[House Report 105-556]
[From the U.S. Government Publishing Office]
105th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 105-556
_______________________________________________________________________
RELIGIOUS LIBERTY AND CHARITABLE DONATION PROTECTION ACT OF 1997
_______________________________________________________________________
June 3, 1998.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Gekas, from the Committee on the Judiciary, submitted the following
R E P O R T
[To accompany H.R. 2604]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the
bill (H.R. 2604) to amend title 11, United States Code, to
protect certain charitable contributions, and for other
purposes, having considered the same, reports favorably thereon
without amendment and recommends that the bill do pass.
TABLE OF CONTENTS
Page
Purpose and Summary........................................ 1
Background and Need for the Legislation.................... 2
Hearings................................................... 6
Committee Consideration.................................... 6
Committee Oversight Findings............................... 6
Committee on Government Reform and Oversight Findings...... 6
New Budget Authority and Tax Expenditures.................. 6
Congressional Budget Office Cost Estimate.................. 6
Constitutional Authority Statement......................... 8
Section-by-Section Analysis and Discussion................. 8
Changes in Existing Law Made by the Bill, as Reported...... 11
Purpose and Summary
H.R. 2604 protects religious and charitable organizations
from having to turn over to bankruptcy trustees donations these
organizations received from individuals who subsequently file
for bankruptcy relief. In addition, the bill protects the
rights of debtors to continue to make religious and charitable
contributions after they file for bankruptcy relief.
Background and Need For the Legislation
Representative Ron Packard (R-Cal.) introduced H.R. 2604 on
October 2, 1997. It currently has 125 bipartisan cosponsors. As
originally introduced, H.R. 2604 was identical to S. 1244, the
``Religious Liberty and Charitable Donation Protection Act of
1997,'' which was introduced by Senator Charles Grassely (R-
Iowa) (for himself and Senators Jeff Sessions (R-Ala.) and Rod
Grams (R-Minn.)) on October 1, 1997.\1\
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\1\ S. 1244, subsequently amended to preempt state fraudulent
transfer statutes in the context of a bankruptcy case, passed the
Senate by a vote of 100 to 0 on May 13, 1998. 105 Cong. Rec. S4823
(daily ed. May 13, 1998).
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Under certain circumstances, a bankruptcy trustee, pursuant
to section 548 of the Bankruptcy Code,\2\ may recover assets
that were transferred by a debtor before such he or she filed
for bankruptcy relief. This provision ensures that these assets
are brought into the bankruptcy estate so that they can be
equitably distributed to the debtor's creditors.\3\
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\2\ 11 U.S.C. Sec. 548.
\3\ Section 548 of the Bankruptcy Code has been described as ``one
of the most powerful tools available to the bankruptcy trustee.'' 5
Collier on Bankruptcy para. 548.01 (Lawrence P. King et al. eds. 15th
ed. rev. 1997).
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Some courts have held that a contribution made to a
religious or charitable organization by a debtor before he or
she filed for bankruptcy relief can be recovered by a
bankruptcy trustee as a fraudulent transfer under section 548
\4\ on the basis that reasonably equivalent value was not
received in exchange for the donation.\5\ Noting that there was
``no exchange of contributions for church services,'' the
Eighth Circuit, for example, concluded that the debtors'
religious contributions were recoverable by the trustee under
section 548(a)(2) of the Bankruptcy Code.\6\ Nevertheless, the
court held that the trustee was precluded from recovering the
suspect charitable contributions under the Religious Freedom
Restoration Act (``RFRA''), 42 U.S.C. Sec. 2000bb.\7\
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\4\ 11 U.S.C. Sec. 548(a)(2)(A). Under this provision, a trustee
can avoid a transfer of property made within one year before the filing
of the bankruptcy case if the debtor received less than reasonably
equivalent value in exchange for such transfer.
\5\ See, e.g., Weinman v. The Word of Life Christian Center (In re
Bloch), 207 B.R. 944, 948 (D. Colo. 1997).
\6\ Christians v. Crystal Evangelical Free Church (In re Young), 82
F.3d 1407, 1415-16 (8th Cir. 1996), vacated & remanded, 117 S. Ct. 2502
(1997), reinstated on remand, 1998 U.S. App. Lexis 7348 (8th Cir. Apr.
13, 1998), petition for cert. filed 66 U.S.L.W. 3720 (U.S. Apr. 24,
1998) (No. 97-1744).
\7\ Id. at 1420. It should be noted, however, that after the Eighth
Circuit issued this holding, the United States Supreme Court rendered a
decision questioning the constitutional validity of RFRA. See City of
Boerne v. Flores, 117 S. Ct. 2157 (1997). In light of this decision,
the Supreme Court vacated and remanded Christians to the Eighth
Circuit. 117 S. Ct. 2502 (1997). On remand, the appellant-church argued
that RFRA was a valid exercise of Congress' Article I powers and that
it did not violate the Establishment Clause of the First Amendment. The
Church also asserted that section 548(a)(2)(A) of the Bankruptcy Code
violated the First Amendment's Free Exercise Clause. On remand, the
Eighth Circuit reinstated its decision, holding that RFRA is ``an
appropriate means by Congress to modify the United States bankruptcy
laws.'' 1998 U.S. App. Lexis 7348, at *16-17 (8th Cir. Apr. 13, 1998).
A petition for certiorari to the Supreme Court has since been filed. 66
U.S.L.W. 3720 (U.S. Apr. 24, 1998) (No. 97-1744).
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Other courts have concluded that a debtor received
reasonably equivalent value in exchange for his or her
religious contributions.\8\ These 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, which essentially requires courts to
value spiritual benefits and to determine whether they were
conferred in exchange for the debtor's tithe, has led to
disparate case law.
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\8\ See, e.g., Ellenberg v. Chapel Hill Harvester Church, Inc. (In
re Moses), 59 B.R. 815 (Bankr. N.D. Ga. 1986). After noting that the
debtors received a variety of services, including counseling, from
their church in exchange for their contribution, the bankruptcy court
concluded that the trustee failed to sustain its burden of proof on the
issue of reasonably equivalent value. Id. at 818.
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The focus on valuation, however, fails to address several
important policy considerations that warrant treating religious
and charitable contributions differently from other property
transfers under section 548 of the Bankruptcy Code. One such
policy consideration pertains to the inherent nature of these
contributions and why they are made. Religious contributions
are often given from a sense of duty. The practice of tithing,
for example, is viewed by some religious organizations as a
``fundamental precept and doctrine'' based on ``divine
commandment from God.'' \9\ A representative of The Church of
Jesus Christ of Latter-day Saints, in his statement to the
Subcommittee on Commercial and Administrative Law, explained:
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\9\ Religious Liberty and Charitable Donation Protection Act of
1997 and Religious Fairness in Bankruptcy Act of 1997: Hearing on H.R.
2604 and H.R. 2611 Before the Subcomm. on Commercial and Administrative
Law of the House Comm. on the Judiciary, 105th Cong. (Feb. 12, 1998)
[hereinafter Hearing] (statement of Ralph W. Hardy, Jr., President,
Washington, D.C. Stake, The Church of Jesus Christ of Latter-day
Saints).
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We have been taught and believe that the voluntary
contribution of a full tithing--with the money or other
in-kind contribution being used by the Church to
further God's work on earth through the worldwide
religious activities and mission of The Church of Jesus
Christ of Latter-day Saints--is necessary in order for
a member to be in good standing in our Church. We
believe devoutly that our living of and obedience to
the Lord's law of tithing is a crucial component to our
spiritual development on earth and to our eternal
salvation. . . . As members of The Church of Jesus
Christ of Latter-day Saints, we believe that it is only
through these highest ordinances and rites that we can
attain eternal salvation and live together with our
family throughout eternity. \10\
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\10\ Id.
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Arguably, the use of fraudulent transfer provisions to undo
tithing may infringe the First Amendment rights of both the
donor and donee.\11\
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\11\ See, e.g., Hearing, supra n. 9 (statement submitted for the
record by Professor Douglas Laycock, University of Texas Law School).
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Another policy consideration is that contributions are used
by religious and charitable organizations to fund valuable
services to society, which serve the common good. This
principle is recognized in the Internal Revenue Code's
provisions concerning the deductibility of certain charitable
contributions.\12\
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\12\ See, e.g., 26 U.S.C. Sec. 170(c).
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Furthermore, most religious and charitable organizations
lack the means to defend against a recovery action filed by a
bankruptcy trustee under section 548. As a result, they must
either return the funds or divert other resources to pay for
defending such recovery actions.\13\ Representative Packard,
noting that it was ``unconscionable'' to require a religious
organization to return contributions it received from a
parishioner who subsequently filed for bankruptcy relief,\14\
observed at the hearing on this bill before the Subcommittee on
Commercial and Administrative Law that ``Churches live on a
day-to-day basis'' and it ``is almost impossible for them to
plan for or budget for the return of sizeable contributions.''
As a result, the current law presented a ``terrible hardship''
for them, he said.\15\ For the same reasons, he likewise
supported extending this protection to nonprofit organizations
as well.\16\
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\13\ 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.
11 U.S.C. Sec. 544(b).
\14\ See, e.g., Hearing, supra n. 9 (draft transcript at 19).
\15\ Id. at 19-20.
\16\ Id. at 20-21.
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As to the substantial litigation costs that can be incurred
by a religious organization in defending against a fraudulent
conveyance action under section 548 of the Bankruptcy Code, the
Subcommittee heard from the pastor of the Crystal Evangelical
Free Church who testified that his church had expended more
than $300,000 to defend a fraudulent transfer action brought by
a bankruptcy trustee to recover $13,450 in tithes given by two
of its members, a husband and wife who filed for bankruptcy
relief.\17\ Another witness testified that his religious
organization incurred ``significant legal expenses'' to defend
against these actions.\18\ He explained:
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\17\ Id. at 42, 45.
\18\ Id. at 60. This witness noted, for example, that his church
has had to defend against more than 120 lawsuits brought by bankruptcy
trustees in ten states. Id. at 59-60.
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In defending demands of bankruptcy trustees, The
Church of Jesus Christ of Latter-day Saints is
primarily interested in asserting the rights of its
members who made the contributions in questions [sic].
These members--who typically have contributed
relatively modest amounts but have subsequently fallen
on hard times financially--are clearly ill equipped to
mount an effective challenge to the impairment of their
most fundamental religious beliefs that the trustees'
demands present.\19\
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\19\ Id. (statement of Ralph W. Hardy, Jr., President, Washington,
D.C. Stake, The Church of Jesus Christ of Latter-day Saints).
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H.R. 2604 protects certain 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 avoided by a bankruptcy
trustee under section 548 of the Bankruptcy Code. The bill
protects donations to qualified religious organizations as well
as to charities, which are defined by reference to the Internal
Revenue Code.
H.R. 2604 is not intended to diminish any of the
protections against prepetition fraudulent transfers available
under section 548 of the Bankruptcy Code.\20\ 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.
As Professor Laycock explained during the Subcommittee hearing
on this bill:
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\20\ Id. (draft transcript at 6-7, 22).
[B]oth of these bills include the very important
safeguard that they don't touch section 548(a)(1). If I
have been going along for years putting $5 a week in
the collection plate and all of a sudden, before I file
for bankruptcy, I clean out my last account and give 15
percent of my last year's income to my church, the
trustee and the bankruptcy judge will look at the
timing, the amount, the circumstances, the change in
pattern, and they will say those are all badges of
fraud. They will say I had the actual intent to hinder
or defraud my creditors, and that is recoverable under
section 548(a)(1). The fraud scenario is not going to
happen.\21\
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\21\ Id. at 39. Likewise, Senator Grassley, testifying with regard
to an identical provision in his bill, S. 1244, stated:
[T]he bill does not amend section 548(a)(1) of the Bankruptcy
Code. This section lets bankruptcy courts recover any transfer of
assets on the eve of bankruptcy if the transfer was made to delay or
hinder a creditor. Therefore, if the bill is enacted, we don't have to
worry about a sudden rash of charitable giving in anticipation of
bankruptcy. Such transfers would obviously be for the purpose of
hindering creditors and would still be subject to the bankruptcy
judge's powers. In other words, there really isn't much room for abuse
as a result of my legislation. Id. at 7.
In addition, H.R. 2604 protects the rights of certain
debtors to tithe or make charitable contributions after filing
for bankruptcy relief. Some courts have dismissed a debtor's
chapter 7 case (a form of bankruptcy relief that discharges an
individual debtor of most of his or her personal liability
without any requirement for repayment) for substantial abuse
under section 707(b) of the Bankruptcy Code based on the
debtor's charitable contributions.\22\
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\22\ See, e.g., In re Faulkner, 165 B.R. 644, 649 (Bankr. W.D. Mo.
1994) (finding substantial abuse ``due to the amount of disposable
income which would be available in the absence of charitable
contributions''); In re Lee, 162 B.R. 31, 42 (Bankr. N.D. Ga. 1993)
(``Because debtors have not tithed consistently and because their
church does not require tithing as a condition for full membership
privileges, the monthly expense for tithing is unreasonable.'').
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The bill also protects the rights of debtors who file for
chapter 13 (a form of bankruptcy relief that requires a debtor
to commit his or her future income to fund a plan of repayment)
to tithe or make charitable contributions. Some courts have
held that tithing is not a reasonably necessary expense or have
attempted to fix a specific percentage as the maximum that the
debtor may include in his or her budget.\23\
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\23\ See, e.g., In re Reynolds, 83 B.R. 684, 684-85 (Bankr. W.D.
Mo. 1988) (denying confirmation on ground that amount of ``semi-
biblical tithe'' exceeded 3 percent of debtor's gross income); In re
Curry, 77 B.R. 969, 969 (Bankr. S.D. Fla. 1987) (finding that a
charitable contribution ``does not constitute a reasonably necessary
living expense''); In re Sturgeon, 51 B.R. 82, 84 (Bankr. S.D. Ind.
1985) (holding monthly $140 tithe was ``not a necessary living
expense'' so debtor must commit this ``amount to her plan as . . . part
of her disposable income''). Other courts have held that tithing is a
proper item of a chapter 13 debtor's proposed budget and confirmed
plans providing for tithing. See, e.g., In re Bien, 95 B.R. 281, 283
(Bankr. D. Conn. 1989); In re Navarro, 83 B.R. 348, 356 (Bankr. E.D.
Pa. 1988) (stating that the court was ``not prepared to conclude that
tithing and religious education are per se unreasonable choices for the
maintenance and support of a chapter 13 debtor's family''); In re
Green, 73 B.R. 893, 896 (Bankr. W.D. Mich. 1987), aff'd, 103 B.R. 852
(W.D. Mich. 1988) (``To deny confirmation of this plan solely because
Mrs. Green [the debtor] tithes would be to deny her the benefits of the
Bankruptcy Code because of conduct mandated by her religious
beliefs.'').
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Hearings
On February 12, 1998, the Committee's Subcommittee on
Commercial and Administrative Law held a hearing on H.R. 2604,
the ``Religious Liberty and Charitable Donation Protection Act
of 1997,'' and H.R. 2611, the ``Religious Fairness in
Bankruptcy Act of 1997.'' \24\ Testimony was received from nine
witnesses: Senator Charles E. Grassley (R-Iowa);
Representatives Helen Chenoweth (R-Idaho) and Ron Packard (R-
Ca.); Stephen H. Case, Davis, Polk & Wardwell, on behalf of the
National Bankruptcy Conference; Michael P. Farris, President,
Home School Legal Defense Association; Dr. Stephen Paul Goold,
Crystal Evangelical Free Church; Ralph W. Hardy, Jr.,
President, Washington, D.C. Stake, The Church of Jesus Christ
of the Latter-day Saints; Professor Douglas Laycock, University
of Texas Law School; and Steven McFarland, Director, Center for
Law and Religious Freedom.
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\24\ As introduced by Representives Helen Chenoweth (R.-Idaho) and
James Traficant (D.-Ohio) on October 6, 1997, H.R. 2611 provides that a
donation to a religious group or entity made by a debtor out of a sense
of religious obligation is deemed to have been made in exchange for a
reasonably equivalent value. This bill proposes to amend section 548(d)
of the Bankruptcy Code by adding a new subsection creating an exemption
for donations made based on religious obligation.
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Committee Consideration
The Subcommittee on Commercial and Administrative Law was
discharged from further consideration of H.R. 2604 on May 7,
1998. Thereafter, the Committee met in open session on May 14,
1998 and ordered favorably reported the bill H.R. 2604 without
amendment by voice vote, a quorum being present.
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)(3)(C) of rule XI of the
Rules of the House of Representatives, the Committee sets
forth, with respect to the bill, H.R. 2604, 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, May 19, 1998.
Hon. Henry J. Hyde,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2604, the
Religious Liberty and Charitable Donation Protection Act of
1997.
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), who can be reached at 226-2860,
and Leo Lex (for the state and local impact), who can be
reached at 225-3220.
Sincerely,
June E. O'Neill, Director.
Enclosure.
cc: Hon. John Conyers, Jr.,
Ranking Minority Member.
H.R. 2604--Religious Liberty and Charitable Donation Protection Act of
1997
CBO estimates that enacting H.R. 2604 would have no
significant impact on the federal budget. Because enactment of
H.R. 2604 would not affect direct spending or receipts, pay-as-
you-go procedures would not apply. H.R. 2604 contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act of 1995. The bill would have an
impact on the budgets of state, local, or tribal governments
only if those governments were creditors in a bankruptcy case
affected by this bill. However, because of the small number and
size of such cases, CBO estimates that the possible budgetary
impact of this bill would be minimal.
Under current law, several courts have required that the
charitable contributions that a debtor makes within a one-year
period prior to declaring bankruptcy be refunded to the
debtor's bankruptcy estate. Also, some courts have considered a
debtor's contributions to charity as indicating that bankruptcy
protection is unnecessary and consequently have dismissed the
debtor's petition for bankruptcy. H.R. 2604 would amend federal
bankruptcy law to prohibit creditors from seizing certain
charitable contributions after an individual declares
bankruptcy. This bill also would prohibit bankruptcy courts
from considering whether a debtor makes charitable
contributions when determining whether to dismiss a petition
for bankruptcy.
Based on information from the Administrative Office of the
United States Courts, CBO estimates that fewer than 1 percent
of all bankruptcy cases that consumers file involve the
contested issue of charitable contributions made by a debtor.
Enacting H.R. 2604 could increase the workload of the courts
and U.S. trustees if fewer cases are dismissed. At the same
time, the bill could decrease the workload of the courts and
U.S. trustees if less time is spent questioning charitable
contributions and ordering charitable organizations to return
such contributions. Although CBO is not certain whether the net
impact of the bill would be a savings or a cost, we expect that
any impact would be negligible because H.R. 2604 would affect
so few cases. Because CBO estimates that enacting H.R. 2604
would not affect the total number of cases initially filed and
the level of filing fees (which are recorded as governmental
receipts and as offsetting collections to the U.S. Trustee
System Fund), we estimate that pay-as-you-go procedures would
not apply.
The CBO staff contacts for this estimate are Susanne S.
Mehlman (for federal costs), who can be reached at 226-2860,
and Leo Lex (for the state and local impact), who can be
reached at 225-3220. This estimate was approved by Paul N. Van
de Water, Assistant Director for Budget Analysis.
Constitutional Authority Statement
Pursuant to Rule XI, clause 2(l)(4) of the Rules of the
House of Representatives, the Committee finds the authority for
this legislation in Article I, section 8, clause 4 of the
Constitution.
Section-By-Section Analysis
Section 1. Short Title. The title of H.R. 2604 is the
``Religious Liberty and Charitable Donation Protection Act of
1997.''
Section 2. Definitions. This section defines ``charitable
contribution'' and ``qualified religious or charitable entity
or organization.'' A ``charitable contribution'' is defined by
reference to section 170(c) of the Internal Revenue Code of
1986.\25\ In addition, the contribution must be made by a
natural person and in the form of either a ``financial
instrument,'' as defined in section 731(c)(2)(C) of the
Internal Revenue Code of 1986, or cash.
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\25\ 26 U.S.C.Sec. 170(c). Section 170(c) of the Internal Revenue
Code defines ``charitable contribution'' as follows:
(c) Charitable contribution defined.--For purposes of this section,
the term ``charitable contribution'' means a contribution or gift to or
for the use of--
(1) A State, a possession of the United States, or any political
subdivision of any of the foregoing, or the United States or the
District of Columbia, but only if the contribution or gift is made for
exclusively public purposes.
(2) A corporation, trust, or community chest, fund, or
foundation--
(A) created or organized in the United States or in any
possession thereof, or under the law of the United States, any State,
the District of Columbia, or any possession of the United States;
(B) organized and operated exclusively for religious,
charitable, scientific, literary, or educational purposes, or to foster
national or international amateur sports competition (but only if no
part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals;
(C) no part of the net earnings of which inures to the benefit
of any private shareholder or individual; and
(D) which is not disqualified for tax exemption under section
501(c)(3) by reason of attempting to influence legislation, and which
does not participate in, or intervene in (including the publishing or
distributing of statements), any political campaign on behalf of (or in
opposition to) any candidate for public office.
A contribution or gift by a corporation to a trust, chest, fund, or
foundation shall be deductible by reason of this paragraph only if it
is to be used within the United States or any of its possessions
exclusively for purposes specified in subparagraph (B). Rules similar
to the rules of section 501(j) shall apply for purposes of this
paragraph.
(3) A post or organization of war veterans, or an auxiliary unit
or society of, or trust or foundation for, any such post or
organization--
(A) organized in the United States or any of its possessions,
and
(B) no part of the net earnings of which inures to the benefit
of any private shareholder or individual.
(4) In the case of a contribution or gift by an individual, a
domestic fraternal society, order, or association, operating under the
lodge system, but only if such contribution or gift is to be used
exclusively for religious, charitable, scientific, literary, or
educational purposes, or for the prevention of cruelty to children or
animals.
(5) A cemetery company owned and operated exclusively for the
benefit of its members, or any corporation chartered solely for burial
purposes as a cemetery corporation and not permitted by its charter to
engage in any business not necessarily incident to that purpose, if
such company or corporation is not operated for profit and no part of
the net earnings of such company or corporation inures to the benefit
of any private shareholder or individual.
For purposes of this section, the term ``charitable contribution''
also means an amount treated under subsection (g) as paid for the use
of an organization described in paragraph (2), (3), or (4).
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A ``qualified religious or charitable entity or
organization'' is defined by reference to applicable provisions
of the Internal Revenue Code.\26\ Included within the meaning
of this term, for example, are entities organized and operated
exclusively for religious, charitable, scientific, literary, or
educational purposes. It also includes the United States,
States and municipalities, if the gift or contribution is made
exclusively for public purposes.
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\26\ This term is defined in the bill by reference to subsections
170(c) (1) and (2) of the Internal Revenue Code.
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Section 3. Treatment of Prepetition Qualified Charitable
Contributions. Subsection (a) of Section 3 amends section
548(a)(2)(A) of the Bankruptcy Code, which, in pertinent part,
permits a bankruptcy trustee to avoid or set aside a transfer
of assets or an obligation incurred by the debtor where the
debtor received ``less than a reasonably equivalent value'' in
exchange for such transfer or obligation.\27\ The determination
of whether or not reasonably equivalent value was received by
the debtor requires a two-prong analysis.\28\ The first part of
the analysis focuses on whether value was received. The second
part requires a determination of whether the transfer was made
in exchange for the value received.\29\
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\27\ 11 U.S.C. Sec. 548(a)(2)(A).
\28\ 5 Collier on Bankruptcy para. 548.05[1][b] (Lawrence P. King
et al. eds. 15th ed. rev. 1997).
\29\ Id.
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Subsection (a) excepts from section 548(a)(2)(A) a
charitable contribution to a qualified religious or charitable
entity or organization on either of the following grounds:
(1) The amount of the contribution does not exceed 15
percent of the debtor's gross annual income for the
year in which the transfer was made by the debtor.
(2) If the contribution exceeded this 15 percent safe
harbor, such transfer nevertheless was consistent with
the debtor's practice of making charitable
contributions.
The 15 percent safe harbor is necessary to protect the
tithing practices of certain religious faiths.\30\ It is
intended to apply 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. Thus, the safe
harbor protects annual aggregate contributions up to 15 percent
of the debtor's gross annual income.\31\
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\30\ See Hearing, supra n. 9 (statement submitted for the record by
Ralph W. Hardy, Jr., President, Washington, D.C. Stake, The Church of
Jesus Christ of Latter-day Saints).
\31\ Id. (statement submitted for the record by Professor Douglas
Laycock, University of Texas Law School).
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Subsection (b) amends section 544(b) of the Bankruptcy
Code, which empowers a bankruptcy trustee to utilize applicable
state law to undo certain property transfers made by a debtor
prior to filing for bankruptcy relief.\32\ Trustees use section
544(b) to avoid fraudulent transfers made outside the one-year
reachback period of section 548 as some states have much longer
periods for avoiding such transfers.\33\ Subsection (b)
specifically exempts the applicability of section 544(b) to
charitable contribution transfers, as defined in section 2 of
the bill.
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\32\ 11 U.S.C. Sec. 544(b).
\33\ Under New York law, for example, the reachback period can be
six years. N.Y.C.P.L.R. Sec. 213.
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Subsection (c) makes conforming amendments to section 546
of the Bankruptcy Code, which sets forth various limitations on
a bankruptcy trustee's avoiding powers.\34\
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\34\ 11 U.S.C. Sec. 546.
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Section 4. Treatment of Post-petition Charitable
Contributions. Section 4 protects the right of certain debtors
to tithe or make charitable contributions after they file for
bankruptcy relief.
Under current law, a chapter 13 trustee or an unsecured
creditor may object to the confirmation of a chapter 13 plan if
it fails to provide that all of the debtor's projected
``disposable income'' \35\ will be applied to make payments
under the plan.\36\ Subsection (a) amends section 1325(b)(2)(A)
of the Bankruptcy Code to include within the definition of
``disposable income'' charitable contributions by the debtor
that do not exceed 15 percent of the debtor's gross income.
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\35\ The Bankruptcy Code defines ``disposable income'' as income in
excess of the debtor's reasonably necessary expenses for his or her
support and that of his or her family. 11 U.S.C. Sec. 1325(b)(2)(A). If
the debtor is engaged in business, this term means income in excess of
expenses necessary for the continuation, preservation and operation of
such business. 11 U.S.C. Sec. 1325(b)(2)(B).
\36\ 11 U.S.C. Sec. 1325(b)(1)(B).
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This provision defines ``charitable contribution'' and
``qualified religious or charitable entity or organization'' as
these terms are defined in section 2 of H.R. 2604. Unlike
section 3, however, religious or charitable contributions that
exceed 15 percent of the debtor's gross income are not
protected even if they comport with the debtor's prior
charitable practices.
Subsection (b) amends section 707(b) of the Bankruptcy
Code, which authorizes the court to dismiss a chapter 7 case
filed by an individual debtor on the ground that it constitutes
substantial abuse of that chapter's provisions. Subsection (b)
restricts a court from considering whether a chapter 7 debtor
has made or continues to make charitable contributions, as
defined in section 2 of H.R. 2604, in deciding to dismiss the
case for substantial abuse under section 707(b).
This provision also employs the definitions set forth in
section 2 for ``charitable contribution'' and ``qualified
religious or charitable entity or organization.'' Accordingly,
contributions that do not meet these definitions remain subject
to judicial scrutiny under section 707(b). The provision is not
intended to limit judicial review concerning the issue of
fraud.\37\
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\37\ At the Subcommittee hearing on H.R. 2604, Representative
Packard testified:
We have tried desperately to craft language that would protect
and avoid and prevent fraud. No one, certainly this member, does not
wish to lay any groundwork that would allow someone to fraudulently use
the church or a charitable organization to make a contribution to avoid
their creditors if they are going into bankruptcy. I would be the very
last to wish for that. We have tried to put language in this bill that
would protect against that kind of fraudulent effort. Hearing, supra n.
9 (draft transcript at 22).
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Section 5. Applicability. This section makes H.R. 2604
applicable to pending cases as well as to cases commenced after
its date of enactment.
Section 6. Rule of Construction. Section 6 provides that
H.R. 2604 is not intended to limit the applicability of the
Religious Freedom Restoration Act of 1993.\38\
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\38\ 42 U.S.C. Sec. 2000bb.
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H.L.C.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3 of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, existing law in which no change
is proposed is shown in roman):
TITLE 11, UNITED STATES CODE
* * * * * * *
CHAPTER 5--CREDITORS, THE DEBTOR, AND THE ESTATE
* * * * * * *
SUBCHAPTER III--THE ESTATE
* * * * * * *
Sec. 544. Trustee as lien creditor and as successor to certain
creditors and purchasers
(a) * * *
[(b) The trustee] (b)(1) Except as provided in paragraph
(2), the trustee may avoid any transfer of an interest of the
debtor in property or any obligation incurred by the debtor
that is voidable under applicable law by a creditor holding an
unsecured claim that is allowable under section 502 of this
title or that is not allowable only under section 502(e) of
this title.
(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).
* * * * * * *
Sec. 546. Limitations on avoiding powers
(a) * * *
* * * * * * *
(e) Notwithstanding sections 544, 545, 547, [548(a)(2)]
548(a)(1)(B), and 548(b) of this title, the trustee may not
avoid a transfer that is a margin payment, as defined in
section 101, 741, or 761 of this title, or settlement payment,
as defined in section 101 or 741 of this title, made by or to a
commodity broker, forward contract merchant, stockbroker,
financial institution, or securities clearing agency, that is
made before the commencement of the case, except under section
[548(a)(1)] 548(a)(1)(A) of this title.
(f) Notwithstanding sections 544, 545, 547, [548(a)(2)]
548(a)(1)(B), and 548(b) of this title, the trustee may not
avoid a transfer that is a margin payment, as defined in
section 741 or 761 of this title, or settlement payment, as
defined in section 741 of this title, made by or to a repo
participant, in connection with a repurchase agreement and that
is made before the commencement of the case, except under
section [548(a)(1)] 548(a)(1)(A) of this title.
(g) Notwithstanding sections 544, 545, 547, [548(a)(2)]
548(a)(1)(B) and 548(b) of this title, the trustee may not
avoid a transfer under a swap agreement, made by or to a swap
participant, in connection with a swap agreement and that is
made before the commencement of the case, except under section
[548(a)(1)] 548(a)(1)(A) of this title.
(g) Notwithstanding the rights and powers of a trustee
under sections 544(a), 545, 547, 549, and 553, if the court
determines on a motion by the trustee made not later than 120
days after the date of the order for relief in a case under
chapter 11 of this title and after notice and a hearing, that a
return is in the best interests of the estate, the debtor, with
the consent of a creditor, may return goods shipped to the
debtor by the creditor before the commencement of the case, and
the creditor may offset the purchase price of such goods
against any claim of the creditor against the debtor that arose
before the commencement of the case.
* * * * * * *
Sec. 548. Fraudulent transfers and obligations
(a)(1) The trustee may avoid any transfer of an interest of
the debtor in property, or any obligation incurred by the
debtor, that was made or incurred on or within one year before
the date of the filing of the petition, if the debtor
voluntarily or involuntarily--
[(1)] (A) made such transfer or incurred such
obligation with actual intent to hinder, delay, or
defraud any entity to which the debtor was or became,
on or after the date that such transfer was made or
such obligation was incurred, indebted; or
[(2)(A)] (B)(i) received less than a reasonably
equivalent value in exchange for such transfer or
obligation; and
[(B)(i)] (ii)(I) was insolvent on the date that
such transfer was made or such obligation was incurred,
or became insolvent as a result of such transfer or
obligation;
[(ii)] (II) was engaged in business or a
transaction, or was about to engage in business or a
transaction, for which any property remaining with the
debtor was an unreasonably small capital; or
[(iii)] (III) intended to incur, or believed that
the debtor would incur, debts that would be beyond the
debtor's ability to pay as such debts matured.
(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.
* * * * * * *
(d)(1) * * *
* * * * * * *
(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.
* * * * * * *
CHAPTER 7--LIQUIDATION
* * * * * * *
Sec. 707. Dismissal
(a) * * *
(b) After notice and a hearing, the court, on its own
motion or on a motion by the United States trustee, but not at
the request or suggestion of any party in interest, may dismiss
a case filed by an individual debtor under this chapter whose
debts are primarily consumer debts if it finds that the
granting of relief would be a substantial abuse of the
provisions of this chapter. There shall be a presumption in
favor of granting the relief requested by the debtor. 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)).
* * * * * * *
CHAPTER 13--ADJUSTMENT OF DEBTS OF AN INDIVIDUAL WITH REGULAR INCOME
* * * * * * *
SUBCHAPTER II--THE PLAN
* * * * * * *
Sec. 1325. Confirmation of plan
(a) * * *
(b)(1) * * *
(2) For purposes of this subsection, ``disposable income''
means income which is received by the debtor and which is not
reasonably necessary to be expended--
(A) for the maintenance or support of the debtor or
a dependent of the debtor, 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; and
* * * * * * *