Boise State University ScholarWorks Accountancy Faculty Publications and Department of Accountancy Presentations 1-1-2014 Assignment of Income at the Ivory Tower: Relaxing the Tax Treatment of Services Donated to Charities by Their mploE yees Mark J. Cowan Boise State University This document was originally published by National Association of College and University Attorneys in Journal of College and University Law. Copyright restrictions may apply. Draft at June 13, 2013 Forthcoming 40 Journal of College and University Law (2013) ASSIGNMENT OF INCOME AT THE IVORY TOWER: RELAXING THE TAX TREATMENT OF SERVICES DONATED TO CHARITIES BY THEIR EMPLOYEES * Mark J. Cowan ABSTRACT When a faculty member donates time to a college or university by, for example, teaching a summer course for no compensation, the federal income tax treatment of the donation can take one of two forms. One possibility is that the donation will have no tax consequences. The faculty member realizes no income from the donation and gets no charitable deduction. A second possibility is that the faculty member will be required to recognize taxable income equal to the value of the services provided and then may (subject to certain limits) be allowed a charitable contribution deduction. In many cases, the income and deduction do not fully offset, resulting in negative tax consequences for the faculty member. This second possibility occurs when the faculty member directs where the funds saved by the donation are used within the institution. Since faculty members normally would prefer to control the specific use of the saved funds, many donations would result in negative tax consequences sufficient to stifle the donation in the first place. This Article argues that the tax law should be clarified and relaxed to allow faculty members (and other employees of charitable organizations) to donate time to their employer institutions on a tax-free basis in more situations than is currently the case. Alternatively, the Article suggests ways for charities to encourage donations of time by employees, even in the absence of a favorable law change. * Professor of Accountancy, Boise State University. I thank the Langroise Faculty Scholarship Endowment at Boise State University for its support of this project. I also thank the anonymous reviewers at the Journal of College and University Law for their helpful comments. TABLE OF CONTENTS I. INTRODUCTION..................................................................................................... 4 A. Illustrating the Problem: The Tax Education of Professor Flinty................ 4 B. The Problem of Donated Services ..................................................................... 7 II. CHARITABLE CONTRIBUTIONS IN GENERAL ............................................ 9 III. THE CURRENT TAX TREATMENT OF DONATED SERVICES.............. 17 A. First Possibility: No Income/No Deduction ................................................... 17 B. Second Possibility: Imputed Income/Deduction ............................................ 21 1. Assignment in the Employment Context: Old Colony Trust ............................ 25 2. Assignment in the Gratuitous Context: Earl and Corliss ................................. 28 3. Assignment in the Charitable Context: The Controversy over Eleanor Roosevelt’s Radio Broadcasts .................................................................................. 30 4. Assignment in the Charitable Context: Giannini and Hedrick’s Interpretation of Giannini ............................................................................................................... 32 5. Assignment in the Charitable Context: Regulations and Rulings ................... 34 C. Current Practice In Higher Education........................................................... 37 D. Justification for Current Rules: Control and Horizontal Equity ............... 41 E. Illustrating the Difference Between No Income/No Deduction and Imputed Income/Deduction—The “Wash Preventers” .......................................................... 47 1. Taxpayers Need to Itemize to Claim a Deduction .............................................. 48 2. Charitable Contribution Ceilings Based on Adjusted Gross Income ............... 49 3. The General Problem of Increases in AGI ........................................................ 51 4. The “Pease” Limits on Itemized Deductions ..................................................... 53 5. Payroll Taxes ....................................................................................................... 54 6. A Possible Wash Preventer on the Horizon ....................................................... 55 IV. THE CASE FOR RELAXING THE RULES .................................................... 56 A. Numerical Examples ........................................................................................ 56 B. Encouraging Volunteerism at Colleges, Universities, and Other Complex Charities ....................................................................................................................... 61 C. Horizontal Equity Issues .................................................................................. 66 D. Precedents—Other Examples of Relaxed Donation Rules ........................... 68 1. Donation of Leave Time ..................................................................................... 68 2. Employer Matching Contributions ..................................................................... 70 3. Donation of Certain Prizes and Awards ............................................................ 71 4. Charitable Distributions from Individual Retirement Accounts ....................... 73 5. Income Earned by Members of Religious Orders Who Took a Vow of Poverty ................................................................................................................................... 75 E. Other Relaxation Proposals ............................................................................ 76 1. Donation of Unused Healthcare Flexible Spending Accounts ......................... 77 2. Exclusion for Donated Lottery Winnings .......................................................... 78 V. RELAXATION POSSIBILITIES AND THEIR BENEFITS AND COSTS ..... 80 A. Relaxation Possibilities .................................................................................... 81 1. Deep Relaxation: Turn Off the Assignment of Income Doctrine .................... 81 2. Gentle Relaxation: Partial Turn Off of the Assignment of Income Doctrine .. 83 2 Assignment of Income at the Ivory Tower 3. Weak Relaxation: Waiving the AGI Limits ....................................................... 85 B. Benefits of Relaxation ...................................................................................... 86 C. Problems with Relaxation ................................................................................ 88 VI. SELF-HELP MEASURES .................................................................................. 95 A. The Gross-Up Alternative ............................................................................... 95 B. Changing Salary Savings Policies ................................................................. 101 VII. CONCLUSION .................................................................................................. 102 3 “University professors never think of themselves as employees; they think of themselves as the heart of the place, as the texture of the place, as the essence of the place. And they are right.”1 I. INTRODUCTION The tax law stifles attempts by employees of charities to do volunteer work for their employers. The problem is manifest, for example, when a professor wants to contribute to his or her university employer by teaching a class for no compensation. This Article analyzes the problem of donated services by employees of charities (particularly in the context of colleges and universities), suggests reforms to remove the tax barriers to donating time, and recommends measures charities can take to ameliorate the tax impediments to employee volunteerism. A. Illustrating the Problem: The Tax Education of Professor Flinty Professors Flinty and Clement were as different as they were inseparable. For 34 years, Flinty and Clement taught accounting at Metro-State University—a quality, but perpetually underfunded, regional institution. “Hard Case” Flinty had a stern reputation for rigor. “Easy A” Clement was known for his jovial nature. Both were excellent teachers revered by generations of students. Together, they battled countless committee assignments, fought to keep the sparse budget from being diverted from traditional disciplines (like accounting, marketing, and the arts and sciences) to “new age” programs and centers, graded thousands of exams, consulted on troubled students, co-authored 22 peer-reviewed articles (three of which were actually worthwhile), dodged dozens of 1 A. BARTLETT GIAMATTI, A FREE AND ORDERED SPACE: THE REAL WORLD OF THE UNIVERSITY 43 (1989), reprinted in ROBERT BIRNBAUM, SPEAKING OF HIGHER EDUCATION: THE ACADEMIC’S BOOK OF QUOTATIONS 218 (2004). 4 Assignment of Income at the Ivory Tower pushy textbook salesmen, hiked in 32 national parks (30 of which were actually worthwhile), attended 176 home football games, and pondered and debated the great accounting questions of the day. Their relationship ended with Clement’s sudden death on a spring day at age 62. Flinty, nearing retirement and devastated over