by In a sharply circumscribed opinion, the Tenth Circuit found that the trustee could avoid in their entirety charitable contributions in excess of 15% of the debtors’ gross annual income. Wadsworth v. The Word of Life Christian Center (In re McGough), No. 12-1142 (Dec. 16, 2013). Section 548(a) allows a trustee to avoid a transfer made within two years of bankruptcy by an insolvent debtor for which the debtor received less than the reasonably equivalent value in exchange. Notwithstanding this provision, section 548(a)(2) permits a debtor to make charitable contributions of up to 15% of his gross annual income (GAI) or, if the contribution exceeds that amount, permits contributions that are “consistent with the practices of the debtor in making charitable contributions.”
The BAP found that the recipient of the debtors’ charitable contributions (the Center) need only turn over the portion of the contribution that exceeded the 15% limit. 467 B.R. 220 (B.A.P. 10th Cir. 2012). The Tenth Circuit reversed.
The circuit court agreed with the trustee that the plain language of section 548(a)(2) carves out an exception for charitable contributions only where specified requirements, including the limitation on amount, are met. The exception does not apply at all to contributions in excess of the permitted amount. Under this reasoning, the circuit court found that the entire contribution, rather than just the amount in excess of 15%, was avoidable.
In light of its finding that the language of the statute was clear, the court did not consider the Center’s legislative history argument based on House Report No. 105-566 which states:
The 15 percent 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 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.
1998 WL 285820, at *9 (1998)
It is important to note that several significant issues were specifically not before the court. (The Bankruptcy court addressed whether 1) Social Security Income should be considered when calculating GA; 2) whether charitable contributions should be considered in their aggregate; and 3) whether only the excess of 15% is recoverable).
First, even though the issue was argued at the bankruptcy court level, the Center did not argue on appeal that the debtors’ social security income should be considered when determining their total GAI. See Wolkowitz v. Breath of Life Seventh Day Adventist Church (In re Lewis), 401 B.R. 431 (Bankr. C.D. Cal. 2009) (GAI should be determined according to IRC definition); Stanziale v. American Friends of Yechave Daat. (In re Dwek), No. 07-11757 (Bankr. N.J. Sept. 17, 2009) (GAI is “total income without regard to any deductions or expenses). Had that income been included, the charitable contributions would not have exceeded the 15% limit.
The court noted that it was not presented with arguments either that the debtors’ charitable contribution in excess of 15% was consistent with the debtors’ practices as permitted by the statutory language creating an exception to the 15% rule, or that the debtors were not insolvent at the time of the contributions.
The charity also did not appeal the lower court’s finding that individual contributions for the year should be considered in the aggregate rather than individually.
Finally, the court refused to consider the argument set forth by amicus, Alliance Defending Freedom, that requiring a religious organization to turn over the entire amount of a contribution rather than only the amount exceeding 15% of the debtors’ gross annual income violates the Religious Freedom Restoration Act, 42 U.S.C. § 2000bb et seq. because the issue was not raised by the appellant.