Nonprofit Law Prof Blog

Senators Propose Amendment to Private Foundation Audit Fee Tax

Below is the sum and substance of a proposal (S 676) to reduce the net investment income tax from 2% to 1.32%:

Mr. SCHUMER (for himself, Ms. STABENOW, and Mr. LEVIN) introduced the following bill; which was read twice and referred to the Committee on Finance

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A BILL

To amend the Internal Revenue Code of 1986 to modify the tax rate for excise tax on investment income of private foundations.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. MODIFICATION OF THE TAX RATE FOR THE EXCISE TAX ON INVESTMENT INCOME OF PRIVATE FOUNDATIONS.

(a) In General- Subsection (a) of section 4940 of the Internal Revenue Code of 1986 is amended by striking `2 percent' and inserting `1.32 percent'.

(b) Elimination of Reduced Tax Where Foundation Meets Certain Distribution Requirements- Section 4940 of the Internal Revenue Code of 1986 is amended by striking subsection (e).

(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

Senators Levin (D. Mich) and Schumer (D. NY) proposed the bill as a remedy to a perverse effect described in their press release:

Private foundations are generally exempt from federal income tax; however, they are required to pay a 2 percent excise tax on their net income in order to cover the costs of the IRS’s oversight of exempt organizations. Under current law, that excise tax is reduced to 1 percent in any year in which the foundation’s charitable donations exceed the average charitable giving of that foundation in the previous five years. While on its face, this appears to be an incentive to give more (i.e. if the foundation gives more than its average, its tax rate is cut in half), the two-tiered tax actually has the opposite effect. The current tax creates an incentive to never dramatically increase giving in any one year because the increase raises the average donation calculation going forward.
 
For instance, consider a foundation that distributes $100,000 in donations in year one. In order to qualify for the lower 1 percent tax rate the following years, the foundation gives $101,000 only slightly more than the average, for the next four years. Over the course of five years, the organization minimizes their tax burden by keeping their contributions close to – but slightly above – the organization’s average giving.
 
 
I could be mistaken, but I am pretty sure the proposal is based on a law review article written a few years back.  Unfortunately, I can seem to find the article right now to give credit where credit is due.
 
dkj