Charitable Contributions of Property: A Broken System Reimagined

Abstract

On average, nearly $46 billion of property is given to charitable organizations each year, about twenty-five percent of the total charitable deduction. This makes the charitable contribution deduction for property a tax expenditure within a tax expenditure, yet it is rarely analyzed as such. It emerged as part of a noble effort to encourage contributions to worthy organizations. But the deduction for property has never worked well. The general rule allowing a deduction based on the fair market value of the property may have some intuitive appeal, but its implementation has yielded numerous exceptions and immense complexity. The Article argues that the extensive historical effort to allow a deduction for property contributions is a failure. Given the substantial direct and indirect costs involved, the uncertain benefit to the donee from property contributions, and the absence of any affirmative policy to favor property contributions as such, it is time to reverse the general rule and not allow a charitable deduction for property contributions. Reversing the general rule would provide many benefits — increased revenue, improved tax administration, fewer abusive transactions, a simpler and more equitable tax code, and a preference for cash. Exceptions to the general rule of disallowance may be warranted, but any exception should be analyzed and fashioned according to whether it provides a measurable benefit to the donee. By following a measurable benefit to the donee standard, emphasis will be placed on providing a tax benefit that is administrable and that is based on the goal — donee benefit. Any resulting complexity should be viewed as a cost of the incentive, and weighed accordingly in deciding whether it should be provided.

Keywords: charitable contributions, property, fair market value deduction, enhanced deduction, art donations, food donations, clothing donations, easement donations, car donations, intellectual property donations, publicly traded securities, land donations

JEL Classification: H2, H4, H5, H24, H26, K34, L3, L31, L33