Monday, February 11, 2013
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.
Thursday, January 24, 2013
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 . . .).
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]
Tuesday, January 8, 2013
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?
Wednesday, January 2, 2013
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?
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 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.
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, October 2, 2012
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)
Friday, September 28, 2012
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
Thursday, September 27, 2012
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.
Friday, September 21, 2012
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.
Tuesday, August 7, 2012
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.
Friday, 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?
Monday, July 23, 2012
Last Wednesday, House Ways and Means Oversight Subcommittee Chairman Charles Boustany (R-La.) announced that a second hearing on tax-exempt organizations (the first was held on May 16 as blogged herein) will be held on July 25, 2012. Per the Ways and Means Committee website:
The hearing will focus on organizational and compliance issues related to public charities, including the increased complexity of public charity organizational structures, the rules governing profit-generating activities giving rise to unrelated business income tax, and whether the newly redesigned Form 990 is promoting increased compliance and transparency.
In the announcement, Boustany makes the following oversight comment:
Given the size and scale of the operations of public charities, which in 2008 had over $2.5 trillion in assets, it is critical that the Subcommittee continue its review of the tax-exempt sector. Indeed, over the last two decades, the organizational structures of public charities have become increasingly complex, creating compliance and transparency issues. This hearing is an excellent opportunity for the Subcommittee to hear from the IRS and experts in the tax-exempt community. Their insight will allow the Subcommittee to better understand what is driving organizational complexity, and to learn about the new compliance efforts by the IRS and the UBIT rules.
No expert witnesses have yet been announced.
(Hat tip: Daily Tax Report)
**Update: Contributing editor Elaine Waterhouse Wilson will be live blogging on July 25th during the hearing.
Wednesday, July 18, 2012
In the red corner - The US Treasury
In the blue corner - The Congressional Research Service
The bout - mandatory payouts from donor advised funds
In December, 2011, Treasury issued the long awaited "Report to Congress on Supporting Organizations and Donor Advised Funds," which was mandated by the Pension Protection Act (PPA). In general, the Treasury report took the position that many of the reforms implemented as part of the PPA were sufficient to address the abuses seen in the area. With specific regard to DAF distributions, Treasury noted favorably that the average payout rates for donor advised funds exceeded the private foundation 5% requirement, although Treasury did indicate that it was premature to make any recommendation based on the paucity of available data (DAF information was added to the Form 990 in 2008)(Treasury Report pp. 81-82).
Fast forward six months. On July 11, the Congressional Research Service issued, "An Analysis of Chariable Giving and Donor Advised Funds," using many of the statistics regarding donor advised funds cited in the Treasury report. Unlike the more cautious but generally favorable Treasury report, the CRS report concluded that donor advised funds should have a mandatory distribution requirement - and further, that it should be applied on a per fund basis. The CRS report focuses on the fact that although average distribution rates among donor advised funds are quite high, there are many DAFs that make little or no distributions at all. Janne Gallagher at the Council on Foundations (CoF posted the CRS report linked above, which is not generally available online) wrote a critique of the CRS report, posted at the CoF site here.
Interestingly, the Summary section of the CRS report notes that "The Treasury study was released in 2011. Senator Chuck Grassley, Senate Finance commitee chairman at the time of the 2006 legislation, has criticized the study as being 'disappointing and nonresponsive.'"
Despite all the statistics and analysis, however, it seems to me that the case has not been made from a policy perspective as to why we should (or should not) require a payout from DAFs. I find myself saying, "well, so there are a few DAFs not making annual distributions - so what?" To some degree, the CRS report comes the closest to reciting a reason - that DAFs are in fact under the functional control of their donors and therefore, they should be regulated similarly to private foundations. Treasury appears not to assume donor control; CRS assumes donor control because the DAF sponsoring organizations generally follow donor suggestions. Clearly, the parties disagree on factual nature this issue - I guess we will see more in Round 2.
Hat tip to my friend Chris Hoyt at the University of Missouri (KC) Law School (you know him... really, really terrible jokes!) for pointing me to the CoF materials.
Tuesday, July 17, 2012
According to the Washington Post, Senate Republicans blocked to the DISCLOSE Act of 2012 on a party line procedural vote, which prevented the legislation from moving to the floor for full consideration.
The DISCLOSE Act of 2012 (which stands for the "Democracy Is Strengthened by Casting Light On Spending in Elections Act of 2012’’)* would have required covered organizations to make additional disclosures regarding their political expenditures and their donors. While the legislation would amend the Federal Election Campaign Act, the definition of a covered organization was mostly drafted in connection to the organization's tax status. Generally, the expanded disclosures would have covered (1) all corporations (other than 501c3 organizations), (2) all organizations exempt under 501(a)(other than 501c3 organizations), (3) certain labor organizations, and (4) 527 organizations. (See page 12 of the linked Act) In addition, there were specific provisions addressing affiliated organizations.
*(Author's Opinion: really, how much legislative staff time is spent coming up with these not-really-so-witty-anymore acronyms for bills? Seriously, enough already.)
Monday, July 9, 2012
Part of the health care overhaul passed by Congress included a new subsection of Section 501, 501(r), that added new requirements for tax-exemption of nonprofit hospitals. These new requirements are mostly what I would call procedural in nature: requiring a health needs assessment and written charity care policies, as well as regulating the billing of indigent patients and debt collection actions. The legislation left most of the implementing details to the IRS. In July, 2011, the IRS issued Notice 2011-52, providing guidance with respect to the health needs assessment requirement. The IRS now has released proposed regulations addressing the remaining three areas (written charity care policies, billing, and debt collection). The agency is seeking public comment on the proposed regulations by September 24, 2012.
Friday, June 22, 2012
Roger Colinvaux (Catholic University) has posted "Testimony of Professor Roger Colinvaux Before the House Committee on Ways & Means, Subcommittee on Oversight Hearing on Tax Exempt Organizations" to SSRN. The article was published in Tax Notes. His testimony was previously blogged herein. The abstract provides:
Recent legislation has established new legislative precedents that run counter to the traditional regulatory approach of 501(c)(3) organizations: precedents for distinct exemption standards based on the type of organization, a weakening of the basis for distinguishing among charities as “public” or “private,” and a related preference for brighter enforcement lines and frustration with the status quo. These trends make for growing complexity, but are in large part a reasonable response to the historic legacy of defining a sector based on broadly conceived purposes and the inherent difficulties of oversight that follow. Going forward, it is critical to assess the federal role in support of the section 501(c)(3) sector, and at a minimum, take steps to further the integrity of the sector by minimizing opportunities for abuse. More broadly, if the federal approach is to be reconceived, the tax policy focus should shift to greater promotion of activities rather than purposes, and require more from the sector than avoiding bad outcomes.