March 20, 2013
Keep those driving logs up-to-date!
From The Chronicle of Philanthropy comes a report on the Charitable Driving Tax Relief Act, filed in the House of Representatives last month. According to the report, the bill would increase the charitable volunteer per mile deduction rate of 14 cents per mile up to the rate for employee reimbursements, which is currently 56.5 cents per mile. The IRS' latest on standard mileage rates can be found here.
Accordingly to Thomas.gov, the bill is H.R. 1212, although the text of the legislation is not yet upload. I will keep checking back and provide a link when it is available.
March 18, 2013
Charitable Deduction Under Fire (Part 78)
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.
February 15, 2013
Ways & Means Hearing Testimony and Video Available
You can now access the opening statement by Chairman Dave Camp and the uploaded testimony of the 40 or so witnesses on the Committee on Ways and Means Committee website. Video of the testimony is available on UStream in two, two-hour recordings. An initial press report from Reuters indicates that the charity leaders who testified were united in their support for preserving the existing tax incentives for charitable giving. While I have not had the opportunity to review all of the testimony, the witnesses who most supported modifying the deduction in a way that would reduce some tax benefits from charitable giving in the interest of making the deduction a more effective tool for encouraging such giving appear to have been Roger Colinvaux (Catholic University) and Gene Steuerle (Urban Institute).
February 14, 2013
Today's Ways & Means Committee Hearing on Charitable Contributions
As I type this post, the House Ways and Means Committee has begun its hearing on Tax Reform and Charitable Contributions. Here is the (long) list of scheduled witnesses:
Mr. Eugene Steuerle, Fellow and Richard B. Fisher Chair, The Urban Institute, Washington, DC.
Mr. Kevin Murphy, President, the Council on Foundations, Arlington, VA.
Mr. David Wills, President, National Christian Foundation, Alpharetta, GA.
Mr. Brian Gallagher, President & CEO, United Way Worldwide, Alexandria, VA.
Mr. Roger Colinvaux, Professor, Catholic University DC Law School, Washington, DC.
Mr. Eugene Tempel, Dean of the Indiana University School of Philanthropy, Indianapolis, IN.
Ms. Jan Masaoka, CEO, California Association of Nonprofits, Sacramento, CA.
Mr. Mark Huddleston, President, University of New Hampshire, on behalf of the American Council on Education, Durham, NH.
Mr. Conrad Teitell, Chairman, Charitable Planning Group, on behalf of the American Council of Gift Annuities, Stanford, CT.
Mr. Jake Schrum, President, Southwestern University, on behalf of the Council for Advancement and Support of Education, Georgetown, TX.
Ms. Diana Aviv, President & CEO, Independent Sector, Washington, DC.
Mr. Vinsen Faris, Chairman of the Board of Directors, Meals on Wheels, Washington, DC.
Mr. Bill Rieth, President & CEO, United Way of Elkhart County, Elkhart, IN.
Ms. Jill Michal, President & CEO, United Way of Greater Philadelphia and Southern New Jersey, Philadelphia, PA.
Ms. Pamela King Sams, Executive Vice President for Development, Children’s National Medical Center, Washington, DC.
Ms. Nicole Busby, Executive Director, the National Association of Free and Charitable Clinics, Alexandria, VA.
Mr. Rand Wentworth, President, Land Trust Alliance, Washington, DC.
Ms. Kim Morgan, CEO, United Way of Western Connecticut, Danbury, CT.
Mr. Terry Mazany, President & CEO, The Chicago Community Trust, Chicago, IL.
Mr. Brent E. Christopher, President & CEO, Communities Foundation of Texas, Dallas, TX.
Ms. Leslie Osche, Executive Director, United Way of Butler County, Butler, PA.
Mr. William Daroff, Vice President for Public Policy, Jewish Federations of North America, Washington, DC.
Ms. Ruth Thomas, Vice President of Finance and Administration, SAT-7, Easton, MD.
Mr. John Ashmen, President, American Gospel Rescue Missions, Colorado Springs, CO.
Mr. John Berry, CEO & Executive Director, Society of St. Vincent de Paul Georgia, Atlanta, GA.
Mr. Larry Minnix, President & CEO, Leading Age, Washington, DC.
Mr. Scott Ferguson, President & CEO, United Way of Chattahoochee Valley, Columbus, GA.
Ms. LaKisha Bryant, CEO, United Way of Southwest Georgia, Albany, GA.
Mr. Mike King, President & CEO, Volunteers of America, Alexandria, VA.
Ms. Jimalita Tillman, Executive Director, Harold Washington Cultural Center, Chicago, IL.
Mr. Tim Delaney, President, National Council of Nonprofits, Washington, DC.
Mr. Bill Kitson, President & CEO, United Way of Greater Cleveland, Cleveland, OH.
Ms. Naomi Adler, President & CEO, United Way of Westchester and Putnam, White Planes, NY.
Ms. Cynthia Gordineer, President & CEO, United Way of Forsyth County, Winston-Salem, NC.
Ms. Karen Rathke, President & CEO, Heartland United Way, Grand Island, NE.
Mr. Earle I. Mack, Retired Ambassador of the United States to the Republic of Finland, Fort Lee, NJ.
Mr. Andrew Watt, President & CEO, Association of Fundraising Professionals, Arlington, VA.
Mr. John Palatiello, President, Business Coalition for Fair Competition, Reston, VA.
Mr. Tony Ross, President, United Way of Pennsylvania, Harrisburg, PA.
Mr. William Hanbury, CEO, United Way of the National Capital Area, Vienna, VA.
Ms. Lisa Ireland, Executive Director, United Way of Orleans County, Medina, NY.
Ms. Tory Irgang, Executive Director, United Way of Southern Chautauqua County, Jamestown, NY.
February 12, 2013
Joint Committee Issues Report on Charitable Contributions In Anticipation of House HearingThe Joint Committee on Taxation yesterday issued a report titled Present Law and Background Relating to the Federal Tax Treatment of Charitable Contributions in preparation for the House Committee on Ways and Means hearing scheduled for this Thursday on this topic. The report describes the history and current tax rules in this area, the economic rationales for, the economic effects of, and the tax cost of the charitable contribution deduction in its current form, and various recent proposals for reform. The report does not endorse any specific proposals, although it notes the possible effects of the proposals discussed.
February 11, 2013
Fiscal Cliff Agreement Likely Helps Charities
We previously blogged that while the charitable contribution deduction dodged a bullet (for the most part) in the fiscal cliff agreement, charities remain concerned that the deduction may be vulnerable in future budget and debt ceiling negotiations. What is worth also highlighting, however, is the extent to which charities benefited from the American Taxpayer Relief Act of 2012. While the Act reinstated the overall limitation on itemized deductions, it also extended several charitable giving incentives that had expired, specifically:
- The charitable IRA rollover provision;
- The enhanced charitable deduction for contributions of food inventory; and
- The basis adjustment to stock of S corporations making charitable contributions of property.
For more details about these provisions and the likely effect of other aspects of the Act on charitable giving see the report by the Tax Policy and Charities project of the Urban Institute.
January 24, 2013
Perhaps We Should Be Like the Philippines?
For a number of years, I've espoused the view that we should expand the unrelated business income tax to a "commercial activity" tax - that is, a charity engaged in any commercial activity should pay taxes on any net revenues from that activity, whether or not the activity is "related" in some way to the organization's charitable purpose. See, e.g., John D. Colombo, Commercial Activity and Charitable Tax Exemption 44 WM. & MARY L. REV. 487 (2002). I've also opined that if we did this, we could grant tax exemption rather broadly to permit organizations with some legitimate charitable purpose the ability to get tax-deductible contributions for their charitable activities, while still fully taxing any commercial activity. I believe this would simplify current law and compliance. For example, museum gift shop revenues would be fully taxable, instead of having to parse whether specific sales were "related" or "unrelated" as is currently the case (e.g., an art museum gift shop can sell replicas of art, art books, "arty" postcards and the like without UBIT liability, but sales of science books or "I Love NY" coffee mugs are subject to the UBIT; see, e.g., Rev. Rul. 73-104). A charity that operates a pay garage would pay taxes on the garage revenues as a whole, without allocating between parking receipts that are "related" to charitable activities and those that are not. I readily admit there are still some interpretive issues (are museum admission charges "commercial" revenues?), but I think these issues would be fewer and easier to resolve than esoteric questions of "relatedness."
It appears that a recent decision by the Supreme Court of the Philippines interpreting its statutory law with respect to charities has more or less adopted my approach with respect to nonprofit hospitals (to be clear, they didn't do this because they read anything I wrote; still, this indicates my approach isn't completely crazy). In Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909, September 26, 2012 (full opinion here; an excellent summary is available here), the Philippine Supreme Court held that Philippine law distinguished between a fully exempt "charitable" hospital or educational institution (whose activities must be exclusively charitable) and a private nonprofit hospital or educational institution engaged in some charitable and some commercial activity. With respect to the latter, the organization is required to pay income tax on their commercial revenues (albeit at a reduced rate as provided in Philippine law), but not required to pay tax on revenues resulting from charitable activities. In the context of the private nonprofit hospital at issue, the court held that revenues from paying patients would be taxable (again, at the reduced rate provided for by Philippine law), because these revenues were part of a for-profit business.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
In other words, revenues from commercial (e.g., for-profit) activity (in this case, paying patients) are taxable, but the organization remains tax-exempt on its actual charitable activities. There is no "relatedness" test here as under our UBIT; the only question is whether an activity is for-profit (commercial).
While this decision obviously is the result of the sui generis statutory law in the Philippines, if it works there, I don't see any reason why it couldn't work here . . . the description of St. Luke's operations in the opinion sounds like a pretty typical nonprofit hospital here in the U.S. (We'll have to talk, though, about this preferential rate stuff . . .).
January 17, 2013
IRS Inaction on Noncash Charitable Contributions Resulting in Lost Revenue
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.”
January 14, 2013
Charities Still Leery After Fiscal Cliff Deal
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]
January 08, 2013
H.R. 8 for Charities for Dumm....Busy Tax Professionals.
First, Happy New Year, All!
As a public service, I thought I'd provide for all of you a down-and-dirty summary of the provisions of H.R. 8 (a.k.a. The American Taxpayer Relief Act of 2012, or "How I Avoided the Fiscal Cliff Retroactively") that specifically affect charities. I realize that one could argue that most of the tax provisions in the legislation (such as the rate changes, estate tax exemption amounts, and the AMT patch) will impact charities or charitable giving in one way or another. I'm going to focus more narrowly on those provisions with a direct impact on charity, as follows:
H.R. 8 Section 101(b)(2) (page 4 of the GPO version of the bill, linked above) - The Pease Limitation. Amends I.R.C. Section 68 to reinstate and amend the so-called "Pease Limitation", which phases out the benefit of certain itemized deductions (including the charitable deduction) for higher income individuals ($250,000 individual AGI, $300,000 married filing jointly AGI for 2013).
- H.R. 8 Section 206 (GPO page 12) - Contributions for Conservation Purposes. Extends I.R.C. Section 170(b)(1)(E)(vi) and I.R.C. Section 170(b)(2)(B)(iii) until December 31, 2013. I.R.C. Section 170(b)(1)(E) contains the rules for contributions of Qualified Conservation Easements; I.R.C. Section 170(b)(2)(B) discusses the treatment of Qualified Conservation Easements by corporate farmers and ranchers.
H.R. 8 Section 208 (GPO page 12) - Charitable IRA Rollover (with Retroactivity!). The Charitable IRA rollover contained in I.R.C. Section 408(d)(8) was extended from December 31, 2011 to December 31, 2013. But wait, you say - what if I wanted to make a contribution from my IRA in 2012, which was in the history books by the time H.R. 8 actually passed? No worries for you if you act fast! Qualified charitable distributions made after December 31, 2012 and before February 1, 2013 shall be deemed to have been made on December 31, 2012.
- H.R. 8 Section 314 (GPO page 18) - Contributions of Food Inventory. The special rules for contributions of food inventory in I.R.C. Section 170(e)(3)(C) are extended from December 31, 2011 to December 31, 2013.
- H.R. 8 Section 319 (GPO page 19) - Payments to Controlling Exempt Parents. The special rule limiting the impact of I.R.C. Section 512(b)(13) to only those amounts in excess of what would be allowed under Section 482 is extended to December 13, 2013.
H.R. 8 Section 325 (GPO page 21) - S Corporation Basis Adjustments. The special rule contained in I.R.C. Section 1367(a)(2) regarding the adjustment of a shareholder's basis in S Corporation stock to reflect charitable contributions is extended to December 31, 2013.
There are bond financing provisions that might be of special interest to some nonprofits, and I'm certain that health care facilities will be interested in Title VI of the bill, which contains a number of Medicare and other changes. Other than those provisions, what did I miss?
January 02, 2013
Doug Donovan: Fiscal Cliff Deal Could Hurt Charitable Giving
With Congress having passed legislation to avert the fiscal cliff, Doug Donovan writes in today's Chronicle of Philanthropy that the deal could hurt charitable giving. According to Donovan, the legislation Congress passed yesterday "limits how much wealthy people can claim in deductions for charitable contributions and other spending when they itemize their tax returns." He also reveals that "throughout December nonprofits have been lobbying Congress and President Obama not to impose limits on tax savings really wealthy donors get when they make charitable contributions."
The Senate-crafted plan enacts limits that charities have opposed. It reinstates a provision eliminated in 2010 that reduces itemized deductions by 3 percent of the amount that household income exceeds $300,000. Write-offs grow more limited the more taxable income a person has and could reduce the value of deductions by up to 80 percent for the highest-income taxpayers, according to the Tax Policy Center.
The 2010 limits have long been opposed by charities. Independent Sector noted that the limit could reduce giving in its February analysis of the idea, which was included in President Obama’s 2013 budget proposal.
The organization, which represents about 600 nonprofits, also signed a letter this summer from the Charitable Giving Coalition to Sen. Harry Reid, the Senate majority leader, stating its opposition to the deduction limits.
The letter, signed by nearly 30 of the nation’s largest nonprofit organizations, said the limits would “result in fewer contributions flowing to America’s charities, which are now being asked to provide even more services to the most vulnerable among us.”
I am unsympatheitc to the cries of the Charitable Giving Coalition. I cannot understand why the organization's members believe that the only reason people give to nonprofits is to get a tax deduction! Also, whoever said that wealthy individuals give more per capita than their poorer fellow citizens?
December 13, 2012
Charitable Giving - a Casualty of the Fiscal Cliff?
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.
November 12, 2012
More on Conservation Easements
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.
November 08, 2012
Post-Election: Where Now for the Charitable Contribution Deduction?
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.
October 02, 2012
Deductibility of Donations in the Political Season
In the Weekend Wall Street Journal Tax Report, an article entitled, Is Your Political Donation Deductible?, provides a good overview of the various entities involved in the political arena and the deductibility of donations to those entities. The article opens as follows:
It is the height of election season, and campaign spending is setting new records. As in previous cycles, most of the giving has come from individuals.
For those people, tax questions abound. Which donations to political causes and campaigns are tax deductible? Which ones will be disclosed on the Internet — or reported to the IRS — and which will remain secret? Which could trigger a 35% gift tax?
A crazy quilt of federal tax and election laws makes simple answers elusive. "At best the rules are opaque, and at worst they're misleading," says Ellen Aprill, a professor at Loyola Law School in Los Angeles who studies the area. The best approach, say experts, is to know the rudiments of this tricky area in order to identify the most effective donation strategies and avoid a few traps. ...
The bottom line: There are many ways to give politically to candidates and causes, depending on how much you value deductibility, disclosure or avoiding potential tangles with the IRS. Here are more details about common types of political contributions.
The article proceeds to discuss donations to: (i) political campaigns, parties and certain PACs; (ii) super PACs; (iii) social-welfare nonprofits; (iv) other nonprofits such as trade associations; and (v) nonprofit public charities.
(Hat tip: TaxProf Blog)
September 28, 2012
Congressional Research Service: What Qualifies as "Educational"?
The Congressional Research Service recently issued a report on 501(c)(3) Organizations: What Qualifies as "Educational"? From the report's Summary section:
The question here is how far can the term “educational” be extended? Can a group espousing a viewpoint (i.e., only one side of an issue) be characterized as educational? If so, does the group have to provide factual information to support its statements? Is there some standard for truthfulness and accuracy?
The answers are rooted in a Treasury regulation, which provides that an organization that advocates a position or viewpoint can qualify as educational if it presents “a sufficiently full and fair exposition of the pertinent facts” so that people can form their own opinions or conclusions. To supplement the regulation’s “full and fair exposition” standard, the Internal Revenue Service (IRS) has developed the “methodology test.” Under it, a method is not “educational” if it fails to provide a “factual foundation” for the position or viewpoint or “a development from the relevant facts that would materially aid a listener or reader in a learning process.”
There are constitutional implications in how the term “educational” is defined. In particular, the denial of tax-exempt status on the basis of an organization’s speech could raise issues under the First Amendment. While there is no constitutional requirement that the term “educational” encompass every communication protected by the First Amendment, courts will examine the IRS’s denial of a tax exemption or other benefit when it is based on the content of the taxpayer’s speech in order to ensure the denial was not done for an impermissible reason. Groups that promote controversial positions may be particularly vulnerable to an interpretation of “educational” that permits a subjective determination by the IRS as to whether a group’s methods of presenting its views are educational.
Concern over these issues has led to questions about whether the “educational” standard is unconstitutionally vague. While the IRS’s methodology test was held to be unconstitutionally vague by a federal appellate court, subsequent court decisions have suggested that the test passes constitutional muster
September 27, 2012
NY AG and Congressmen Exchange Letters Over 501(c)(4)s
We previously blogged about the New York Attorney General Eric T. Schneiderman's inquiry into politically active Internal Revenue Code section 501(c)(4) tax-exempt organizations. Last week U.S. Senator Orrin Hatch (R-Utah) and U.S. Representative Dave Camp (R-Mich.), the Ranking Member of the Senate Finance Committee and the Chairman of the House Ways and Means Committee, respectively, called on AG Schneiderman to halt his investigations. They focused in particular on the reported attempts by the AG to obtain IRS filings directly from the targeted organizations, including the non-public schedule of significant donors, rather than through the IRS-admnistered process for states to obtain tax return information, and stated that "We emphasize strongly that willful unauthorized disclosure of returns or return information is a federal crime subject to fines and/or imprisonment."
This week the Hill reports that AG Schneiderman fired back, defending his right as a state attorney general to directly request tax information from charitable and other nonprofit groups, including federal information returns such as the Form 990. And according to a report in Politico, the AG's response provided that "“Each state has a fundamental interest in ensuring compliance with its tax laws and in regulating certain activities of nonprofits. The recent activities of some tax-exempt organizations and businesses have been matters of great concern to New Yorkers. While my office respects applicable federal requirements and restrictions, I will continue to perform my duties and enforce the laws of the State of New York.”
The bottom line is that it appears that a previously obscure issue - whether charities and other nonprofits required to provide copies of their Forms 990 to state officials under state law could withhold or redact the schedule of donors for those returns (Schedule B) so as not to have that information publicly disclosed by the state - is now front-and-center in the ongoing dispute over politically active 501(c)(4) organizations.
September 21, 2012
The Fiscal Cliff
Congress has folded its tent until after the election and, by most peoples' lights, has accomplished extraordinarily little, leaving untouched a profusion of urgent matters. One unresolved issue is the looming "fiscal cliff": massive automatic budget cuts that will take place if Congress and the president cannot agree on an alternative plan for reducing the budget deficit. Last week, the White House issued a report on how it will execute the massive cuts if no agreement is reached. According to a recent analysis published in The Nonprofit Quarterly, the picture is grim for the nonprofit sector. There will be crippling cuts in support for programs that 1) provide housing for the elderly and disabled, 2) focus on juvenile justice, 3) combat violence against women, 4) spur community economic development. And so on.
August 07, 2012
GOP Senators Pressure IRS on 501(c)(4) Rules
Led by Senator Orrin Hatch (R-Utah), ten GOP senators sent a letter to the IRS yesterday urging it not to revisit its regulations governing section 501(c)(4) organizations in response to outside political pressure without careful (and time-consuming) deliberation. More specifically, they stated "public confidence in the non-partisan integrity of the agency demands that you issue no sub-regulatory guidance nor engage in any similar efforts that would effectuate immediate changes without a lengthy period of review, separated in time from the current heated political environment." The Senators were writing in response to a letter the IRS sent last month to two groups supporting campaign finance reform stating:
I am responding to your letter dated March 22, 2012, which supplemented you [sic] letter dated July 27, 2011, urging the IRS to institute a rulemaking proceeding to address the rules related to political activity by organizations exempt under section 501(c)(4) of the Internal Revenue Code.
The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.
This letter underlines the political tightrope that the IRS is walking in this area, especially with countervailing pressure coming from the Democratic side of the congressional aisle. Whether the Service can successfully walk this tightrope - and where it leads - remains to be seen.
July 27, 2012
More on Use of 501(c)(4)s in the Political Campaign Context - Disclosure Requirements, Need For Reform
As reported in The New York Times as well as other news sources (including the live blogging herein), the IRS announced in Congressional hearings on Wednesday that 50 political groups have obtained 501(c)(4) exemptions in 2010 and 2011.
In the Forth Worth Star-Telegram, an editorial entitled "IRS needs to strengthen tax code to uncover political nonprofits" criticizes the use of 501(c)(4)s for political campaign purposes, concluding: "Tax-exempt status is intended to promote the public good, not enable wealthy and powerful donors of any political stripe to wield influence without public scrutiny."
In the BNA Daily Tax Report on Wednesday, an article addressed the disclosure requirement with respect to 501(c)(4) donors. Although 501(c)(4)s are required to inform the IRS, but not the public, of the identity of donors, many organizations find ways around these full disclosure rules. The organization can list the donor as "anonymous" if it doesn't know where the money originated from and "can't easily find out," or client trust accounts are used (i.e., donors make contributions through law firms that transmits the money to the organization, with only the law firm's name disclosed). Cashier's checks and bank wire transfers are other means to keep donors anonymous and, thus, out of the IRS's purview. Another potential area for reform?