Monday, March 18, 2013
Our most current installment, courtesy of the Senate Democrats in their 2014 Budget Proposal:
The Senate Budget calls for deficit reduction of $975 billion to be achieved by eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations. It recognizes that the Finance Committee, which has jurisdiction over tax legislation, could generate this additional revenue through a variety of different methods.
One potential approach is an across‐the‐board limit on tax expenditures claimed by high‐income taxpayers (specifically, the top two percent of income earners). This could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one’s tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer’s income, or a specific dollar cap on the amount of allowable deductions. In assessing any such across‐the‐board limit, Congress should consider the extent to which each proposal would retain a marginal tax incentive to engage in the affected activities and investments.
Another potential approach by which Congress could increase tax fairness and reduce the deficit is by reforming the structure of particular tax expenditures. The Simpson‐Bowles illustrative tax reform plan, for example, proposed to convert certain itemized deductions into limited tax credits, which more equitably deliver tax benefits and, because only about one‐third of taxpayers itemize their deductions, are often better for targeting tax incentives at low‐income and middle class families. Reforms like these could also generate substantial new revenue for deficit reduction.
See Foundation for Growth: Restoring the Promise of American Opportunity, page 66 (emphasis added). As a reminder, the charitable deduction is an "itemized deduction." Therefore, the charitable deduction will be limited by any indiscriminate cap on itemized deductions, whether expressed as a percentage of income or a specific dollar cap. One could guess that the caution highlighted above in bold might have been aimed specifically at the chartiable deduction, although the mortgage interest deduction might lay a claim to such specific attention. The nonprofit sector may have the most about which to worry, as charitable contributions are voluntary and easy to eliminate out of one's personal budget, if a taxpayer choose not to spend above the allowable deduction cap.
Future installments to follow, no doubt.
Friday, February 22, 2013
When does improper campaign intervention become a crime? At the least, there has to be an instance of campaign intervention. But is that all? According to a federal information to which the defendent is set to plead guilty, the answer is "yes" surprisingly. A short but interesting story in yesterday's Wapo describes a federal information in which the crime is hard to find. The crime, acccording to the indictment, is that a nonprofit insider in DC used nonprofit money to fund an inauguration party and, in doing so, "interfered with the proper administration of the tax laws." The indictment states that the insider knowingly prepared fraudulent documents to obtain $110,000 to support a "political group" that was not an eligible recipient of the nonprofit's funds and, in doing so, criminally interfered with the operation of the Internal Revenue Laws. The criminal interference, according to the brief information stems from the allegation that the insider (1) requested her chief of staff to prepare a grant request for the money, but to list the recipient as someone other than the Young Democrats, the organization hosting the Inauguration party, out of fear that a political organization was an ineligible recipient, (2) knew at the time of the grant application that the nonprofit's accountants would prepare a 990, and (3) knew, at the time of the grant application, that the 990 would be incorrect because the actual [political] use of the funds would not have been disclosed. According to the report, the insider intends to plead guilty. I am just not so sure about the wisdom of doing so, unless there is a deal for some sort of diversion. It sounds like the U.S. Attorney is really stretching to find a criminal allegation in this case. First, the money was not going to be used to intervene in a campaign -- it was to be used for an inauguration party, the campaign having already been won. Second, the allegation is built on too many suppositions -- the insider filed the grant application knowing that a 990 would later be filed, the acountants or auditors would prepare a 990 presumably asking no questions about ambiguous expenditures, and then eventually the 990 would in fact be filed incorrectly. This seems a house of cards as far as criminal liability goes -- at least under the charge of interfering with the proper administration of the internal revenue laws. If it were to stand, it seems to me, nearly all improper campaign interventions ought to constitute a crime as opposed to a violation of the condition of tax exemption. The bottom cards are the least stable, by the way, since an inauguration party might not be a good use of charitable funds but hardly constitutes improper campaign intervention. Another rickety card in this house is the assumption that the Young Democrats are necessarily an improper recipient, of a charitable grant (even if the insider was concerned that they might be). What if they were conducting a voter registration drive or just . . . having a party to celebrate another successful violence-free political process? I just wonder if the poor defendant in this case has received decent tax advice or, instead just simply hired some top flight but no less tax exemption-insensitive litigators. There should be a motion to dismiss and, failing that, perhaps a trial, nevermind a guilty plea! But then again, nobody asked me.
Wednesday, February 13, 2013
The New York Times reports that in the wake of various measures deemed hostile to nonprofit groups working in Russia, Deputy Assistant Secretary of State Thomas Melia announced that the United States would no longer be part of a "civil society working group" created in 2009. The article reports the group, which the US and Russia created under the US-Russia Bilateral Presidential Commission, has not met in plenary session for many than a year. We have previously blogged about some of the actions that apparently contributed to the withdrawal, including requiring nonprofits receiving funding from outside of Russia to identify themsevles as foreign agents.
Monday, February 11, 2013
In its annual Revenue Procedure covering determiniation letters and rulings for tax-exempt organizations (Rev. Proc. 2013-9), the IRS made an interesting change this year relating to applications for recognition of exemption by most entities not required to file such applications. Here is the IRS' explanation of the change:
The provisions in section 11.01 regarding the effect of determination letters or rulings recognizing exempt status of organizations described in § 501(c), other than §§ 501(c)(3), (9), (17), and (29), have been revised. Prior to this year, and back to 1962, when such organizations applied for recognition, the IRS would usually recognize such organizations as tax-exempt from the date of formation, no matter how long the interval between the date of formation and the date of application. In addition to the practical difficulties of ascertaining an organization’s purposes and activities for this period, such recognition is now potentially inconsistent with the provisions of § 6033(j), which automatically revokes the exempt status of an organization that fails to file required Form 990 series returns or notices for three consecutive years. The new procedure adopts a practice similar to the rule for § 501(c)(3) organizations for these organizations, generally permitting recognition from the date of formation if the organization has always met the requirements for exemption, has applied within 27 months from the end of the month in which it was organized, and has not failed to file required Form 990 series returns or notices for three consecutive years.
The effect of this change is to encourage such entities to file their application for recognition of exemption (IRS Form 1024) within 27 months of formation or face the risk that the IRS will not grant such recognition retroactively and may seek to collect taxes owed for the period before the application is filed. This change therefore represents a possible tightening up of the rules relating to non-501(c)(3) tax-exempt organizations, although a relatively mild one.
IRS Exempt Organizations Division has issued the its annual report for Fiscal Year 2012 and its workplan for Fiscal Year 2013. Highlights include:
- Staffing declined slightly from FY2010 (900) to FY 2012 (876).
- Examinations also declined slightly during the same period from 11,449 returns to 10,743 returns (not including compliance checks).
- Disclosures from the IRS to the states remain limited, with only eight agencies in seven states apparently able to meet the disclosure eligibility requirements for such disclosures, although those eight agencies received approximately 27,000 disclosures (which includes 501(c)(3) exemption application approvals).
- Seventy percent of the approximately 60,000 applications were reviewed and closed within 120 days.
- Among its projects for FY2013 is sending a questionnaire to "self-declared" section 501(c)(4), (5), and (6) organizations that filed Form 990 in 2010 or 2011, presumably to determine to what extent there may be questions regarding their claimed tax-exempt status among these groups.
Monday, January 21, 2013
A number of news sources reported at the end of last week that President Obama was converting his campaign organization into a 501(c)(4) organization, "Organizing for Action." Apparently this has upset Mike Huckabee (who apparently had his own exempt PAC, as this article points out), but I'd note that that at least we have fair assurance that this new (c)(4) won't be a thinly-disguised campaign funding vehicle, since President Obama can't be re-elected. It also allows me to emphasize a point lost in most of the "(c)(4) and politics" discussion: (c)(4)'s can engage in essentially an unlimited amount of legislative lobbying, which the IRS views as a proper social welfare activity (see the IRS 2003 EO CPE text, available here), but in theory they cannot engage in an unlimited amount of candidate-for-public-office activity (unlike (c)(3) charities, which cannot engage in any candidate support activities, a (c)(4) can engage in some, as long as that is not their "primary purpose").
Still, I have become ever-more convinced that we should simply eliminate (c)(4) status from Section 501. Organizations that are truly supporting social welfare should be able to qualify as charitable organizations with some modest limits on their lobbying activity (add some educational functions, cut back a bit on lobbying, and you're probably there, since the IRS can't really enforce the "no substantial part" test under 501(c)(3) anyway). Everyone else either needs to admit they are a 527 political organization or go away.
Thursday, January 17, 2013
As reported by The Chronicle of Philanthropy and BNA Daily Tax Report, a recent Treasury Inspector General for Tax Administration report estimates that approximately 60% of of claimed noncash charitable contributions (e.g., cars, boats, artwork, real estate) are reported incorrectly with little to no IRS enforcement. The report further estimates that more than 273,000 taxpayers erroneously reported $3.8 billion in noncash contributions in taxable year 2010 (i.e., the proper paperwork and appraisals were not filed), resulting in potentially $1.1 billion in lost revenues to the federal government. The IRS disputes the amount of revenue loss.
One of the primary areas of concern centers on car/vehicle donations. Although taxpayers are generally allowed to deduct the fair market value of property donated to qualified charitable donees, there are further limitations on car donations. Specifically, a car donor must substantiate, and not deduct more than, the amount the charity received from selling the car for cash. The report concluded that the IRS is not effectively enforcing compliance with the reporting requirements for motor vehicle donations. Over 35,846 tax returns filed for 2011 claiming $77 million in charitable donations of cars failed to comply with reporting requirements.
Senator Charles Grassley (R-Iowa), who chaired the 2005 law changes requiring greater taxpayer substantiation of the value of donated items, criticized the Obama administration's push to raise taxes on higher-income taxpayers, while "giving a free pass to those claiming high-value deductions for donations of vehicles, art, or securities.”
Monday, January 14, 2013
In an article entitled "Charitable groups fear tax victory in 'fiscal cliff' deal will prove hollow," The Hill reports that, despite the preservation of the charitable contribution deduction in the recent American Taxpayer Relief Act of 2012, charitable organizations are still concerned about their future due to debt ceiling negotiations and other automatic spending cuts still to be addressed by Congress. The article discusses that charities should take heart in recent Tax Policy Center estimates that charitable giving will increase approximatley 1 percent in 2013 and the reenacted "Pease" limitation on itemized deductions should have "negligible effects on the tax incentive for charitable giving." Nevertheless, charities are concerned that the Obama Administration will continue to push for limits on deductions for wealthy taxpayers, thereby resulting in decreased charitable donations overall.
[See also, "Catholic Charities and Others Fretting over Tax Plight of the Wealthy" in Nonprofit Quarterly]
Saturday, December 29, 2012
Earlier this month, ProPublica announced that it had received a copy from the IRS of the Form 1024 (Application for Recognition of Exemption) for claimed 501(c)(4) Crossroads GPS in response to a public-records request. While ProPublica focused primarily on the apparent disconnect between the planned activities listed on the application and the actual activities of Crossroads GPS, it also acknowledged that the IRS released the application despite the fact it is still pending. While the IRS on discovering this apparent error warned ProPublica that publishing unauthorized returns or return information was a felony, ProPublica decided to proceed with its story after concluding that its actions were not covered by the relevant statute and also furthered strong First Amendment interests. The ProPublica story is part of a series on the activities of Crossroads GPS and other nonprofit organizations during the 2012 election, with the most recent story focusing on the role of such groups in the Montana U.S. Senate race.
While not yet reported publicly, I have reliable information that attorneys for several other, conservative nonprofit organizations with pending applications have been contacted by the IRS and informed that the IRS released those applications as well. If correct, their release indicates a serious breakdown in the IRS Exempt Organizations Division's procedures for keeping pending applications confidential. There is nothing at this point, however, to indicate that the release or releases here were anything but accidental, especially since the applications will be publicly disclosable if and when the applications are granted. This situation therefore appears to be different on that score from the earlier reported release of the always confidential Schedule B to the Form 990, involving the National Organization for Marriage.
UPDATE: ProPublica has now reported on the IRS applications of five other "conservative dark money groups", including providing links in the article to copies of the applications (with certain financial information redacted).
Thursday, December 27, 2012
The Treasury Department has released final and temporary regulations regarding the requirements to quality as a Type III ("operated in connection with") supporting organization. Changes from the proposed regulations include (1) adding back in the defined term "publicly supported organization," (2) clarifying which Form 990 such a supporting organization must provide to its supported organizations, (3) clarifying certain aspects of the requirements for being considered "functionally integrated," and, most significantly, (4) modifying the payout requirement for non-functionally integrated Type III supporting organizations to now require an annual distribution equal to the greater of 85% of adjusted net income or 3.5% of the fair market value of the supporting organization's non-exempt-use assets. The Treasury also stated it is still considering certain further changes, including providing a definition of "control" for purposes of the provision prohibiting the acceptance of gifts or contributions from a person who controls the governing body of a supporting organization, providing additional examples of how Type III supporting organizations can satisfy the responsiveness test, and whether program-related investments may count toward the payout requirement for non-functionally integrated Type III supporting organizations.
Last month Treasury released the Priority Guidance Plan for this fiscal year. Listed items for tax-exempt organizations are:
1. Revenue Procedures updating grantor and contributor reliance criteria under §§170 and 509.
2. Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check.
3. Regulations under §501(r) on requirement for community health needs assessments by charitable hospitals as added by §9007 of the ACA.
4. Final regulations under §§501(r) and 6033 on additional requirements for charitable hospitals as added by §9007 of the ACA. Proposed regulations were published on June 26, 2012.
5. Final regulations under §§509 and 4943 regarding the new requirements for supporting organizations (SOs) as added by §1241 of the Pension Protection Act of 2006. Proposed regulations were published on September 24, 2009.
6. Additional guidance on §509(a)(3) supporting organizations (SOs).
7. Additional guidance under §§4942 and 4945 regarding reliance standards for making equivalency determinations. PUBLISHED 09/24/12 in FR as REG-134974-12 (NPRM).
8. Final regulations under §4944 on program-related investments. Proposed regulations were published on April 19, 2012.
9. Regulations regarding the new excise taxes on donor advised funds and fund management under §4966 as added by §1231 of the Pension Protection Act of 2006.
10. Regulations under §6033 on group returns.
11. Revenue Procedure under §6033 to update and consolidate all non-regulatory exceptions from filing.
12. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
13. Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009.
Additional items that may be of interest to tax-exempt organizations include:
- Final regulations under §170 regarding charitable contributions. Proposed regulations were published on August 7, 2008.
- Notice under §170 regarding charitable contributions to disregarded entities. PUBLISHED 08/27/12 in IRB 2012-35 as NOT. 2012-52 (RELEASED 07/31/12).
- Guidance concerning adjustments to sample charitable remainder trust forms under § 664.
- Regulations under §1014 regarding uniform basis of charitable remainder trusts.
Friday, December 14, 2012
As reported by the Dayton Daily News, the Internal Revenue Service determined that a nonprofit organization affiliated with the Tea Party, Ohio Liberty Council, is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. In a statement issued by the organization, its president opined that “our victory today will pave the way for other liberty groups around the nation to replicate our success’’
Meanwhile, as reported by the Washington Post, Crossroads GPS, the nonprofit organization formed by Karl Rove, is similarly seeking a 501(c)(4) tax-exempt status based on its primary activity of "public education."
[Hat tip on Ohio Liberty Council: Tax Prof Blog]
Thursday, December 13, 2012
The Fiscal Cliff is topping the headlines these days. A part of that discussion involves potentially severe reductions in certain deductions, like the charitable contributions deduction, in order to eliminate or minimize rate increases. At the front of the debate is the White House, two Presidential advisors of which recently posted a blog entry entitled "Why Taking Tax Rates Off the Table Threatens Non-Profits and Charitable Giving." Here is a small abstract from that blog entry:
But what is clear is that proposals that take tax rates off the table would threaten donations to universities, non-profit hospitals, social services providers, arts and cultural institutions and other nonprofit organizations. This is because – to make the math work – these proposals rely on hundreds of billions of dollars of revenue that would result from drastically cutting or eliminating the charitable deduction as we now know it.
Currently, the tax code encourages gifts to charity by allowing taxpayers to claim itemized deductions for charitable giving. But – as a new report by the National Economic Council (NEC) shows, the most prominent dollar cap proposals would effectively eliminate the charitable deduction for up to 13 million households and for as much as 60 percent of currently deductible giving.
Using Congressional Budget Office assumptions, the NEC estimates that a $50,000 cap would reduce charitable giving by about $150 billion over 10 years, while a $25,000 cap would reduce giving by about $200 billion. Even a $25,000 cap that applied only to high-income households would reduce giving by at least $10 billion per year. As the report discusses, a cap could impact nonprofit organizations in every sector and in every state.
In a recent article in the Tulsa World, the newspaper reported that last week approximately 225 nonprofit representatives travelled to Washington "warning elected officials that tampering with the charitable tax deduction would limit or even eliminate their ability to serve those in need." A similar article was published by The Oregonian, titled "Oregon charities give good reasons for dodging fiscal cliff."
As reported by the Chronicle of Philanthropy, the Independent Sector published a 2-page advertisement in Politico, directed to President Obama and Congress and President Obama, entitled “Don’t push charities over the fiscal cliff.” Another large nonprofit association, the American Hospital Association, sent a letter to Senate Majority Leader Harry Reid urging him to preserve the charitable contributions deduction.
The Wall Street Journal reported that the lingering uncertainty around the negotiations between President Obama and Congress is resulting in donors making contributions to "charitable-gift funds" (i.e., donor-advised funds) prior to the end of the year, allowing them to take a deduction in 2012 but delay giving decisions until a later time. Specifically, fear surrounding Congress's potential cuts or caps on charitable contributions for 2013 is leading to urgency to take advantage of deductions under current law.
Monday, November 26, 2012
According to this story from Lancaster Online, last May the IRS denied tax-exempt status to two joint ventures run by Lancaster General Hospital in Lancaster, PA. One of the joint ventures was a 50-50 deal with a for-profit company to run a rehabilitation center; the other was a 50-50 deal with doctors to run an ambulatory surgery center. According to the story, the IRS denied exemption because the 50-50 arrangement did not give Lancaster General (a tax-exempt 501(c)(3) charity) sufficient control over the joint ventures to assure they were run in a charitable manner.
This result indicates that the IRS's "control" test for determining charitable status of joint venture operations between a charity and a for-profit enterprise is still alive and well. The control test first surfaced in the "whole hospital joint venture" ruling, Rev. Rul. 98-15, and then was relaxed somewhat in the "ancillary" joint venture ruling, Rev. Rul. 2004-51. In that latter ruling, which would seem to govern the kinds of transactions involving Lancaster General, the IRS approved a 50-50 ownership arrangement, where the charity (a university in this case) had absolute control over the way in which the substantive services (educational distance learning) were delivered - (e.g., approval of the curriculum, training materials and instructors). After Rev. Rul. 2004-51, the control test sort of disappeared from view as practitioners learned to draft deals around the requirements. But the Lancaster General story indicates that it is still very much alive and enforced by the IRS.
I've frankly never understood why the IRS presses a "control" requirement in the context of ancillary joint ventures. "Ancillary" joint ventures by their nature are simply business deals done by a charity. The question involved in these cases should ONLY be whether the deal is a fair one to the charity (to avoid issues of private inurement and private benefit); if so, then the joint venture interest should be treated like any other commercial activity: that is, subject to the unrelated business income tax if indeed the venture's business is "unrelated" (in many cases, I would suggest that joint ventures entered into by hospitals to expand health services in fact are "related," but that's another story). It is very odd to me that an exempt hospital or exempt university could open a BMW dealership with no ill effects on exemption other than having to pay the UBIT. And a direct investment in a business corporation via stock doesn't create any exemption issues at all, not even UBIT issues. But a business investment done as a joint venture suddenly causes us to break out in hives . . . In my opinion, very odd, and not well-justified by any underlying theory applicable to exempt status.
Tuesday, November 13, 2012
As it did with 9/11 and Katrina, the IRS has issued Notice 2012-69 granting favorable treatment to certain vacation/leave donation programs run by employers. In summary, it appears that an employee may release vacation or similar leave back to the employer. In return, the employer makes a cash donation to charity. Under the Notice, the payments from the employer must be made to Section 170(c) organizations "for the relief of victims of Hurrican Sandy" and must be made before January 1, 2014. (The Sandy Notice is almost exactly the same as the Katrina Notice and the revised 9/11 Notice).
If a program is structured appropriately, then the IRS will not treat the payments as income to the employee or take the position that the employee was in constructive receipt of funds. Of course, that means the employee cannot take a Section 170 deduction for the donation, since the value of the leave time will be fully excluded from his or her income - allowing the deduction would be double counting!
Interestingly, the Notice indicates that the the IRS "will not assert that an employer will only be permitted to deduct these cash payments" under Section 170 rather than Section 162. Thus, it appears that the employer may fully deduct the value of any foregone leave, even if Section 170's limitations might otherwise disallow part of the deduction.
I'm curious why the benefit to the employer - I'm also curious as to why there is no requirement that the value given to charity be somehow equal to the value of the leave surrendered. It seems like a potential "win-win-win" for employers. They get employees to release their vacation time, potentially for less than a cash out would be worth, and they get to take a deduction for it, without regard to Section 170 limits - as if it were still compensation paid under Section 162. Wondering outloud, it appears from the language of the Notice that an employer could get a full charitable contribution for other donations, and then take these donations on top. And they get the good PR to boot. That seems like a really good deal! (Don't get me wrong - I think such a program, and anything else that gets funds to our friends on the East Coast, is a good thing).
Finally, I wonder what an employer would have to do to demonstrate that the recipient charity is "for the relief of victims of Hurricane Sandy." If one gave a grant to the Red Cross for general operating expenses (or with a partial allocation to general operating expenses), would that be sufficent?
Okay - I'm not done wondering outloud quite yet. It seems like it is well within bounds of authority for the IRS to act on the assignment of income issue - after all, that's a pretty mushy, facts-and- circumstancy-type test. But what about the Section 162/170 determination? (I know,I know... say thank you, IRS.. and move along. Nothing to see here!)
Monday, November 12, 2012
With h/t to our friends at the TaxProf Blog:
Preservation Easements in an Uncertain Regulatory Future
Jess R. Phelps (Historic New England), Preserving Preservation Easements?: Preservation Easements in an Uncertain Regulatory Future, 91 Neb. L. Rev. 121 (2012):
While federal tax deductions are an important tool for organizations operating easement programs, recent IRS enforcement activity has called the future of this incentive into question--at least as currently constituted. Even if these incentives continue, the presence of continued regulatory uncertainty will make federally subsidized easements less viable unless enforcement activity decreases or easement-holding organizations begin to change how they protect privately-owned homes. However, these challenges provide easement-holding organizations a chance to step back and evaluate their accomplishments of the past thirty years. Many significant structures have been protected, but preservation easements lag far behind in numbers, impact, and public awareness when compared to land conservation efforts. The public has yet to fully “buy in” to the concept of preservation easements and are suspicious of efforts to provide funds to protect private residences.
For this perception to change, easement-holding organizations need to fundamentally re-evaluate the role they play within the preservation movement and determine whether a larger role is possible. There are a variety of ways that easement-holding organizations can shift their thinking and practices to expand the benefit provided through their programs. Similarly, there are clear alternatives to securing the preservation of significant historic resources via reliance on the federal tax incentives. In the end, the efforts of easement-holding organizations to respond to these challenges and reimagine the possibilities of preservation easements will go a long way toward fulfilling SPNEA's original vision of obtaining control of the most significant historic properties and “let[ting] them to tenants under wise restrictions.” Perhaps more importantly, these efforts can also expand upon this vision to protect the underlying stories and preserve a more meaningful spectrum of our collective architectural heritage.
Last month the IRS released information about the questionnaire that it is sending to more than 2,000 randomly selected central organizations to complete. The stated purpose of the questionnaire is "[t]o help us better understand the relationship between central or parent organizations of group rulings and their subordinates, and learn how they satisfy their exemption and filing requirements." These inquiries reflect the apparently continuing IRS concerns regarding groups rulings, as reflected in the IRS Advisory Committee on Tax Exempt and Government Entitites report relating to such rulings, issued in 2011.
Thursday, November 8, 2012
With the 2012 election (mostly) behind us, and the fiscal cliff and growing federal government debt in front of us, it is an appropriate time to consider possible changes to the charitable contribution deduction.
Cap on Value of Itemized Deductions: As we have previously noted, the Obama administration has repeatedly called for a cap on itemized deductions, including the charitable contributiond deduction, by limiting the benefit from such deductions to 28%. This would mean that taxpayers with a higher marginal rate than 28% would not avoid completely the otherwise owed federal income tax on the income offset by the deduction. Not surprisingly, leading charitable organizations, including Independent Sector, have come out in opposition to this proposal. For an analysis of this proposal, see the 2010 Congressional Research Service report on it.
Replace Deduction with a Non-Refundable Tax Credit: The National Commission on Fiscal Responsiblity and Reform, more commonly known as the Simpson-Bowles Commission, proposed replacing the charitable contribution deduction with a 12 percent non-refundable tax credit for charitable contributions that exceed 2 percent of adjusted gross income in the Commission's final report (page 31). With Erskine Bowles being mentioned as a possible candidate for Secretary of the Treeasury if and when current Secretary Tim Geithner steps down, the Commission's recommendations may very well still be in play despite the lack of initial enthusiam for them from either the Obama Administration or Congress.
Other Revenue-Saving Modifications: As the agenda for the recent NYU National Center on Philanthropy and the Law Conference illustrates, there are numerous, less dramatic ways that the charitable contribution deduction could be modified, many of which could result in significant revenue savings for the federal government. The most recent Joint Committee on Taxation tax expenditures report states that cost of the deduction over the 2011 thru 2015 fiscal years is $242.6 billion (see pages 40 and 42), so even a relatively small change could potentially generate a not insubstantial amount of additional federal income tax. For additional resources regarding possible changes, see the Urban Institute's Tax Policy and Charities website, and especially the report titled Evaluating the Charitable Deduction and Proposed Reforms by Roger Colinvaux, Brian Galle, and C. Eugene Steuerle.
Tuesday, November 6, 2012
With today's election, the perennial issue of church political involvement has once again gained prominence. What is new is the since-repudiated statement of an IRS official confirming what many have long suspected - that the still pending regulations on who exactly within the IRS can sign off on a church tax inquiry have left such inquiries in limbo. As reported by the AP and republished at the Huffington Post, and also previously reported by Christianity Today, a manager in the IRS Mid-Atlantic region said such inquiries had been suspended pending these regulations, but an IRS spokesman quickly said the manager "misspoke", although the spokesman refused to provide any more details about the status of such inquiries. Both an academic and a practitioner quoted in the AP story said they were not aware of any church tax inquiries over the past three years. This is apparently the case even with the increasingly popularity of Pulpit Freedom Sunday, as the press has noticed (see, for example, coverage by NBC News and The Nonprofit Quarterly).
There is also an interesting lack of activity on the side of those seeking to challenging the limits on church political activity, not with respect to such activity itself but instead with respect to forcing the IRS into court. While a church that allegedly violates the prohibition on political campaign intervention cannot force the IRS to launch a church tax inquiry, such a church that has not yet applied for tax-exempt status could file such an application, fully disclose its actual or planned political activity, and then wait to see what the IRS does. If the IRS grants the application that would give a green light for such activity. If the IRS denies the application or refuses to rule on it for 270 days, the church could file a declaratory judgment action seeking a declaration that it qualifies for exemption, thereby forcing the IRS to litigate the validity of the prohibition assuming the church otherwise qualifies for exemption under Internal Revenue Code section 501(c)(3). It is not clear why the the Alliance Defending Freedom (previously named the Alliance Defense Fund), which has brought us Pulpit Freedom Sunday, or other groups that assert they are seeking to challenging the prohibition have not pursued this route in order to bring this issue to a head.