A Lay Word for a Legal Term: How the Popular Definition of Charity has Muddled the Perception of the Charitable Deduction

Paul J. Valentine, New York University School of Law

Abstract

In the United States there is a deeply held conviction “that taxpayers who donate to charity should generally not be subject to the same income tax liability as similarly situated taxpayers.” This innate sense about the Internal Revenue Code’s section 170, otherwise known as the charitable deduction, resonates with the Americans’ sense of fairness and creates strong barriers to curtailing its function.

This same sense of fairness is tied to the perceived effects of the charitable deduction. Yet, how “charitable” is the charitable deduction and how charitable do we expect it to be? This paper argues that the discrepancy between the popular meaning of the word “charitable” and the legal meaning has distorted both the perception of, and the political justifications for, the provision.

This definitional discrepancy is perhaps not immediately apparent, because often the legal and layperson’s definition of the same word are the same. However, on occasion, the legal and popular definitions vary. One such example is the difference between the tax code’s and layperson’s definition of the word “charitable.” The laypersons’ definition is simple; the Merriam-Webster dictionary defines charity as “generosity and helpfulness especially toward the needy or suffering.” The legal definition is not quite as succinct. The Treasury regulations define charitable as:

[r]elief of poor and distressed or of the underprivileged; advancement of religion; advancement of education or science, erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Governments and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency. Thus, although the legal definition does cover direct relief of the poor, it also has a much wider mandate including advancing religion, science and education, constructing public buildings, lessening neighborhood tensions and other public benefit purposes. These types of causes may provide a service to society, but are neither charitable under the popular meaning of the word nor would most individuals consider organizations that provide such services a charity.

This broad legal definition of “charitable” has created a misperception of where the benefits of the charitable deduction is allocated in the American psyche. The very use of the word “charitable” in the statutory language creates a powerful association in most non-lawyers that ties the deduction to churches and poverty relief organizations, when in reality this is only a small portion of the tax subsidy. Further, the emotive rhetoric used by politicians when attacking proposed amendments curtailing the charitable deduction is grossly out-of-sync with the primary beneficiaries of the provision.

This paper argues that that the definitional gap between the legal and lay definition of “charitable” impedes meaningful discussion of amendments to the charitable deduction. This has led to mistaken or underestimated assumptions about the allocation of the subsidy. In fact, as demonstrated by the calculations in this paper, only about 8% of the charitable deduction is apportioned to direct relief of poverty organizations.

A clearer understanding of where the § 170 subsidy is allocated would allow politicians and the public to more critically examine this tax expenditure. However, very little about § 170 is clear, from theoretical justifications, to the reasoning for the provision when it was codified. In light of this confusion, the Article proposes that Congress should rename § 170 to the “qualified donation deduction” - a term that would not create the same poverty relief associations as the charitable deduction misnomer.