Article Archives >> Lead Stories >> July 16-31, 2006

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Congress Passes Charity Provisions,
Gift Incentives in Pension Bill
Incentives would expire in two years;
“reform” provisions would be permanent

The House of Representatives and the Senate have approved a few two-year charitable giving incentives and a host of permanent limitations on charity operations as an unheralded part of the Pension Protection Act (H.R. 4).

The incentives include a modified IRA-rollover provision which would allow those over 70 1/2 to exclude up to $100,000 a year in retirement plan assets if contributed directly to a charity. Gifts to split-interest vehicles like charitable remainder trusts, and to donor advised funds, supporting organizations and private foundations would not qualify.

Other incentives are provided for contributions of food inventory, book inventory and qualified conservation contributions. The bill also excludes certain payments from charitable subsidiaries from unrelated business income tax. A proposal to permit deductions for non-itemizers, contained in the Senate version of the Tax Reconciliation Bill passed last November (See Ready Reference Page: “Senate Proposes Two Year Contribution Breaks.”), was not included.

Significant reforms are in store for donor advised funds and supporting organizations.

Donor advised funds will be defined for the first time and will be prohibited from making grants to individuals, private non-operating foundations, any entity if not for a charitable purpose, or to Type III supporting organizations (except those that are “functionally integrated” with their supported organizations) or Type I or Type II supporting organizations if the donor or advisor controls a supported organization (hereafter called the “suspect” type) or the IRS determines, by rule, that a distribution is inappropriate. A DAF may not make a grant to an organization which is not a public charity, private operating foundation or governmental entity without following the rules of expenditure responsibility for private foundations.

The bill imposes excess benefit taxes on certain transactions with donors or advisors and imposes the excess business holdings rules on DAFs. (See Ready Reference Page: “Foundations Avoid Excess Business Holdings.”) Gifts to Type III organizations, except those functionally integrated, and to the suspect Type I or II SOs will not be deductible. The bill does not include a minimum distribution requirement of the type proposed by the Senate. The Treasury Department will be required to study DAFs for a year, including the question whether the retention of advisory rights is consistent with the treatment of donations as completed gifts, or, in other words, whether they qualify for charitable contribution deductions.

Supporting organizations, particularly the Type III (operated in conjunction with the supported organizations) will also face new limitations. Type IIIs will not be able to support foreign organizations, after a three-year transition period. Persons who are disqualified persons with respect to a supporting organization will also be considered disqualified with respect to the supported organization.

Supporting organizations may not make loans, grants, compensation or similar payments to substantial contributors, members of the family or businesses they control (although the rule is not applicable if the substantial contributor is a public charity). Excess business holdings rules will also be applicable to Type III SOs and the suspect types of Type I and II. The Hershey Trust and any other Type III SOs which held assets on November 18, 2005 on the direction of a state attorney general, will be exempt from the rules.

Private foundations will be barred from making grants to Type III (other than functionally integrated) and the suspect Type I and II SOs.

The bill will increase some excise taxes on private foundations, including certain types of self-dealing, and will strengthen excess benefits taxes for public charities.

In other provisions on deductions, the bill will prohibit deductions for gifts of clothing or household items if the items are not in good used condition or better and the Secretary could deny deduction for any item with minimal value. The bill has a number of other tightening rules, including efforts to assure more accurate appraisals by reducing the threshold for imposing penalties on excessive claims for deductions. Charities will also have to publicly disclose their unrelated business income tax returns.

Various effective dates apply to separate provisions, so charities will want to be fully aware of its provisions. We will have a more complete Ready Reference Page analysis in our next edition.

YOU NEED TO KNOW

These provisions are not nearly as bad as the original proposals (See Ready Reference Page: “Senate Committee’s White Paper Proposes Vast Expansion of Federal Power Over Charities”) and the end result seems to have gotten a little better with each iteration. Much of the credit for the improvement goes to the efforts by the Independent Sector, the Council on Foundations, and other groups lobbying on behalf of the sector.

Article Archives >> Lead Stories >> July 16-31, 2006