[House Report 104-336]
[From the U.S. Government Publishing Office]



104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    104-336
_______________________________________________________________________


 
               CHARITABLE GIFT ANNUITY RELIEF ACT OF 1995

                                _______


 November 14, 1995.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

_______________________________________________________________________


 Mr. Hyde, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                        [To accompany H.R. 2525]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 2525) to modify the operation of the antitrust laws, 
and of State laws similar to the antitrust laws, with respect 
to charitable gift annuities, having considered the same, 
report favorably thereon without amendment and recommend that 
the bill do pass.

                                CONTENTS

                                                                   Page
Purpose and summary..............................................     1
Background and need for legislation..............................     2
Committee consideration..........................................     4
Vote of the committee............................................     4
Committee oversight findings.....................................     4
Committee on Government Reform and Oversight Findings............     4
New budget authority and tax expenditures........................     4
Congressional Budget Office estimate.............................     4
Inflationary impact statement....................................     5
Section-by-section analysis and discussion.......................     5

                          purpose and summary

    The ``Charitable Gift Annuity Antitrust Relief Act of 
1995'' (H.R. 2525) provides antitrust protection to 
organizations which are registered as 501(c)(3) non-profit 
entities and exempt from taxation, and which issue charitable 
gift annuities. It specifies that agreeing to use, or using the 
same annuity rate for the purpose of issuing one or more 
charitable gift annuity is not unlawful under the antitrust 
laws. The exemption extends to both Federal and State law, 
although a state would have three years after enactment to 
expressly override application of the bill to its state 
antitrust laws.

                background and need for the legislation

    A charitable gift annuity is a fundraising instrument 
defined and regulated under section 501(m)(5) of the Internal 
Revenue Code. A person who enters into a gift annuity agreement 
with a religious, charitable or educational institution makes a 
gift to the institution and receives a fixed income for life. 
Since the value of the gift received is more than the property 
transferred to the donor, a bargain sale has occurred, and the 
difference in values is deductible to the donor. 26 U.S.C. 
Sec. 1011(b).
    The annuity rate applied to the value of the gift is the 
critical element in ensuring that the transaction will result 
in a meaningful gift to the charity. The American Council on 
Gift Annuities, a non-profit organization representing more 
than 1,500 charitable organizations and institutions, provides 
technical assistance to its members in determining appropriate 
annuity rates. The rates recommended by the Council are based 
on actuarial studies of mortality experience among annuitants 
and a conservative projection of the rate of income to be 
earned on invested reserve funds. They are computed to produce 
an average ``residium'' or gift to the organization of between 
40 and 60 percent of the amount originally donated under the 
agreement. Consequently, the rates are lower than and are not 
in competition with any rates offered commercially.
    The Council promotes the use of its rates for two reasons. 
First, it protects the fiscal integrity of the charity. 
Offering gift annuities at rates higher than the recommended 
rates may jeopardize the gift that is to be available to the 
charity. If the rate is too high, other funds or the general 
assets of the organization may be required to carry out the 
terms of the agreement. Second, it ensures that donative intent 
rather than financial gain motivates the choice of recipient. 
Use of consistent annuity rates, and thus equal rates of 
return, assure a ``level playing field'' for charities, so that 
a donor's choice of the charitable beneficiary of a gift 
annuity will depend on the relative merits of the institutions 
under consideration in the subjective judgment of the donor.
    Charitable giving through gift annuities is threatened by a 
lawsuit currently pending in the United States District Court 
for the Northern District of Texas. Richie v. American Council 
on Gift Annuities (Civ. No. 7:94-CV-128-X). The Richie suit 
alleges that the use of the same annuity rate by the various 
charities constitutes price fixing, and thus a violation of the 
antitrust laws. The complaint seeks to enjoin the charities 
from offering gift annuities using the Council's tables, to 
obtain a refund, and to recover treble damages. The suit also 
includes several counts alleging violations of securities and 
insurance laws.\1\
    \1\ Separate legislation (H.R. 2519) has been introduced which 
addresses the securities and insurance law aspects of the lawsuit.
---------------------------------------------------------------------------
    The number of potential defendants in the case--which 
initially included the Lutheran Church, the United Way of 
America, and Northwestern University--has now been greatly 
expanded due to certification of the case as a class action. 
Under the ruling, the plaintiff class can include all those who 
received gift annuities after December 30, 1990, from past or 
present members or sponsors of the American Council who 
followed its recommended rates. This means that virtually every 
charitable organization in America using the gift annuity 
device is threatened with losses that could run in the millions 
of dollars.
    The ongoing litigation is causing charities to expend 
massive amounts of time and resources on defending their 
positions. It is also forcing these organizations to make 
public information about their donors, a fact which makes 
people who guard their privacy reluctant to give. Regardless of 
the outcome of the suit, it has already had and will continue 
to have a chilling effect on gift giving and that it is 
consuming financial resources which would otherwise be 
allocated to charitable missions.
    Courts are now finding that charitable and educational 
organizations can violate the antitrust laws. ``There is no 
doubt that the sweeping language of section 1 [of the Sherman 
Act] applies to non-profit entities.'' NCAA v. University of 
Oklahoma, 468 U.S. 85, 100 n.22 (1984). The antitrust theory is 
that the absence of profit is no guarantee that an entity will 
act in the best interest of consumers. ``Pure charity'' is 
beyond the reach of antitrust law, United States v. Brown 
University, 5 F.3d 658, 666 (3d Cir. 1993), but ``commercial 
transactions with a `public service aspect' '' are not. Id.
    Drawing the line between ``pure charity'' and ``commercial 
transactions with a `public service aspect' '' can be 
difficult. Increasing the percentage of minority-group students 
at Ivy League schools through a ``need blind'' admissions 
program is too commercial because even reduced tuition is a 
commercial payment for educational services. Id. Soliciting 
funds from donors, however, is not engaging in trade or 
commerce and is not covered by the Sherman Act. DELTA v. Humane 
Society, 50 F.3d 710, 714 (9th Cir. 1995).
    Whether the issuance of a charitable gift annuity will be 
deemed ``pure charity'' or a ``commercial transaction with a 
`public service aspect' '' is unclear. If it is found to be a 
commercial transaction, the court will apply a rule of reason 
analysis to determine whether the charities' use of particular 
annuity rates is necessary to achieve their purported goal. 
Brown University, supra, 5 F.3d at 678.
    The Committee believes that there are strong public policy 
arguments which favor the enactment of this legislation. 
Congress encourages private gift giving through legitimate 
means, and particularly through instruments which the IRS 
approves and regulates. Gift annuities carry this imprimatur. 
Allowing litigants to use the antitrust laws as an impediment 
to these beneficial activities should not be countenanced 
where, as here, there is no detriment associated with the 
conduct. It is particularly difficult to see what 
anticompetitive effect the supposed setting of prices has in a 
context where the decision to give is motivated not by price 
but by interest in and commitment to a charitable mission.
    Furthermore, it is a misnomer to use the term ``price'' to 
describe the selection of an annuity rate: in this context an 
annuity rate merely determines the portion of the donation to 
be returned to the donor, and the portion the charity will 
retain. Donors are not primarily buying an annuity; they are 
making a gift. It is the idea of helping the charity, not 
maximizing return, which stimulates the transaction.
    The Judiciary Committee believes in the vigorous and non-
discriminatory application of the antitrust laws. As a general 
matter it does not favor exemptions or exclusions from the 
antitrust laws. However, in this limited instance it would 
serve no public policy purpose to subject the calculation of 
charitable gifts to antitrust scrutiny. H.R. 2525 has been 
crafted in an extremely narrow manner, so as to protect only 
this limited conduct and to avoid application to any potential 
anti-competitive conduct.
    Enactment of H.R. 2525 will provide a complete defense to 
the antitrust portions of Richie, as well as protection from 
future suits based on the use of agreed-upon annuity rates. The 
exemption granted extends to both Federal and State law, 
although a state would have three years after enactment to 
expressly override application of the bill to its state 
antitrust laws.

                        committee consideration

    Chairman Hyde introduced H.R. 2525 on October 24, 1995. 
Original co-sponsors of the measure included Ranking Minority 
Member Conyers, as well as Messrs. Sensenbrenner, McCollum, 
Gekas, Smith of Texas, Schiff, Canady of Florida, Inglis of 
South Carolina, Goodlatte, Bono, Bryant of Texas, and Ramstad.

                         vote of the committee

    The Committee on the Judiciary met in open session on 
October 31, 1995. A quorum being present, it ordered H.R. 2525 
favorably reported to the House of Representatives by unanimous 
voice vote.

                      committee oversight findings

    In compliance with clause 2(l)(3)(A) of rule XI of the 
Rules of the House of Representatives, the Committee reports 
that the findings and recommendations of the Committee, based 
on oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

         committee on government reform and oversight findings

    No findings or recommendations of the Committee on 
Government Reform and Oversight were received as referred to in 
clause 2(l)(3)(D) of rule XI of the Rules of the House of 
Representatives.

               new budget authority and tax expenditures

    Clause 2(l)(3)(B) of House rule XI is inapplicable because 
this legislation does not provide new budgetary authority or 
increased tax expenditures.

               congressional budget office cost estimate

    In compliance with clause 2(l)(C)(3) of rule XI of the 
Rules of the House of Representatives, the Committee sets 
forth, with respect to the bill, H.R. 2525, the following 
estimate and comparison prepared by the Director of the 
Congressional Budget Office under section 403 of the 
Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, November 8, 1995.
Hon. Henry J. Hyde, 
Chairman, Committee on the Judiciary, House of Representatives, 
        Washington, DC.
    Dear Mr. Chairman. The Congressional Budget Office has 
reviewed H.R. 2525, the Charitable Gift Annuity Antitrust 
Relief Act of 1995, as ordered reported by the House Committee 
on the Judiciary on October 31, 1995. CBO estimates that 
enacting H.R. 2525 would not result in any significant cost to 
the federal government. Because enactment of H.R. 2525 would 
not affect direct spending or receipts pay-as-you-go procedures 
would not apply to the bill.
    This bill would provide antitrust protection to certain 
non-profit organizations which issue charitable gift annuities. 
Under current law, it is a violation of the antitrust laws for 
two or more charitable organizations to use or agree to use the 
same annuity rate for the purpose of issuing one or more 
charitable gift annuities. According to the Administrative 
Office of the United States Courts (AOUSC), only one lawsuit 
alleging such a violation is currently pending in federal 
court. Based on information from the AOUSC, CBO estimates that 
while enacting this bill would preclude certain antitrust cases 
from being litigated, any reduction in future cases would not 
be significant. Thus, this bill could result in some savings to 
the federal governments, but the amount of such savings would 
not be significant.
    While enacting H.R. 2525 could reduce the future antitrust 
caseload in state courts, CBO estimates that any reduction in 
litigation would not result in any significant savings to 
states or local governments.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Susanne S. 
Mehlman, for federal costs, and Karen McVey, for state and 
local costs.
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).

                     inflationary impact statement

    Pursuant to clause 2(l)(4) of rule XI of the Rules of the 
House of Representatives, the Committee estimates that H.R. 
2525 will have no significant inflationary impact on prices and 
costs in the national economy.

                      section-by-section analysis

Section 1. Short title

    This section states that this Act may be cited as the 
``Charitable Gift Annuity Antitrust Relief Act of 1995.''

Section 2. Modification of antitrust laws

    Section 2(a) makes it lawful under any of the antitrust 
laws, or under any State law similar to the antitrust laws, for 
two or more persons described in section 501(c)(3) of the 
Internal Revenue Code that are exempt from taxation under 
section 501(a) of such Code to use, or to agree to use, the 
same annuity rate for the purpose of issuing one or more 
charitable gift annuities.
    The Committee intends the protections of the Act to extend 
to attorneys, accountants, actuaries, consultants and others 
retained or employed by a person described in section 501(c)(3) 
of the Internal Revenue Code of 1986, when assisting in the 
issuance of a charitable gift annuity or the setting of 
charitable annuity rates.
    The antitrust exemption provided in section 2(a) is 
intended to include the act of publishing suggested annuity 
rates. Thus, a non-profit organization such as the American 
Council on Gift Annuities could not be in violation of the 
antitrust laws due to its publication of actuarial tables or 
annuity rates for use in issuing gift annuities.
    Section 2(b) establishes limited conditions under which a 
State may override the provisions of section 2(a) with regard 
to its State antitrust laws. To obtain this result, within 3 
years of enactment of this Act, the State must enact a law 
which expressly provides that section 2(a) shall not apply with 
respect to the conduct described in that subsection. A State 
statute in effect on the date of enactment of this Act would 
not qualify for treatment under section 2(b), because it could 
not have expressly referenced the provisions of this Act.

Section 3. Definitions

    Section 3 defines various terms used in the bill.
    ``Annuity rate'' is defined as the percentage of the fair 
market value of a gift given in exchange for a charitable gift 
annuity, that represents the amount of the annual payment to be 
made to 1 or 2 annuitants over the life of either or both under 
the terms of the agreement to be determined as of the date of 
the gift.
    The term ``annuity rate'' is intended to describe only the 
calculation which would be required in order to offer an 
annuity described in section 514(c)(5)(B) of the Internal 
Revenue Code.
    The term ``antitrust laws'' has the meaning given it in 
subsection (a) of the first section of the Clayton Act (15 
U.S.C. 12), except that it also includes section 5 of the 
Federal Trade Commission Act (15 U.S.C. 45) to the extent that 
such section applies to unfair methods of competition.
    A ``charitable gift annuity'' has the same meaning given it 
in section 501(m)(5) of the Internal Revenue Code of 1986. That 
section reads as follows:

    (5) Charitable gift annuity.--For purposes of paragraph 
(3)(E), the term `charitable gift annuity' means an annuity 
if--
          (A) a portion of the amount paid in connection with 
        the issuance of the annuity is allowable as a deduction 
        under section 170 or 2055, and
          (B) the annuity is described in section 514(c)(5) 
        (determined as if any amount paid in cash in connection 
        with such issuance were property).

    Section 514(c)(5) of the Internal Revenue Code further 
describes the terms of a charitable gift annuity under section 
501(m)(5):

    (5) Annuities.--For purposes of this section, the term 
`acquisition indebtedness' does not include an obligation to 
pay an annuity which--
          (A) is the sole consideration (other than a mortgage 
        to which paragraph (2)(B) applies) issued in exchange 
        for property if, at the time of the exchange, the value 
        of the annuity is less than 90 percent of the value of 
        the property received in the exchange,
          (B) is payable over the life of one individual in 
        being at the time the annuity is issued, or over the 
        lives of two individuals in being at such time, and
          (C) is payable under a contract which--
                  (i) does not guarantee a minimum amount of 
                payments or specify a maximum amount of 
                payments, and
                  (ii) does not provide for any adjustment of 
                the amount of the annuity payments by reference 
                to the income received from the transferred 
                property or any other property.

    The terms ``person'' and ``State'' are defined with 
reference to the definition of those terms in section 12(a) and 
section 4G(2), respectively, of the Clayton Act.

Section 4. Application of the act

    The provisions of this bill shall apply to conduct 
occurring before, on, or after the date of enactment. In the 
instance of conduct which occurred before the date of 
enactment, or continuing conduct which began prior to the date 
of enactment, the provisions of this bill shall apply 
regardless of whether that conduct is the subject of a pending 
administrative or judicial proceeding.

                                
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