President Approves Charitable Incentives and Safeguards Passed with Pension Bill

On August 17, 2006, President Bush signed into law the Pension Protection Act (Pub. Law 109-280) that includes a package of charitable giving incentives and safeguard measures. The Senate easily passed the measure by a vote of 93-5 on August 3. The House passed it by a 279-131 vote on July 28. See IS's detailed summary (PDF) of the giving incentives and reforms.

While the new law does not include all of the charitable incentives Independent Sector has supported, such as the nonitemizer deduction, the bill’s giving incentives should attract needed resources to our sector. The bill also contains a series of reforms designed to deter individuals who would use charitable organizations for personal benefit and to ensure that donations are used for charitable purposes. They incorporate many of the changes that IS sought in working with Congressional staff, particularly in the Senate, to improve reforms initially passed late last year, however, IS remains concerned about several other provisions that we are raising with the Treasury Department and Congress (see below).

IS submitted a letter (PDF) to Ways and Means Oversight Subcommittee Chairman John Lewis (D-GA) on August 7, 2007 in response to a request for written comments on provisions in the Pension Protection Act relating to tax-exempt organizations.

IRS Issues Guidance on Pension Protection Act
The IRS has issued guidance in a number of areas to assist charities, foundations, and donors in complying with provisions in the Pension Protection Act.

• The IRS requested public comments on issues to be included in a study of donor advised funds and supporting organizations. (Notice 2007-21)
  
  
• Additionally, in an August 2007 release, the IRS announced its plans for implementing changes enacted in the PPA regarding payout requirements for Type III supporting organizations and criteria for determining whether a Type III supporting organization is functionally integrated. Comments on the Advanced Notice of Proposed Rulemaking were due October 31, 2007.
  
  
• Interim guidance released on December 4, 2006 describes how private foundations and sponsors of donor advised funds can clarify whether a organization is a Type I, II, or functionally integrated Type III supporting organization and whether their disqualified persons "control" a supporting organization or any of its supported organizations. Previous guidance provides a new procedure for requesting reclassification from a 509(a)(3) supporting organization to another type of public charity. On September 24, 2007, the IRS also released a memo (PDF) and guidelines (PDF) outlining procedures it will follow for organizations seeking functionally integrated Type III supporting organization status.

Charitable Giving Incentives
Among the charitable tax incentives included in the pension reform act is an IRA rollover provision that allows individuals age 70½ and older to make charitable donations up to $100,000 from an IRA without having to count the donation as taxable income. This provision would be in effect for two years, allowing the charitable community to demonstrate its value as an incentive for increased giving that could be expanded in the future. (See IRA Rollover Fact Sheets for Charities and Donors.)

The bill also provides expanded tax deductions for contributions of book and food inventory and qualified conservation contributions. The bill does not include a charitable deduction for taxpayers who do not itemize their deductions, despite the efforts of IS and a number of our member organizations

IS Requests Clarification of the Charitable Provisions in the Pension Protection Act
Independent Sector and the Council on Foundations sent a joint memorandum (PDF) to the IRS in October 2006 regarding provisions in the Pension Protection Act that have raised concerns for both organizations. The two organizations have sought guidance from the Internal Revenue Service to assist charitable organizations in complying with the provisions and will be working to address these and other issues of common interest. The memo follows an October 10th meeting with IRS Commissioner Mark Everson and Steve Miller, head of the IRS exempt organizations division.

IS members Goodwill Industries, Volunteers of America, and Salvation Army also met with Treasury Department officials to clarify charities’ responsibilities regarding new rules for substantiating the condition of gifts of household and clothing items. According to the charities, Treasury indicated that the burden of establishing the value of such donations falls upon the taxpayer claiming a deduction. The charities are planning to indicate on the receipts they issue that donated items must be in “good used condition or better” for tax purposes.
Household and Clothing Donations Coalition Letter (PDF)

In September, 2006, Independent Sector sent a letter (PDF) asking the Treasury Department to issue immediate guidance on and provide an appropriate transition period for those charitable provisions in the Pension Protection Act that took effect on or before the bill’s enactment on August 17, 2006. IS is deeply concerned that restrictions on gifts by private foundations and donor-advised funds to supporting organizations will have negative unintended consequences for grantmakers and for public charities that are supported by one or more supporting organizations. In its letter to Treasury, IS also argues that new restrictions on payments from any supporting organization to a substantial contributor or to individuals and businesses related to substantial contributors should not be applied to employment and other contracts in place prior to enactment of the bill. IS had previously understood that these restrictions would apply only to Type III supporting organizations and is seeking legislative action to address this problem. IS is also asking Treasury to facilitate implementation of the new IRA Charitable Rollover provision and to address questions about other provisions in the bill which that take effect for most organizations after January 1, 2007.

Previous Action
Independent Sector sent a letter to President Bush on July 24, 2006, asking him to help secure passage of a package of charitable giving incentives and safeguard measures as part of the pension reform legislation. The letter continues IS’s commitment to strengthening the charitable community by supporting this legislation, an effort that has included an earlier letter that IS and 100 leading charitable organizations delivered to House and Senate leaders urging enactment of this package.

A package of charitable incentives and safeguards was originally included in the Senate’s version of the tax reconciliation bill (H.R. 4297), passed by that chamber in November 2005. IS has been strongly supportive of many of the charitable giving incentives and charitable safeguards included in that bill. However, there were several specific provisions in the bill that we believed could be harmful to the charitable sector which prevented IS from providing our full support for the reforms as then drafted. As a result, since November 2005, IS has worked closely with congressional tax staff to make needed changes to the reforms.

In May 2006, Congress passed the final version of the tax reconciliation bill (H.R. 4297) without a package of charitable giving incentives and reforms, however, one provision addressing abusive tax shelters was included that is broader than one recommended by the Panel on the Nonprofit Sector. The final version of the tax shelter provision dropped a reasonable cause exception, and added an excise tax on entities that are parties to a prohibited tax shelter transaction without knowing or having reason to know that the transaction is a prohibited transaction. This second tax is lower than the excise tax for knowing violations. See IRS guidance (PDF) on this provision.

In June 2006, the Senate Finance Committee passed tax administration legislation (S. 1321) that included several charitable safeguards provisions. Most of these provisions had been included in previous legislation such as the CARE Act and the Senate version of the tax reconciliation bill. The provisions include: expanded mandatory e-filing of the Forms 990, notification requirements for exempt organizations not currently required to file a Form 990, reform of appraising and valuing donated property, information sharing with state officials of proposed IRS actions against exempt organizations, and increased fines and penalties on nonprofits for self-dealing and engaging in inappropriate lobbying and political activity. Several of the provisions were subsequently enacted in the Pension Protection Act (H.R. 4). See a list of the provisions in S. 1321 based on the Joint Tax Committee's description of the legislation (PDF). S. 1321 was not voted on by the full Senate.

Changes in the Charitable Provisions
The following provisions were modified by the staff of the Senate Finance Committee and the Joint Committee on Taxation.

Treatment of Unrelated Business Income
The bill would no longer require that nonprofits have their UBIT liability certified by an outside party. It still corrects the treatment of payments by affiliated organizations, but now only requires that nonprofits make their Form 990-T public, excluding information that would jeopardize the operations of unrelated business activities.

Fractional Interest Donations
The provision has been broadened to provide agencies receiving such gifts maximum flexibility in taking actual possession of the gift over time (it is no longer restricted to possession in a given year, or every year).

Donor-Advised Funds
The provision has been corrected to permit donor advised funds to count any payment to the sponsoring organization as part of its qualifying distributions. DAFs would also be permitted to count payments to organizations not defined as public charities (including international organizations) if the amount is exclusively for a charitable purpose as defined in the tax law. The definition of a donor-advised fund has been clarified to exclude funds which exclusively benefit a single identified organization or governmental entity and funds which provide scholarships or study and travel benefits to individuals if the committee which determines grants is not controlled directly or indirectly by the donor or other disqualified persons of the fund. Type I and Type II supporting organizations as well as “Functionally Integrated Type III” supporting organizations would be permitted to hold donor-advised funds (for which donors receive a tax deduction when making gifts to the DAF). A “functionally integrated Type III” organization is one that performs functions or carries out purposes of the supported organization or that conducts activities that would normally be performed by the supported organization if the Type III did not exist.

Supporting organizations
Many of the provisions have been altered (except for the identification and reporting on the Form 990) to apply only to Type III supporting organizations that are not “functionally integrated.” Private foundations would continue to be able to count as qualifying distributions grants awarded to Type I and II supporting organizations, and “functionally integrated” Type III supporting organizations.

Earlier Efforts

Background on Charitable Incentives and Reforms -- read more about the legislative history of this legislation and earlier efforts of Independent Sector in support of charitable incentives and reforms.

Members with additional specific concerns are urged to contact the IS Public Policy staff at: publicpolicy@independentsector.org

Last Updated: November 19, 2007

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