[Congressional Record Volume 142, Number 136 (Friday, September 27, 1996)]
[Senate]
[Pages S11546-S11547]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. FEINSTEIN:
  S. 2141. A bill to amend the Internal Revenue Code of 1986 to permit 
certain tax free corporate liquidations into a 501(c)(3) organization 
and to revise the unrelated business income tax rules regarding receipt 
of debt-financed property in such a liquidation; to the Committee on 
Finance.


                   CHARITABLE GIVING TAX LEGISLATION

 Mrs. FEINSTEIN. Mr. President, I introduce legislation to 
strengthen tax incentives to encourage more charitable giving in 
America. The legislation would represent an important step and 
encourage greater private sector support of important educational, 
medical, and other valuable programs in local communities across the 
country.
  Americans are among the most caring in the world, contributing 
generously to charities in their communities:
  American families contribute, on average, nearly $650 per household, 
or about $130 billion, per year, to charities.
  Approximately, three out of every four households give to nonprofit 
charitable organizations.
  However, charities are very concerned for the future, anticipating a 
decline in Federal social spending to address urgent needs like 
childrens' services, homelessness, job training, health and welfare, 
just as the need for help accelerates.
  Nonprofit charities are very concerned about their ability to 
maintain their current level of services, let alone expand to meet the 
increasing demand for services. While charitable contributions grew by 
3.7 percent in 1994, contributions for human services, the area most 
closely associated with poverty programs, dropped by 6 percent.
  Private charities can never replace government programs for national 
social priorities. However, nonprofit charities across America play a 
critical role in providing vital services to people in need. The 
Federal Government needs to take steps to ensure we are doing 
everything we can to encourage private charitable support to supplement 
government programs and government support.
  The Federal Government needs to take steps to encourage greater 
private sector support. Government must provide both the leadership and 
the incentives to encourage more private, charitable giving through the 
tax code. Analysts believe the gift of closely held business stock is 
an underutilized source of potential funds for charitable activities 
that warrants closer attention and legislative remedies.

  A closely held business is a corporation, in which stock is issued to 
a small number shareholders, such as family members, but is not 
publicly traded on a stock exchange. This business form is very popular 
for family businesses involving different generations.
  However, today, the tax cost of contributing closely-held stock to a 
charity or foundation can be prohibitively high. The tax burden 
discourages families and owners from winding down a business and 
contributing the proceeds to charity. This legislation would permit 
certain tax-free liquidations of closely held corporations into one or 
more tax exempt 501(c)(3) organizations.
  Under current law, a corporation may have to be liquidated to 
effectively complete the transfer of assets to the charity for its use, 
incurring a corporate tax at the Federal rate of 35 percent. In 1986, 
Congress repealed the ``General Utilities'' doctrine, imposing a 
corporate level tax on all corporate transfers, including those to tax 
exempt charitable organizations. Additionally, a charitable 
organization could also be subject to taxation on its unrelated 
business income from certain types of donated property.
  These tax costs make contributions of closely held stock a costly and 
ineffective means of transferring resources to charity. If the Federal 
Government is going to find new ways to encourage charitable giving, we 
need to look at these tax costs which undercut both the incentive to 
give and the potential value of any charitable gift.
  Governments at the Federal, State, and local level, are reducing 
spending in all areas of their budgets, including spending for social 
services. Public charities and private foundations already distribute 
funds to a diverse and wide ranging group of social support 
organizations at the community level. Congressional leaders have looked 
to private charities in our religious institutions, our schools and 
communities, to fill the void created by government cut-backs. However, 
volunteers are already hard at work in their communities and charitable 
funding is already stretched dangerously thin. Charities need added 
tools to unlock the public's desire to give generously. We need to 
create appropriate incentives for the private sector to do more.

  In California and throughout the country, volunteer and charitable 
organizations, together, perform vital roles in the community and they 
deserve our support. Allow me to provide a few examples, which could be 
repeated in any town across America:
  Summer Search: In San Francisco, the Summer Search Foundation is hard 
at work preventing high school students from dropping out of school. 
Summer Search helps students not only successfully complete high school 
but, for 93 percent of the participants, go on to college. By 
increasing charitable contributions, groups like Summer Search can help 
keep kids in school and moving forward toward graduation and a more 
productive contribution to the Nation.
  Drew Center For Child Development: Dramatic increases in the number 
of child abuse and neglect cases, which now total nearly 3 million 
children in the United States, is deeply troubling for everyone. We 
must do everything to prevent these cases, but cutbacks in Social 
Services block grants will impose new burdens on local communities. 
Charitable support can be a small part of the solution.
  Drew Child Development, a child care and development center in the 
Watts neighborhood of Los Angeles, works directly with children and 
families involved in child abuse environments. Unfortunately, these 130 
families in which the Drew Center supports is not the end of the story. 
There are thousands of other families that could benefit from this 
child abuse treatment program if more resources were available.
  The Drew Center expects cuts in government funding. They anticipate 
that they will have to cut counselor positions and turn needy families 
away. Stronger incentives for private sector giving would provide the 
Drew Center with some of the resources needed to combat this enormous 
problem.
  The Chrysalis Center: In 1993 I visited the Chrysalis Center, a 
nonprofit organization in downtown Los Angeles dedicated to helping 
homeless individuals find and keep jobs. Chrysalis provides employment 
assistance, from training in job-seeking skills to supervised searches 
for permanent employment. In 1995, the center helped over 750 people 
find work, and has helped place more than 3,000 people in permanent, 
full-time jobs in the last decade.

  However, there are still an estimated 15,000 homeless individuals in 
the Los Angeles area that are able to work. Most of these men and 
women, however, lack literacy skills and the resources to move from the 
streets to full-time employment. With increased charitable 
contributions, Chrysalis would be able to offer hope and opportunity 
for thousands more.

[[Page S11547]]

  Today, I introduce tax incentive legislation to encourage stronger 
support for the Nation's vital charities. The proposal:
  Eliminates the corporate tax upon liquidation of a qualifying 
closely-held corporation under certain circumstances. The legislation 
would require 80 percent or more of the stock to be bequeathed to a 
501(c)(3) tax-exempt organization; and
  Clarifies that a charity can receive mortgaged property in a 
qualified liquidation, without triggering unrelated business income tax 
for a period of 10 years. This change parallels the exemption from 
unrelated business income tax provided under current law for direct 
transfers by gift or bequest.
  Under the legislation, the individual donor would receive no tax 
benefit from the proposal, as the tax savings generated would increase 
the funds available for the charity.
  By eliminating the corporate tax upon liquidation, Congress would 
encourage additional, and much needed, charitable gifts. Across 
America, countless thousands have built successful careers and have 
generated substantial wealth in closely-held corporations. As the 
individuals age and plan for their estate, we should help them channel 
their wealth to meet philanthropic goals. Individuals who are willing 
to make generous bequests of companies and assets, often companies they 
have spent years building, should not be discouraged by substantially 
reducing the value of their gifts through Federal taxes.

  While the Joint Tax Committee has not yet prepared an official 
revenue cost, previous estimates suggest a 7-year cost of about $600 
million.
  However, the revenue estimate represents the expectation of 
significant transfer to charity as a result of the legislation. By the 
same techniques used to estimate the tax cost to Treasury, we estimate 
between $3 and $5 billion in charitable contributions would be 
stimulated by this tax change. This tax proposal may generate as much 
as seven times its revenue loss in expanded charitable giving.
  The legislation has been endorsed by the Council on Foundations, the 
umbrella organization for foundations throughout the country, and the 
Council of Jewish Federations.
  I am pleased to add my colleagues Mark Hatfield, of Oregon, Slade 
Gorton of Washington and Max Baucus, of Montana, as co-sponsors of the 
legislation. I encourage others to review this legislation and listen 
to the charitable sectors in your community. During this past year, the 
proposed legislation went through several different revisions in order 
to sharpen the bill's focus and target the legislation in the most 
effective manner. I want to encourage the review process to continue, 
so we may continue to build support and target the bill's impact for 
the benefit of the Nation's nonprofit community.
  With virtually limitless need, we must look at new ways to encourage 
and nurture a strong charitable sector. The private sector cannot begin 
to replace the government role, but if the desire to support charitable 
activity exists, we should not impose taxes to deplete the value of 
that support.
  Tax laws should encourage, rather than impede, charitable giving. By 
inhibiting charitable gifts, Federal tax laws hurt those individuals 
that most need the help of their government and their community.
  I request unanimous consent to have the legislation and section-by-
section analysis printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2141

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. ELIMINATION OF CORPORATE LEVEL TAX UPON 
                   LIQUIDATION OF CLOSELY HELD CORPORATIONS UNDER 
                   CERTAIN CONDITIONS.

       (a) In General.--Paragraph (2) of section 337(b) of the 
     Internal Revenue Code of 1986 (relating to treatment of 
     indebtedness of subsidiary, etc.) is amended--
       (1) by striking ``Except as provided in subparagraph (B)'' 
     in subparagraph (A) and inserting ``Except as provided in 
     subparagraph (B) or (C)'', and
       (2) by adding at the end the following new subparagraph:
       ``(C) Exception in the case of stock acquired without 
     consideration.--If the 80-percent distributee is an 
     organization described in section 501(c)(3) and acquired 
     stock in a liquidated domestic corporation from either a 
     decedent (within the meaning of section 1014(b)) or the 
     decedent's spouse, subparagraph (A) shall not apply to any 
     distribution of property to the 80-percent distributee. This 
     subparagraph shall apply only if all of the following 
     conditions are met:
       ``(i) Eighty percent or more of the stock in the liquidated 
     corporation was acquired by the distributee, solely by a 
     distribution from an estate or trust created by one or more 
     qualified persons. For purposes of this clause, the term 
     `qualified person' means a citizen or individual resident of 
     the United States, an estate (other than a foreign estate 
     within the meaning of section 7701(a)(31)(A)), or any trust 
     described in clause (i), (ii), or (iii) of section 
     1361(c)(2)(A).
       ``(ii) The liquidated corporation adopted its plan of 
     liquidation on or after January 1, 1997.
       ``(iii) The 80-percent distributee is an organization 
     created or organized under the laws of the United States or 
     of any State.

     Nothing in subsection (d) shall be construed to limit the 
     application of this subsection in circumstances in which this 
     subparagraph applies.''.
       (b) Revision of Unrelated Business Income Tax Rules To 
     Exempt Certain Assets.--Subparagraph (B) of section 514(c)(2) 
     of the Internal Revenue Code of 1986 (relating to property 
     acquired subject to mortgage, etc.) is amended by inserting 
     ``or pursuant to a liquidation described in section 
     337(b)(2)(C),'' after ``bequest or devise,''.
       (c) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.
                                                                    ____


                     Section By Section Description

       Amending the Internal Revenue Code to permit certain tax 
     free corporate liquidations into 501(c)(3) organizations and 
     to revise the Unrelated Business Income Tax (UBIT) rules 
     regarding the receipt of mortgaged property in a corporate 
     liquidation:
       Section 1: Establishes an exception under IRC section 337 
     to permit a tax-free liquidation of a corporation into a 
     charitable organization under IRC section 501(c)(3) when 
     eighty percent or more of the corporation is dedicated to the 
     charity through a bequest at death by a US citizen or 
     resident of the US, an estate or trust.
       Section 2: Expands the current law ten year exemption from 
     the Unrelated Business Income Tax to include entities 
     receiving mortgaged assets in a corporate liquidation. When a 
     tax exempt entity receives mortgaged property from a 
     corporate liquidation covered by section one of this bill, no 
     Unrelated Business Income Tax would be imposed for 10 years.
       Section 3: The amendment takes effect upon date of 
     enactment for corporate plans of liquidation adopted on or 
     after January 1, 1997.
                                 ______