[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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \34\ 11 U.S.C. Sec. 546.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \38\ 42 U.S.C. Sec. 2000bb.
---------------------------------------------------------------------------

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

           *       *       *       *       *       *       *


                                 
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