SFC working group, individual provisions, part 2

As described yesterday, the Senate Finance Committee’s bipartisan tax working group selected two extender provisions for discussion as consensus items: the IRA distribution provision and conservation easements. The two options on conservation easements signal that there is some consensus that the extraordinary incentives for easement contributions should not be made permanent without reform to the program.

The bipartisan staff says that one option is to reinstate and make permanent the special incentives (increased percentage limitations and carryforwards). The second option, which would be in addition to the first, would add “provisions designed to ensure that conservation easements are properly valued and serve a legitimate conservation purpose.” The implication is that the staff is well aware of the many problems with easement donations. (For some scholarly discussion of why the charitable deduction is a bad fit for the conservation easement program, and an overview of reform options, see Conservation Easements: Design Flaws, Enforcement Challenges, and Reform.)

The main question then should be: if there is consensus that present law (with or without the special incentives) results in excess benefits to donors from overvaluation and uncertain conservation outcomes, why would any rational lawmaker decline to tighten the easement deduction as part of tax reform? And why would any rational lawmaker make the problems worse by permanently increasing the tax benefits without reform? Hopefully, the fact that Congress and the White House are controlled by different parties will not blind lawmakers to the Administration’s proposal (page 188) on easements. The Treasury Department has a number of worthwhile ideas for reform of easement donations (tightening donee eligibility requirements, conservation purpose rules, and appraisal standards and penalties). These should be nonpartisan ideas and hopefully Congressional staff is working with the Treasury.

The bipartisan staff report transitions from easements to a discussion of property contributions generally. The discussion nicely highlights some of the problems with noncash contributions and steps Congress has taken in recent years to curtail fair market value-based deductions for property. As I have argued elsewhere, charitable contributions of property should be viewed as a distinct tax expenditure (distinct from cash) that costs taxpayers billions of dollars each year ($49 billion of deductions were claimed for 2012), induces administrative nausea, is incredibly complex, damages the reputation of the charitable sector, and often produces uncertain benefits to charity. For recent statistics on noncash giving, see IRS data.

The staff report is something of a cliff hanger, however, as it stops almost mid-thought with no indication of what if any steps might lie ahead. Nonetheless, clearly noncash contributions are a consensus item of concern – meaning that proposals like those in the Tax Reform Act of 2014 (a basis deduction for real estate and privately held securities) likely are in play. Perhaps there also is consideration for eliminating (or at least reducing) the ability to deduct unrealized appreciation with respect to other assets and to revisit the extent to which giving incentives are necessary to encourage taxpayers to dispose of used clothing and household goods.

It also is worth noting that the special enhanced deduction for food inventory (which was part of the America Gives More Act) is absent from the bipartisan report. Thus even though food donations generally are a sympathetic and worthy cause, this extra enhanced deduction was not a consensus item, suggesting that staff suspect that the proposed enhancements for gifts of food inventory (special valuation and basis rules) are generous give-aways to donors without sufficient assurances that donee charities (and the hungry) will benefit commensurately.

Roger Colinvaux