The Tenth Circuit Court of Appeals has reversed a District Court and has held that the Bankruptcy Code permits a bankruptcy trustee to void the entire amount of a donor’s charitable contribution if it exceeds 15% of the donor’s gross annual income. It has reversed a District Court decision holding that the trustee could recover only the amount of the gift that exceeds 15%. (In re: McGough, Wadsworth v. The Word of Life Christian Center, 10th Cir., No. 12-1142,12/16/13.)
The debtors had made 25 contributions to the Word of Life Christian Center in 2008 totaling $3478 and seven contributions in 2009 totaling $1280. They had taxable income in those years of only $6800 and $7487 (plus social security). The trustee filed an adversary proceeding against the Center, claiming that the gifts had to be considered in the aggregate rather than individually and seeking to recover the entire amount. The District Court agreed that they should be considered in the aggregate, but held that Congress had intended to protect gifts up to 15% of income and allowed the trustee to recover only the excess. (See Nonprofit Issues®, 4/1/12.) In what it said was a case of first impression, the Court of Appeals held that the entire amount of the gifts could be recovered.
The statute provides that a charitable contribution shall not be avoidable by the trustee “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 … exceeded [15%] if the transfer was consistent with the practices of the debtor in making charitable contributions.”
The trustee argued that the language was clear and that the transfer was voidable if it did exceed the 15% amount. The Center cited legislative history of a House Report stating that the 15% safe harbor “is necessary to protect the tithing practices of certain religious faiths. It is intended to apply to transfers that a debtor makes on an aggregate basis during the … reachback period…. Thus, the safe harbor protects annual aggregate contributions up to 15 percent of the debtor’s gross annual income.” The Court reviewed the language of the statute and a 1999 case from a Louisiana bankruptcy court and concluded that “without language limiting the word ‘transfer’ to that portion of the transfer exceeding 15%, the entire transfer is avoidable.”
The Center argued that such an interpretation was absurd and that allowing the trustee to recover the entire contribution if it exceeded 15% would undercut the purpose of the provision. The Court recognized that the absurdity doctrine is an exception to the rule that the plain language controls, but did not agree that it would be absurd. Congress is free to enact any number of foolish statutes, it said, and it was not convinced that Congress had not intended the result it reached.
“We see no absurdity here. The statute establishes a bright-line rule — donations not exceeding 15% of GAI are protected; donations exceeding 15% are not. While the statute may place a burden on churches and other religious and charitable organizations which may be faced with potentially having to turn over donations they receive to a trustee, that burden exists even under the Center’s interpretation of the statute. Indeed, under the Center’s interpretation, the burden would be even more onerous — rather than set aside the entire amount of the donation for two years, the organization would potentially only have to set aside the portion of the donation exceeding 15% of the debtor’s GAI — a tedious and potentially impossible calculation for an organization to make.
“Nor does our interpretation of [the statute] undermine the purposes of [the statute]. It allows debtors to make donations to religious and charitable organizations up to 15% of their GAI and, to the extent the donations do not exceed that amount, they may be kept by the organization. If the Center is unhappy with the result in this case, its remedy lies with Congress, not this court.”
The Court went on to respond: “The key flaw in the Center’s absurdity argument, however, is it ignores the other protection built-in to [the statute] — even if the debtor’s contribution exceeds 15% of GAI, the entire amount is protected if it is consistent with his past charitable giving practices.”
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The Court’s opinion is tightly worded and defensible. But we agree with the Center that it does not reflect the intent of Congress to protect contributions “up to” 15% of a donor’s income. It doesn’t really make a lot of sense to let a trustee recover an entire donation because it exceeds by $1 a 15% number that could not be determined at the time the contribution was made. The intent was to protect the churches so that they would not lose their tithes. Giving up the amount that exceeded the 15% limit would be significantly less damaging to their budgets than losing everything the donor gave. The statute was not designed to force churches to retain donations for two years, as the Court suggests, before they could use them without fear of recapture.
It wouldn’t be the first time that Congress has passed a statute that did not exactly reflect its purpose, however. In the days before the present dysfunctionality, Congress would often pass a ”technical corrections” act to cure a problem. Such an accommodative spirit has not been seen very much recently, but since it is almost un-American to oppose churches, it might be possible to rewrite the law.