table transfers, treated as incomplete for estate tax purposes, gain an entirely unintended tax advantage over outright gifts. To remove these unjustified and incongruous tax preferences, the Treasury Department recommends that, where a donor secures an income tax deduction for the transfer of an interest in property to a private foundation, the value of the property be excluded from the base upon which his estate tax marital deduction is computed.10 By placing contributions to donor-influenced foundations upon the same estate tax footing as those to foundations which the donor does not influence, such legislation would confine the tax reward for both classes of transfers to the income tax benefits which they were specifically intended to receive. Similarly, where the recipient charitable organization is a private foundation, it would eliminate the advantage which lifetime charitable transfers, framed to retain donor connection with the contributed asset, have over outright and unrestricted gifts. D. SANCTIONS FOR FAILURE TO FILE INFORMATION RETURNS To proceed with effective administration of the tax laws governing private foundations, the Internal Revenue Service must obtain completed copies of the annual information returns required of foundations. Unfortunately, not all foundations comply with the reporting rules prescribed by the Internal Revenue Code and the implementing regulations. While the Internal Revenue Service has taken what steps it can to cope with this problem-it has, among other things, undertaken the compilation of a master list of taxexempt organizations which will permit use of automatic data processing equipment to facilitate identification of the nonfilers-its efforts have been hampered by the absence of an effective sanction for noncompliance. Under present law, the willful failure to file any return required by law is a criminal offense. The penalty provided is imprisonment not exceeding 1 year and a fine not exceeding $10,000. This criminal penalty is the only sanction available in cases involving the failure to file foundation information returns. Plainly, its severity makes it inappropriate in most such cases. To overcome this defect of existing law, the Treasury Department recommends that private foundations which fail, without reasonable cause, to make timely and complete filing of a required information return be subjected to a penalty of $10 for each day of delay beyond the prescribed filing date. The penalty should be subject to a maximum limit of $5,000. A similar penalty, with a similar maximum limit, should be imposed upon officers, directors, or trustees responsible for filing private foundation returns if, after notice from the Internal Revenue Service of failure to make a complete and timely return, they omit (without reasonable cause) to remedy the defect within a specified reasonable time. Measured by the seriousness of the noncompliance in individual cases and sufficiently moderate to be appropriate in situations not warranting criminal treatment, these sanctions would afford the Internal Revenue Service considerable assistance in securing adherence to private foundation reporting requirements. 10 Commentators upon the problems of the present section have treated them in a context wider than that of private foundations. By restricting its recommendation to the area of the present Report, the Treasury Department intends no implication that such views are in error. APPENDIX A STATISTICAL APPENDIX This appendix presents statistical estimates of the operation of the charitable contribution provisions of present law. It also contains information on the growth, the present size, and operations of foundations. 1. Historical pattern of total contributions It is not easy to determine just what has been the effect of the tax provisions relating to charitable organizations. One would naturally look first at the size of the contribution deduction. This is summarized in table 1 for selected years. The difficulty of year-to-year comparisons from the data in table 1 is the differing coverage of income tax returns in various years. In the 1920's, tax returns covered a far smaller portion of the population than they did in the 1950's. Also, when the standard deduction was introduced or increased, many contributors stopped listing contributions. But with any given standard deduction a smaller portion of taxpayers use it, more itemize each year, and thus itemized contribution deductions go up more than contributions. Table 2 shows several long-term comparisons of the contributions of living individuals. So far as the tax-deductible contributions are concerned, the table shows the figures adjusted to include estimated contributions of nonfilers and of individuals using the standard deduction. These adjustments have been estimated by C. Harry Kahn for earlier years. The 1956 and 1962 adjustments were made following Kahn's technique. To provide conceptual correspondence with estimated contributions received by operating charities, the table also includes charitable bequests and corporate contributions. 1 C. Harry Kahn, "Personal Deductions in the Federal Income Tax," National Bureau of Economic Research, Princeton University Press, 1960. Kahn's technique on nonfilers involved applying to their estimated income the ratio of contributions to income of the low-income filers. The estimate of contributions by standard deduction takers was based on changes in reported contributions at times when the standard deduction was expanded. TABLE 1.-Amount of charitable deductions on tax returns of individuals, corporations, and estates, selected years 1 Estate tax deductions listed for the year in which the estate return was filed. Not available. Interpolated. Source: "Statistics of Income," except corporations before 1936 which are taken from "National Income," 1954 edition, Department of Commerce. TABLE 2.-Estimates of contributions to charity, derived from donor and recipient reports, in relation to adjusted gross income, selected years 1924-62 1 Not available. SOURCES Col. 1: 1924-50, "Personal Deductions in the Federal Income Tax," C. Harry Kahn, Col. 2: 1929-35, "National Income," 1954 edition, Department of Commerce, pp. 212- Col. 4: Includes principally an estimate of endowment income of foundations and of operating charities, i.e., income made available for charitable purposes. Col. 5: "Annual Report of the National Bureau of Economic Research," 1962, p. Col. 7: From "Giving U.S.A.," 1963 edition. Col. 8: This is adjusted gross income as reported on tax returns plus an estimate of unreported AGI including AGI of nonfilers. The other statistical difficulty involves the accuracy of contributions reported on tax returns. ("Statistics of Income for Individuals" includes unaudited data.) Several authorities in the field have attempted to estimate charitable contributions received by collecting this information from the charities. In some cases estimates have to be reconstructed from estimated expenditures of charitable organizations and changes in endowments. The most reliable of these estimates is a series prepared by Ralph Nelson from which preliminary figures have been published by the National Bureau of Economic Research. Table 2 shows that there has been some relative growth in contributions over time. The ratio of contributions of living individuals based on tax return data shows a growth from the 1920's to recent years from about 1.5 percent of adjusted gross income to about 2.5 percent, roughly an increase of two-thirds. The other series suggest much less growth. The recipient estimate for 1930 is conspicuously high and probably overstates the actual figure. The donor figure is inflated relative to AGI for 1930 because it includes bequests from persons whose deaths occurred (and whose wills were written) in the different atmosphere of the 1920's. Table 3 presents more detail on estate tax charitable deductions. Here the raw data show little trend because of two offsetting tendencies. By 1959-61, due to growing wealth levels, the United States reached the point where estate tax returns were filed with respect to about 32 percent of all decedents. The number of returns filed in the 1920's and 1930's covered on the average about 0.9 percent of the decedents. At the same time charitable bequests account for a significantly greater part of the estate for large estates compared to small estates. The broadening of the estate tax coverage brought in relatively more small estates where charitable bequests were less common, thus holding down the contribution ratio. TABLE 3.-Charitable bequests reported on estate tax returns |