Congressional Record, Volume 144 Issue 70 (Wednesday, June 3, 1998)

[Congressional Record Volume 144, Number 70 (Wednesday, June 3, 1998)]
[House]
[Pages H3999-H4005]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

{time} 1530
RELIGIOUS LIBERTY AND CHARITABLE DONATION PROTECTION ACT OF 1998

Mr. GEKAS. Mr. Speaker, I move to suspend the rules and pass the bill
(H.R. 2604) to amend title 11, United States Code, to protect certain
charitable contributions, and for other purposes, as amended.
The Clerk read as follows:

H.R. 2604

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

SECTION 1. SHORT TITLE.

This Act may be cited as the ``Religious Liberty and
Charitable Donation Protection Act of 1998''.

SEC. 2. DEFINITIONS.

Section 548(d) of title 11, United States Code, is amended
by adding at the end the following:
``(3) In this section, the term `charitable contribution'
means a charitable contribution, as that term is defined in
section 170(c) of the Internal Revenue Code of 1986, if that
contribution--
``(A) is made by a natural person; and
``(B) consists of--
``(i) a financial instrument (as that term is defined in
section 731(c)(2)(C) of the Internal Revenue Code of 1986);
or
``(ii) cash.
``(4) In this section, the term `qualified religious or
charitable entity or organization' means--
``(A) an entity described in section 170(c)(1) of the
Internal Revenue Code of 1986; or
``(B) an entity or organization described in section
170(c)(2) of the Internal Revenue Code of 1986.''.

SEC. 3. TREATMENT OF PRE-PETITION QUALIFIED CHARITABLE
CONTRIBUTIONS.

(a) In General.--Section 548(a) of title 11, United States
Code, is amended--
(1) by inserting ``(1)'' after ``(a)'';
(2) by striking ``(1) made'' and inserting ``(A) made'';
(3) by striking ``(2)(A)'' and inserting ``(B)(i);
(4) by striking ``(B)(i)'' and inserting ``(ii)(I)'';
(5) by striking ``(ii) was'' and inserting ``(II) was'';
(6) by striking ``(iii)'' and inserting ``(III)''; and
(7) by adding at the end the following:
``(2) A transfer of a charitable contribution to a
qualified religious or charitable entity or organization
shall not be considered to be a transfer covered under
paragraph (1)(B) in any case in which--
``(A) the amount of that contribution does not exceed 15
percent of the gross annual income of the debtor for the year
in which the transfer of the contribution is made; or
``(B) the contribution made by a debtor exceeded the
percentage amount of gross annual income specified in
subparagraph (A), if the transfer was consistent with the
practices of the debtor in making charitable
contributions.''.
(b) Trustee as Lien Creditor and as Successor to Certain
Creditors and Purchasers.--Section 544(b) of title 11, United
States Code, is amended--
(1) by striking ``(b) The trustee'' and inserting ``(b)(1)
Except as provided in paragraph (2), the trustee''; and
(2) by adding at the end the following:
``(2) Paragraph (1) shall not apply to a transfer of a
charitable contribution (as that term is defined in section
548(d)(3)) that is not covered under section 548(a)(1)(B), by
reason of section 548(a)(2). Any claim by any person to
recover a transferred contribution described in the preceding
sentence under Federal or State law in a Federal or State
court shall be preempted by the commencement of the case.''.
(c) Conforming Amendments.--Section 546 of title 11, United
States Code, is amended--
(1) in subsection (e)--
(A) by striking ``548(a)(2)'' and inserting
``548(a)(1)(B)''; and
(B) by striking ``548(a)(1)'' and inserting
``548(a)(1)(A)'';
(2) in subsection (f)--
(A) by striking ``548(a)(2)'' and inserting
``548(a)(1)(B)''; and
(B) by striking ``548(a)(1)'' and inserting
``548(a)(1)(A)''; and
(3) in subsection (g)--
(A) by striking ``section 548(a)(1)'' each place it appears
and inserting ``section 548(a)(1)(A)''; and
(B) by striking ``548(a)(2)'' and inserting
``548(a)(1)(B)''.

SEC. 4. TREATMENT OF POST-PETITION CHARITABLE CONTRIBUTIONS.

(a) Confirmation of Plan.--Section 1325(b)(2)(A) of title
11, United States Code, is amended by inserting before the
semicolon the following: ``, including charitable
contributions (that meet the definition of `charitable
contribution' under section 548(d)(3)) to a qualified
religious or charitable entity or organization (as that term
is defined in section 548(d)(4)) in an amount not to exceed
15 percent of the gross income of the debtor for the year in
which the contributions are made''.
(b) Dismissal.--Section 707(b) of title 11, United States
Code, is amended by adding at the end the following: ``In
making a determination whether to dismiss a case under this
section, the court may not take into consideration whether a
debtor has made, or continues to make, charitable
contributions (that meet the definition of `charitable
contribution' under section 548(d)(3)) to any qualified
religious or charitable entity or organization (as that term
is defined in section 548(d)(4)).''.

SEC. 5. APPLICABILITY.

This Act and the amendments made by this Act shall apply to
any case brought under an applicable provision of title 11,
United States Code, that is pending or commenced on or after
the date of enactment of this Act.

SEC. 6. RULE OF CONSTRUCTION.

Nothing in the amendments made by this Act is intended to
limit the applicability of the Religious Freedom Restoration
Act of 1993 (42 U.S.C. 2002bb et seq.).

The SPEAKER pro tempore (Mr. Pease). Pursuant to the rule, the
gentleman from Pennsylvania (Mr. Gekas) and the gentleman from New York
(Mr. Nadler) each will control 20 minutes.
The Chair recognizes the gentleman from Pennsylvania (Mr. Gekas).

General Leave

Mr. GEKAS. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days within which to revise and extend their remarks
on the bill under consideration.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Pennsylvania?
There was no objection.
Mr. GEKAS. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I urge adoption of this legislation and wish to set the
stage for some of the comments that we will hear during the debate on
this measure.
This issue was brought to our attention by the gentlewoman from Idaho
(Mrs. Chenoweth) and the gentleman from California (Mr. Packard) on two
separate pieces of legislation that dealt with the same issue. Their
legislative efforts came from different angles and from different
perspectives, but the ultimate purpose was the same: to try to rectify
a situation in which a contributor to a charitable organization, for
the purpose of our hypothetical say to a church organization, makes a
contribution, he subsequently files for bankruptcy, and a decision is
made by the bankruptcy court and direction is given to the bankruptcy
trustee to recover that amount paid by contribution to the church
because it came within a certain period of time and, therefore, was not
subject to be clear of the bankruptcy laws. So now we have the strange
situation of a bankruptcy trustee having to assert a claim against a
church.
Mr. Speaker, that seemed unseemly to a great number of people. The
gentlewoman from Idaho and the gentleman from California took to the
legislative process to try to bring about a change. Hence their
legislation, hence the action of the Committee on the Judiciary, and we
have arrived at this stage.
What we have done ultimately is to mirror, or try to mirror as much
as we can, the Senate version of this same issue in legislation that
they have passed so that we can be better prepared when the time comes
for ultimate decision to be made by a conference in the two bodies.
That is why we have come to the floor at this moment with the vehicle
being H.R. 2604.
Mr. Speaker, after the gentleman from New York (Mr. Nadler) presents
his opening statement, I will yield to these two Members so that they
can fully explain the contents of the legislation, the purpose, et
cetera.
Mr. Speaker, I urge adoption of H.R. 2604, the ``Religious Liberty
and Charitable Donation

[[Page H4000]]

Protection Act of 1998'' This legislation, introduced by my colleague,
Mr. Packard, on October 2, 1997, has as of today more than 120
bipartisan co-sponsors. It was reported out of the Judiciary Committee
without objection.
H.R. 2604, with amendment, which is before you for consideration
today, contains one substantial change from the bill as reported by the
Judiciary Committee which is in accord with the members of the other
body. The additional provision it contains prevents creditors from
using remedies available under state law to avoid transfers of
religious or charitable contributions. H.R. 2604, as amended, is now
identical to its Senate counterpart, S. 1244, which passed the other
body on a vote of 100 to 0 on May 13, 1998. Favorable action today in
this body can send this legislation to the President for his approval.
The principal component of H.R. 2604 protects certain prepetition
charitable contributions made by an individual debtor to qualified
religious or charitable entities within one year preceding the filing
date of the debtor's bankruptcy petition from being subsequently
avoided by a bankruptcy trustee under Section 548 of the Bankruptcy
Code. The bill defines ``charitable contribution'' and ``qualified
religious or charitable entity or organization'' by reference to
applicable provisions of the Internal Revenue Code. In addition, its
sets certain limits on the amount of charitable contributions that
would be exempt from Section 548.
Important policy considerations support this bill. Voluntary
donations should be treated differently than other types of property
transfers under the Bankruptcy Code. The inherent nature of charitable
contributions is that they are made specifically without the intent of
receiving anything in return. This principal is recognized in the
Internal Revenue Code's provisions concerning the deductibility of
certain charitable contributions.
Under current law, the courts often conduct a very fact-specific
analysis to determine whether a debtor received reasonably equivalent
value in exchange for a charitable contribution. In the religious
context, courts consider, for example, whether the debtor received
certain services from the religious entity, such as counseling, in
exchange for his or her donation. This analysis essentially places
courts in the untenable position of having to value spiritual benefits
and has led to disparate case law development.
Other policy considerations favoring the exemption of charitable
contributions from the purview of Section 548 include the fact that
religious and charitable organizations provide valuable services to
society and serve the common good. Another consideration is the fact
that most religious and charitable organizations simply lack the funds
to litigate a recovery action filed a bankruptcy trustee under Section
548 and therefore must simply return the funds received. Particularly
in light of the longer reachback period permitted under state law made
applicable under Section 544(b) of the Bankruptcy Code, a charitable
organization or religious entity may have to return funds it received
from a debtor over a period extending several years.
The bill also addresses problems presented by the current unclear
state of the law that exists in light of a recent decision by the
Supreme Court that places the continuing validity of the Religious
Freedom Restoration Act in doubt.
It is important to keep in mind that H.R. 2604 is not intended to
diminish any of the protections against prepetition fraudulent
transfers available under section 548 of the Bankruptcy Code. First, it
applies to transfers that a debtor makes on an aggregate basis during
the one-year reachback period preceding the filing of the debtor's
bankruptcy case. Second, if a debtor, on the eve of filing for
bankruptcy relief, suddenly donates 15 percent of his or her gross
income to a religious organization, the debtor's fraudulent intent, if
any, would be subject to scrutiny under section 548(a)(1) of the
Bankruptcy Code. This fifteen percent ``safe harbor'' merely shifts the
burden of proof and limits litigation to where there is evidence of a
change in pattern large enough to establish fraudulent intent.
In addition, H.R. 2604 protects the right of certain debtors to tithe
or make charitable contributions after filing for bankruptcy relief.
This protection is required because some courts have held that tithing
is not a reasonably necessary expense or have dismissed these debtors'
bankruptcy cases on the ground that such tithing constituted a
``substantial abuse'' under section 707(b) of the Bankruptcy Code.
For all of these laudatory reasons, I urge the adoption of H.R. 2604,
as amended.
Mr. Speaker, I reserve the balance of my time.
Mr. NADLER. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I want to begin by thanking the honorable gentleman from
California (Mr. Packard), my friend, for originally introducing this
legislation. I also thank the honorable gentleman from Pennsylvania
(Mr. Gekas), for bringing this legislation forward.
Mr. Speaker, given the spirited debates we have been having on our
subcommittee and on the full committee on certain other bankruptcy
legislation the gentleman is sponsoring, I am glad we have been able to
work together to develop this bill and to bring it to the floor as
bipartisan legislation today.
This bipartisan legislation would protect religious and other
charitable institutions that receive donations from individuals who
later declare bankruptcy, and would permit debtors in bankruptcy to
continue to make donations to such organizations of up to 15 percent of
their gross annual income.
This bill is needed to address a problem that originated with the
Supreme Court's decision in 1990 in Employment Division versus Smith,
which said that the government may impose substantial burdens on an
individual's free exercise rights so long as the government does so in
a manner that is facially neutral toward religion.
Congress attempted to correct this decision in 1993 by enacting the
Religious Freedom Restoration Act, RFRA. The Court of Appeals in the
Eighth Circuit ruled in 1996 that RFRA protected tithed donations to a
charitable organization from creditors in bankruptcy proceedings.
The following year, last year, the Supreme Court unfortunately struck
down RFRA in City of Boerne versus Florez, and later, in accordance
with its decision in Boerne that RFRA was unconstitutional, vacated and
remanded the Eighth Circuit decision.
Since the Supreme Court decision struck down RFRA only with respect
to State laws, however, it is uncertain today whether RFRA remains good
law as applied to Federal statutes such as the Bankruptcy Code. While
the Supreme Court may ultimately decide this question, I see no reason
to wait for a decision when a simple and straightforward remedy is at
hand as to the tithing problem.
This legislation would protect religious and charitable donations in
bankruptcy proceedings by clarifying that they are not ``fraudulent
transfers" within the meaning of the statute. As modified by the Senate
language, the legislation also deals with the problem of State fraud
statutes which might otherwise, under some circumstances, be used to
undercut the Federal protection which I trust we will institute today.
So this legislation takes care of that potential problem.
Mr. Speaker, I would like at this time to engage the gentleman from
Pennsylvania (Mr. Gekas) in a colloquy to confirm my understanding of
the legislative intent with respect to section 3(a) of this bill which
adds a new section 548(a)(2)(A) to title 11 of the U.S. Code. This
section provides a safe harbor for qualified contributions of up to 15
percent of the debtor's gross annual income for the year in which such
contributions were made. Under the new section 548(a)(2)(B), if the
debtor's aggregate donations exceed 15 percent, the debtor would have
to establish that the transfer was consistent with his or her prior
pattern of charitable giving in order for that donation to be
protected.
Mr. Speaker, I would ask the gentleman from Pennsylvania (Mr. Gekas)
to confirm my understanding as set forth in the committee report that
the intent of this provision is to protect qualified contributions of
up to 15 percent of the debtor's gross annual income in the aggregate
for the year in which the contribution was made, and that we do not
intend this language to allow multiple contributions to a given
organization or to more than one organization which in the aggregate
exceed 15 percent of the debtor's gross annual income to be protected.
Would the gentleman confirm whether this is his understanding as well?
Mr. GEKAS. Mr. Speaker, will the gentleman yield?
Mr. NADLER. I yield to the gentleman from Pennsylvania.
Mr. GEKAS. Mr. Speaker, I appreciate the opportunity at this juncture
to explain in response to the gentleman's question that this
legislation is not intended to diminish any of the protections against
pre-petition, fraudulent transfers available under section 548 of the
Bankruptcy Code.
First, it applies to transfers that a debtor makes, and I emphasize
this, on

[[Page H4001]]

an aggregate basis during the one year reach-back period to which the
gentleman has referred proceeding the filing of the debtor's bankruptcy
case.
Second, if the debtor on the eve of filing for bankruptcy relief
suddenly donates 15 percent of his or her gross income to a religious
organization, the debtor's fraudulent intent, if any, would be subject
to scrutiny under section 548(a)(1) of the Bankruptcy Code. This 15
percent safe harbor merely shifts the burden of proof and limits
litigation to where there is evidence of a change in pattern large
enough to establish fraudulent intent. We hope this satisfies the
inquiry that the gentleman has posed.
Mr. NADLER. Mr. Speaker, reclaiming my time, I thank the gentleman
very much for his response. Yes, indeed it does satisfy the inquiry. I
thank the gentleman for his assistance in clarifying the intent of the
legislation and of the Congress in regard to this matter. Mr. Speaker,
I urge my colleagues to adopt this legislation.
Mr. Speaker, I reserve the balance of my time.
Mr. GEKAS. Mr. Speaker, I yield 5 minutes to the gentleman from
California (Mr. Packard).
(Mr. PACKARD asked and was given permission to revise and extend his
remarks.)
Mr. PACKARD. Mr. Speaker, I thank the gentleman from Pennsylvania
(Mr. Gekas) for yielding me this time. I would like to take this moment
to heartily thank the gentleman from Illinois (Mr. Hyde), chairman of
the full Committee on the Judiciary, the gentleman from Pennsylvania
(Mr. Gekas), the chairman of the subcommittee, and the gentleman from
New York (Mr. Nadler), the ranking Democrat on the subcommittee, for
bringing this bill to the floor today and for their support of the
Religious Liberty and Charitable Donations Protection Act which is
before us.
Mr. Speaker, in the Old Testament it says, ``Will a man rob God? Yet
ye have robbed me. But ye say, Wherein have we robbed thee? In tithes
and offerings. Bring ye all the tithes into the storehouse, that there
may be meat in mine house, and prove me now herewith, sayeth the Lord
of Hosts, if I will not open you the windows of heaven, and pour you
out a blessing, that there shall not be room enough to receive it.''
To many Christians this is a sacred commandment, and they cannot
practice their religions unless they can obey this commandment that
says they need to bring their tithes to Him.
A person often in times of financial and other problems turns to God
and their church for strength and for blessings. To close those windows
of heaven and prevent God from pouring out a blessing at the very time
that bankrupt families need His blessings would be unconscionable, for
the law of the land to prevent a person from being able to practice
that part of their religion.
Mr. Speaker, many churches and charitable organizations across this
country live from hand to mouth, when what comes into the collection
plate on one day is usually spent the next. When a creditor is allowed
to sue a church or a charity in order to recover a donation made
possibly months or even years earlier, the church or charity is usually
put in a position of hardship. What is more, they rarely have the
ability or the resources to fight the suit in court. In some cases,
that can lead to financial ruin for the church or for the charitable
organization.
I do not believe that a church or a charity that receives a tithe or
a donation ought to have to check the financial background of the donor
before they donate. They certainly should not be penalized for
receiving a donation from anybody, but that is exactly what current law
requires.
My bill, along with Senator Grassley's bill, S. 1244, would correct
this problem. In addition to protecting churches and charities, our
bill also assists the individual donor himself. Currently, a person who
files for bankruptcy under chapter 13 is not allowed to make charitable
contributions or tithes to a church. Amazingly, the court has said that
in making this type of contribution, the donor receives nothing of
value in return. Mr. Speaker, I cannot accept this. I contribute to my
church and I am here to say that I do receive something of significant
value, and it is tangible to me, in return.
Under chapter 13, a person can go to a bar, to a beer hall. They can
get advice on a 1-900 psychic advice line. They can gamble their money
away. They can fill their basement full of alcohol. But they cannot
contribute to their church or to a charity. That is unconscionable and
ought to be corrected, and this bill will correct that.
I hope and pray that every Member of this House will follow the lead
of the Senate. The Senate, when this was called for on a rollcall vote
on the floor of the Senate, 100 Senators voted for it. Not a single one
voted against it. We hope the House will follow that example.
Again, I thank the gentlemen from Pennsylvania (Mr. Gekas), the
chairman of the subcommittee, and the gentleman from New York (Mr.
Nadler), ranking member, for bringing this to the floor of the House
today.
Mr. Speaker, I submit the following three letters that deal with this
bill for inclusion in the Record:

Christian Legal Society,

Annandale, VA, May 13, 1998.
Re support for H.R. 2604.

Hon. Ron Packard,
U.S. House of Representatives,
Washington, DC.
Dear Representative Packard: The 4,000 member attorneys and
law students of the Christian Legal Society unequivocally
endorse your ``Religious Liberty And Charitable Donation
Protection Act,'' for a number of reasons.
First, your bill would prevent bankruptcy trustees or
creditors under section 544 from using state fraudulent
transfer laws that allow confiscation of donations going back
as far as six years prior to bankruptcy filing. H.R. 2611
does not.
Second, H.R. 2604 ensures the right of Americans to
continue to give to their church or charity while they are
paying off their debts pursuant to a Chapter 13 plan.
Otherwise, religious believers will be barred for years from
exercising this form of worship. H.R. 2611 does not address
Chapter 13.
Third, H.R. 2604 would protect tithes and offerings
received by churches and charities from donors who gave
either from a sense of religious obligation or motivation.
Some judges will inevitably conclude that the clause in H.R.
2611 that limits protection to gifts made ``from a sense of
religious obligation'' does not extend to the millions of
Americans who give not because of a commandment but out of
gratitude to God.
Fourth, H.R. 2604 is constitutionally sound. It extends
protection to donations given to religious as well as non-
religious donees. H.R. 2611 only protects gifts to ``a
religious group or entity''; consequently, it is likely to be
challenged as violative of the First Amendment's prohibition
on an establishment of religion.
With the Senate's near unanimous approval today of the
identical Grassley language (S. 1244), it is apparent that
H.R. 2604 enjoys broad bipartisan support. The Packard-
Grassley bill can pass this Congress, providing immediate
relief for churches and ministries that are otherwise bound
to continue losing in the courts. Unlike H.R. 2611, it would
protect debtors in Chapter 13 who wish to continue their
donations. Unlike H.R. 2611, H.R. 2604 would prevent the
misuse of state laws to confiscate multiple years of giving.
And H.R. 2604 would protect far more churches (not just those
that require tithing) and would not likely be a target of a
lawsuit challenging its constitutionality.
For any and all of these reasons, Christian Legal Society
will work for the earlier passage in the House of H.R. 2604.
Respectfully,
Steven T. McFarland,
Director, Center For Law and Religious Freedom.
P.S. We understand that some may question whether the 15%
figure in section 3 of H.R. 2604 is a cap. We believe the
answer is clearly ``no.'' Rather than inviting trustees
across the country to litigate over whether the tithe was a
consistent practice of the donor, H.R. 2604 creates a bright-
line test, a ``safe harbor'' that defuses this issue.
Churches would not have to waste precious funds on legal fees
defending their offerings in court. It would be clear; if the
donations are no more than 15%, then trustee cannot challenge
them, unless he has evidence of actual fraud (section 548a(1)
would remain available). With the 15% shield, Congress would
be clarifying what creditors cannot challenge, not
prescribing how much a donor should give. A donor can give
more than 15% of his income to charity, but will have to
prove that this has been his consistent practice over several
years.
____

School of Law,

The University of Texas at Austin,

Austin, TX, May 6, 1998.
Hon. Ron Packard,
Rayburn House Office Building,
Washington, DC.
Dear Rep. Packard: The question has arisen whether S. 1244
and H.R. 2604 would protect unincorporated churches. The
answer is yes; unincorporated churches would be protected.
These bills protect organizations defined in Sec. 170(c)(2)
of the Internal Revenue Code,

[[Page H4002]]

which includes any ``corporation, trust, or community chest,
fund, or foundation'' organized and operated exclusively for
charitable, religious, or other listed purposes. The Internal
Revenue Code defines ``corporation'' to include an
``association.'' 26 U.S.C. Sec. 7701(a)(3). An unincorporated
association may also be a ``fund.''
The language of Sec. 170(c)(2) dates to shortly after World
War I. Related sections drafted more recently use the word
``organization,'' which more obviously includes
unincorporated associations. See, e.g., Sec. 170b and
Sec. Sec. 502-511. The implementing regulations under
Sec. 170 and Sec. 501(c)(3) also used the word
``organization.'' 26 C.F.R. Sec. Sec. 1.170 and 1.501.
``Organization'' does not appear to be a defined term. But
Treasury Regulations define ``articles of organization'' in
inclusive terms: ``The term `articles of organization' or
`articles' includes the trust instrument, the corporate
charter, the articles of association, or any other written
instrument by which an organization is created.'' 26 C.F.R.
Sec. 1.501(c)(3)(b)(2) (emphasis added). ``Articles of
association'' clearly seems designed to include
unincorporated associations.
The clearest statement from the Internal Revenue Service
appears to be Revenue Procedure 82-2 (attached), which sets
out certain rules for different categories of tax exempt
organizations. Section 3.04 provides a rule for
``Unincorporated Nonprofit Associations.'' This Procedure
treats the question as utterly settled and noncontroversial.
Tax scholars agree that Sec. 170 includes unincorporated
associations. The conclusion appears to be so universally
accepted that there has been no litigation and no need to
elaborate the explanation. The leading treatise on tax-exempt
organizations states: ``An `unincorporated association' or
`trust' can qualify under this provision, presumably as a
`fund' or `foundation' or perhaps, as noted, as a
`corporation.' '' Bruce R. Hopkins, The Law of Tax-Exempt
Organizations Sec. 4.1 at 52 (7th ed. 1997).
Borris Bittker of Yale and Lawrence Lokken of NYU say:
``Since the term `corporation' includes associations and
`fund or foundation' as used in IRC Sec. 501(c)(3) is
construed to include trusts, the technical form in which a
charitable organization is clothed rarely results in
disqualification.'' Boris I. Bittker & Lawrence Lokken, 4
Federal Taxation of Income, Estates and Gifts para.100.1.2 at
100-6 (2d ed. 1989).
Closely related provisions of the Code expressly cover
churches. I.R.C. Sec. 170(b)(1) states special rules for a
subset of organizations defined in Sec. 170(c), including ``a
church, or a convention or association of churches.'' I.R.C.
Sec. 508(c)(1) provides that ``churches, their integrated
auxiliaries, and conventions or associations of churches'' do
not have to apply for tax exemption. These provisions plainly
contemplate that churches are covered; they also prevent the
accumulation of IRS decisions granting tax exempt status to
unincorporated churches. These churches are simply presumed
to be exempt.
There are tens of thousands of unincorporated churches in
America. I am not aware that any of these churches has ever
had difficulty with tax exemption or tax deductibility of
contributions because of their unincorporated status. I work
with many church lawyers and religious leaders, and none of
them has ever mentioned such a problem. There are no reported
cases indicating litigation over such a problem. If
unincorporated churches were having this problem, Congress
would have heard demands for constituent help or corrective
legislation.
The fact is that legitimate unincorporated churches that
otherwise qualify for tax deductibility under Sec. 170 and
for tax exemption under Sec. 501(c)(3) are not rendered
ineligible by their failure to incorporate. There is so
little doubt about that that neither Congress, the IRS, nor
the courts has ever had to expressly elaborate on the rule
that everyone knows. This is a question that can be safely
dealt with in legislative history affirming Congress's
understanding that unincorporated associations are included
in Sec. 170(c)(2) and Congress's intention that they be
protected by these bills.
I consulted informally with Deirdre Halloran, the expert on
tax exempt organizations at the United States Catholic
Conference, and with tax professors here and elsewhere, who
confirmed these conclusions. Ms. Halloran would be happy to
respond to inquiries from your office if you need a second
opinion.
Very truly yours,
Douglas Laycock.
____

Rev. Proc. 82-2

section 1. purpose

The purpose of this revenue procedure is to identify the
states and circumstances in which the Service will not
require an express provision for the distribution of assets
upon dissolution in an exempt organization's articles of
incorporation, trust instrument, or other organizing document
to satisfy the ``organizational'' test in section
1.501(c)(3)-1(b)(4) of the Income Tax Regulations. Also, this
procedure provides a sample of an acceptable dissolution
provision for organizations that are required to have an
express provision for the distribution of assets upon
dissolution.

sec. 2. background

.01 Section 1.501(c)(3)-1(b)(4) of the regulations provides
that:
``(4) Distribution of assets on dissolution. An
organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt
purpose. An organization's assets will be considered
dedicated to an exempt purpose, for example, if, upon
dissolution, such assets would, by reason of a provision in
the organization's articles or by operation of law, be
distributed for one or more exempt purposes, or to the
Federal government, or to a State or local government, for a
public purpose, or would be distributed by a court to another
organization to be used in such manner as in the judgment of
the court will best accomplish the general purposes for which
the dissolved organization was organized. However, an
organization does not meet the organizational test if its
articles or the law of the State in which it was created
provide that its assets would, upon dissolution, be
distributed to its members or shareholders. [Emphasis added.]
.02 The issue of the applicability of state law in relation
to section 1.501(c)(3)-1(b)(4) of the regulations as to a
particular organization arises only where the organization
itself has not provided for the distribution of its assets
upon dissolution in its articles of incorporation, organizing
document, or trust instrument. When state law satisfies the
provisions of section 1.501(c)(3)-1(b)(4), it is not
necessary to require an organization to amend its articles of
incorporation or organizing document, or to require a trust
to obtain a judicial decree amending its trust instrument, in
order to satisfy the organizational test for qualification as
an exempt organization described in section 501(c)(3) of the
Code, where all the other requirements for exemption are met.
.03 The issue of whether section 1.501(c)(3)-1(b)(4) of the
regulations is satisfied under state law can be broken down
into four areas according to the type of entity involved:
(1) the cy pres doctrine as to inter vivos charitable
trusts;
(2) the cy pres doctrine as to testamentary charitable
trusts, which can exist in a particular state by case law
and/or by statute;
(3) state corporate law containing statutes that provide
for the distribution of assets upon the dissolution of
nonprofit corporations; and
(4) state law by court decision or statute relating to
unincorporated associations.

Each of these four areas will be treated separately in this
revenue procedure.

sec. 3. guidelines

.01 Inter Vivos Charitable Trusts.
1. Because there is no guarantee under the law of any
jurisdiction, except Delaware, that cy pres would be used to
keep an inter vivos charitable trust from failing, any inter
vivos charitable trust, except in Delaware, should be
required to have an adequate dissolution provision in its
trust instrument to satisfy the requirements of section
1.501(c)(3)-1(b)(4) of the regulations.
.02 Testamentary Charitable Trusts.
1. The courts in the following states always apply the cy
pres doctrine or the doctrine of equitable approximation to
keep a charitable testamentary trust from failing, and thus
section 1.501(c)(3)-1(b)(4) of the regulations with respect
to charitable testamentary truss is satisfied:
Alabama.
Delaware.
Louisiana.
Pennsylvania.
South Dakota.
Virginia.
West Virginia (However, a state court decision has held
that the cy pres doctrine does not apply to a scientific
organization in West Virginia.)
2. The courts in the jurisdictions listed below will apply
the cy pres doctrine to keep a charitable testamentary trust
from failing when the language of the trust instrument
demonstrates that the settlor had a general intent to benefit
charity, and not merely a specific intent to benefit a
particular institution. In such jurisdiction the cy pres
doctrine may be relied upon by a charitable testamentary
trust to satisfy section 1.501(c)(3)-(b)(4) of the
regulations only when the settlor has demonstrated a general
charitable intent in the language of the trust instrument.
Unless the testator manifests a general intent to benefit
charity, the Service will require the testamentary charitable
trust to provide an express dissolution provision in the
trust instrument to satisfy section 1.501(c)(3)-1(b)(4).
Arkansas.
California.
Colorado.
Connecticut.
District of Columbia.
Florida.
Georgia.
Illinois.
Indiana.
Iowa.
Kansas.
Kentucky.
Maine.
Maryland.
Massachusetts.
Michigan.
Minnesota.
Mississippi.
Missouri--MO. ANN. STAT. Sec. 352.210.3 satisfies the
provisions of section 1.501(c)(3)-1(b)(4) of the regulations
while MO. ANN. STAT. Sec. 355.230.(3) does not satisfy the
requirements.
Nebraska.
New Hampshire.
New Jersey.
New York.
North Carolina.
Ohio.
Oklahoma.
Oregon.

[[Page H4003]]

Rhode Island.
Tennessee.
Texas.
Vermont.
Washington.
Wisconsin.
3. Charitable testamentary trusts in the following states
need a dissolution provision in the trust instrument to
satisfy section 1.501(c)(3)-1(b)(4) of the regulations
because these states have either expressly rejected or have
never applied the cy pres doctrine:
Alaska.
Arizona.
Hawaii.
Idaho.
Montana.
Nevada.
New Mexico.
North Dakota.
South Carolina.
Utah.
Wyoming.
.03 Nonprofit Charitable Corporations.
1. The statutes applicable to nonprofit charitable
corporations in the states listed below will satisfy the
provisions of section 1.501(c)(3)-1(b)(4) of the Regulations:
Arkansas.
California.
Louisiana.
Massachusetts.
Minnesota.
Missouri.
Ohio.
Oklahoma.
All other states, and the District of Columbia do not have
statutes applicable to nonprofit charitable corporations that
will satisfy the provisions of section 1.501(c)(3)-
1(b)(4). Thus, nonprofit corporations in the eight named
states do not need a dissolution provision to satisfy
section 1.501(c)(3)-1(b)(4). A nonprofit corporation in a
jurisdiction not listed needs an adequate dissolution
provision in its organizing document to satisfy section
1.501(c)(3)-1(b)(4).
.04 Unincorporated Nonprofit Associations.
None of the fifty-one jurisdictions provides certainty by
statute or case law, for the distribution of assets upon the
dissolution of an unincorporated nonprofit association.
Therefore, any unincorporated nonprofit association needs an
adequate dissolution provision in its organizing document to
satisfy the requirements of section 1.501(c)(3)-1(b)(4) of
the regulations.
.05 Sample Dissolution Provision.
1 For any organization that needs a dissolution provision
in its organizing instrument to satisfy the provisions of
section 1.501(c)(3)-1(b)(4) of the regulations, the following
language is illustrative of what may be used:
(a) Upon the dissolution of [this organization] assets
shall be distributed for one or more exempt purposes within
the meaning of section 501(c)(3) of the Internal Revenue
Code, or corresponding section of any future Federal tax
code, or shall be distributed to the Federal government, or
to a state or local government, for a public purpose.
.06 Periodic Update.
This Revenue Procedure will be updated periodically as
changes in state laws come to the attention of the Service.
____

Home School

Legal Defense Association,

Purcellville, VA, May 8, 1998.
Dear Senator Grassley and Representative Packard, I
received a copy of the letter from Professor Doug Laycock
concerning my question regarding the inclusion of
unincorporated associations in S. 1244 and H.R. 2604. His
letter more than answers my question.
Although an attorney with substantial constitutional
practice, I am not a non-profit tax expert by any means. Doug
Laycock has outstanding credentials in all relevant areas and
his opinion is conclusive for me.
I would note that the expert commentators he quotes appear
to point to different terms in the phrase ``corporation,
trust, or community chest, fund, or foundation'' to include
unincorporated churches. Taken literally, unincorporated
associations do not fall in any of these categories. Reading
laws literally is generally a good idea, but was my mistake
on this occasion.
Despite the lack of statutory clarity, the practice of the
IRS appears clear. And if an appropriate legislative record
is made, this should settle the matter for all judges with
the possible exception of Justice Scalia.
Thanks for getting an answer so quickly.
Sincerely,
Michael Farris,
President.

Mr. GEKAS. Mr. Speaker, I yield 4 minutes to the gentlewoman from
Idaho (Mrs. Chenoweth).
Mrs. CHENOWETH. Mr. Speaker, I rise to engage in a colloquy with the
gentleman from California (Mr. Packard), my friend and the author of
this bill.
As the gentleman knows, I have legislation that also addresses the
issue of bankruptcy trustees disgorging from innocent churches the
tithes of members who have filed for bankruptcy. I applaud the
gentleman's efforts and thank him very much for his hard work.
As we have discussed together numerous times, our primary concern is
that anything that we do to address this issue will not lead to the
future government regulation of the church and the interference in the
free exercise of religion. We have had many discussions over that.
Mr. Speaker, with the passage of H.R. 2064, we provide the Federal
Government absolutely no opportunity to extend its reach to regulate
churches in this country. I would ask, is that the intent of the
gentleman's legislation?

{time} 1545

Mr. PACKARD. Mr. Speaker, will the gentlewoman yield?
Mrs. CHENOWETH. I yield to the gentleman from California.
Mr. PACKARD. Absolutely, the gentlewoman is certainly right. I have
no intentions in this bill or in any other way for the government to
regulate churches.
Mrs. CHENOWETH. Mr. Speaker, I thank the gentleman.
With the passage of H.R. 2604, there is no opportunity to have the
Federal Government define tithes or to place a floor or a limit on the
amount of tithes that a parishioner can give to his or her church. Is
that the gentleman's intent?
Mr. PACKARD. Mr. Speaker, that is certainly my intent.
Mrs. CHENOWETH. And, Mr. Speaker, it is my understanding of the
intent of H.R. 2604 that we are not including churches in the same
legal classifications as 501(c)(3)s, which are an artificial creation
of the State, while the churches are a creation of God. Is this the
intent of H.R. 2604?
Mr. PACKARD. Mr. Speaker, the gentlewoman is correct.
Mrs. CHENOWETH. Lastly, Mr. Speaker, in solving this problem between
churches and the bankruptcy courts, we are not intending the Federal
Government to be involved in any way in overriding scripture or taking
away the autonomy and the free exercise of religion in America's
churches. Is this the intent of H.R. 2604?
Mr. PACKARD. Mr. Speaker, if the gentlewoman will continue to yield,
it is certainly the intent of the bill.
Mrs. CHENOWETH. Mr. Speaker, I want to thank the gentleman from
California (Mr. Packard) for all of his hard work on this issue. I also
want to thank his staff for their hard work. The gentleman is a true
champion of religious freedom, and he has my deepest respect and
admiration. I want to thank the gentleman and my friend from
California.
I also join with the gentleman from California (Mr. Packard) in
thanking the gentleman from Illinois (Mr. Hyde), the gentleman from
Pennsylvania (Mr. Gekas) and the ranking member, the gentleman from New
York (Mr. Nadler).
Mr. PACKARD. Mr. Speaker, if the gentlewoman will continue to yield,
I want to personally thank her for her leadership on this issue. She
wrote a bill that is very similar and I think it has the same basic
goals. I applaud the gentlewoman for that. I have sponsored her bill.
It is just that this was the bill that moved through the committee
structure. I thank the gentlewoman very much.
Mr. NADLER. Mr. Speaker, I yield myself such time as I may consume.
I simply wanted to make a number of observations on this bill.
One, this bill does afford to religious institutions and to
nonreligious charitable institutions the same protection. If someone in
good faith gives a charitable contribution, whether to a church or the
American Cancer Society, the trustee in bankruptcy, if the person
subsequently declares bankruptcy, should not go into the church or to
the Cancer Society or the Lung Society, whatever it may be, and try to
get them to repay the money. That is what this bill does. It sets up
those protections.
The second thing I want to say, in light of what I said earlier about
the history of this bill, the religious liberty protections, is that
some of us in this House are very strong advocates of separation of
church and State. I will be opposing the so-called Istook amendment on
the floor later in the week. We do believe very strongly in the
separation of church and State, but we also believe that government
should not be hostile to religion and government should be
accommodating to people with religious beliefs and also to people with
charitable intentions, and this legislation is very much in that
direction.
I think no matter what position someone may take on some of the

[[Page H4004]]

other legislation such as the Istook amendment, we can all unite in
supporting this type of legislation which does not breach the will of
separation of church and State but says that the freedom to contribute
money to the church or to the synagogue or the mosque or to the
nonreligious charitable institution should not be violated and that
government should not be hostile to these institutions.
Again, I thank my colleague from Pennsylvania and my colleague from
California for their leadership in bringing this bill to the floor. I
urge all my colleagues to vote for it.
Mr. Speaker, I reserve the balance of my time.
Mr. GEKAS. Mr. Speaker, I yield 2 minutes to the gentleman from
Indiana (Mr. Souder).
Mr. SOUDER. Mr. Speaker, I thank the chairman for yielding me this
time and commend the gentleman from California (Mr. Packard) for his
leadership in this important area of religious liberty and charitable
contributions. There is nothing more important to our society than
trying to strengthen the voluntary time and money commitments as an
alternative, as a supplement to the efforts that government and other
organizations make in their communities.
As has been pointed out, I am sure, this legislation is particularly
needed to protect religious freedom in this country because of the
Crystal Evangelical Free Church in Minneapolis, Minnesota, which has
had a prolonged legal fight for over 6 years in an effort to prevent
the church from being forced to return money which had been regularly
tithed by a parishioner who subsequently filed for bankruptcy.
At the lower court, a Federal bankruptcy trustee recaptured $13,500
in past tithes from the Minnesota congregation. The church appealed the
ruling and the Eighth Circuit Court vacated the decision, ruling that
the Religious Freedom Restoration Act, RFRA, passed by this Congress,
prevented bankruptcy trustees from voiding debtor's tithes to their
church as fraudulent transfers.
Unfortunately, as a result of the Supreme Court's decision on June
25, 1997, that RFRA was unconstitutional as applied to the States. The
Eighth Circuit was required to vacate its earlier decision on behalf of
the church and reconsider its ruling in light of the Supreme Court.
The tragic result is that churches and charities around this country
are now vulnerable to aggressive bankruptcy lawyers and other creditors
while, at the same time, we are allowing people to take cruises,
gamble, even call psychic hotlines, but denying them the right to
exercise their faith through contributing to charities and/or other, as
the gentleman from New York (Mr. Nadler) pointed out, other charities,
not just religious based.
I believe that this situation is intolerable. It violates the first
amendment religious clauses of the Constitution, while encouraging an
outbreak of bankruptcy litigation against churches and other charities.
This bill provides an excellent resolution to a serious threat to
religious freedom and charities across the board.
The full text is also included in the community renewal legislation
which I support along with members of the Renewal Alliance.
I once again congratulate the chairman on his leadership.
Mr. GEKAS. Mr. Speaker, I yield 2 minutes to the gentleman from Utah
(Mr. Cannon), a member of the Committee on the Judiciary.
Mr. CANNON. Mr. Speaker, one of the common threads throughout the
American experience is the strong yearning for religious liberty. It is
what brought the Puritans to Plymouth Rock, the Mennonites to Lancaster
County and the Mormons to Utah. It is part of what we are as Americans.
Protection of religious expression is a bedrock principle of the
Constitution enshrined in the very first amendment to the Bill of
Rights. The freedom to fully participate in religion includes the right
to make offerings.
Sometimes those who make contributions will fall into financial
problems and end up before the local bankruptcy court. Over the past
few years bankruptcy courts with neither divine guidance nor the
direction of Congress have struggled with reconciling competing
interests of creditors and churches. In my view, it is inappropriate
for the bankruptcy court system to force religious denominations to
disgorge good-faith offerings or tithes in order to comply with rigid
formulas.
S. 1244 seeks to resolve this by establishing a simple formula:
Religious contributions by a debtor, if consistent with past practice
or if totaling less than 15 percent of gross income, shall not be
reachable by a creditor in the context of bankruptcy.
In a sense, this measure follows Christ's admonition to render
therefore unto Caesar the things that are Caesar's and unto God the
things which are God's. It avoids the effect of our current course that
puts Federal bankruptcy court judges in the position of knocking on the
doors of our churches wearing the hat of the repo man and demanding the
return of tithes, offerings and other contributions.
I compliment the gentleman from California (Mr. Packard) and the
gentleman from Pennsylvania (Mr. Gekas) for their hard work and
encourage a yes vote.
Mr. GEKAS. Mr. Speaker, I yield back the balance of my time.
Mr. NADLER. Mr. Speaker, I yield 1 minute to the gentleman from
Texas, Mr. Bentsen.
(Mr. BENTSEN asked and was given permission to revise and extend his
remarks.)
Mr. BENTSEN. Mr. Speaker, I rise in strong support of the bill. I
appreciate the sponsors for doing this.
I had a church in Baytown, Texas, in my district which has
experienced a problem with the current law. I appreciate the sponsors
of the bill for correcting this situation. I hope the other body takes
it up, and it is passed and signed and corrected.
Mr. BENTSEN. Mr. Speaker, I rise as a co-sponsor and strong supporter
of H.R. 2604, the Religious Liberty and Charitable Donation Protection
Act.
This legislation provides much-needed protection to churches and
other charitable organizations by preventing creditors from attempting
to seize tithes and other donations made by individuals who later file
for bankruptcy. Business and individuals should have the right to
vigorously pursue the repayment of bad debts. But they should not have
the right to reach into church offering plates and the limited budgets
of charities providing invaluable services.
I know from the experience of a church in my district, the Cedar
Bayou Baptist Church in Baytown, how harmful current law can be. Cedar
Bayou was sued by creditors in 1995 and in September of 1997, the
church was ordered to return $23,000 in tithes given by a member who
later declared bankruptcy. The church has run up more than $7,000 in
legal bills defending itself in court and expects the costs to rise
even higher as it proceeds with an appeal of its case. Other churches
across the country have incurred even higher costs, with one church in
Minnesota spending $280,000 on legal fees in a case that reached the
U.S. Supreme Court.
Unfortunately, the courts have ruled that tithes and donations are
not protected from bankruptcy proceedings and instead are considered
fraudulent transfers under current bankruptcy law. So there is an
urgent need for this legislation.
This legislation provides much needed protection for houses of
worship and charities. Our churches, synagogues, and charities often
operate on small budgets and depend on donations for basic operations
and services. They should not have to pay the price for someone else's
financial problems.
In addition, this legislation also would allow debtors to make a
charitable contribution of up to 15 percent under their Chapter 13
bankruptcy protection budget plans. I believe it is appropriate that we
give people the peace of mind that, in the event of personal financial
difficulties, they can continue to contribute to their favorite church
or charity.
I urge approval of this important legislation to protect our
charities and houses of worship.
Ms. JACKSON-LEE of Texas. Mr. Speaker, I rise today in support of
H.R. 2604, the Religious Liberty and Charitable Donation Protection Act
of 1997. First of all, I am glad that we are considering this bill that
I think, in some part, affects all of us. The important question that
rests before us today is not simply whether our bankruptcy laws, as
they stand, are effectively negating the protections for religious
freedom afforded by the 1st Amendment of our Constitution, but whether
this Congress will continue to be a strong defender of civil and
Constitutional rights.
Although we often do so, the Constitution and the rights it extends
to the citizens of this country is something that we must not take for
granted. According to Judge Alphonzo Taft, father of President and
Chief Justice William

[[Page H4005]]

Howard Taft, ``The ideal of our people as to religious freedom is
absolute equality under the law of all religious opinions and sects * *
* the government is neutral and while protecting all, it prefers none
and disparages none.''
The right to express one's religious beliefs freely, as long as their
expression does not harm others, is a fundamental part of the American
experience. Those who came to this country found the early American
colonies nearly four centuries ago, did so in order to escape the
bitter sting of religious persecution. So it is no surprise that the
first Amendment to the Constitution crafted by the descendants of these
brave trailblazers was an attempt to ensure free religious expression.
Although at times it is difficult to see, as Americans, we are the
products of a great legacy of freedom. A legacy that we, as Members of
the United States Congress, have been duly empowered to continue on the
people's behalf.
However, in large part, the lasting impact of the 105th Congress, on
the people that we have been elected to serve, still remains to be
determined. One thing is for sure, whether we are Democrat or
Republican, liberal or conservative, male or female, is the fact that
the Members of this Congress have a sacred duty to be vigilant
defenders of the public good. I believe that a vote of confidence, at
least, for the civil libertarian spirit of H.R. 2604, the Religious
Liberty and Charitable Donation Protection Act is a necessary step in
the right direction. As a proponent of freedom, I can say without
reservation that this bill cuts to the heart of what our Constitution
and country are really all about.
However, at another level, this bill reminds us of the challenge
before us to be at the forefront of the many sorely-needed reforms to
our consumer and commercial bankruptcy laws. H.R. 2604, of which I am a
co-sponsor, seeks to protect any religious and charitable contribution
of a debtor made within one year of their filing for bankruptcy from
possible recovery by a Trustee or creditor. Essentially, a Chapter 13
participant can be barred from tithing to their local church if their
creditors object to the addition of this gift to their debt
restructuring plan. Additionally, in Chapter 7 cases, religious
contributions can be used as suitable basis to dismiss a debtor's case
on the grounds that they are substantially abusing the Chapter's many
favorable bankruptcy provisions. At some point, this subtle form of
religious persecution must stop.
Especially at this time when several other sections of Title 11 of
our Federal Code are under serious legislative review by this Congress,
efforts to provide protection for the charitable and religious
donations of debtors are particularly important. If any of the current
legislative initiatives that encourage debtors to enter into Chapter 13
recommitment plans are passed, without first enacting these necessary
protections for the religious contributions of debtors, then this
growing deficiency in our bankruptcy laws will surely be exacerbated.
For all of these reasons, I urge all of my colleagues to please support
H.R. 2604.
Mr. NADLER. Mr. Speaker, I yield back the balance of my time.
The SPEAKER pro tempore (Mr. Pease). The question is on the motion
offered by the gentleman from Pennsylvania (Mr. Gekas) that the House
suspend the rules and pass the bill, H.R. 2604, as amended.
The question was taken; and (two-thirds having voted in favor
thereof) the rules were suspended and the bill, as amended, was passed.
A motion to reconsider was laid on the table.
Mr. GEKAS. Mr. Speaker, I ask unanimous consent to take from the
Speaker's table the Senate bill (S. 1244) to amend title 11, United
States Code, to protect certain charitable contributions, and for other
purposes, and ask for its immediate consideration.
The Clerk read the title of the Senate bill.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Pennsylvania?
There was no objection.
The Clerk read the Senate bill, as follows:

S. 1244