Senate Passes Charitable Reforms and Giving Incentives

IS's description of the legislation Charitable provisions added or modified by the managers' amendment (PDF) The Tax Relief Act of 2005 as passed by the Senate Finance Committee (PDF)

Early this morning, the U.S. Senate passed the Tax Relief Act of 2005, which includes a package of charitable giving incentives and reforms important to our sector. As modified by a managers’ amendment filed late last night, the bill reflects almost all of the changes that Independent Sector requested to bring the reforms in closer alignment with the recommendations of the Panel on the Nonprofit Sector. These provisions would correct abuses by taxpayers who claim excessive tax deductions and by individuals who use charitable organizations for personal gain. It also includes several tax incentives for charitable giving that IS has long advocated.

Specifically, the bill would:

• Permit taxpayers who do not itemize deductions on their income taxes to take a deduction for their total cash contributions over $210 for single filers and over $420 for joint filers. Taxpayers who itemize deductions will be permitted to deduct the total of both cash and non-cash contributions over $210 ($420 for joint filers). New substantiation rules apply for non-cash gifts valued at $250 or more.
• Permit taxpayers over age 70½ to make tax-free distributions from their IRAs directly to charitable organizations or make such contributions to split-interest trusts.
• Grant enhanced deductions to corporations for contributions of food and book inventory.
• Encourage the contribution of capital gain real property for conservation purposes.
• Provide an enhanced deduction for gifts of literary, musical, artistic, and scholarly compositions.
• Strengthen the rules for appraisals required to claim tax deductions for contributions of property, impose new rules on tax-deductible gifts of façade easements and taxidermy, and add new rules to ensure that contributions of partial interest in gifts of property are used for charitable purposes.
• Increase fines and penalties for self-dealing and certain other violations by private foundations, and excess benefit transactions by public charities.
• Establish a definition of donor-advised funds that gives the Secretary of the Treasury broad authority to delineate appropriate exceptions; impose aggregate payout requirements for donor-advised funds that would include reasonable and necessary expenditures by the sponsoring organization to administer the fund; and impose minimum payout requirements on individual funds that hold over 10 percent of their assets in property or other illiquid assets, which could be satisfied by transferring full control of partial interest in those illiquid assets to the sponsoring organization. Sponsoring organizations would be required to report annually the total number of and aggregate assets and contributions made by donor-advised funds they hold. To claim a tax deduction for funds or assets given to a donor-advised fund, donors would be required to have written substantiation that those assets are under the exclusive legal control of the sponsoring organization.
• Prohibit donors from taking a tax deduction for contributions to a donor-advised fund held by a Type III supporting organization.
• Prohibit both donor-advised funds and supporting organizations from making payments and distributions to donors and related parties (other than public charities), although fair and reasonable compensation may be provided to investment advisors.
• Require minimum aggregate distributions by all supporting organizations of 85 percent of investment income or 3 percent of the fair market value of assets (other than assets used or held for the use of the supported organization), rising to 5 percent of assets in the third taxable year after enactment, and impose new rules on Type III supporting organizations that limit the number of organizations that may be supported and that require documentation of the approval of arrangements by the supported organizations. Reasonable and necessary administrative expenses would count towards qualifying distributions of a supporting organization.
• Require organizations that do not otherwise have to file an annual information return to notify the IRS each year.
• Permit the IRS to disclose to state officials information related to proposed actions involving tax-exempt organizations.
• Expand the base of tax on private foundation net investment income.

More information on this bill, including the full text and the relevant section of the managers’ amendment, are available on the IS website. Our staff is also preparing a detailed analysis, which will be posted on our website as soon as it is complete.

Independent Sector thanks Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Max Baucus (D-MT) for their careful attention to these issues and for understanding the important balance that must be maintained between legitimate oversight of charitable activities and the essential independence of the charitable sector. In addition, IS offers its appreciation to Senator Rick Santorum (R-PA), whose unwavering commitment and leadership ensured that charitable giving incentives were included in this bill. Senator Santorum and many of his colleagues on both sides of the aisle on the Senate Finance Committee were most helpful in ensuring that the proposals addressed abuse without harming the charitable sector. We are deeply grateful for these efforts.

The passage of this bill is mostly a tribute to the Panel on the Nonprofit Sector, IS members, other charitable organizations, and experts in the field who have worked so hard during the past year to put together a responsible package of needed reforms and incentives.

The bill will now move to conference with the House of Representatives. It is important that we thank all members of the Senate who supported this effort and let the members of the House Ways and Means Committee and the leadership of the House know that our sector supports this bill and wants to see it become law.

Sincerely,

Diana Aviv
President and CEO, Independent Sector

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