(d)(2) of the Foreign Relations Authorization Act, Fiscal Years 

1988 and 1989). During the period of suspension, no deduction for 

any contribution to a terrorist organization is allowed under section 

170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522. 

52

76Sec. 7611. 

No organization or other person may challenge, under section 

7428 or any other provision of law, in any administrative or judicial proceeding relating to the Federal tax liability of such organization or other person, the suspension of tax-exemption, the ineligibility to apply for tax-exemption, a designation or identification described above, the period of suspension, or a denial of a deduction 

described above. The suspended organization may maintain other 

suits or administrative actions against the agency or agencies that 

designated or identified the organization, for the purpose of challenging such designation or identification (but not the suspension 

of tax-exempt status under this provision). 

If the tax-exemption of an organization is suspended and each 

designation and identification that has been made with respect to 

the organization is determined to be erroneous pursuant to the law 

or Executive order making the designation or identification, and 

such erroneous designation results in an overpayment of income 

tax for any taxable year with respect to such organization, a credit 

or refund (with interest) with respect to such overpayment shall be 

made. If the operation of any law or rule of law (including res judicata) prevents the credit or refund at any time, the credit or refund 

may nevertheless be allowed or made if the claim for such credit 

or refund is filed before the close of the one-year period beginning 

on the date that the last remaining designation or identification 

with respect to the organization is determined to be erroneous. 

The provision directs the IRS to update the listings of tax-exempt 

organizations to take account of organizations that have had their 

exemption suspended and to publish notice to taxpayers of the suspension of an organization’s tax-exemption and the fact that contributions to such organization are not deductible during the period 

of suspension. 

EFFECTIVE DATE

The provision is effective for designations made before, on, or 

after the date of enactment.

B. CLARIFICATION OF DEFINITION OF CHURCH TAX INQUIRY

(Sec. 202 of the bill and sec. 7611 of the Code) 

PRESENT LAW

Under present law, the IRS may begin a church tax inquiry only 

if an appropriate highlevel Treasury official reasonably believes, on 

the basis of the facts and circumstances recorded in writing, that 

an organization (1) may not qualify for tax exemption as a church, 

(2) may be carrying on an unrelated trade or business, or (3) otherwise may be engaged in taxable activities.76 A church tax inquiry 

is defined as any inquiry to a church (other than an examination) 

that serves as a basis for determining whether the organization 

qualified for tax exemption as a church or whether it is carrying 

on an unrelated trade or business or otherwise is engaged in taxable activities. An inquiry is considered to commence when the IRS 

requests information or materials from a church of a type contained in church records, other than routine requests for informaVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00052 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
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tion or inquiries regarding matters that do not primarily concern 

the tax status or liability of the church itself. 

REASONS FOR CHANGE

The Committee believes that the present-law church tax inquiry 

procedures provide important safeguards against the IRS engaging 

in unnecessary and intrusive examinations of churches. However, 

the church tax inquiry procedures also have the effect of hampering 

IRS efforts to educate churches with respect to actions that are not 

permissible under section 501(c)(3). The Committee believes that a 

clarification of the scope of the church tax inquiry procedures to 

make it clear that the IRS may undertake educational outreach efforts with respect to specific churches (e.g., initiating meetings with 

representatives of a particular church to discuss the rules that 

apply to such church) will improve compliance with the law by 

churches. 

EXPLANATION OF PROVISION

The provision clarifies that the church tax inquiry procedures do 

not apply to contacts made by the IRS for the purpose of educating 

churches with respect to the federal income tax law governing taxexempt organizations. For example, the IRS does not violate the 

church tax inquiry procedures when written materials are provided 

to a church or churches for the purpose of educating such church 

or churches with respect to the types of activities that are not permissible under section 501(c)(3). 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

C. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO NON501(c)(3) TAX-EXEMPT ORGANIZATIONS

(Sec. 203 of the bill and sec. 7428 of the Code) 

PRESENT LAW

In order for an organization to be granted tax exemption as a 

charitable entity described in section 501(c)(3), it generally must 

file an application for recognition of exemption with the IRS and 

receive a favorable determination of its status. Similarly, for most 

organizations, a charitable organization’s eligibility to receive taxdeductible contributions is dependent upon its receipt of a favorable determination from the IRS. In general, a section 501(c)(3) organization can rely on a determination letter or ruling from the 

IRS regarding its tax-exempt status, unless there is a material 

change in its character, purposes, or methods of operation. In cases 

in which an organization violates one or more of the requirements 

for tax exemption under section 501(c)(3), the IRS is authorized to 

revoke an organization’s tax exemption, notwithstanding an earlier 

favorable determination. 

In situations in which the IRS denies an organization’s application for recognition of exemption under section 501(c)(3) or fails to 

act on such application, or in which the IRS informs a section 

501(c)(3) organization that it is considering revoking or adversely 

modifying its tax-exempt status, present law authorizes the organiVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00053 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
54

zation to seek a declaratory judgment regarding its tax status (sec. 

7428). Section 7428 provides a remedy in the case of a dispute involving a determination by the IRS with respect to: (1) The initial 

qualification or continuing qualification of an organization as a 

charitable organization for tax exemption purposes or for charitable 

contribution deduction purposes; (2) the initial classification or continuing classification of an organization as a private foundation; (3) 

the initial classification or continuing classification of an organization as a private operating foundation; or (4) the failure of the IRS 

to make a determination with respect to (1), (2), or (3). A ‘‘determination’’ in this context generally means a final decision by the 

IRS affecting the tax qualification of a charitable organization, although it also can include a proposed revocation of an organization’s tax-exempt status or public charity classification. Section 

7428 vests jurisdiction over controversies involving such a determination in the U.S. District Court for the District of Columbia, 

the U.S. Court of Federal Claims, and the U.S. Tax Court. 

Prior to utilizing the declaratory judgment procedure, an organization must have exhausted all administrative remedies available 

to it within the IRS. An organization is deemed to have exhausted 

its administrative remedies at the expiration of 270 days after the 

date on which the request for a determination was made if the organization has taken, in a timely manner, all reasonable steps to 

secure such determination. 

If an organization (other than a section 501(c)(3) organization) 

files an application for recognition of exemption and receives a favorable determination from the IRS, the determination of tax-exempt status is usually effective as of the date of formation of the 

organization if its purposes and activities during the period prior 

to the date of the determination letter were consistent with the requirements for exemption. However, if the organization files an application for recognition of exemption and later receives an adverse 

determination from the IRS, the IRS may assert that the organization is subject to tax on some or all of its income for open taxable

years. In addition, as with charitable organizations, the IRS may 

revoke or modify an earlier favorable determination regarding an 

organization’s tax-exempt status. 

Under present law, a non-charity (i.e., an organization not described in section 501(c)(3)) may not seek a declaratory judgment 

with respect to an IRS determination regarding its tax-exempt status. The only remedies available to such an organization are to petition the U.S. Tax Court for relief following the issuance of a notice of deficiency or to pay any tax owed and sue for refund in Federal district court or the U.S. Court of Federal Claims. 

REASONS FOR CHANGE

The Committee believes that it is important to provide certainty 

for organizations that have sought a determination of their tax-exempt status. Thus, the Committee finds it appropriate to extend 

the present-law declaratory judgment procedures to all organizations that apply for tax exempt status as organizations described 

in section 501(c) or 501(d). 

55

77This limitation currently applies to declaratory judgments relating to tax qualification for 

certain employee retirement plans (sec. 7476). 78Sec. 126. 

EXPLANATION OF PROVISION

The provision extends declaratory judgment procedures similar 

to those currently available only to charities under section 7428 to 

other section 501(c) and 501(d) determinations. The provision limits 

jurisdiction over controversies involving such other determinations 

to the United States Tax Court.77

EFFECTIVE DATE

The extension of the declaratory judgment procedures to organizations other than section 501(c)(3) organizations is effective for 

pleadings filed with respect to determinations (or requests for determinations) made after the date of enactment. 

D. EXCLUSION FROM INCOME OF CERTAIN LANDOWNER INITIATIVES

PROGRAM PAYMENTS

(Sec. 204 of the bill and sec. 126 of the Code) 

PRESENT LAW

Under present law, gross income does not include the excludable 

portion of payments made to taxpayers by Federal and state governments for a share of the cost of improvements to property under 

certain conservation programs. These programs include payments 

received under (1) the rural clean water program authorized by section 208(j) of the Federal Water Pollution Control Act; (2) the rural 

abandoned mine program authorized by section 406 of the Surface 

Mining Control and Reclamation Act of 1977; (3) the water bank 

program authorized by the Water Bank Act; (4) the emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978; (5) the agriculture conservation program 

authorized by the Soil Conservation and Domestic Allotment Act; 

(6) the great plains conservation program authorized by section 16 

of the Soil Conservation and Domestic Policy Act; (7) the resource 

conservation and development program authorized by the 

Bankhead-Jones Farm Tenant Act and by the Soil Conservation 

and Domestic Allotment Act; (8) the forestry incentives program 

authorized by section 4 of the Cooperative Forestry Assistance Act 

of 1978; (9) any small watershed program administered by the Secretary of Agriculture which is determined by the Secretary of the 

Treasury or his delegate to be substantially similar to the type of 

programs described in items (1) through (8); and (10) any program 

of a State, possession of the United States, a political subdivision 

of any of the foregoing, or the District of Columbia under which 

payments are made to individuals primarily for the purpose of conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.78

Under present law, the excludable portion of a program payment 

means that portion (or all) of a payment made to any person under 

the program that is determined by the Secretary of Agriculture to 

be made primarily for the purpose of conserving soil and water resources, protecting or restoring the environment, improving forests, 

56

79The provision also provides that the excludable portion of payments received under a program described in present law section 126(a)(10), under which payments are made to individuals 

primarily for the purpose of conserving soil, protecting or restoring the environment, improving 

forests, or providing a habitat for wildlife, shall be determined by the Secretary of Interior, rather than by the Secretary of Agriculture, if the program is implemented by the Department of 

Interior. 

or providing a habitat for wildlife, and is determined by the Secretary of the Treasury or his delegate as not increasing substantially the annual income derived from the property. 

REASONS FOR CHANGE

The Committee believes that certain qualified cost-sharing payments received by taxpayers under the Fish and Wildlife Coordination Act, the Fish and Wildlife Act, and the Endangered Species 

Act, are similar to payments made under other government programs that are excludable from gross income under present law. 

Accordingly, the Committee believes it is appropriate to extend the 

present-law exclusion to payments under such programs. 

EXPLANATION OF PROVISION

The provision expands the types of qualified cost-sharing payments described in section 126 to include payments received under 

landowner initiatives programs to conserve threatened, endangered, or imperiled species, or protect or restore habitat carried out 

under: (1) the Fish and Wildlife Coordination Act (16 U.S.C. 661 

et seq.); (2) the Fish and Wildlife Act of 1956 (16 U.S.C. 742f); or 

(3) section 6 of the Endangered Species Act (16 U.S.C. 11531 et 

seq.). 

The provision provides that the determination of the excludable 

portion of the landowner initiatives program payments described in 

the provision shall be made by the Secretary of the Interior, rather 

than by the Secretary of Agriculture, if the programs are implemented by the Department of Interior.79

EFFECTIVE DATE

The provision is effective for amounts received after December 

31, 2003, in taxable years ending after such date.

E. MODIFY TAX TREATMENT OF CERTAIN PAYMENTS TO

CONTROLLING EXEMPT ORGANIZATIONS

(Sec. 205 of the bill and sec. 512 of the Code) 

PRESENT LAW

In general, interest, rents, royalties, and annuities are excluded 

from the unrelated business income of tax-exempt organizations. 

However, section 512(b)(13) generally treats otherwise excluded 

rent, royalty, annuity, and interest income as unrelated business 

income if such income is received from a taxable or tax-exempt subsidiary that is 50 percent controlled by the parent tax-exempt organization. In the case of a stock subsidiary, ‘‘control’’ means ownership by vote or value of more than 50 percent of the stock. In the 

case of a partnership or other entity, control means ownership of 

more than 50 percent of the profits, capital or beneficial interests. 

In addition, present law applies the constructive ownership rules of 

57

section 318 for purposes of section 512(b)(13). Thus, a parent exempt organization is deemed to control any subsidiary in which it 

holds more than 50 percent of the voting power or value, directly 

(as in the case of a first-tier subsidiary) or indirectly (as in the case 

of a second-tier subsidiary). 

Under present law, interest, rent, annuity, or royalty payments 

made by a controlled entity to a tax-exempt organization are includable in the latter organization’s unrelated business income and 

are subject to the unrelated business income tax to the extent the 

payment reduces the net unrelated income (or increases any net 

unrelated loss) of the controlled entity (determined as if the entity 

were tax exempt). 

The Taxpayer Relief Act of 1997 (the ‘‘1997 Act’’) made several 

modifications to the control requirement of section 512(b)(13). In 

order to provide transitional relief, the changes made by the 1997 

Act do not apply to any payment received or accrued during the 

first two taxable years beginning on or after the date of enactment 

of the 1997 Act (August 5, 1997) if such payment is received or accrued pursuant to a binding written contract in effect on June 8, 

1997, and at all times thereafter before such payment (but not pursuant to any contract provision that permits optional accelerated 

payments). 

REASONS FOR CHANGE

The present-law rule that requires a controlling entity to include 

as unrelated business income certain payments made by a controlled entity applies without regard to whether the amount of the 

payment is fair and reasonable under the circumstances or would 

otherwise constitute unrelated business income if paid by an organization not controlled by the exempt organization. The Committee 

believes that the controlling organization should not be subject to 

the unrelated business income tax if the amount of the payment 

from the controlled entity is determined in accordance with established arm’s-length principles. The Committee intends that the controlling organization be subject to the present-law rule only to the 

extent that a payment made by a controlled entity exceeds the 

amount that would have been paid if the payment had been determined under established arm’s-length principles. In order to discourage controlled entities from claiming deductions in excess of 

the arm’s-length amount, the Committee believes that it is appropriate to subject the controlling organization to a penalty tax for 

making excess payments. 

EXPLANATION OF PROVISION

The provision provides that the general rule of section 512(b)(13), 

which includes interest, rent, annuity, or royalty payments made 

by a controlled entity to a tax-exempt organization in the latter organization’s unrelated business income to the extent the payment 

reduces the net unrelated income (or increases any net unrelated 

loss) of the controlled entity, applies only to the portion of payments received or accrued in a taxable year that exceeds the 

amount of the specified payment that would have been paid or accrued if such payment had satisfied the requirements prescribed 

under section 482. Thus, if a payment of rent by a controlled subsidiary to its tax-exempt parent organization exceeds fair market 

58

80Sec. 501(c)(3). 81Organizations that do not make a section 501 (h) election are subject to the ‘‘no substantial 

part’’ test. 

value, the excess amount of such payment over fair market value 

(as determined in accordance with section 482) is included in the 

parent organization’s unrelated business income, to the extent that 

such excess reduced the net unrelated income (or increased any net 

unrelated loss) of the controlled entity (determined as if the entity 

were tax exempt). In addition, the provision imposes a 20-percent 

addition to tax on the larger of such excess determined without regard to any amendment or supplement to a return of tax, or such 

excess determined with regard to all such amendments and supplements. 

The provision provides that if modifications to section 512(b)(13) 

made by the 1997 Act did not apply to a contract because of the 

transitional relief provided by the 1997 Act, then such modifications also do not apply to amounts received or accrued under such 

contract before January 1, 2001. 

EFFECTIVE DATE

The provision applies to payments received or accrued after December 31, 2003.

F. SIMPLIFICATION OF LOBBYING EXPENDITURE LIMITATION

(Sec. 206 of the bill and secs. 501 and 4911 of the Code) 

PRESENT LAW

In general 

An organization does not qualify for tax-exempt status under section 501(c)(3) unless ‘‘no substantial part’’ of the activities of the organization is ‘‘carrying on propaganda, or otherwise attempting, to 

influence legislation,’’ except as provided by section 501(h).80 Carrying on propaganda and attempting to influence legislation commonly are referred to as ‘‘lobbying’’ activities. Thus, section 

501(c)(3) permits a limited amount of lobbying activity without loss 

of tax-exempt status. 

For purposes of determining whether lobbying activities are a 

substantial part of an organization’s overall functions, an organization generally may choose between two standards, the ‘‘no substantial part’’ test of section 501(c)(3) or the ‘‘expenditure’’ test of section 501(h). 

Whether an organization meets the ‘‘no substantial part’’ test is 

based on all the facts and circumstances. There is no statutory or 

regulatory guidance, and it is not clear whether the determination 

is based on the organization’s activities, its expenditures, or both. 

Alternatively, under section 501(h), certain organizations described 

in section 501(c)(3) can elect to be subject to the expenditure test,81

which consists of bright-line rules that specify the dollar amount 

of permitted expenditures on lobbying activities. 

Consequences of excess lobbying under section 501(h) 

Organizations that make a section 501(h) election (‘‘electing charities’’) are subject to tax if the electing charity makes either ‘‘lobbying expenditures’’ or ‘‘grass roots expenditures’’ in excess of a cerVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00058 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
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82Secs. 501(h)(2)(A), 4911(c)(1), 4911(d). 83 Exempt purpose expenditures generally are expenses incurred for exempt purposes, such as 

amounts paid to accomplish exempt purposes, administrative expenses such as overhead, lobbying expenses, and certain fundraising expenses. Exempt purpose expenditures do not include, 

for example, expenses not for exempt purposes, payments of unrelated business income tax, or 

capital expenses in connection with an unrelated business. See Treas. Reg. sec. 56.49114. 84Sec. 501(h)(1). 85Treas. Reg. sec. 1.501(h)–3. 86Secs. 501(h)(2)(C) & 4911(d)(1)(A). 87Treas. Reg. sec. 56.4911–2(b)(2)(i). 88Treas. Reg. sec. 56.4911–2(b)(2)(iii). The regulations provide that the first three elements 

constitute ‘‘direct’’ encouragement, whereas the fourth element is ‘‘indirect’’ encouragement. This 

distinction becomes relevant in determining whether a communication meets one of the preContinued

tain amount established for each type of expenditure for each taxable year. Lobbying expenditures are the sum of grass-roots expenditures and ‘‘direct lobbying’’ expenditures.82

The expenditure limits are based on a ‘‘lobbying nontaxable 

amount’’ for the taxable year and a ‘‘grass roots nontaxable 

amount’’ for the taxable year. The lobbying nontaxable amount is the lesser of $1 million or an amount determined as a percentage 

of an organization’s exempt purpose expenditures.83 The grassroots nontaxable amount is 25 percent of the organization’s lobbying nontaxable amount. An electing charity that exceeds either 

of the spending limitations is subject to a 25 percent tax on the excess. An electing charity that exceeds both of the spending limitations is subject to a 25 percent tax on the greater of the excess of 

the lobbying expenditures or the grass-roots expenditures. 

An electing charity that normally exceeds either of two ‘‘ceiling 

amounts,’’ which are based on the expenditure limits, will lose its 

tax exemption.84 The ‘‘lobbying ceiling amount’’ is 150 percent of 

the electing charity’s lobbying nontaxable amount for the taxable 

year and the ‘‘grass roots ceiling amount’’ is 150 percent of the 

grass-roots nontaxable amount for the taxable year. For this purpose, ‘‘normal’’ expenditures are calculated based on a four-year 

averaging mechanism.85

Definitions 

Grass-roots expenditures are defined as ‘‘any attempt to influence any legislation through an attempt to affect the opinions of 

the general public or any segment thereof.’’ 86 a For a communication to constitute grass-roots lobbying, it must refer to ‘‘specific legislation,’’ reflect a view on such legislation, and encourage the recipient of the communication to take action with respect to such 

legislation (a ‘‘call to action’’).87 A communication includes a call to 

action if it incorporates one of four elements: (1) It urges the recipient to contact a legislator, employee of a government body, or any 

other government official or employee who may participate in the 

formulation of legislation with the principal purpose of influencing 

legislation; (2) it states the address, telephone number, or similar 

information of a legislator or an employee of a legislative body; (3) 

it provides a petition, tear-off postcard, or similar device for the recipient to communicate with government officials or employees who 

participate in the formulation of legislation with the principal purpose of influencing legislation; or (4) it states the position of one 

or more legislators on the legislation, except that a communication 

may name the main sponsors of legislation for purposes of identifying the legislation without constituting a call to action.88 In addiVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00059 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
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scribed exceptions to lobbying, i.e., an indirect call to action in a grass-roots communication may 

qualify as ‘‘nonpartisan analysis, study or research’’ (Treas. Reg. sec. 56.4911–2(b)(2)(iv)), and 

in determining the proper allocation of expenses between grass-roots and direct lobbying. Treas. 

Reg. sec. 56.4911–5(e). 89Treas. Reg. sec. 56.4911–2(b)(5)(ii). 90 Id. 91Secs. 501(h)(2)(A) and 4911(d)(1)(13) and Treas. Reg. sec. 56.4911–2(b)(1). 92Sec. 4911(d)(2). 93Treas. Reg. sec. 56.4911–5(e). 

tion, a communication is presumed to be grass-roots lobbying if the 

communication is a paid advertisement that: (1) Appears in the 

mass media within two weeks before a vote by a legislative body 

or committee (but not a subcommittee) on a highly publicized piece 

of legislation; (2) reflects a view on the general subject of the legislation; and (3) either refers to the legislation or encourages the 

public to communicate with legislators on the general subject of 

such legislation.89 The presumption is rebuttable if the electing 

charity demonstrates that the timing of the communication was not 

related to the legislation or that the advertisement was of a type 

regularly made by the electing charity without regard to the timing 

of the legislation (a customary course of business exception).90

Direct lobbying expenditures are ‘‘any attempt to influence any 

legislation through communication with any member or employee 

of a legislative body, or with any government official or employee 

who may participate in the formulation of the legislation’’ if the 

principal purpose of the communication is to influence legislation.91

A communication would constitute direct lobbying only if the communication ‘‘refers to specific legislation’’ and reflects a view on 

such legislation. 

Certain specified activities do not constitute attempts to influence legislation and therefore expenditures for such activities are 

not subject to the expenditure limits for lobbying expenditures or 

grass-roots expenditures. In general, such activities include: (1) 

Making available the results of nonpartisan analysis, study, or research; (2) providing technical advice or assistance to a governmental body or to a committee in response to a written request; (3) 

appearances before, or communications to, any legislative body 

with respect to a possible decision of such body that might affect 

the existence of the organization, its powers and duties, tax-exempt 

status, or the deduction of contributions to the organization (socalled ‘‘self-defense’’ expenditures); (4) certain communications to 

members of the electing charity; and (5) communications with governmental officials or employees that are not intended to influence 

legislation.92

Special rules for mixed lobbying expenditures 

Expenses that serve both direct and grass-roots lobbying purposes, e.g., communications that are sent to members and nonmembers, or ‘‘mixed lobbying’’ expenditures, are subject to special rules. 

The regulations specify how an electing charity is to allocate mixed 

lobbying expenditures between direct and grass-roots lobbying purposes.93 For example, for a mixed lobbying communication that is 

designed primarily for members (i.e., more than half the recipients 

are members) and that directly encourages grass-roots lobbying 

(even if it also encourages direct lobbying), the grass-roots expenditure amount includes all the costs of preparing the material used 

for purposes of grass-roots lobbying plus the mechanical and disVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00060 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
61

94See Treas. Reg. sec. 56.4911–6. 

tributional costs associated with the communication. If a mixed lobbying communication encourages direct lobbying, but only indirectly encourages grass-roots lobbying, then the entire costs of the 

communication are allocated based on the proportion of members 

and nonmembers receiving the communication. 

Disclosure of lobbying expenditures 

An electing charity must disclose lobbying expenditures annually 

on Schedule A of Form 990. In order to meet disclosure requirements, electing charities are required to keep detailed records of direct and grass-roots lobbying expenditures. Required records of 

grass-roots expenditures include: (1) All amounts directly paid or 

incurred for grass-roots lobbying; (2) payments to other organizations earmarked for grass-roots lobbying; (3) fees and expenses paid 

for grass-roots lobbying; (4) the printing, mailing, and other costs 

of reproducing and distributing materials used in grass-roots lobbying; (5) the portion of amounts paid or incurred as current or deferred compensation for an employee’s grass-roots lobbying services; (6) any amount paid for out-of-pocket expenditures incurred 

on behalf of the electing charity for grass-roots lobbying; (7) the allocable portion of administrative, overhead and other general expenditures attributable to grass-roots lobbying; and (8) expenditures for grass-roots lobbying of a controlled organization.94

REASONS FOR CHANGE

The Committee believes that the separate limitation on grassroots lobbying expenditures is an unnecessary complication for 

electing charities. The Committee believes that the overall limit on 

lobbying expenditures is a sufficient ceiling on the lobbying activities of electing charities, irrespective of the proportion of lobbying 

activities that are grass-roots lobbying or direct lobbying. 

EXPLANATION OF PROVISION

The provision eliminates the separate limitation for grass-roots 

lobbying expenditures applicable to electing charities. Electing 

charities remain subject to the overall limitation on lobbying expenditures, which does not change in amount, but electing charities 

are not required to limit grass roots expenditures as a percentage 

of overall lobbying. Thus, an electing charity is able to make taxfree any combination of grass-roots and direct lobbying expenditures up to the lobbying non-taxable amount and does not risk loss 

of tax-exemption as a result of such expenditures until total lobbying expenditures normally exceed the lobbying ceiling amount. 

For purposes of the section 501(h) election, electing charities are 

not required to distinguish between grass-roots lobbying and direct 

lobbying, whether for mixed lobbying expenditures or otherwise. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2003.

62

95 Residential rental projects must satisfy low-income tenant occupancy requirements for a 

minimum period of 15 years. 

G. PILOT PROJECT FOR FOREST CONSERVATION ACTIVITIES

(Sec. 207 of the bill) 

PRESENT LAW

Tax-exempt bonds 

In general 

Interest on debt incurred by States or local governments is excluded from income if the proceeds of the borrowing are used to 

carry out governmental functions of those entities or the debt is repaid with governmental funds (section 103). Interest on bonds that 

nominally are issued by States or local governments, but the proceeds of which are used (directly or indirectly) by a private person 

and payment of which is derived from funds of such a private person, is taxable unless the purpose of the borrowing is approved specifically in the Code or in a non-Code provision of a revenue act. 

Such bonds are called ‘‘private activity bonds.’’ The term ‘‘private 

person’’ includes the Federal Government and all other individuals 

and entities other than States or local governments. 

Private activities eligible for financing with tax-exempt private activity bonds 

Present law includes several exceptions permitting States or 

local governments to act as conduits providing tax-exempt financing for private activities. Both capital expenditures and limited 

working capital expenditures of charitable organizations described 

in section 501(c)(3) of the Code may be financed with tax-exempt 

bonds (‘‘qualified 501(c)(3) bonds’’). 

States or local governments may issue tax-exempt ‘‘exempt-facility bonds’’ to finance property for certain private businesses. Business facilities eligible for this financing include transportation (airports, ports, local mass commuting, and high speed intercity rail facilities); privately owned and/or privately operated public works facilities (sewage, solid waste disposal, local district heating or cooling, and hazardous waste disposal facilities); privately owned and/

or operated low-income rental housing;95 and certain private facilities for the local furnishing of electricity or gas. A further provision 

allows tax-exempt financing for ‘‘environmental enhancements of 

hydro-electric generating facilities.’’ Tax-exempt financing also is 

authorized for capital expenditures for small manufacturing facilities and land and equipment for first-time farmers (‘‘qualified 

small-issue bonds’’), local redevelopment activities (‘‘qualified redevelopment bonds’’), and eligible empowerment zone and enterprise 

community businesses. Tax-exempt private activity bonds also may 

be issued to finance limited non-business purposes: certain student 

loans and mortgage loans for owner-occupied housing (‘‘qualified 

mortgage bonds’’ and ‘‘qualified veterans’’ mortgage bonds’’). 

With the exception of qualified 501(c)(3) bonds, private activity 

bonds may not be issued to finance working capital requirements 

of private businesses. In most cases, the aggregate volume of taxexempt private activity bonds that may be issued in a State is restricted by annual volume limits. 

63

Several additional restrictions apply to the issuance of tax-exempt bonds. First, private activity bonds (other than qualified 

501(c)(3) bonds) may not be advance refunded. Governmental bonds 

and qualified 501(c)(3) bonds may be advance refunded one time. 

An advance refunding occurs when the refunded bonds are not retired within 90 days of issuance of the refunding bonds. 

Issuance of private activity bonds is subject to restrictions on use 

of proceeds for the acquisition of land and existing property, use of 

proceeds to finance certain specified facilities (e.g., airplanes, 

skyboxes, other luxury boxes, health club facilities, gambling facilities, and liquor stores), and use of proceeds to pay costs of issuance 

(e.g., bond counsel and underwriter fees). Additionally, the term of 

the bonds generally may not exceed 120 percent of the economic 

life of the property being financed, and certain public approval requirements (similar to requirements that typically apply under 

State law to issuance of governmental debt) apply under Federal 

law to issuance of private activity bonds. Present law precludes 

substantial users of property financed with private activity bonds 

from owning the bonds to prevent their deducting tax-exempt interest paid to themselves. Finally, owners of most private-activitybond-financed property are subject to special ‘‘change-in-use’’ penalties if the use of the bond-financed property changes to a use that 

is not eligible for tax-exempt financing while the bonds are outstanding. 

Taxation of income from timber harvesting 

In general, gross income for Federal income tax purposes means 

all income from whatever source derived, including gross income 

derived from a trade or business. An organization exempt from taxation generally is subject to tax on its unrelated business taxable 

income, generally defined to mean gross income (less deductions) 

derived from a trade or business, the conduct of which is not substantially related to the exercise or performance of the organization’s exempt purposes or functions, that is regularly carried on by 

the organization. Special unrelated trade or business income rules 

applicable to the cutting of timber are contained in sections 

512(b)(5) and 631. Under these rules, the determination of whether 

income derived from the cutting of timber constitutes unrelated 

trade or business income depends upon a variety of factors. 

REASONS FOR CHANGE

Many forests have a higher fair market value as land to be developed for residential purposes than as working forests or as forests 

dedicated to conservation purposes. These increased fair market 

values oftentimes make it difficult or impossible for nonprofit conservation organizations or governments to acquire forests so that 

they can be used and managed consistent with long-term conservation purposes. The Committee believes that providing tax-exempt 

financing to nonprofit organizations for the purpose of acquiring 

forests and forest lands to be dedicated to qualified conservation 

purposes will increase their ability to purchase such properties 

from commercial owners and operators, and that providing limited 

exclusions from income tax to such nonprofit organizations will enable them to conduct charitable and conservation activities as they 

make debt service payments on the bonds. The Committee believes 

64

96The provision requires that at least 20 percent of the board members be comprised of representatives of the holders of the conservation restriction, and that at least 20 percent of the 

board members be public officials. Not more than one-third of the board members may be comprised of individuals who have or had (during a prescribed five year period) certain types of financial or contractual relationships with a commercial forest products enterprise. 

that it is appropriate to evaluate whether providing such tax incentives would further the goal of permanently setting aside working 

forests for qualified conservation purposes. The Committee believes 

that the provision of such tax incentives initially should be made 

available on a limited basis, and that a pilot project, combined with 

a study and report examining the extent to which forests and forest 

lands are managed under the pilot project, should be implemented 

for this purpose. 

EXPLANATION OF PROVISION

Overview 

In general 

The provision establishes a pilot project for forest conservation 

activities by providing two types of tax benefits available to qualified organizations that acquire forest and forest lands for conservation management. First, the provision provides for the treatment of 

qualified forest conservation bonds as exempt facility bonds within 

the meaning of section 142. Second, the provision provides for the 

exclusion from gross income of income from certain timber harvesting activities conducted by a qualified organization on lands acquired with proceeds from qualified forest conservation bonds. 

Qualified organizations 

Under the provision, an organization must be a qualified organization to be eligible for the tax-exempt financing benefit, and must 

be a qualified organization for whom qualified forest conservation 

bonds have been issued (and remain outstanding as tax-exempt 

bonds) to be eligible for the income exclusion. Under the provision, 

a qualified organization means a nonprofit organization: (1) Substantially all the activities of which are charitable, scientific, or 

educational, including acquiring, protecting, restoring, managing, 

and developing forest lands and other renewable resources for the 

long-term charitable, educational, scientific, and public benefit; (2) 

more than one half of the value of the property of which consists 

of forests and forest land acquired with the proceeds from qualified 

forest conservation bonds; (3) that periodically conducts educational 

programs designed to inform the public of environmentally sensitive forestry management and conservation techniques; (4) whose 

board satisfies certain board composition requirements designed to 

ensure that it represents public conservation interests;96 (5) with 

governance provisions contained in its bylaws that provide a supermajority vote of at least two-thirds of the members of the board of 

directors is required to approve and amend the qualified organization’s qualified conservation plan; and (6) that upon dissolution, its 

assets are required to be dedicated to an organization exempt from 

tax under section 501(c)(3) that is organized and operated for conservation purposes, or to a governmental unit. 

65

97For this purpose, a person is related to another person if such person bears a relationship 

to such other person described in section 267(b) (determined without regard to paragraph (9) 

thereof), or section 707(b)(1), determined by substituting 25 percent for 50 percent for purposes 

of those determinations. If such other person is a nonprofit organization, a person is related to 

such nonprofit organization if such person controls directly or indirectly more than 25 percent 

of the governing body of such nonprofit organization. 

Qualified forest conservation bonds 

In general 

The provision creates a new category of tax-exempt bonds, the 

‘‘qualified forest conservation bond.’’ For purposes of the Code, 

qualified forest conservation bonds are treated as exempt facility 

bonds, and therefore, unless otherwise provided, are governed by 

the same rules as exempt facility bonds. A qualified forest conservation bond means any bond issued as part of an issue if: (1) 

95 percent or more of the net proceeds of such issue are to be used 

for qualified project costs; (2) such bond is an obligation of the 

State of Washington or any political subdivision thereof, and (3) 

such bond is issued for a qualified organization before December 

31, 2006. The maximum aggregate face amount of bonds that may 

be issued under the pilot program is $250 million. 

Qualified project costs 

Qualified project costs include the cost of acquisition by the 

qualified organization, from an unrelated person, of forests and forest land located in the State of Washington that at the time of acquisition or immediately thereafter are subject to a conservation restriction that meets certain requirements.97 Qualified project costs 

also include interest on the qualified forest conservation bonds for 

the three-year period beginning on the date of issuance of such 

bonds, and credit enhancement fees that constitute qualified guarantee fees within the meaning of section 148. The conservation restriction must: (1) Be granted in perpetuity to an unrelated charitable organization (other than a private foundation) that is organized and operated for conservation purposes, or to a governmental 

unit; (2) protect a relatively natural habitat of fish, wildlife, or 

plants, or similar ecosystem, or preserve open space (including 

farmland and forest land) pursuant to a clearly delineated Federal, 

State, or local governmental conservation policy and yield a significant public benefit; (3) obligate the qualified organization to pay 

the costs incurred by the holder of the conservation restriction in 

monitoring compliance with such restriction; and (4) require that 

an increasing level of conservation benefits be provided whenever 

circumstances allow it. 

Special rules 

Subject to the following exceptions and modifications, issuance of 

qualified forest conservation bonds is subject to the general rules 

applicable to issuance of exempt-facility private activity bonds: 

(1) Issuance of the bonds is not subject to the aggregate annual State private activity bond volume limits (section 146);

(2) The restrictions on acquisition of land and existing property do not apply (section 147(c) and (d)); 

(3) For purposes of section 147(b) (relating to the rule that 

maturity may not exceed 120 percent of economic life) the land 

66

98This debt service limitation does not apply to income that otherwise is not subject to tax 

under other provisions of the Code (e.g., income from harvesting if such harvesting activity is 

not an unrelated trade or business within the meaning of section 513 with respect to the qualified organization). 

and standing timber acquired with the proceeds of the bonds 

is treated as having an economic life of 35 years; and 

(4) Interest on the bonds is not a preference item for purposes 

of the alternative minimum tax preference for private activity 

bond interest (section 57(a)(5)). 

Qualified forest conservation bonds may be currently refunded if 

certain requirements are satisfied, but may not be advance refunded. 

Exclusion of certain qualified harvesting activity income from tax 

Income from qualified harvesting activities 

Under the provision, income, gains, deductions, losses, or credits 

from a qualified harvesting activity conducted by a qualified organization generally are not subject to tax or taken into account for 

Federal income tax purposes. A qualified harvesting activity means 

the sale, lease, or harvesting of standing timber: (1) On land owned 

by a qualified organization that it acquired with proceeds of qualified forest conservation bonds; and (2) pursuant to a qualified conservation plan adopted by the organization. Qualified harvesting 

activity does not include any sale, lease, or harvesting for any period during which the organization ceases to qualify as a qualified 

organization. 

Timber cutting and the sale or lease of timber is not a qualified 

harvesting activity to the extent the timber harvesting or removal 

exceeds prescribed limits. For this purpose, the average annual 

area of timber harvested cannot exceed 2.5 percent of the total area 

of the land acquired with the proceeds of qualified forest conservation bonds. Further, the quantity of timber removed from such land 

cannot exceed the quantity that can be removed from such land annually in perpetuity on a sustained-yield basis determined only 

with respect to such land. Certain deviations from these restrictions are permitted to protect the forest from catastrophic danger, 

such as by fire or windthrow, or from imminent danger from insect 

or disease attack. 

The amount of income from a qualified harvesting activity that 

may be excluded from gross income for a taxable year may not exceed the amount used by the qualified organization to make debt 

service payments during such taxable year for qualified forest conservation bonds.98 The exclusion of income from a qualified harvesting activity does not apply during any period the organization 

fails to qualify as a qualified organization, or after the bonds are 

no longer outstanding or fail to qualify as tax-exempt bonds. 

Qualified conservation plan 

A qualified conservation plan means a multiple land use plan (a) 

designed and administered primarily for the purposes of protecting 

and enhancing wildlife, fish, timber, scenic attributes, recreation, 

and soil and water quality of the forest and forest land, (b) mandates that conservation of the forest and forest land is the singlemost significant use of the forest and land, and (c) requires that 

67

timber harvesting be consistent with (1) restoring and maintaining 

reference conditions for the region’s ecotype (such as with respect 

to types of trees), (2) restoring and maintaining a representative 

sample of young, mid, and late successional forest age classes, (3) 

maintaining or restoring the resources’ ecological health for purposes of preventing damage from fire, insect, or disease, (4) maintaining or enhancing wildlife or fish habitat, or (5) enhancing research opportunities in sustainable renewable resource uses. 

Recapture taxes 

Once the qualified forest conservation bonds issued for a qualified organization are no longer outstanding or cease to qualify as 

tax-exempt bonds, the qualified organization becomes liable for a 

recapture of tax benefits (plus interest) for its excess harvesting activities. Under the provision, if the average annual area of timber 

harvested from the land exceeds the applicable 2.5 percent average 

annual area limitation, the organization’s income tax liability is increased by the amount of the tax benefits (plus interest) attributable to such excess harvesting. 

Report on pilot project 

The provision provides that the Comptroller General of the 

United States shall conduct a study on the pilot project for forest 

conservation activities under the provision. Such study shall examine the extent to which forests and forest lands were managed during the five year period beginning on the date of enactment of the 

provision to achieve the goals of such project. Not later than six 

years after the date of enactment of the provision, the Comptroller 

General shall submit a report of such study to the Committee on 

Ways and Means and the Committee on Resources of the House of 

Representatives and the Committee on Finance and the Committee 

on Energy and Natural Resources of the Senate. 

EFFECTIVE DATE

The provision is effective for obligations issued on or after the 

date of enactment.

TITLE III. OTHER PROVISIONS 

A. COMPASSION CAPITAL FUND

(Sec. 301 of the bill) 

PRESENT LAW

There is no provision under present law. However, $35 million 

was appropriated for such grants for fiscal year 2003, to be awarded by the Secretary of Health and Human Services under Section 

1110 of the Social Security Act. 

REASONS FOR CHANGE

This provision is included to provide authorizing language and to 

outline the priorities for this program. 

68

99Title IV of Pub L. No. 105–285 (1998). 100Sec. 32(b)(2). 

EXPLANATION OF PROVISION

The provision creates a Secretary’s Fund to support and replicate 

promising social service programs as part of the Social Security 

Act. Grants would be awarded by the Secretary of Health and 

Human Services to support any private entity that operates a 

promising social services program. These entities would then use 

these funds to provide technical assistance, such as legal assistance 

or business assistance, or to provide support to other entities that 

operate social service programs that assist persons and families in 

need. 

Up to 25 percent of the funds appropriated also could be used by 

the Secretary of Health and Human Services to provide guidance 

and technical assistance on program implementation to States and 

political subdivisions of States. 

The provision authorizes $150 million for fiscal year 2004 and 

such sums as may be necessary for fiscal year 2005 through fiscal 

year 2008. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

B. INDIVIDUAL DEVELOPMENT ACCOUNTS

(Sec. 302 of the bill) 

PRESENT LAW

The Assets for Independence Act 99 authorizes $25 million annually for a five-year demonstration Individual Development Account 

(‘‘IDA’’) program to evaluate the effects of savings incentives on 

persons of limited means. Means-tested programs must disregard 

all funds in an IDA, including accruing interest, in determining an 

individual’s eligibility. The demonstration program provides direct 

Federal funds to nonprofit organizations, States and localities, tribal governments, community-development financial institutions, and 

certain credit unions to match the amount of earnings deposited by 

eligible individuals. Grantees must provide non-Federal matching 

funds (one dollar per Federal grant dollar), and the maximum Federal grant is $1 million for each project year. Eligible persons are 

those (1) who are eligible under the Temporary Assistance for 

Needy Families program, or (2) whose household net worth is 

below $10,000 (‘‘net worth test’’), and who meet the greater of (a) 

the income limits of the earned income credit (taking into account 

the size of the household) 100 or (b) 200 percent of the poverty 

guideline (‘‘income test’’). 

Each participant is eligible to receive up to $2,000 in Federal 

funds plus accrued interest while they participate over the course 

of the project. Households may receive no more than $4,000 in Federal grant funds over the course of the project. The projects must 

create trust or custodial accounts that permit withdrawals of account balances only for three designated purposes: (1) first home 

purchase, (2) business capitalization, and (3) postsecondary education. Emergency withdrawals (from the account holder’s own deVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00068 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
69

posits only) are allowed for three conditions—medical expenses, 

prevention of eviction or mortgage foreclosure, and living expenses 

after job losses. 

Each grantee is required to prepare an annual report on the 

progress of its project. These reports must be submitted to the Secretary of Health and Human Services, and if a tribe, State or local 

government committed funds to the project, to the Treasurer (or 

equivalent official) of the State in which the project is conducted. 

The Secretary of Health and Human Services is required to provide 

the results of these reports to Congress every 12 months until all 

of the demonstration projects are completed, and to submit a final 

report, setting forth the results and findings of all reports and evaluations, not later than 12 months after the conclusion of all demonstration projects. The Assets for Independence Act directs the 

Secretary of Health and Human Services to enter into a contract 

with an independent research organization to evaluate the projects, 

individually, and as a group. The Secretary of Health and Human 

Services may spend up to $500,000 each fiscal year for evaluation 

expenses. 

The demonstration program expires at the end of fiscal year 

2003. 

REASONS FOR CHANGE

The Committee seeks to extend the availability and use of IDAs, 

which promote work and asset-building among low-income families, 

rather than dependence on cash welfare and other benefits. These 

goals are consistent with the Committee’s extensive activities in recent years to reform welfare by promoting work and independence 

from government benefits, as well as the Committee’s recent activities to promote savings and investment through tax policy changes. 

The changes proposed will provide greater flexibility to grantees 

and program participants to achieve the purposes of the IDA program. 

EXPLANATION OF PROVISION

The provision extends the program for an additional five years, 

through fiscal year 2008, continuing the current authorization of 

$25 million per year for the program. 

The provision also makes several technical changes designed to 

ease program administration: (1) removing the cost of financial literacy activities provided to IDA holders from the current administrative spending cap (current law bars entities from spending more 

than 15% of program dollars on administrative costs, including financial literacy activities); (2) making eligible certain households 

whose income does not exceed 50 percent of Area Median Income; 

(3) extending the availability of IDA funds for up to 6 months beyond program termination; (4) providing greater flexibility in how 

IDA funds can be spent for certain postsecondary expenses; and (5) 

providing grantees added flexibility in spending excess interest 

earned on IDA match funds. 

EFFECTIVE DATE

The provision is effective for fiscal years 2004 through 2008.

70

C. MATERNITY GROUP HOMES

(Sec. 304 of the Bill) 

PRESENT LAW

Part B of the Runaway and Homeless Youth Act authorizes the 

Secretary of Health and Human Services to make grants to public 

and nonprofit private agencies to establish and operate Transitional Living Projects for homeless youth. Grantees provide both 

services and shelter, such as group homes, host family homes, and 

supervised apartments, for homeless youth. Of funds appropriated 

for all components of the Runaway and Homeless Youth Act (except 

the Sexual Abuse Prevention Program under Part E), the Secretary 

must use no less than 90 percent for Runaway and Homeless 

Youth centers and services under Part A and Transitional Living 

Project grants under Part B. Further, of this 90 percent, no less 

than 20 percent or more than 30 percent must be reserved for 

Transitional Living Project grants under Part B. 

REASONS FOR CHANGE

This provision affords pregnant and parenting mothers access to 

transitional living opportunities, an alternative to the environments of violence and despair that many young pregnant and parenting mothers face. Additionally, pregnant women will have access to information regarding the option of placing their children 

for adoption. 

EXPLANATION OF PROVISION

The provision would add ‘‘maternity group homes’’ to the illustrative list of types of shelter that can be supported through Transitional Living Project grants. The provision also defines ‘‘maternity group homes’’ to mean community-based, adult-supervised 

group homes that provide young mothers and their children with 

a supportive and supervised living arrangement in which the mothers are required to learn parenting and other skills to promote 

their long-term economic independence and the well-being of their 

children, and that provide pregnant women with information about 

the option of placing their children for adoption, assistance with 

prenatal care and child birthing, and pre- and post-placement 

adoption counseling. 

The provision requires the Secretary to contract for an evaluation 

of maternity group homes. The provision also authorizes appropriations of $33 million in fiscal year 2003 and such sums as necessary 

for fiscal year 2004 for maternity group homes. This authorization 

would be separate from the present law authorization of appropriations for Transitional Living Projects and other components of the 

Runaway and Homeless Youth Act. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

71

D. TRANSFERS FROM THE TEMPORARY ASSISTANCE FOR NEEDY

FAMILIES BLOCK GRANT TO THE SOCIAL SERVICES BLOCK GRANT

(Sec. 305 of the bill) 

PRESENT LAW

The 1996 welfare reform law permitted States to transfer up to 

10 percent of their annual Federal Temporary Assistance for Needy 

Families (TANF) welfare block grant allocations to the Social Services Block Grant (SSBG). In 1998, P.L. 105–178 reduced the limit 

on TANF transfers to the SSBG from 10 percent to 4.25 percent 

as a matter of permanent law. Recent appropriations bills, including for fiscal year 2003, have maintained the 10 percent transfer 

limit only on an annual basis. 

REASONS FOR CHANGE

Since 1996, States have used the flexibility provided under the 

welfare reform law to transfer TANF funds to the SSBG and help 

provide an array of social services to low-income individuals. This 

provision will allow States to maximize the flexibility to transfer 

TANF funds to the SSBG, and provide States assurance this flexibility will be available on an ongoing basis. 

EXPLANATION OF PROVISION

The provision restores the TANF transfer limit to 10 percent. 

EFFECTIVE DATE

The provision is effective on the date of enactment.

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the following statements are made concerning the votes of the Committee on Ways and Means in its consideration of the bill, H.R. 7. 

MOTION TO REPORT THE BILL

The bill, H.R. 7, as amended, was ordered favorably reported by 

a voice vote (with a quorum being present). 

VOTES ON AMENDMENTS

A rollcall vote was conducted on the following amendment to the 

Chairman’s amendment in the nature of a substitute. 

An amendment by Mr. Doggett, which would impose penalties for 

failing to disclose certain reportable transactions and increase penalties for engaging in, promoting, and aiding abusive tax shelters, 

was defeated by a rollcall vote of 15 yeas to 23 nays. The vote was 

as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... ........... ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ ........... ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... ........... X .............

72

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... X .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... ........... .............

A voice vote was conducted on the following amendments to the 

Chairman’s amendment in the nature of a substitute. 

An amendment by Mr. Camp and Mr. English to allow States to 

transfer up to 10 percent of their annual Federal Temporary Assistance for Needy Families block grant funds to the Social Services 

Block Grant was approved by voice vote. 

An amendment by Mr. Cardin to restore funding to the Social 

Services Block Grant program was defeated by a show of hands. 

IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of rule XIII of the Rules of the 

House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the 

bill, H.R. 7, as reported. 

The bill is estimated to have the following effects on budget receipts for fiscal years 2003–2008:

ESTIMATED BUDGET EFFECTS OF H.R. 7, THE ‘‘CHARITABLE GIVING ACT OF 2003,’’ AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS 

[Fiscal years 2004–2008, in millions of dollars] 

Provision Effective 2004 2005 2006 2007 2008 

Charitable Giving Incentive Provisions: 

1. Provide charitable contribution deduction for non-itemizers with cash contributions in excess 

of $250 for individuals and $500 for joint returns; cap on deduction of $250 for individuals and $500 for joint returns.

tyba 12/31/03 & tybb 1/1/06 ¥214 ¥1,431 ¥1,244 .............. .............. 

2. Allow tax-free distributions from IRAs for charitable purposes for individuals age 701

⁄2 and 

above, apply to both direct gifts and split-interest gifts; modify return requirements and penalties for certain trusts.

dma 12/31/03 & rf tyba 12/31/03 ¥97 ¥204 ¥236 ¥256 ¥242 

3. Raise the cap on corporate charitable contributions from 10% to: 11% in 2004, 12% in 

2005, 13% in 2006, 14% in 2007, 15% in 2008 through 2011, and 20% in 2012 and thereafter.

tyba 12/31/03 ¥40 ¥89 ¥118 ¥149 ¥156 

4. Extend and modify present-law 170(e)(3) enhanced deduction for food inventory to all businesses; limit non-C corporation taxpayers to corporate cap percentage of their taxable income 1. tyba 12/31/03 ¥30 ¥56 ¥60 ¥63 ¥66 

5. Reform of certain excise taxes related to private foundations: 

a. Replace 2% tax on net investment income with 1% tax .................................................. tyba 12/31/03 ¥144 ¥196 ¥218 ¥225 ¥230 

b. Modify definition of qualifying distributions to exclude certain administrative expenses 

and increase first tier of self-dealing tax 2.

tyba 12/31/03 Negligible Revenue Effect 

6. Modify tax on unrelated business taxable income of charitable remainder trusts .................... tyba 12/31/03 ¥4 ¥4 ¥5 ¥5 ¥5 

7. Expand enhanced deduction allowed for scientific property used for research and for computer technology and equipment to assembled property; permanent extension of enhanced 

deduction for qualified computer contributions 1.

tyba 12/31/03 ¥67 ¥133 ¥142 ¥149 ¥156 

8. Adjustment to basis of S corporation stock for certain charitable contributions ...................... tyba 12/31/03 ¥13 ¥29 ¥33 ¥37 ¥41 

9. Charitable organizations permitted to make collegiate housing and infrastructure grants ...... gma 12/31/03 ¥5 ¥12 ¥13 ¥14 ¥15 

10. Treat certain games of chance as a related business for UBIT purposes ............................... gca 12/31/03 (3) ¥1 ¥1 ¥1 ¥1 

11. Federal excise tax exemptions for blood collector organizations .............................................. 1/1/04 ¥1 ¥1 ¥1 ¥1 ¥1 12. Extend nonrecognition period on certain capital gains realized by section 501(c)(7) organizations.

(4) ¥8 ¥11 ¥8 ¥7 ¥7 

13. One-year exemption of certain qualified 501(c)(3) bonds for nursing homes from Federal 

guarantee prohibitions.

bia 12/31/03 & woyo DOE (3) ¥1 ¥1 ¥2 ¥2 

Total of Charitable Giving Incentive Provisions ........................................................................... ................................................................ ¥623 ¥2,168 ¥2,080 ¥909 ¥922 

Tax Reform and Improvements Relating to Charitable Organizations and Programs: 

1. Suspension of tax-exempt status of terrorist organizations ....................................................... dmbo/a DOE Negligible Revenue Effect 

ESTIMATED BUDGET EFFECTS OF H.R. 7, THE ‘‘CHARITABLE GIVING ACT OF 2003,’’ AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS

—Continue

[Fiscal years 2004–2008, in millions of dollars] 

Provision Effective 2004 2005 2006 2007 2008 

2. Clarify that the church tax inquiry procedures do not apply to contacts made by the IRS for 

the purpose of educating churches with respect to tax laws governing exempt organizations.

DOE No Revenue Effect 

3. Extension of declaratory judgment procedures to non-501(c)(3) tax-exempt organizations ...... (5) Negligible Revenue Effect 

4. Exclusion from income of certain landowner incentives program payments ............................. ara 12/31/03 in tyea sd ¥2 ¥4 ¥4 ¥4 ¥4 

5. Modify tax treatment of certain payments to controlling exempt organizations ........................ (6) ¥28 ¥13 ¥13 ¥14 ¥15 

6. Elimination of separate limitation on grass-roots lobbying ........................................................ tyba 12/31/03 ¥1 ¥1 ¥1 ¥1 ¥1 7. Pilot project for forest conservation activities ............................................................................. oia DOE ab 12/31/06 ¥5 ¥7 ¥6 ¥6 ¥6 

Total of Tax Reform and Improvements Relating to Charitable Organizations and Programs: ................................................................ ¥36 ¥25 ¥24 ¥25 ¥26 

Other Provisions: 

1. Compassion Capital Fund 7 8 ....................................................................................................... DOE No Revenue Effect 

2. Expansion of assets for Independence Act demonstration spending program7 8 ...................... effy 2004 through 2008 No Revenue Effect 

3. Maternity Group Homes 7 8 ........................................................................................................... DOE No Revenue Effect 

4. Authority of States to use 10% of their TANF funds to carry out Social Services Block Grant 

programs 7.

DOE ¥114 ¥84 82 49 50 

Total of Other Provisions .............................................................................................................. ................................................................ ¥114 ¥84 82 49 50 Net Total ....................................................................................................................................... ................................................................ ¥773 ¥2,277 ¥2,022 ¥885 ¥898 

1 Includes interaction with increase in corporate charitable contribution limit. 2 Estimate is preliminary and subject to change upon receipt of new data. 3 Loss of less than $500,000. 4 Sales for which the 3-year nonrecognition period had not expired as of January 1, 2001. 5 Effective for pleadings filed with respect to determinations (or requests for determinations) made after the date of enactment.6 Effective for payments received or accrued after December 31, 2003, and extends grandfather rule to certain payments received or accrued before January 1, 2001. 7 Estimate provided by the Congressional Budget Office. 8 Proposal provides authorization for spending subject to appropriations.

Legend for ‘‘Effective’’ column: ab = and before; ara = amounts received after; bia = bonds issued after; dma = distributions made after; dmbo/a = designations made before, on, or after; DOE = date of enactment; effy = 

fiscal years; gca = games conducted after; gma = grants made after; oia = obligations issued after; rf = returns for; sd = such date; tyba = taxable years beginning after; tybb = taxable years beginning before; tyea = taxabling after; woyo = within one year of.

Note.

—Details may not add to totals due to rounding.

Source: Joint Committee on Taxation. 

75

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue reducing tax provisions involve increased tax expenditures. (See amounts in table in Part IV.A., 

above.) 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, requiring a cost estimate prepared by 

the CBO, the following statement by CBO is provided.

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, September 15, 2003. 

Hon. WILLIAM ‘‘BILL’’ M. THOMAS, Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 7, the Charitable Giving 

Act of 2003, as ordered reported by the House Committee on Ways 

and Means on September 9, 2003. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contacts are Annabelle Bartsch (for 

federal revenues) and Donna Wong (for federal spending). 

Sincerely, 

DOUGLAS HOLTZ-EAKIN, 

Director. 

Enclosure.

H.R. 7—The Charitable Giving Act of 2003 

Summary: H.R. 7 would provide taxpayers with several incentives for charitable giving, authorize the Compassion Capital Fund, 

reauthorize the Individual Development Account (IDA) program, 

create a new program for maternity group homes, and increase the 

amount of Temporary Assistance to Needy Families (TANF) funds 

that may be transferred to activities funded out of the Social Services Block Grant (SSBG). 

CBO and the Joint Committee on Taxation (JCT) estimate that 

enacting the bill would decrease governmental receipts by $659 

million in 2004, by about $6.8 billion over the 2004–2008 period, 

and by about $12.7 billion over the 2004–2013 period. The bill 

would increase direct spending by $114 million in 2004 and by $17 

million over the 2004–2008 period. However, over the entire 2004–

2013 period, there would be no net effect on outlays. 

The bill also would authorize the appropriation of $209 million in 2004 and $938 million over the 2004–2008 period for the Compassion Capital Fund, the IDA program, and the Maternity Group 

Homes. Assuming that those amounts are appropriated, CBO estimates that the resulting outlays would be $838 million over the 

2004–2008 period. 

76

JCT and CBO have determined that H.R. 7 contains no intergovernmental or private-sector mandates as defined in the Unfunded 

Mandates Reform Act (UMRA). 

Estimated cost to the Federal Government: The estimated budgetary impact of H.R. 7 is shown in Table 1. The spending under 

the bill falls in budget functions 500 (education, training, employment, and social services) and 600 (income security).

TABLE 1.—ESTIMATED BUDGETARY IMPACT OF H.R. 7 

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007 2008

Changes in Revenue 

Estimated Revenues ......................................................... 0 ¥659 ¥2,193 ¥2,104 ¥934 ¥948 

Changes in Direct Spending

Increase in Transfer Authority from TANF to SSBG: 

Estimated Budget Authority .................................... 0 0 0 0 0 0 

Estimated Outlays ................................................... 0 114 84 ¥82 ¥49 ¥50 

Changes in Spending Subject to Appropriation 

Compassion Capital Fund: 

Estimated Authorization Level ................................. 0 150 153 156 159 162 

Estimated Outlays ................................................... 0 78 144 152 157 160 

Individual Development Accounts: 

Authorization Level .................................................. 0 25 25 25 25 25 

Estimated Outlays ................................................... 0 13 24 25 25 25 

Maternity Group Homes: 

Estimated Authorization Level ................................. 0 34 0 0 0 0 

Estimated Outlays ................................................... 0 17 15 2 0 0 

Total: 

Estimated Authorization Level ................................. 0 209 178 181 184 187 

Estimated Outlays ................................................... 0 108 183 179 182 185 

Notes.—The Joint Committee on Taxation provided the revenue estimates. TANF = Temporary Assistance for Needy Families; SSBG = Social Services Block Grant. 

Basis of estimate: For this estimate, CBO assumes H.R. 7 will be 

enacted early in fiscal year 2004, that the authorized amounts for 

2004 will be appropriated early in that year, and that the authorized amounts in later years will be appropriated at the beginning 

of those years.

Revenues 

All estimates were provided by JCT. In total, the bill’s provisions 

would reduce governmental receipts by $659 million in 2004 and by 

about $6.8 billion over the 2004–2008 period. (See Table 2.)

TABLE 2.—ESTIMATED REVENUE EFFECTS OF H.R. 7 

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007 2008

Incentives for Charitable Giving: 

Allow nonitemizers to deduct charitable contributions .................................................................... 0 ¥214 ¥1,431 ¥1,244 0 0

Allow tax-free distributions from IRAs for charitable purposes for persons age 701

⁄2 or older .. 0 ¥97 ¥204 ¥236 ¥256 ¥242

Raise caps on corporate charitable contributions 0 ¥40 ¥89 ¥118 ¥149 ¥156

Reform certain excise taxes related to private 

foundations ......................................................... 0 ¥144 ¥196 ¥218 ¥225 ¥230

Expand enhanced deduction allowed for scientific 

property ............................................................... 0 ¥67 ¥133 ¥142 ¥149 ¥156

77

TABLE 2.—ESTIMATED REVENUE EFFECTS OF H.R. 7—Continued

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007 2008

Other provisions relating to charitable giving ....... 0 ¥61 ¥115 ¥122 ¥130 ¥138

Subtotal ............................................................... 0 ¥623 ¥2,168 ¥2,080 ¥909 ¥922

Other Revenue Provisions ................................................. 0 ¥36 ¥25 ¥24 ¥25 ¥26

Total Change in Revenues ................................ 0 ¥659 ¥2,193 ¥2,104 ¥934 ¥948

Note.—Components may not sum to totals because of rounding.

Source: Joint Committee on Taxation. 

Much of the reduction in revenues would result from five of the 

bill’s provisions. Those provisions would permit taxpayers who do 

not itemize deductions in their income tax returns to deduct some 

of their cash charitable contributions (such deductions are currently limited to taxpayers who itemize their deductions), allow 

tax-free distributions from individual retirement accounts (IRAs) 

for charitable purposes, raise the cap on corporate charitable contributions, reduce the excise tax rate on net investment income of 

private foundations, and expand the deduction allowed for certain 

scientific property. Together, these five provisions would reduce 

revenues by $562 million in 2004, by about $6.1 billion over the 

2004–2008 period, and by about $11 billion over the 2004–2013 period. The remaining provisions to provide incentives to increase 

charitable giving would reduce governmental receipts by about $1.4 

billion over the 2004–2013 period. 

H.R. 7 also contains several provisions that would alter existing 

tax law relating to charitable organizations and programs. Those 

provisions would decrease governmental receipts by $288 million 

over the 2004–2013 period. 

Direct spending 

Title III would allow states to maintain the authority to transfer 

up to 10 percent of TANF funds to SSBG. The 1996 welfare law 

that established the TANF program set the level of the transfer authority at 10 percent. Subsequent legislation permanently lowered 

the authority to 4.25 percent. However, recent appropriation bills, 

including that for fiscal year 2003, restored the authority to 10 percent on an annual basis. In the absence of further legislation, the 

authority will fall to 4.25 percent in 2004 and after. (Although the 

TANF program is not authorized beyond 2003, CBO assumes that 

funding continues in its baseline in accordance with rules for constructing baseline projections, as set forth in section 257 of the Balanced Budget and Emergency Deficit Control Act of 1985.) 

In recent years, states have transferred about $1 billion annually. Maintaining the transfer authority at the higher level would 

make it easier for states to spend their TANF grants and would 

tend to accelerate spending relative to current law. Based on recent 

state transfers, CBO expects that states would transfer an additional $400 million in 2004 under the provision, but because some 

of this money would have been spent within the TANF program 

anyway, only $114 million of additional spending would occur in 

2004. The provision would increase net TANF spending in 2005 (by 

$84 million). Because total TANF funding is assumed to remain 

fixed over the 2004–2013 period, the increase in spending in 2004 

78

and 2005 would be offset by decreased spending in subsequent 

years. Thus, there would be no net impact on TANF spending over 

the 2004–2013 period as a whole.

Spending Subject to Appropriation 

CBO estimates that title III would authorize appropriations of $209 million in 2004 and $939 million over the 2004–2008 period. 

Assuming appropriation of the authorized amounts, CBO estimates 

outlays of $108 million in 2004 and $837 million over the 2004– 2008 period. 

Compassion Capital Fund. The bill would authorize the Compas- sion Capital Fund. The program received an appropriation of $35 

million for 2003 and is currently administered by the Secretary of 

Health and Human Services under authority given under section 

1110 of the Social Security Act (Cooperative Research or Demonstration Projects). The Compassion Capital Fund would provide 

funds to private entities that operate promising social service programs. Funds could be used for many purposes, including technical 

assistance, information for identifying best practices, and research. 

The bill would authorize $150 million in 2004 and such sums as 

may be necessary in years 2005 through 2008. CBO estimates 

funding over the 2005–2008 period at the level authorized for 2004 

adjusted for inflation. 

Individual Development Accounts. The bill would reauthorize the 

Individual Development Accounts (IDA) program and authorize the 

appropriation of $25 million in each year from 2004 through 2008. 

The IDA program, administered by the Department of Health and 

Human Services, provides matching funds to qualified low-income 

individuals who save in order to encourage more savings. Appropriations for the program were $25 million for 2003. 

Maternity Group Homes. H.R. 7 also would create a Maternity 

Group Homes program within the Runaway and Homeless Youth 

program. It would give the Runaway and Homeless Youth program 

authority to award funds to Maternity Group Homes and would 

also authorize the appropriation of an additional $33 million in 

2003 and such sums as may be necessary in 2004 specifically for 

this purpose. However, because CBO assumes that enactment of 

this legislation will not occur until after fiscal year 2003 has ended, 

the authorized amount for 2003 is not displayed in the tables. CBO 

estimates funding in 2004 at the level authorized for 2003 adjusted 

for inflation. 

The Maternity Group Homes program would fund communitybased, adult-supervised group homes for young mothers and their 

children. Activities could include providing information, assistance 

with prenatal care, and counseling. 

Effects on revenues and direct spending: The overall effects of 

H.R. 7 on revenues and direct spending over the 2003–2013 period 

are displayed in Table 3.

TABLE 3.—EFFECTS ON REVENUES AND DIRECT SPENDING 

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 

Changes in receipts ............ 0 ¥659 ¥2,193 ¥2,104 ¥934 ¥948 ¥955 ¥1,001 ¥1,134 ¥1,320 ¥1,418 

Changes in outlays ............. 0 114 84 ¥82 ¥49 ¥50 ¥17 0 0 0 0 

79

Estimated impact on state, local, and tribal governments: JCT 

and CBO have determined that H.R. 7 contains no intergovernmental mandates as defined in UMRA. 

Title III of the bill would benefit states by authorizing grants for 

social services programs, some of which may be run by state or 

local governments, and it would allow states to use up to 10 percent of their TANF funds for SSBG programs. For fiscal year 2004, 

CBO estimates that state and local governments would be eligible 

for up to $37.5 million in technical assistance from the Compassion 

Capital Fund for implementing social service programs and for part 

of the $34 million estimated to be authorized for maternity group 

homes. In fiscal years 2005–2008, state and local governments 

would be eligible for up to 25 percent of the appropriation for the 

Compassion Capital Fund for technical assistance. Any obligations 

incurred by states would be the result of complying with conditions 

of federal grant assistance. 

Estimated impact on the private sector: JCT and CBO have determined that H.R. 7 contains no-private-sector mandates as defined in UMRA. 

Previous CBO estimate: On February 25, 2003, CBO transmitted 

a cost estimate for the CARE Act of 2003 as ordered reported by 

the Senate Committee on Finance on February 5, 2003. While some 

major provisions are similar, the two bills contain many different 

revenue proposals. The CARE Act contained a number of tax provisions that would increase revenues, whereas H.R. 7 has no such 

provisions. H.R. 7 contains different authorizations of discretionary 

spending and, unlike the Senate bill, would not increase the Social 

Services Block Grant appropriation. JCT determined that the tax 

shelter provisions in the Senate-reported bill contained private-sector mandates. Neither bill contains intergovernmental mandates. 

Estimate prepared by: Federal revenues: Annabelle Bartsch. Federal spending: Donna Wong. Impact on state, local, and tribal governments: Sarah Puro. Impact on the private sector: Bruce 

Vavrichek. 

Estimate approved by: Robert A. Sunshine, Assistant Director for 

Budget Analysis; and G. Thomas Woodward, Assistant Director for 

Tax Analysis.

D. MACROECONOMIC IMPACT ANALYSIS

In compliance with clause 3(h)(2) of rule XIII of the Rules of the 

House of Representatives, the following statement is made by the 

Joint Committee on Taxation with respect to the provisions of the 

bill amending the Internal Revenue Code of 1986: the effects of the 

bill on economic activity are so small as to be incalculable within 

the context of a model of the aggregate economy. 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives (relating to oversight findings), the Committee advises that it was a result of the Committee’s oversight review concerning the tax burden on individual taxpayers and the 

80

tax rules relating to charitable giving and the impact of these rules 

on charitable organizations that the Committee concluded that it is 

appropriate and timely to enact the revenue provisions included in 

the bill as reported. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the performance goals and objectives of 

the Individual Development Account demonstration program reauthorized under this legislation are to test savings incentives for 

low-income households, including as a means of reducing such 

households’ need for and use of cash and other welfare benefits. 

Similarly, the performance goals and objectives of the Compassion 

Capital Fund are to support and replicate promising social service 

programs to better serve needy individuals and families. The performance goals and objectives of the Maternity Group Home program authorized under this bill are to afford pregnant and parenting mothers access to safe transitional living opportunities. 

(This provision is under the jurisdiction of the Committee on Education and the Workforce.) 

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of the rule XIII of the Rules of the 

House of Representatives (relating to Constitutional Authority), the 

Committee states that the Committee’s action in reporting this bill 

is derived from Article I of the Constitution, Section 8 (‘‘The Congress shall have Power To lay and collect Taxes, Duties, Imposts 

and Excises . . . ’’), and from the 16th Amendment to the Constitution. 

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Act of 1995 (P.L. 104–4). 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

E. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not 

be considered as passed or agreed to unless so determined by a 

vote of not less than three-fifths of the Members voting, a quorum 

being present.’’ The Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not 

involve any Federal income tax rate increases within the meaning 

of the rule. 

F. TAX COMPLEXITY ANALYSIS

The following tax complexity analysis is provided pursuant to 

section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998, which requires the staff of the Joint ComVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00080 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
81

mittee on Taxation (in consultation with the Internal Revenue 

Service (‘‘IRS’’) and the Treasury Department) to provide a complexity analysis of tax legislation reported by the House Committee 

on Ways and Means, the Senate Committee on Finance, or a Conference Report containing tax provisions. The complexity analysis 

is required to report on the complexity and administrative issues 

raised by provisions that directly or indirectly amend the Internal 

Revenue Code and that have widespread applicability to individuals or small businesses. For each such provision identified by the 

staff of the Joint Committee on Taxation, a summary description 

of the provision is provided along with an estimate of the number 

and type of affected taxpayers, and a discussion regarding the relevant complexity and administrative issues. 

Following the analysis of the staff of the Joint Committee on 

Taxation are the comments of the IRS and the Treasury Department regarding each of the provisions included in the complexity 

analysis, including a discussion of the likely effect on IRS forms 

and any expected impact on the IRS. 

Direct charitable deduction for nonitemizers (sec. 101 of the bill) 

Summary description of provision 

In the case of an individual taxpayer who does not itemize deductions, the bill would allow a direct charitable deduction from adjusted gross income for charitable contributions paid in cash. This 

deduction would be allowed in addition to the standard deduction. 

The deduction would be available only for that portion of contributions that in the aggregate exceed $250 ($500 in the case of a joint 

return). The maximum deduction would be $250 ($500 in the case 

of a joint return). The direct charitable deduction generally would 

be subject to the tax rules normally governing charitable contribution deductions, such as the substantiation requirements. The deduction would be allowed in computing alternative minimum taxable income. The direct charitable deduction would be effective for 

taxable years beginning after December 31, 2003, and before January 1, 2006. 

Number of affected taxpayers 

It is estimated that the provision will affect approximately 30 

million individual income tax returns each year the deduction is in 

effect. 

Discussion 

Individuals who do not itemize their deductions will need to keep 

additional records (e.g., canceled checks, a receipt from the donee 

organization, or other reliable written records) in order to substantiate that a contribution was made to a qualified charitable organization. The information necessary to implement the provision 

should be readily available to taxpayers (in the form of new tax return forms and instructions). The direct charitable deduction is expected to require an additional line on the individual income tax 

return forms. The provision might result in an increase in disputes 

with the IRS for taxpayers who are unable to substantiate a 

claimed deduction. Additional regulatory guidance will not be necVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00081 Fmt 6659 Sfmt 6602 E:\HR\OC\HR270P1.XXX HR270P1
82

essary to emplement this provision. Any increase in tax preparation costs is expected to be negligible.

DEPARTMENT OF THE TREASURY, 

INTERNAL REVENUE SERVICE, 

Washington, DC, September 11, 2003. 

Mr. GEORGE K. YIN, 

Chief of Staff, Joint Committee on Taxation, 

Washington, DC. 

DEAR MR. YIN: Enclosed are the combined comments of the Internal Revenue Service and the Treasury Department on the provision 

for a charitable deduction for non-itemizers from the House Ways 

and Means Committee’s markup of H.R. 7, the ‘‘Charitable Giving 

Act of 2003,’’ that you identified for complexity analysis in your letter of September 9, 2003. 

Our comments are based on the statutory language for that provision contained in Chairman Thomas’s Amendment in the Nature 

of a Substitute to H.R. 7, reprinted in Daily Tax Reports for September 9, 2003, and the description of that provision in your letter 

and in JCX–73–03, the Joint Committee on Taxation’s Description 

of the Chairman’s Amendment in the Nature of a Substitute to 

N.R. 7, September 8, 2003. Due to the short turnaround time, our 

comments are provisional and subject to change upon a more complete and in-depth analysis of the provision. 

Sincerely, 

BOB WENZEL

(For Mark W. Everson, Commissioner). 

Enclosure. 

COMPLEXITY ANALYSIS OF PROVISION FROM H.R. 7, THE CHARITABLE

GIVING ACT OF 2003 

CHARITABLE DEDUCTION FOR NON-ITEMIZERS

Provision: A taxpayer who does not itemize deductions would be 

allowed a direct charitable deduction from adjusted gross income 

for charitable contributions paid in cash. This deduction would be 

allowed in addition to the standard deduction. The deduction would 

be available only for that portion of contributions that in the aggregate exceeds $250 ($500 in the case of a joint return). The maximum deduction would be $250 ($500 in the case of a joint return). 

The direct charitable deduction generally would be subject to the 

tax rules normally governing charitable contribution deductions 

and would be allowed in computing alternative minimum taxable 

income. The provision would be effective for taxable years beginning after December 31, 2003, and before January 1, 2006. 

IRS and Treasury Comments 

• Two lines would have to be added to Forms 1040, 1040A, 

1040EZ, 1040NR, and 1040NR–EZ for 2004 and 2005; one for the 

allowable deduction and one to reflect the total of the standard deduction and the charitable contribution deduction. One line would 

be added to the TeleFile Tax Record for 2004 and 2005 (taxpayers 

would enter their total contributions on the new line and TeleFile 

would calculate the allowable deduction). No new forms would be 

required. 

83

• The new deduction would also have to be reflected on Form 

1040–ES and in the instructions for Forms 1040X and 1045 for 

2004 and 2005. • Information necessary for taxpayers to determine their eligibility for the deduction, including the AGI limitation applicable to 

cash contributions, and the substantiation requirements, would 

have to be reflected in the 2004 and 2005 instructions for Forms 

1040, 1040A, 1040EZ, 1040NR, and 1040NR–EZ and for TeleFile. • A worksheet (consisting of four lines) for taxpayers to calculate 

their allowable deduction would have to be reflected in the 2004 

and 2005 instructions for Forms 1040, 1040A, 1040EZ, 1040NR, 

and 1040NR–EZ. • Changes to the TeleFile script for 2004 and 2005 would be required to allow the deduction to taxpayers who use TeleFile. • All of the above changes would have to be reversed for tax 

years beginning after December 31, 2005, to reflect the termination 

of the charitable deduction for nonitemizers (e.g., the lines would 

be removed from the Form 1040 series of returns, the worksheet 

would be removed from the instructions for these returns, and programming and script changes would be necessary to eliminate the 

deduction). • Ensuring compliance with the new charitable deduction would 

be difficult. The only means of verifying amounts deducted would 

be through examination, and the normal examination rate for such 

returns is relatively low. • Programming changes would be required to reflect the new deduction on the tax returns.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 

INTERNAL REVENUE CODE OF 1986

* * * * * * *

Subtitle A—Income Taxes 

* * * * * * *

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * *

Subchapter B—Computation of taxable income 

* * * * * * *

PART I—DEFINITION OF GROSS INCOME, ADJUSTED 

GROSS INCOME, TAXABLE INCOME, ETC. 

* * * * * * *

84

SEC. 63. TAXABLE INCOME DEFINED. 

(a) * * *

(b) INDIVIDUALS WHO DO NOT ITEMIZE THEIR DEDUCTIONS.—In 

the case of an individual who does not elect to itemize his deductions for the taxable year, for purposes of this subtitle, the term 

‘‘taxable income’’ means adjusted gross income, minus—

(1) the standard deduction, øand¿

(2) the deduction for personal exemptions provided in section 

151ø.¿, and

(3) the direct charitable deduction.

* * * * * * *

(d) ITEMIZED DEDUCTIONS.—For purposes of this subtitle, the 

term ‘‘itemized deductions’’ means the deductions allowable under 

this chapter other than— (1) the deductions allowable in arriving at adjusted gross income, øand¿

(2) the deduction for personal exemptions provided by section 

151ø.¿, and

(3) the direct charitable deduction.

* * * * * * *

(g) DIRECT CHARITABLE DEDUCTION.—For purposes of this section, the term ‘‘direct charitable deduction’’ means that portion of 

the amount allowable under section 170(a) which is taken as a direct charitable deduction for the taxable year under section 170(m).

ø(g)¿ (h) MARITAL STATUS.—For purposes of this section, marital 

status shall be determined under section 7703. 

* * * * * * *

PART III—ITEMS SPECIFICALLY EXCLUDED FROM 

GROSS INCOME 

* * * * * * *

SEC. 126. CERTAIN COST-SHARING PAYMENTS. 

(a) GENERAL RULE.—Gross income does not include the excludable portion of payments received under—

(1) * * *

* * * * * * *

(10) Landowner initiatives programs to conserve threatened, 

endangered, or imperiled species, or protect or restore habitat 

carried out under—

(A) the Fish and Wildlife Coordination Act (16 U.S.C. 

661 et seq.), 

(B) the Fish and Wildlife Act of 1956 (16 U.S.C. 742f), 

or 

(C) section 6 of the Endangered Species Act (16 U.S.C. 

11531 et seq.).

ø(10)¿ (11) Any program of a State, possession of the United 

States, a political subdivision of any of the foregoing, or the 

District of Columbia under which payments are made to individuals primarily for the purpose of conserving soil, protecting 

or restoring the environment, improving forests, or providing a 

habitat for wildlife. 

(b) EXCLUDABLE PORTION.—For purposes of this section—

85

(1) IN GENERAL.—The term ‘‘excludable portion’’ means that 

portion (or all) of a payment made to any person under any 

program described in subsection (a) which— (A) is determined by the Secretary of Agriculture (the 

Secretary of the Interior, in the case of the landowner incentives programs described in subsection (a)(10) and the 

programs described in subsection (a)(11) that are implemented by the Department of the Interior) to be made primarily for the purpose of conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife, and 

* * * * * * *

PART VI—ITEMIZED DEDUCTIONS FOR INDIVIDUALS 

AND CORPORATIONS 

* * * * * * *

SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS. 

(a) * * *

(b) PERCENTAGE LIMITATIONS.—

(1) * * *

(2) CORPORATIONS.—In the case of a corporation, the total 

deductions under subsection (a) for any taxable year shall not 

exceed ø10 percent¿ the applicable percentage of the taxpayer’s 

taxable income computed without regard to—

(A) * * *

* * * * * * *

(3) APPLICABLE PERCENTAGE DEFINED.—For purposes of paragraph (2), the applicable percentage shall be determined in accordance with the following table:

For taxable years beginning The applicable 

in calendar year— percentage is—

2004 ................................................................................................ 11

2005 ................................................................................................ 12

2006 ................................................................................................ 13

2007 ................................................................................................ 14

2008 through 2011 ......................................................................... 15

2012 and thereafter ........................................................................ 20.

(e) CERTAIN CONTRIBUTIONS OF ORDINARY INCOME AND CAPITAL

GAIN PROPERTY.— (1) * * *

* * * * * * *

(3) SPECIAL RULE FOR CERTAIN CONTRIBUTIONS OF INVENTORY

AND OTHER PROPERTY.—

(A) * * *

* * * * * * *

(C) SPECIAL RULE FOR CONTRIBUTIONS OF FOOD INVENTORY.—

(i) GENERAL RULE.—In the case of a charitable contribution of food from any trade or business (or interest 

therein) of the taxpayer, this paragraph shall be applied—

(I) without regard to whether the contribution is 

made by a C corporation, and 

86

(II) only to food that is apparently wholesome 

food. 

(ii) LIMITATION.—In the case of a taxpayer other than 

a C corporation, the aggregate amount of such contributions for any taxable year which may be taken 

into account under this section shall not exceed the applicable percentage (within the meaning of subsection 

(b)(3)) of the taxpayer’s aggregate net income for such 

taxable year from all trades or businesses from which 

such contributions were made for such year, computed 

without regard to this section. 

(iii) DETERMINATION OF FAIR MARKET VALUE.—In the 

case of a qualified contribution of apparently wholesome food to which this paragraph applies and which, 

solely by reason of internal standards of the taxpayer 

or lack of market, cannot or will not be sold, the fair 

market value of such food shall be determined by taking into account the price at which the same or substantially the same food items (as to both type and 

quality) are sold by the taxpayer at the time of the contribution (or, if not so sold at such time, in the recent 

past). 

(iv) APPARENTLY WHOLESOME FOOD.—For purposes of 

this subparagraph, the term ‘‘apparently wholesome 

food’’ has the meaning given to such term by section 

22(b)(2) of the Bill Emerson Good Samaritan Food Donation Act (42 U.S.C. 1791(b)(2)), as in effect on the 

date of the enactment of this subparagraph.

ø(C)¿ (D) This paragraph shall not apply to so much of 

the amount of the gain described in paragraph (1)(A) 

which would be long-term capital gain but for the application of sections 617, 1245, 1250, or 1252. 

(4) SPECIAL RULE FOR CONTRIBUTIONS OF SCIENTIFIC PROP- ERTY USED FOR RESEARCH.— (A) * * *

(B) QUALIFIED RESEARCH CONTRIBUTIONS.—For purposes 

of this paragraph, the term ‘‘qualified research contribution’’ means a charitable contribution by a corporation of 

tangible personal property described in paragraph (1) of 

section 1221(a), but only if— (i) * * *

(ii) the property is constructed or assembled by the 

taxpayer, 

(iii) the contribution is made not later than 2 years 

after the date the construction or assembling of the 

property is substantially completed, 

* * * * * * *

(6) SPECIAL RULE FOR CONTRIBUTIONS OF COMPUTER TECH- NOLOGY AND EQUIPMENT FOR EDUCATIONAL PURPOSES.— (A) * * *

(B) QUALIFIED COMPUTER CONTRIBUTION.—For purposes 

of this paragraph, the term ‘‘qualified computer contribution’’ means a charitable contribution by a corporation of 

any computer technology or equipment, but only if—

(i) * * *

87

(ii) the contribution is made not later than 3 years 

after the date the taxpayer acquired the property (or 

in the case of property constructed or assembled by the 

taxpayer, the date the construction or assembling of 

the property is substantially completed), 

* * * * * * *

(D) DONATIONS OF PROPERTY REACQUIRED BY MANUFAC- TURER.—In the case of property which is reacquired by the 

person who constructed or assembled the property— (i) subparagraph (B)(ii) shall be applied to a contribution of such property by such person by taking 

into account the date that the original construction or 

assembling of the property was substantially completed, and 

* * * * * * *

ø(G) TERMINATION.—This paragraph shall not apply to 

any contribution made during any taxable year beginning 

after December 31, 2003.¿

* * * * * * *

(m) DEDUCTION FOR INDIVIDUALS NOT ITEMIZING DEDUCTIONS.— (1) IN GENERAL.—In the case of an individual who does not 

itemize deductions for a taxable year, there shall be taken into 

account as a direct charitable deduction under section 63 an 

amount equal to the amount allowable under subsection (a) for 

the taxable year for cash contributions (determined without regard to any carryover), to the extent that such contributions exceed $250 ($500 in the case of a joint return) but do not exceed 

$500 ($1,000 in the case of a joint return). 

(2) TERMINATION.—Paragraph (1) shall not apply to any taxable year beginning after December 31, 2005.

ø(m)¿ (n) OTHER CROSS REFERENCES.— (1) For treatment of certain organizations providing child care, 

see section 501(k).

* * * * * * *

Subchapter D—Deferred Compensation, Etc. 

* * * * * * *

PART I—PENSION, PROFIT-SHARING, STOCK BONUS 

PLANS, ETC. 

* * * * * * *

Subpart A—General Rule 

* * * * * * *

SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS. 

(a) * * *

* * * * * * *

(d) TAX TREATMENT OF DISTRIBUTIONS.—

(1) * * *

* * * * * * *

88

(8) DISTRIBUTIONS FOR CHARITABLE PURPOSES.—

(A) IN GENERAL.—No amount shall be includible in gross 

income by reason of a qualified charitable distribution. 

(B) QUALIFIED CHARITABLE DISTRIBUTION.—For purposes 

of this paragraph, the term ‘‘qualified charitable distribution’’ means any distribution from an individual retirement 

plan other than a plan described in subsection (k) or (p) of 

section 408—

(i) which is made on or after the date that the individual for whose benefit the plan is maintained has attained age 70 1⁄2, and 

(ii) which is made directly by the trustee—

(I) to an organization described in section 170(c), 

or 

(II) to a split-interest entity. 

A distribution shall be treated as a qualified charitable distribution only to the extent that the distribution would be 

includible in gross income without regard to subparagraph 

(A) and, in the case of a distribution to a split-interest entity, only if no person holds an income interest in the 

amounts in the split-interest entity attributable to such distribution other than one or more of the following: the individual for whose benefit such plan is maintained, the 

spouse of such individual, or any organization described in 

section 170(c). 

(C) CONTRIBUTIONS MUST BE OTHERWISE DEDUCTIBLE.—

For purposes of this paragraph—

(i) DIRECT CONTRIBUTIONS.—A distribution to an organization described in section 170(c) shall be treated 

as a qualified charitable distribution only if a deduction for the entire distribution would be allowable 

under section 170 (determined without regard to subsection (b) thereof and this paragraph). 

(ii) SPLIT-INTEREST GIFTS.—A distribution to a splitinterest entity shall be treated as a qualified charitable 

distribution only if a deduction for the entire value of 

the interest in the distribution for the use of an organization described in section 170(c) would be allowable 

under section 170 (determined without regard to subsection (b) thereof and this paragraph). 

(D) APPLICATION OF SECTION 72.—Notwithstanding section 72, in determining the extent to which a distribution 

is a qualified charitable distribution, the entire amount of 

the distribution shall be treated as includible in gross income without regard to subparagraph (A) to the extent that 

such amount does not exceed the aggregate amount which 

would have been so includible if all amounts distributed 

from all individual retirement plans were treated as 1 contract under paragraph (2)(A) for purposes of determining 

the inclusion of such distribution under section 72. Proper 

adjustments shall be made in applying section 72 to other 

distributions in such taxable year and subsequent taxable 

years. 

(E) SPECIAL RULES FOR SPLIT-INTEREST ENTITIES.—

89

(i) CHARITABLE REMAINDER TRUSTS.—Notwithstanding section 664(b), distributions made from a 

trust described in subparagraph (G)(i) shall be treated 

as ordinary income in the hands of the beneficiary to 

whom is paid the annuity described in section 

664(d)(1)(A) or the payment described in section 

664(d)(2)(A). 

(ii) POOLED INCOME FUNDS.—No amount shall be includible in the gross income of a pooled income fund 

(as defined in subparagraph (G)(ii)) by reason of a 

qualified charitable distribution to such fund, and all 

distributions from the fund which are attributable to 

qualified charitable distributions shall be treated as 

ordinary income to the beneficiary. 

(iii) CHARITABLE GIFT ANNUITIES.—Qualified charitable distributions made for a charitable gift annuity 

shall not be treated as an investment in the contract. 

(F) DENIAL OF DEDUCTION.—Qualified charitable distributions shall not be taken into account in determining 

the deduction under section 170. 

(G) SPLIT-INTEREST ENTITY DEFINED.—For purposes of 

this paragraph, the term ‘‘split-interest entity’’ means— (i) a charitable remainder annuity trust or a charitable remainder unitrust (as such terms are defined in 

section 664(d)) which must be funded exclusively by 

qualified charitable distributions, 

(ii) a pooled income fund (as defined in section 

642(c)(5)), but only if the fund accounts separately for 

amounts attributable to qualified charitable distributions, and 

(iii) a charitable gift annuity (as defined in section 

501(m)(5)).

* * * * * * *

Subchapter F—Exempt Organizations 

* * * * * * *

PART I—GENERAL RULE 

* * * * * * *

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN 

TRUSTS, ETC. 

(a) * * *

* * * * * * *

(h) EXPENDITURES BY PUBLIC CHARITIES TO INFLUENCE LEGISLATION.—

ø(1) GENERAL RULE.—In the case of an organization to which 

this subsection applies, exemption from taxation under subsection (a) shall be denied because a substantial part of the activities of such organization consists of carrying on propaganda, or otherwise attempting, to influence legislation, but 

only if such organization normally—

90

ø(A) makes lobbying expenditures in excess of the lobbying ceiling amount for such organization for each taxable 

year, or 

ø(B) makes grass roots expenditures in excess of the 

grass roots ceiling amount for such organization for each 

taxable year.¿

(1) GENERAL RULE.—In the case of an organization to which 

this subsection applies, exemption from taxation under subsection (a) shall be denied because a substantial part of the activities of such organization consists of carrying on propaganda, 

or otherwise attempting, to influence legislation, but only if 

such organization normally makes lobbying expenditures in excess of the lobbying ceiling amount for such organization for 

each taxable year.

(2) DEFINITIONS.—For purposes of this subsection—

(A) * * *

* * * * * * *

ø(C) GRASS ROOTS EXPENDITURES.—The term ‘‘grass 

roots expenditures’’ means expenditures for the purpose of 

influencing legislation (as defined in section 4911(d) without regard to paragraph (1)(B) thereof). 

ø(D) GRASS ROOTS CEILING AMOUNT.—The grass roots 

ceiling amount for any organization for any taxable year is 

150 percent of the grass roots nontaxable amount for such 

organization for such taxable year, determined under section 4911.¿

* * * * * * *

(p) SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.—

(1) IN GENERAL.—The exemption from tax under subsection 

(a) with respect to any organization described in paragraph (2), 

and the eligibility of any organization described in paragraph 

(2) to apply for recognition of exemption under subsection (a), 

shall be suspended during the period described in paragraph 

(3). 

(2) TERRORIST ORGANIZATIONS.—An organization is described 

in this paragraph if such organization is designated or otherwise individually identified—

(A) under section 212(a)(3)(B)(vi)(II) or 219 of the Immigration and Nationality Act as a terrorist organization or 

foreign terrorist organization, 

(B) in or pursuant to an Executive order which is related 

to terrorism and issued under the authority of the International Emergency Economic Powers Act or section 5 of 

the United Nations Participation Act of 1945 for the purpose of imposing on such organization an economic or other 

sanction, or 

(C) in or pursuant to an Executive order issued under the 

authority of any Federal law if—

(i) the organization is designated or otherwise individually identified in or pursuant to such Executive 

order as supporting or engaging in terrorist activity (as 

defined in section 212(a)(3)(B) of the Immigration and 

Nationality Act) or supporting terrorism (as defined in 

91

section 140(d)(2) of the Foreign Relations Authorization 

Act, Fiscal Years 1988 and 1989); and 

(ii) such Executive order refers to this subsection. 

(3) PERIOD OF SUSPENSION.—With respect to any organization 

described in paragraph (2), the period of suspension—

(A) begins on the later of—

(i) the date of the first publication of a designation 

or identification described in paragraph (2) with respect to such organization, or 

(ii) the date of the enactment of this subsection, and 

(B) ends on the first date that all designations and identifications described in paragraph (2) with respect to such 

organization are rescinded pursuant to the law or Executive 

order under which such designation or identification was 

made. 

(4) DENIAL OF DEDUCTION.—No deduction shall be allowed 

under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), 

or 2522 for any contribution to an organization described in 

paragraph (2) during the period described in paragraph (3). 

(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL CHALLENGE OF

SUSPENSION OR DENIAL OF DEDUCTION.—Notwithstanding section 7428 or any other provision of law, no organization or 

other person may challenge a suspension under paragraph (1), 

a designation or identification described in paragraph (2), the 

period of suspension described in paragraph (3), or a denial of 

a deduction under paragraph (4) in any administrative or judicial proceeding relating to the Federal tax liability of such organization or other person. 

(6) ERRONEOUS DESIGNATION.—

(A) IN GENERAL.—If—

(i) the tax exemption of any organization described in 

paragraph (2) is suspended under paragraph (1), 

(ii) each designation and identification described in 

paragraph (2) which has been made with respect to 

such organization is determined to be erroneous pursuant to the law or Executive order under which such 

designation or identification was made, and 

(iii) the erroneous designations and identifications 

result in an overpayment of income tax for any taxable 

year by such organization, 

credit or refund (with interest) with respect to such overpayment shall be made. 

(B) WAIVER OF LIMITATIONS.—If the credit or refund of 

any overpayment of tax described in subparagraph (A)(iii) 

is prevented at any time by the operation of any law or rule 

of law (including res judicata), such credit or refund may 

nevertheless be allowed or made if the claim therefor is 

filed before the close of the 1-year period beginning on the 

date of the last determination described in subparagraph 

(A)(ii). 

(7) NOTICE OF SUSPENSIONS.—If the tax exemption of any organization is suspended under this subsection, the Internal Revenue Service shall update the listings of tax-exempt organizations and shall publish appropriate notice to taxpayers of such 

92

suspension and of the fact that contributions to such organization are not deductible during the period of such suspension. 

(q) TREATMENT OF ORGANIZATIONS MAKING COLLEGIATE HOUSING

AND INFRASTRUCTURE IMPROVEMENT GRANTS.— (1) IN GENERAL.—For purposes of subsection (c)(3) and sections 170(c)(2)(B), 2055(a), and 2522(a)(2), an organization 

shall not fail to be treated as organized and operated exclusively for charitable or educational purposes solely because such 

organization makes collegiate housing and infrastructure 

grants to an organization described in subsection (c)(7), so long 

as, at the time of the grant, substantially all of the active members of the recipient organization are full-time students at the 

college or university with which such recipient organization is 

associated. 

(2) HOUSING AND INFRASTRUCTURE GRANTS.—For purposes of 

paragraph (1), collegiate housing and infrastructure grants are 

grants to provide, improve, operate, or maintain collegiate housing that may involve more than incidental social, recreational, 

or private purposes, so long as such grants are for purposes that 

would be permissible for a dormitory of the college or university 

referred to in paragraph (1). A grant shall not be treated as a 

collegiate housing and infrastructure grant for purposes of 

paragraph (1) to the extent that such grant is used to provide 

physical fitness equipment. 

(3) GRANTS TO CERTAIN ORGANIZATIONS HOLDING TITLE TO

PROPERTY, ETC.—For purposes of this subsection, a collegiate 

housing and infrastructure grant to an organization described 

in subsection (c)(2) or (c)(7) holding title to property exclusively 

for the benefit of an organization described in subsection (c)(7) 

shall be considered a grant to the organization described in 

subsection (c)(7) for whose benefit such property is held.

ø(p)¿ (r) CROSS REFERENCE.— For nonexemption of Communist-controlled organizations, see 

section 11(b) of the Internal Security Act of 1950 (64 Stat. 997; 50 

U.S.C. 790(b)).

* * * * * * *

PART III—TAXATION OF BUSINESS INCOME OF CERTAIN 

EXEMPT ORGANIZATIONS 

* * * * * * *

SEC. 512. UNRELATED BUSINESS TAXABLE INCOME. 

(a) DEFINITION.—For purposes of this title—

(1) * * *

* * * * * * *

(3) SPECIAL RULES APPLICABLE TO ORGANIZATIONS DESCRIBED

IN PARAGRAPH (7), (9), (17), OR (20) OF SECTION 501(C).—

(A) * * *

* * * * * * *

ø(D) NONRECOGNITION OF GAIN.—If property used directly in the performance of the exempt function of an organization described in paragraph (7), (9), (17), or (20) of 

section 501(c) is sold by such organization, and within a 

period beginning 1 year before the date of such sale, and 

93

ending 3 years after such date, other property is purchased 

and used by such organization directly in the performance 

of its exempt function, gain (if any) from such sale shall 

be recognized only to the extent that such organization’s 

sales price of the old property exceeds the organization’s 

cost of purchasing the other property. For purposes of this 

subparagraph, the destruction in whole or in part, theft, 

seizure, requisition, or condemnation of property, shall be 

treated as the sale of such property, and rules similar to 

the rules provided by subsections (b), (c), (e), and (j) of section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) shall apply.¿

(D) NONRECOGNITION OF GAIN.—

(i) IN GENERAL.—If property used directly in the performance of the exempt function of an organization described in paragraph (7), (9), (17), or (20) of section 

501(c) is sold by such organization, and within a period beginning 1 year before the date of such sale, and 

ending 3 years (10 years, in the case of an organization 

described in section 501(c)(7)) after such date, other 

property is purchased and used by such organization 

directly in the performance of its exempt function, gain 

(if any) from such sale shall be recognized only to the 

extent that such organization’s sales price of the old 

property exceeds the organization’s cost of purchasing 

the other property. 

(ii) STATUTE OF LIMITATIONS.—If an organization described in section 501(c)(7) sells property on which gain 

is not recognized, in whole or in part, by reason of 

clause (i), then the statutory period for the assessment 

of any deficiency attributable to such gain shall not expire until the end of the 3-year period beginning on the 

date that the Secretary is notified by such organization 

(in such manner as the Secretary may prescribe) that—

(I) the organization has met the requirements of 

clause (i) with respect to gain which was not recognized, 

(II) the organization does not intend to meet 

such requirements, or 

(III) the organization failed to meet such requirements within the prescribed period. 

For the purposes of this clause, any deficiency may be 

assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of 

law which would otherwise prevent such assessment. 

(iii) DESTRUCTION AND LOSS.—For purposes of this 

subparagraph, the destruction in whole or in part, 

theft, seizure, requisition, or condemnation of property, 

shall be treated as the sale of such property, and rules 

similar to the rules provided by subsections (b), (c), (e), 

and (j) of section 1034 (as in effect on the day before 

the date of the enactment of the Taxpayer Relief Act of 

1997) shall apply.

* * * * * * *

94

(b) MODIFICATIONS.—The modifications referred to in subsection 

(a) are the following: 

(1) * * *

* * * * * * *

(10) In the case of any organization described in section 

511(a), the deduction allowed by section 170 (relating to charitable etc. contributions and gifts) shall be allowed (whether or 

not directly connected with the carrying on of the trade or 

business), but shall not exceed ø10 percent¿ the applicable percentage (determined under section 170(b)(3)) of the unrelated 

business taxable income computed without the benefit of this 

paragraph. 

* * * * * * *

(13) SPECIAL RULES FOR CERTAIN AMOUNTS RECEIVED FROM

CONTROLLED ENTITIES—

(A) * * *

* * * * * * *

(E) PARAGRAPH TO APPLY ONLY TO EXCESS PAYMENTS.—

(i) IN GENERAL.—Subparagraph (A) shall apply only 

to the portion of a specified payment received or accrued by the controlling organization that exceeds the 

amount which would have been paid or accrued if such 

payment met the requirements prescribed under section 

482. 

(ii) ADDITION TO TAX FOR VALUATION

MISSTATEMENTS.—The tax imposed by this chapter on 

the controlling organization shall be increased by an 

amount equal to 20 percent of the larger of—

(I) such excess determined without regard to any 

amendment or supplement to a return of tax, or 

(II) such excess determined with regard to all 

such amendments and supplements.

ø(E)¿ (F) RELATED PERSONS.—The Secretary shall prescribe such rules as may be necessary or appropriate to 

prevent avoidance of the purposes of this paragraph 

through the use of related persons. 

* * * * * * *

SEC. 513. UNRELATED TRADE OR BUSINESS. 

(a) * * *

* * * * * * *

(f) CERTAIN øBINGO GAMES¿ GAMES OF CHANCE.—

ø(1) IN GENERAL.—The term ‘‘unrelated trade or business’’

does not include any trade or business which consists of conducting bingo games.¿

(1) IN GENERAL.—The term ‘‘unrelated trade or business’’ does 

not include—

(A) any trade or business which consists of conducting 

bingo games, and 

(B) any trade or business which consists of conducting 

qualified games of chance if the net proceeds from such 

trade or business are paid or set aside for payment for purposes described in section 170(c)(2)(B), for the promotion of 

95

social welfare (within the meaning of section 501(c)(4)), or 

for a purpose for which State law specifically authorizes 

the expenditure of such proceeds. 

* * * * * * *

(3) QUALIFIED GAMES OF CHANCE.—For purposes of paragraph (1), the term ‘‘qualified game of chance’’ means any game 

of chance (other than bingo) conducted by an organization if— (A) such organization is licensed pursuant to State law 

to conduct such game, 

(B) only organizations which are organized as nonprofit 

corporations or are exempt from tax under section 501(a) 

may be so licensed to conduct such game within the State, 

and 

(C) the conduct of such game does not violate State or 

local law.

* * * * * * *

Subchapter G—Corporations Used to Avoid 

Income Tax on Shareholders 

* * * * * * *

PART II—PERSONAL HOLDING COMPANIES 

* * * * * * *

SEC. 545. UNDISTRIBUTED PERSONAL HOLDING COMPANY INCOME. 

(a) * * *

(b) ADJUSTMENTS TO TAXABLE INCOME.—For the purposes of subsection (a), the taxable income shall be adjusted as follows: 

(1) * * *

(2) CHARITABLE CONTRIBUTIONS.—The deduction for charitable contributions provided under section 170 shall be allowed, but in computing such deduction the limitations in section 170(b)(1)(A), (B), and (D) shall apply, and section 170(b)(2) 

and (d)(1) shall not apply. For purposes of this paragraph, the 

term ‘‘contribution base’’ when used in section 170(b)(1) means 

the taxable income computed with the adjustments (other than 

the ø10-percent limitation¿ applicable percentage limitation) 

provided in section 170(b)(2) and (d)(1) and without deduction 

of the amount disallowed under paragraph (6) of this subsection. 

* * * * * * *

PART III—FOREIGN PERSONAL HOLDING COMPANIES 

* * * * * * *

SEC. 556. UNDISTRIBUTED FOREIGN PERSONAL HOLDING COMPANY 

INCOME. 

(a) * * *

(b) ADJUSTMENTS TO TAXABLE INCOME.—For the purposes of subsection (a), the taxable income shall be adjusted as follows: 

(1) * * *

(2) CHARITABLE CONTRIBUTIONS.—The deduction for charitable contributions provided under section 170 shall be alVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00095 Fmt 6659 Sfmt 6601 E:\HR\OC\HR270P1.XXX HR270P1
96

lowed, but in computing such deduction the limitations in section 170(b)(1)(A), (B), and (D) shall apply, and section 170(b)(2) 

and (d)(1) shall not apply. For purposes of this paragraph, the 

term ‘‘contribution base’’ when used in section 170(b)(1) means 

the taxable income computed with the adjustments (other than 

the ø10-percent limitation¿ applicable percentage limitation) 

provided in section 170(b)(2) and (d)(1) and without the deduction of the amounts disallowed under paragraphs (5) and (6) of 

this subsection or the inclusion in gross income of the amounts 

includible therein as dividends by reason of the application of 

the provisions of section 555(b) (relating to the inclusion in 

gross income of a foreign personal holding company of its distributive share of the undistributed foreign personal holding 

company income of another company in which it is a shareholder). 

* * * * * * *

Subchapter J—Estates, Trusts, Beneficiaries, and 

Decedents 

* * * * * * *

PART I—ESTATES, TRUSTS, AND BENEFICIARIES 

* * * * * * *

Subpart C—Estates and Trusts Which May Accumulate 

Income or Which Distribute Corpus 

* * * * * * *

SEC. 664. CHARITABLE REMAINDER TRUSTS. 

(a) * * *

* * * * * * *

ø(c) EXEMPTION FROM INCOME TAXES.—A charitable remainder 

annuity trust and a charitable remainder unitrust shall, for any 

taxable year, not be subject to any tax imposed by this subtitle, unless such trust, for such year, has unrelated business taxable income (within the meaning of section 512, determined as if part III 

of subchapter F applied to such trust).¿

(c) TAXATION OF TRUSTS.—

(1) INCOME TAX.—A charitable remainder annuity trust and 

a charitable remainder unitrust shall, for any taxable year, not 

be subject to any tax imposed by this subtitle. 

(2) EXCISE TAX.—

(A) IN GENERAL.—In the case of a charitable remainder 

annuity trust or a charitable remainder unitrust that has 

unrelated business taxable income (within the meaning of 

section 512, determined as if part III of subchapter F applied to such trust) for a taxable year, there is hereby imposed on such trust or unitrust an excise tax equal to the 

amount of such unrelated business taxable income. 

(B) CERTAIN RULES TO APPLY.—The tax imposed by subparagraph (A) shall be treated as imposed by chapter 42 for 

purposes of this title other than subchapter E of chapter 42. 

97

(C) CHARACTER OF DISTRIBUTIONS AND COORDINATION

WITH DISTRIBUTION REQUIREMENTS.—The amounts taken 

into account in determining unrelated business taxable income (as defined in subparagraph (A)) shall not be taken 

into account for purposes of— (i) subsection (b), 

(ii) determining the value of trust assets under subsection (d)(2), and 

(iii) determining income under subsection (d)(3). 

(D) TAX COURT PROCEEDINGS.—For purposes of this paragraph, the references in section 6212(c)(1) to section 4940 

shall be deemed to include references to this paragraph.

* * * * * * *

Subchapter L—Insurance Companies 

* * * * * * *

PART I—LIFE INSURANCE COMPANIES 

* * * * * * *

Subpart C—Life Insurance Deductions 

* * * * * * *

SEC. 805. GENERAL DEDUCTIONS. 

(a) * * *

(b) MODIFICATIONS.—The modifications referred to in subsection 

(a)(8) are as follows: 

(1) * * *

(2) CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.—In applying section 170—

(A) the limit on the total deductions under such section 

provided by section 170(b)(2) shall be ø10 percent¿ the applicable percentage (determined under section 170(b)(3)) of 

the life insurance company taxable income computed without regard to—

(i) * * *

* * * * * * *

Subchapter S—Tax Treatment of S Corporations 

and Their Shareholders 

* * * * * * *

PART II—TAX TREATMENT OF SHAREHOLDERS 

* * * * * * *

SEC. 1367. ADJUSTMENTS TO BASIS OF STOCK OF SHAREHOLDERS, 

ETC. 

(a) GENERAL RULE.— (1) * * *

(2) DECREASES IN BASIS.—The basis of each shareholder’s 

stock in an S corporation shall be decreased for any period (but 

98

not below zero) by the sum of the following items determined 

with respect to the shareholder for such period: 

(A) * * *

* * * * * * *

The decrease under subparagraph (B) by reason of a charitable 

contribution (as defined in section 170(c)) of property shall be 

the amount equal to the shareholder’s pro rata share of the adjusted basis of such property.

* * * * * * *

Subtitle D—Miscellaneous Excise Taxes 

* * * * * * *

CHAPTER 31—RETAIL EXCISE TAXES 

* * * * * * *

Subchapter B—Special Fuels 

* * * * * * *

SEC. 4041. IMPOSITION OF TAX. 

(a) * * *

* * * * * * *

(g) OTHER EXEMPTIONS.—Under regulations prescribed by the 

Secretary, no tax shall be imposed under this section—

(1) * * *

* * * * * * *

(3) upon the sale of any liquid for export, or for shipment to 

a possession of the United States, and in due course so exported or shipped; øand¿

(4) with respect to the sale of any liquid to a nonprofit educational organization for its exclusive use, or with respect to 

the use by a nonprofit educational organization of any liquid 

as a fuelø.¿; and

(5) with respect to the sale of any liquid to a qualified blood 

collector organization (as defined in section 7701(a)(48)) for 

such organization’s exclusive use, or with respect to the use by 

a qualified blood collector organization of any liquid as a fuel.

* * * * * * *

CHAPTER 32—MANUFACTURERS EXCISE 

TAXES 

Subchapter G—Exemptions, Registration, Etc. 

* * * * * * *

SEC. 4221. CERTAIN TAX-FREE SALES. 

(a) GENERAL RULE.—Under regulations prescribed by the Secretary, no tax shall be imposed under this chapter (other than 

99

under section 4121, 4081, or 4091) on the sale by the manufacturer 

(or under subchapter A or C of chapter 31 on the first retail sale) 

of an article— (1) * * *

* * * * * * *

(4) to a State or local government for the exclusive use of a 

State or local government, øor¿

(5) to a nonprofit educational organization for its exclusive 

use, or

(6) to a qualified blood collector organization (as defined in 

section 7701(a)(48)) for such organization’s exclusive use,

but only if such exportation or use is to occur before any other use. 

øParagraphs (4) and (5)¿ Paragraphs (4), (5), and (6) shall not 

apply to the tax imposed by section 4064. In the case of taxes imposed by section 4051, or 4071, paragraphs (4) and (5) shall not 

apply on and after October 1, 2005. In the case of the tax imposed 

by section 4131, paragraphs (3), (4), and (5) shall not apply and 

paragraph (2) shall apply only if the use of the exported vaccine 

meets such requirements as the Secretary may by regulations prescribe. In the case of taxes imposed by subchapter A of chapter 31, 

paragraphs (1), (3), (4), and (5) shall not apply. 

* * * * * * *

CHAPTER 33—FACILITIES AND SERVICES 

* * * * * * *

Subchapter B—Communications 

* * * * * * *

SEC. 4253. EXEMPTIONS. 

(a) * * *

* * * * * * *

(k) EXEMPTION FOR QUALIFIED BLOOD COLLECTOR ORGANIZATIONS.—Under regulations provided by the Secretary, no tax shall 

be imposed under section 4251 on any amount paid by a qualified 

blood collector organization (as defined in section 7701(a)(48)) for 

services or facilities furnished to such organization.

ø(k)¿ (l) FILING OF EXEMPTION CERTIFICATES.—

(1) IN GENERAL.—In order to claim an exemption under subsection (c), (h), (i), øor (j)¿ (j), or (k), a person shall provide to 

the provider of communications services a statement (in such 

form and manner as the Secretary may provide) certifying that 

such person is entitled to such exemption. 

* * * * * * *

CHAPTER 41—PUBLIC CHARITIES 

* * * * * * *

SEC. 4911. TAX ON EXCESS EXPENDITURES TO INFLUENCE LEGISLATION. 

(a) * * *

100

ø(b) EXCESS LOBBYING EXPENDITURES.—For purposes of this section, the term ‘‘excess lobbying expenditures’’ means, for a taxable 

year, the greater of— ø(1) the amount by which the lobbying expenditures made by 

the organization during the taxable year exceed the lobbying 

nontaxable amount for such organization for such taxable year, 

or 

ø(2) the amount by which the grass roots expenditures made 

by the organization during the taxable year exceed the grass 

roots nontaxable amount for such organization for such taxable 

year.¿

(b) EXCESS LOBBYING EXPENDITURES.—For purposes of this section, the term ‘‘excess lobbying expenditures’’ means, for a taxable 

year, the amount by which the lobbying expenditures made by the 

organization during the taxable year exceed the lobbying nontaxable 

amount for such organization for such taxable year.

(c) DEFINITIONS.—For purposes of this section—

(1) * * *

* * * * * * *

ø(3) GRASS ROOTS EXPENDITURES.—The term ‘‘grass roots expenditures’’ means expenditures for the purpose of influencing 

legislation (as defined in subsection (d) without regard to paragraph (1)(B) thereof). 

ø(4) GRASS ROOTS NONTAXABLE AMOUNT.—The grass roots 

nontaxable amount for any organization for any taxable year 

is 25 percent of the lobbying nontaxable amount (determined 

under paragraph (2)) for such organization for such taxable 

year.¿

* * * * * * *

(f) AFFILIATED ORGANIZATIONS.—

(1) IN GENERAL.—Except as otherwise provided in paragraph 

(4), if for a taxable year two or more organizations described 

in section 501(c)(3) are members of an affiliated group of organizations as defined in paragraph (2), and an election under 

section 501(h) is effective for at least one such organization for 

such year, then—

(A) the determination as to whether excess lobbying expenditures have been made and the determination as to 

whether the expenditure ølimits of section 501(h)(1) have¿

limit of section 501(h)(1) has been exceeded shall be made 

as though such affiliated group is one organization, 

* * * * * * *

(C) if the expenditure ølimits of section 501(h)(1) are¿

limit of section 501(h)(1) is exceeded, each such organization as to which an election under section 501(h) is effective for such year shall be treated as an organization 

which is not described in section 501(c)(3) by reason of the 

application of 501(h), and 

* * * * * * *

(4) LIMITED CONTROL.—If two or more organizations are 

members of an affiliated group of organizations (as defined in 

paragraph (2) without regard to subparagraph (B) thereof), no 

two members of such affiliated group are affiliated (as defined 

101

in paragraph (2) without regard to subparagraph (A) thereof), 

and the governing instrument of no such organization requires 

it to be bound by decisions of any of the other such organizations on legislative issues other than as to action with respect 

to Acts, bills, resolutions, or similar items by the Congress, 

then—

(A) in the case of any organization whose decisions bind 

one or more members of such affiliated group, directly or 

indirectly, the determination as to whether such organization has paid or incurred excess lobbying expenditures and 

the determination as to whether such organization has exceeded the expenditure ølimits of section 501(h)(1)¿ limit 

of section 501(h)(1) shall be made as though such organization has paid or incurred those amounts paid or incurred 

by such members of such affiliated group to influence legislation with respect to Acts, bills, resolutions, or similar 

items by the Congress, and 

(B) in the case of any organization to which subparagraph (A) does not apply, but which is a member of such 

affiliated group, the determination as to whether such organization has paid or incurred excess lobbying expenditures and the determination as to whether such organization has exceeded the expenditure ølimits of section 

501(h)(1)¿ limit of section 501(h)(1) shall be made as 

though such organization is not a member of such affiliated group. 

* * * * * * *

CHAPTER 42—PRIVATE FOUNDATIONS & CERTAIN OTHER TAX-EXEMPT ORGANIZATIONS 

* * * * * * *

Subchapter A—Private Foundations 

* * * * * * *

SEC. 4940. EXCISE TAX BASED ON INVESTMENT INCOME. 

(a) TAX-EXEMPT FOUNDATIONS.—There is hereby imposed on each 

private foundation which is exempt from taxation under section 

501(a) for the taxable year, with respect to the carrying on of its 

activities, a tax equal to ø2¿ 1 percent of the net investment income of such foundation for the taxable year. 

* * * * * * *

ø(e) REDUCTION IN TAX WHERE PRIVATE FOUNDATION MEETS

CERTAIN DISTRIBUTION REQUIREMENTS.—

ø(1) IN GENERAL.—In the case of any private foundation 

which meets the requirements of paragraph (2) for any taxable 

year, subsection (a) shall be applied with respect to such taxable year by substituting ‘‘1 percent’’ for ‘‘2 percent’’. 

ø(2) REQUIREMENTS.—A private foundation meets the requirements of this paragraph for any taxable year if—

102

ø(A) the amount of the qualifying distributions made by 

the private foundation during such taxable year equals or 

exceeds the sum of— ø(i) an amount equal to the assets of such foundation for such taxable year multiplied by the average 

percentage payout for the base period, plus 

ø(ii) 1 percent of the net investment income of such 

foundation for such taxable year, and 

ø(B) such private foundation was not liable for tax under 

section 4942 with respect to any year in the base period. 

ø(3) AVERAGE PERCENTAGE PAYOUT FOR BASE PERIOD.—For 

purposes of this subsection— ø(A) IN GENERAL.—The average percentage payout for 

the base period is the average of the percentage payouts 

for taxable years in the base period. 

ø(B) PERCENTAGE PAYOUT.—The term ‘‘percentage payout’’ means, with respect to any taxable year, the percentage determined by dividing— ø(i) the amount of the qualifying distributions made 

by the private foundation during the taxable year, by 

ø(ii) the assets of the private foundation for the taxable year. 

ø(C) SPECIAL RULE WHERE TAX REDUCED UNDER THIS

SUBSECTION.—For purposes of this paragraph, if the 

amount of the tax imposed by this section for any taxable 

year in the base period is reduced by reason of this subsection, the amount of the qualifying distributions made by 

the private foundation during such year shall be reduced 

by the amount of such reduction in tax. 

ø(4) BASE PERIOD.—For purposes of this subsection— ø(A) IN GENERAL.—The term ‘‘base period’’ means, with 

respect to any taxable year, the 5 taxable years preceding 

such taxable year. 

ø(B) NEW PRIVATE FOUNDATIONS, ETC.—If an organization has not been a private foundation throughout the base 

period referred to in subparagraph (A), the base period 

shall consist of the taxable years during which such foundation has been in existence. 

ø(5) OTHER DEFINITIONS.—For purposes of this subsection— ø(A) QUALIFYING DISTRIBUTION.—The term ‘‘qualifying 

distribution’’ has the meaning given such term by section 

4942(g). 

ø(B) ASSETS.—The assets of a private foundation for any 

taxable year shall be treated as equal to the excess determined under section 4942(e)(1). 

ø(6) TREATMENT OF SUCCESSOR ORGANIZATIONS, ETC.—In the 

case of—

ø(A) a private foundation which is a successor to another 

private foundation, this subsection shall be applied with 

respect to such successor by taking into account the experience of such other foundation, and 

ø(B) a merger, reorganization, or division of a private 

foundation, this subsection shall be applied under regulations prescribed by the Secretary.¿

* * * * * * *

103

SEC. 4941. TAXES ON SELF-DEALING. 

(a) INITIAL TAXES.—

(1) ON SELF-DEALER.—There is hereby imposed a tax on each 

act of self-dealing between a disqualified person and a private 

foundation. The rate of tax shall be equal to ø5¿ 25 percent of 

the amount involved with respect to the act of self-dealing for 

each year (or part thereof) in the taxable period. The tax imposed by this paragraph shall be paid by any disqualified person (other than a foundation manager acting only as such) who 

participates in the act of self-dealing. In the case of a government official (as defined in section 4946(c)), a tax shall be imposed by this paragraph only if such disqualified person participates in the act of self-dealing knowing that it is such an 

act. 

* * * * * * *

SEC. 4942. TAXES ON FAILURE TO DISTRIBUTE INCOME. 

(a) * * *

* * * * * * *

(f) ADJUSTED NET INCOME.— (1) * * *

(2) INCOME MODIFICATIONS.—The income modifications referred to in paragraph (1)(A) are as follows: 

(A) * * *

* * * * * * *

(C) there shall be taken into account—

(i) amounts received or accrued as repayments of 

amounts which were taken into account as a qualifying distribution within the meaning of subsection 

(g)(1)(A) (determined without regard to subsection 

(g)(4)) for any taxable year; 

* * * * * * *

(g) QUALIFYING DISTRIBUTIONS DEFINED

(1) * * *

* * * * * * *

ø(4) LIMITATION ON ADMINISTRATIVE EXPENSES ALLOCABLE TO

MAKING OF CONTRIBUTIONS, GIFTS, AND GRANTS.—

ø(A) IN GENERAL.—The amount of the grant administrative expenses paid during any taxable year which may be 

taken into account as qualifying distributions shall not exceed the excess (if any) of—

ø(i) .65 percent of the sum of the net assets of the 

private foundation for such taxable year and the immediately preceding 2 taxable years, over 

ø(ii) the aggregate amount of grant administrative 

expenses paid during the 2 preceding taxable years 

which were taken into account as qualifying distributions. 

ø(B) GRANT ADMINISTRATIVE EXPENSES.—For purposes of 

this paragraph, the term ‘‘grant administrative expenses’’

means any administrative expenses which are allocable to 

the making of qualified grants. 

104

ø(C) QUALIFIED GRANTS.—For purposes of this paragraph, the term ‘‘qualified grant’’ means any contribution, 

gift, or grant which is a qualifying distribution. 

ø(D) NET ASSET.—For purposes of this paragraph, the 

term ‘‘net assets’’ means, with respect to any taxable year, 

the excess determined under subsection (e)(1) for such taxable year. 

ø(E) TRANSITIONAL RULE.—In the case of any preceding 

taxable year which begins before January 1, 1985, the 

amount of the grant administrative expenses taken into 

account under subparagraph (A)(ii) shall not exceed .65 

percent of the net assets of the private foundation for such 

taxable year. 

ø(F) TERMINATION.—This paragraph shall not apply to 

taxable years beginning after December 31, 1990.¿

(4) LIMITATION ON ADMINISTRATIVE EXPENSES TREATED AS

DISTRIBUTIONS.—

(A) IN GENERAL.—For purposes of paragraph (1)(A), the 

following administrative expenses shall not be treated as 

qualifying distributions: 

(i) Any administrative expense which is not directly 

attributable to direct charitable activities, grant selection activities, grant monitoring and administration 

activities, compliance with applicable Federal, State, or 

local law, or furthering public accountability of the private foundation. 

(ii) Any compensation paid to a disqualified person 

to the extent that such compensation exceeds an annual 

rate of $100,000. 

(iii) Any expense incurred for transportation by air 

unless such transportation is regularly-scheduled commercial air transportation. 

(iv) Any expense incurred for regularly-scheduled 

commercial air transportation to the extent that such 

expense exceeds the cost of such transportation in 

coach-class accommodations. 

(B) ADJUSTMENT FOR INFLATION.—In the case of a taxable year beginning after December 31, 2004, the $100,000 

amount in subparagraph (A)(ii) shall be increased by an 

amount equal to—

(i) such dollar amount, multiplied by 

(ii) the cost-of-living adjustment determined under 

section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘‘calendar 

year 2003’’ for ‘‘calendar year 1992’’ in subparagraph 

(B) thereof. 

If any amount as increased under the preceding sentence is 

not a multiple of $50, such amount shall be rounded to the 

next lowest multiple of $50. 

(5) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of paragraph (4). Such regulations shall provide that administrative 

expenses which are excluded from qualifying distributions solely by reason of the limitations in paragraph (4) shall not for 

105

such reason subject a private foundation to any other excise 

taxes imposed by this subchapter.

* * * * * * *

(j) OTHER DEFINITIONS.—For purposes of this section—

(1) * * *

* * * * * * *

(3) OPERATING FOUNDATION.—For purposes of this section, 

the term ‘‘operating foundation’’ means any organization—

(A) which makes qualifying distributions ø(within the 

meaning of paragraph (1) or (2) of subsection (g))¿ directly 

for the active conduct of the activities constituting the purpose or function for which it is organized and operated 

equal to substantially all of the lesser of—

(i) * * *

* * * * * * *

(B)(i)***

(ii) which normally makes qualifying distributions 

ø(within the meaning of paragraph (1) or (2) of subsection 

(g))¿ directly for the active conduct of the activities constituting the purpose or function for which it is organized 

and operated in an amount not less than two-thirds of its 

minimum investment return (as defined in subsection (e)), 

or 

* * * * * * *

Notwithstanding the provisions of subparagraph (A), if the 

qualifying distributions ø(within the meaning of paragraph (1) 

or (2) of subsection (g))¿ of an organization for the taxable year 

exceed the minimum investment return for the taxable year, 

clause (ii) of subparagraph (A) shall not apply unless substantially all of such qualifying distributions are made directly for 

the active conduct of the activities constituting the purpose or 

function for which it is organized and operated. For purposes 

of this paragraph, the term ‘‘qualifying distributions’’ means 

qualifying distributions within the meaning of paragraph (1) or 

(2) of subsection (g) (determined without regard to subsection 

(g)(4)).

* * * * * * *

Subtitle F—Procedure and Administration 

* * * * * * *

CHAPTER 61—INFORMATION AND RETURNS 

* * * * * * *

Subchapter A—Returns and Records 

* * * * * * *

106

PART III—INFORMATIONAL RETURNS 

* * * * * * *

Subpart A—Information Concerning Persons Subject to 

Special Provisions 

* * * * * * *

SEC. 6033. RETURNS BY EXEMPT ORGANIZATIONS. 

(a) * * *

(b) CERTAIN ORGANIZATIONS DESCRIBED IN SECTION 501(c)(3).— Every organization described in section 501(c)(3) which is subject 

to the requirements of subsection (a) shall furnish annually information, at such time and in such manner as the Secretary may by 

forms or regulations prescribe, setting forth— (1) * * *

* * * * * * *

(8) in the case of an organization with respect to which an 

election under section 501(h) is effective for the taxable year, 

the following amounts for such organization for such taxable 

year: 

(A) the lobbying expenditures (as defined in section 

4911(c)(1)), and

(B) the lobbying nontaxable amount (as defined in section 4911(c)(2)), 

ø(C) the grass roots expenditures (as defined in section 

4911(c)(3)), and 

ø(D) the grass roots nontaxable amount (as defined in 

section 4911(c)(4)),¿

* * * * * * *

øSEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(A)(2) OR 

CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 

642(C). 

ø(a) GENERAL RULE.—Every trust described in section 4947(a)(2) 

or claiming a charitable, etc., deduction under section 642(c) for the 

taxable year shall furnish such information with respect to such 

taxable year as the Secretary may by forms or regulations prescribe, including—

ø(1) the amount of the charitable, etc., deduction taken 

under section 642(c) within such year, 

ø(2) the amount paid out within such year which represents 

amounts for which charitable, etc., deductions under section 

642(c) have been taken in prior years, 

ø(3) the amount for which charitable, etc., deductions have 

been taken in prior years but which has not been paid out at 

the beginning of such year, 

ø(4) the amount paid out of principal in the current and 

prior years for charitable, etc., purposes, 

ø(5) the total income of the trust within such year and the 

expenses attributable thereto, and 

ø(6) a balance sheet showing the assets, liabilities, and net 

worth of the trust as of the beginning of such year. 

ø(b) EXCEPTIONS.—This section shall not apply in the case of a 

taxable year if all the net income for such year, determined under 

the applicable principles of the law of trusts, is required to be disVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00106 Fmt 6659 Sfmt 6601 E:\HR\OC\HR270P1.XXX HR270P1
107

tributed currently to the beneficiaries. This section shall not apply 

in the case of a trust described in section 4947(a)(1). 

ø(c) CROSS REFERENCE.— øFor provisions relating to penalties for failure to file a return required by this section, see section 6652(c).¿

SEC. 6034. RETURNS BY TRUSTS DESCRIBED IN SECTION 4947(a)(2) OR 

CLAIMING CHARITABLE DEDUCTIONS UNDER SECTION 

642(c). 

(a) TRUSTS DESCRIBED IN SECTION 4947(a)(2).—Every trust described in section 4947(a)(2) shall furnish such information with respect to the taxable year as the Secretary may by forms or regulations require. 

(b) TRUSTS CLAIMING A CHARITABLE DEDUCTION UNDER SECTION

642(c).—

(1) IN GENERAL.—Every trust not required to file a return 

under subsection (a) but claiming a deduction under section 

642(c) for the taxable year shall furnish such information with 

respect to such taxable year as the Secretary may by forms or 

regulations prescribe, including— (A) the amount of the deduction taken under section 

642(c) within such year, 

(B) the amount paid out within such year which represents amounts for which deductions under section 642(c) 

have been taken in prior years, 

(C) the amount for which such deductions have been 

taken in prior years but which has not been paid out at the 

beginning of such year, 

(D) the amount paid out of principal in the current and 

prior years for the purposes described in section 642(c), 

(E) the total income of the trust within such year and the 

expenses attributable thereto, and 

(F) a balance sheet showing the assets, liabilities, and net 

worth of the trust as of the beginning of such year. 

(2) EXCEPTIONS.—Paragraph (1) shall not apply to a trust for 

any taxable year if— (A) all the net income for such year, determined under 

the applicable principles of the law of trusts, is required to 

be distributed currently to the beneficiaries, or 

(B) the trust is described in section 4947(a)(1).

* * * * * * *

Subchapter B—Miscellaneous Provisions 

* * * * * * *

SEC. 6104. PUBLICITY OF INFORMATION REQUIRED FROM CERTAIN 

EXEMPT ORGANIZATIONS AND CERTAIN TRUSTS. 

(a) * * *

(b) INSPECTION OF ANNUAL INFORMATION RETURNS.—The information required to be furnished by sections 6033, 6034, and 6058, 

together with the names and addresses of such organizations and 

trusts, shall be made available to the public at such times and in 

such places as the Secretary may prescribe. Nothing in this subsection shall authorize the Secretary to disclose the name or address of any contributor to any organization or trust (other than a 

private foundation, as defined in section 509(a) or a political orgaVerDate jul 14 2003 06:44 Sep 17, 2003 Jkt 019008 PO 00000 Frm 00107 Fmt 6659 Sfmt 6601 E:\HR\OC\HR270P1.XXX HR270P1
108

nization exempt from taxation under section 527) which is required 

to furnish such information. In the case of an organization described in section 501(d), this subsection shall not apply to copies 

referred to in section 6031(b) with respect to such organization. In 

the case of a trust which is required to file a return under section 

6034(a), this subsection shall not apply to information regarding 

beneficiaries which are not organizations described in section 

170(c).

* * * * * * *

CHAPTER 65—ABATEMENTS, CREDITS, AND 

REFUNDS 

* * * * * * *

Subchapter B—Rules for Special Application 

* * * * * * *

SEC. 6416. CERTAIN TAXES ON SALES AND SERVICES. 

(a) * * *

(b) SPECIAL CASES IN WHICH TAX PAYMENTS CONSIDERED OVERPAYMENTS.—Under regulations prescribed by the Secretary, credit 

or refund (without interest) shall be allowed or made in respect of 

the overpayments determined under the following paragraphs: 

(1) * * *

(2) SPECIFIED USES AND RESALES.—The tax paid under chapter 32 (or under subsection (a) or (d) of section 4041 in respect 

of sales or under section 4051) in respect of any article shall 

be deemed to be an overpayment if such article was, by any 

person—

(A) * * *

* * * * * * *

(E) sold to a qualified blood collector organization (as defined in section 7701(a)(48)) for such organization’s exclusive use;

ø(E)¿ (F) in the case of any tire taxable under section 

4071(a), sold to any person for use as described in section 

4221(e)(3); or 

ø(F)¿ (G) in the case of gasoline, used or sold for use in 

the production of special fuels referred to in section 4041. 

øSubparagraphs (C) and (D)¿ Subparagraphs (C), (D), and (E)

shall not apply in the case of any tax paid under section 4064. 

In the case of the tax imposed by section 4131, subparagraphs 

(B), ø(C), and (D)¿ (C), (D), and (E) shall not apply and subparagraph (A) shall apply only if the use of the exported vaccine meets such requirements as the Secretary may by regulations prescribe. This paragraph shall not apply in the case of 

any tax imposed under section 4041(a)(1) or 4081 on diesel fuel 

or kerosene and any tax paid under section 4091 or 4121. 

* * * * * * *

(4) TIRES.—If—

(A) * * *

109

(B) such tire is sold by any person on or in connection 

with, or with the sale of, any other article, such tax shall 

be deemed to be an overpayment by such person if such 

other article is— (i) an automobile bus chassis or an automobile bus 

body, or 

(ii) by such person exported, sold to a State or local 

government for the exclusive use of a State or local 

government, sold to a nonprofit educational organization for its exclusive use, sold to a qualified blood collector organization (as defined in section 7701(a)(48)) 

for its exclusive use, or used or sold for use as supplies 

for vessels or aircraft. 

* * * * * * *

SEC. 6421. GASOLINE USED FOR CERTAIN NONHIGHWAY PURPOSES, 

USED BY LOCAL TRANSIT SYSTEMS, OR SOLD FOR CERTAIN EXEMPT PURPOSES. 

(a) * * *

* * * * * * *

(c) EXEMPT PURPOSES.—If gasoline is sold to any person for any 

purpose described in paragraph (2), (3), (4) øor (5)¿ (5), or (6) of 

section 4221(a), the Secretary shall pay (without interest) to such 

person an amount equal to the product of the number of gallons of 

gasoline so sold multiplied by the rate at which tax was imposed 

on such gasoline by section 4081. The preceding sentence shall 

apply notwithstanding paragraphs (2) and (3) of subsection (f). Subsection (a) shall not apply to gasoline to which this subsection applies. 

* * * * * * *

CHAPTER 68—ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES 

* * * * * * *

Subchapter A—Additions to the Tax, Additional 

Amounts 

* * * * * * *

PART I—GENERAL PROVISIONS 

* * * * * * *

SEC. 6652. FAILURE TO FILE CERTAIN INFORMATION RETURNS, REGISTRATION STATEMENTS, ETC. 

(a) * * *

* * * * * * *

(c) RETURNS BY EXEMPT ORGANIZATIONS AND BY CERTAIN

TRUSTS.—

(1) * * *

(2) RETURNS UNDER SECTION 6034 OR 6043(B).—

110

(A) * * *

* * * * * * *

(C) SPLIT-INTEREST TRUSTS.—In the case of a trust which 

is required to file a return under section 6034(a), subparagraphs (A) and (B) of this paragraph shall not apply and 

paragraph (1) shall apply in the same manner as if such 

return were required under section 6033, except that—

(i) the 5 percent limitation in the second sentence of 

paragraph (1)(A) shall not apply, 

(ii) in the case of any trust with gross income in excess of $250,000, the first sentence of paragraph (1)(A) 

shall be applied by substituting ‘‘$100’’ for ‘‘$20’’, and 

the second sentence thereof shall be applied by substituting ‘‘$50,000’’ for ‘‘$10,000’’, and 

(iii) the third sentence of paragraph (1)(A) shall be 

disregarded. 

In addition to any penalty imposed on the trust pursuant 

to this subparagraph, if the person required to file such return knowingly fails to file the return, such penalty shall 

also be imposed on such person who shall be personally liable for such penalty.

* * * * * * *

CHAPTER 76—JUDICIAL PROCEEDINGS 

* * * * * * *

Subchapter B—Proceedings by Taxpayers and 

Third Parties 

* * * * * * *

SEC. 7428. DECLARATORY JUDGMENTS RELATING TO STATUS AND 

CLASSIFICATION OF ORGANIZATIONS UNDER SECTION 

501(C)(3), ETC. 

(a) CREATION OF REMEDY.—In a case of actual controversy involving—

(1) a determination by the Secretary—

(A) * * *

(B) with respect to the initial classification or continuing 

classification of an organization as a private foundation (as 

defined in section 509(a)) or as a private operating foundation (as defined in section 4942(j)(3)), or 

ø(C) with respect to the initial classification or continuing classification of an organization as a private operating foundation (as defined in section 4942(j)(3)), or¿

(C) with respect to the initial qualification or continuing 

qualification of an organization as an organization described in subsection (c) (other than paragraph (3)) or (d) 

of section 501 which is exempt from tax under section 

501(a), or

(2) a failure by the Secretary to make a determination with 

respect to an issue referred to in paragraph (1),

111

upon the filing of an appropriate pleading, the øUnited States Tax 

Court, the United States Claims Court, or the district court of the 

United States for the District of Columbia¿ United States Tax 

Court (in the case of any such determination or failure) or the 

United States Claims Court or the district court of the United States 

for the District of Columbia (in the case of a determination or failure with respect to an issue referred to in subparagraph (A) or (B) 

of paragraph (1)), may make a declaration with respect to such initial qualification or continuing qualification or with respect to such 

initial classification or continuing classification. Any such declaration shall have the force and effect of a decision of the Tax Court 

or a final judgment or decree of the district court or the Claims 

Court, as the case may be, and shall be reviewable as such. For 

purposes of this section, a determination with respect to a continuing qualification or continuing classification includes any revocation of or other change in a qualification or classification. 

* * * * * * *

CHAPTER 78—DISCOVERY OF LIABILITY AND 

ENFORCEMENT OF TITLE 

* * * * * * *

Subchapter A—Examination and Inspection 

* * * * * * *

SEC. 7611. RESTRICTIONS ON CHURCH TAX INQUIRIES AND EXAMINATIONS. 

(a) * * *

* * * * * * *

(i) SECTION NOT TO APPLY TO CRIMINAL INVESTIGA- TIONS, ETC.—This section shall not apply to— (1) * * *

* * * * * * *

(4) any willful attempt to defeat or evade any tax imposed 

by this title, øor¿

(5) any knowing failure to file a return of tax imposed by 

this titleø.¿, or

(6) information provided by the Secretary related to the 

standards for exemption from tax under this title and the requirements under this title relating to unrelated business taxable income.

* * * * * * *

CHAPTER 79—DEFINITIONS 

* * * * * * *

SEC. 7701. DEFINITIONS. 

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—

112

(1) * * *

* * * * * * *

(48) QUALIFIED BLOOD COLLECTOR ORGANIZATION.—The term 

‘‘qualified blood collector organization’’ means an organization 

which is—

(A) described in section 501(c)(3) and exempt from tax 

under section 501(a), 

(B) registered by the Food and Drug Administration to 

collect blood, and 

(C) primarily engaged in the activity of the collection of 

blood.

* * * * * * *

SOCIAL SECURITY ACT 

* * * * * * *

TITLE IV—GRANTS TO STATES FOR AID AND SERVICES TO 

NEEDY FAMILIES WITH CHILDREN AND FOR CHILD-WELFARE SERVICES 

* * * * * * *

PART A—BLOCK GRANTS TO STATES FOR TEMPORARY ASSISTANCE FOR NEEDY FAMILIES 

* * * * * * *

SEC. 404. USE OF GRANTS. 

(a) * * *

* * * * * * *

(d) AUTHORITY TO USE PORTION OF GRANT FOR OTHER PURPOSES.—

(1) * * *

ø(2) LIMITATION ON AMOUNT TRANSFERABLE TO TITLE XX PROGRAMS.—

ø(A) IN GENERAL.—A State may use not more than the 

applicable percent of the amount of any grant made to the 

State under section 403(a) for a fiscal year to carry out 

State programs pursuant to title XX. 

ø(B) APPLICABLE PERCENT.—For purposes of subparagraph (A), the applicable percent is 4.25 percent in the 

case of fiscal year 2001 and each succeeding fiscal year.¿

(2) LIMITATION ON AMOUNT TRANSFERABLE TO TITLE XX PROGRAMS.—A State may use not more than 10 percent of the 

amount of any grant made to the State under section 403(a) for 

a fiscal year to carry out State programs pursuant to title XX. 

* * * * * * *

113

PART F—COMPASSION CAPITAL FUND 

SEC. 481. SECRETARY’S FUND TO SUPPORT AND REPLICATE PROMISING SOCIAL SERVICE PROGRAMS. 

(a) GRANT AUTHORITY.—

(1) IN GENERAL.—The Secretary may make grants to support 

any private entity that operates a promising social services program. 

(2) APPLICATIONS.—An entity desiring to receive a grant 

under paragraph (1) shall submit to the Secretary an application for the grant, which shall contain such information as the 

Secretary may require. 

(b) CONTRACT AUTHORITY, ETC.—The Secretary may enter into a 

grant, contract, or cooperative agreement with any entity under 

which the entity would provide technical assistance to another entity 

to operate a social service program that assists persons and families 

in need, including by—

(1) providing the other entity with—

(A) technical assistance and information, including legal 

assistance and other business assistance; 

(B) information on capacity-building; 

(C) information and assistance in identifying and using 

best practices for serving persons and families in need; or 

(D) assistance in replicating programs with demonstrated 

effectiveness in assisting persons and families in need; or 

(2) supporting research on the best practices of social service 

organizations. 

(c) GUIDANCE AND TECHNICAL ASSISTANCE.—The Secretary may 

use not more than 25 percent of the amount appropriated under this 

section for a fiscal year to provide guidance and technical assistance 

to States and political subdivisions of States with respect to the implementation of any social service program. 

(d) SOCIAL SERVICES PROGRAM DEFINED.—In this section, the 

term ‘‘social services program’’ means a program that provides benefits or services of any kind to persons and families in need. 

(e) LIMITATIONS ON AUTHORIZATION OF APPROPRIATIONS.—To 

carry out this section, there are authorized to be appropriated to the 

Secretary $150,000,000 for fiscal year 2004, and such sums as may 

be necessary for fiscal years 2005 through 2008.

* * * * * * *

ASSETS FOR INDEPENDENCE ACT 

TITLE IV—ASSETS FOR INDEPENDENCE 

SEC. 401. SHORT TITLE. 

This title may be cited as the ‘‘Assets for Independence Act’’. 

* * * * * * *

SEC. 404. DEFINITIONS. 

In this title: 

114

(1) * * *

* * * * * * *

(8) QUALIFIED EXPENSES.—The term ‘‘qualified expenses’’

means one or more of the following, as provided by a qualified 

entity: 

(A) POSTSECONDARY EDUCATIONAL EXPENSES.—Postsecondary educational expenses paid from an individual development account directly to an eligible educational institution or a vendor, but only to the extent that the expenses 

are described in a document which explains the educational 

items to be purchased, and the document and the expenses 

are approved by the qualified entity. In this subparagraph: 

(i) * * *

* * * * * * *

SEC. 407. RESERVE FUND. 

(a) * * *

* * * * * * *

(c) USE OF AMOUNTS IN THE RESERVE FUND.—

(1) * * *

* * * * * * *

(3) LIMITATION ON USES.—Not more than 15 percent of the 

amounts provided to a qualified entity under section 406(b) 

shall be used by the qualified entity for the purposes described 

in subparagraphs (A), (C), and (D) of paragraph (1), of which 

not less than 2 percent of the amounts shall be used by the 

qualified entity for the purposes described in paragraph (1)(D). 

Of the total amount specified in this paragraph, not more than 

7.5 percent shall be used for administrative functions under 

paragraph (1)(C), including program management, reporting 

requirements, recruitment and enrollment of individuals, and 

monitoring. The remainder of the total amount specified in this 

paragraph (not including the amount specified for use for the 

purposes described in paragraph (1)(D)) shall be used for nonadministrative functions described in paragraph (1)(A), including case management, budgeting, economic literacy, and credit 

counseling. If the cost of nonadministrative functions described 

in paragraph (1)(A) is less than 5.5 percent of the total amount 

specified in this paragraph, such excess funds may be used for 

administrative functions. If two or more qualified entities are 

jointly administering a project, no qualified entity shall use 

more than its proportional share for the purposes described in 

subparagraphs (A), (C), and (D) of paragraph (1). The preceding 

sentences of this paragraph shall not apply to amounts used by 

an entity for any activity described in paragraph (1)(A).

(d) UNUSED FEDERAL GRANT FUNDS TRANSFERRED TO THE SEC- RETARY øWHEN PROJECT TERMINATES¿.—Notwithstanding subsection (c), øupon¿ on the date that is 6 months after the termination of any demonstration project authorized under this section, 

the qualified entity conducting the project shall transfer to the Secretary an amount equal to—

(1) * * *

* * * * * * *

115

SEC. 408. ELIGIBILITY FOR PARTICIPATION. 

(a) IN GENERAL.—Any individual who is a member of a household 

that is eligible for assistance under the State temporary assistance 

for needy families program established under part A of title IV of 

the Social Security Act (42 U.S.C. 601 et seq.), or that meets each 

of the following requirements shall be eligible to participate in a 

demonstration project conducted under this title: 

ø(1) INCOME TEST.—The adjusted gross income of the household is equal to or less than 200 percent of the poverty line (as 

determined by the Office of Management and Budget) or the 

earned income amount described in section 32 of the Internal 

Revenue Code of 1986 (taking into account the size of the 

household).¿

(1) INCOME TEST.—The adjusted gross income of the household—

(A) does not exceed 200 percent of the poverty line (as determined by the Office of Management and Budget) or the 

earned income amount described in section 32 of the Internal Revenue Code of 1986 (taking into account the size of 

the household); or 

(B) does not exceed 50 percent of the area median income 

(as determined by the Secretary of Housing and Urban Development) for the area in which the household is located.

* * * * * * *

SEC. 410. DEPOSITS BY QUALIFIED ENTITIES. 

(a) IN GENERAL.—Not less than once every 3 months during each 

project year, each qualified entity under this title shall deposit in 

the individual development account of each individual participating 

in the project, or into a parallel account maintained by the qualified entity—

(1) * * *

* * * * * * *

(3) øany interest that has accrued¿ interest that has accrued 

during that period on amounts deposited under paragraph (1) 

or (2) on behalf of that individual into the individual development account of the individual or into a parallel account maintained by the qualified entityø.¿, but only to the extent that the 

amount of the interest does not exceed the amount of interest 

that has accrued during that period on amounts deposited in 

the account by that individual.

* * * * * * *

(f) USE OF EXCESS INTEREST TO FUND OTHER INDIVIDUAL DEVELOPMENT ACCOUNTS.—To the extent that a qualified entity has an 

amount that, but for the limitation in subsection (a)(3), would be required by that subsection to be deposited into the individual development account of an individual or into a parallel account maintained by the qualified entity, the qualified entity may deposit the 

amount into the individual development account of any individual 

or into any such parallel account maintained by the qualified entity.

* * * * * * *

116

SEC. 416. AUTHORIZATION OF APPROPRIATIONS. 

There is authorized to be appropriated to carry out this title, 

$25,000,000 for each of fiscal years 1999, 2000, 2001, 2002, øand 

2003¿ 2003, 2004, 2005, 2006, 2007, and 2008, to remain available 

until expended. 

RUNAWAY AND HOMELESS YOUTH ACT 

TITLE III—RUNAWAY AND HOMELESS YOUTH 

SHORT TITLE

SEC. 301. This title may be cited as the ‘‘Runaway and Homeless 

Youth Act’’. 

* * * * * * *

PART B—TRANSITIONAL LIVING GRANT PROGRAM

* * * * * * *

ELIGIBILITY

SEC. 322. (a) To be eligible for assistance under this part, an applicant shall propose to establish, strengthen, or fund a transitional 

living youth project for homeless youth and shall submit to the Secretary a plan in which such applicant agrees, as part of such 

project—

(1) to provide, directly or indirectly, shelter (such as group 

homes (including maternity group homes), host family homes, 

and supervised apartments) and services (including information and counseling services in basic life skills which shall include money management, budgeting, consumer education, and 

use of credit, interpersonal skill building, educational advancement, job attainment skills, and mental and physical health 

care) to homeless youth; 

* * * * * * *

(c) MATERNITY GROUP HOME.—In this part, the term ‘‘maternity 

group home’’ means a community-based, adult-supervised group 

home that provides—

(1) young mothers and their children with a supportive and 

supervised living arrangement in which such mothers are required to learn parenting skills, including child development, 

family budgeting, health and nutrition, and other skills to promote their long-term economic independence and the well-being 

of their children; and 

(2) pregnant women with—

(A) information regarding the option of placing children 

for adoption through licensed adoption service providers; 

(B) assistance with prenatal care and child birthing; and 

(C) pre- and post-placement adoption counseling. 

SEC. 323. CONTRACT FOR EVALUATION. 

(a) IN GENERAL.—The Secretary shall enter into a contract with 

a public or private entity for an evaluation of the maternity group 

homes that are supported by grant funds under this Act. 

117

(b) INFORMATION.—The evaluation described in subsection (a) 

shall include the collection of information about the relevant characteristics of individuals who benefit from maternity group homes 

such as those that are supported by grant funds under this Act and 

what services provided by those maternity group homes are most 

beneficial to such individuals. 

(c) REPORT.—Not later than 2 years after the date on which the 

Secretary enters into a contract for an evaluation under subsection 

(a), and biennially thereafter, the entity conducting the evaluation 

under this section shall submit to Congress a report on the status, 

activities, and accomplishments of maternity group homes that are 

supported by grant funds under this Act.

* * * * * * *

PART F—GENERAL PROVISIONS

* * * * * * *

SEC. 388. AUTHORIZATION OF APPROPRIATIONS. 

(a) IN GENERAL.—

(1) AUTHORIZATION.—øThere¿

(A) IN GENERAL.—There is authorized to be appropriated 

to carry out this title (other than part E and the purpose 

described in subparagraph (B)) such sums as may be necessary for fiscal years 2000, 2001, 2002, and 2003.

(B) MATERNITY GROUP HOMES.—There is authorized to be 

appropriated, for maternity group homes eligible for assistance under section 322(a)(1)—

(i) $33,000,000 for fiscal year 2003; and 

(ii) such sums as may be necessary for fiscal year 

2004.

(2) ALLOCATION.—

(A) PARTS A AND B.—From the amount appropriated 

under paragraph (1)(A) for a fiscal year, the Secretary 

shall reserve not less than 90 percent to carry out parts 

A and B. 

* * * * * * *

Æ