Legislative Update - Council on Foundations

Council on Foundations
2014 Annual Conference
Washington Update
June 9, 2014
Alexander Reid
[email protected]
Legislative Update
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Expiring Tax Provisions (a/k/a “Extenders”) –
• The current extenders provisions expired at the end of 2013.
• Senate Finance Committee marked up the Expiring Provisions Improvement,
Reform, and Efficiency Act of 2014 (EXPIRE) (S. 2260) and voted it out of
committee on April 3, 2014. The bill extends the following through 2015:
– deduction for contributions of capital gain real property made for conservation
– tax-free distributions from individual retirement accounts (IRAs) for charitable
– the tax deduction for contributions of food inventory by taxpayers other than C
– the basis adjustment rule for stock of an S corporation making charitable
contributions of property;
– extension of modification of tax treatment of certain payments to controlling
exempt organizations
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Expiring Tax Provisions (a/k/a “Extenders”) –
House of Representatives
• House Ways and Means Committee approved a package of legislation on May 29,
2014 that would make the following extenders permanent:
– Conservation easements (HR 2807),
– Charitable distributions from IRAs (HR 4619),
– Contributions of food inventory (HR 4719), and
– Bonus depreciation (a non-charity related extender)
In addition, the package included two new provisions:
– Extension of charitable gifts to April 15 (HR 3134), and
– Private Foundation investment income excise tax to 1% (HR 4691)
• House Ways and Means Committee previously voted to make six tax extenders
permanent on April 29, 2014, including the basis adjustment for S corporations.
• Rep. Camp’s Tax Reform Act of 2014 discussion draft revises and extends only two
of the charity related extenders: conservation contributions and basis adjustment for
S corporations
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Tax Reform of 2014 Discussion Draft
• Released by Rep. Dave Camp (R-MI), chairman of the House Ways & Means Committee,
on Feb. 26, 2014.
• Proposes New Tax Rate Structure:
• Two tax brackets of 10% and 25%;
• 10% surtax for income over $450,000;
• Corporate rate reduced to 25%
• Standard Deduction increased to $11,000 for individuals and $22,000 for married couples
(inflation adjusted)
• Repeal Alternative Minimum Tax
• Long-term capital gains and dividends taxed as ordinary income (40 percent of such
income exempted from tax)
• Other: larger child tax credit, consolidated education benefits, modernized international
system, permanent R&D credit, infrastructure investment, repeal medical device tax.
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Total Revenue Raised from Exempt
Organizations: ~$12 Billion
Excise Tax on Executive Compensation Exceeding $1M
Compute UBTI Separately for Each Trade or Business
Royalties from Name and Logo Treated as UBTI
Tax on Private University Endowments
Repeal Type II and III Supporting Organizations
Impose UBIT on Income from Private Research
Repeal Exemption for Professional Sports Leagues
Donor Advised Fund 5 Year Distribution Requirement
Revisions to Charitable Deduction
Simplification of Private Foundation Excise Tax
Morgan, Lewis & in
billion estimate for modifications
to itemized deductions
Compare with Other Business
Tax Reform Proposals
Reform Accelerated Cost Recovery System
Amortize Research and Experimentation
Treatment of Deferred Foreign Income
Amortize Advertising Expenses
Reform Subpart F
Financial Institution Excise Tax
Repeal Last In First Out Accounting Method
Repeal Like Kind Exchanges
Limit Cash Method Accounting
Make Research Credit Permanent
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Private Foundation Excise Tax
• Proposal to reduce excise tax on private foundation net
investment income to 1% and repeal exception for exempt
operating foundations.
“The net investment excise tax on private foundations has long
been a source of confusion and frustration for taxpayers. Private
foundations, both large and small, recommended to the
Committee’s Tax Reform Working Group on Charitable/Exempt
Organizations that the net investment tax be reduced to a flat 1
percent to ease compliance.”
–W&M Majority Tax Staff, Section by Section Summary
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Anti Deferral:
Private Operating Foundations and
Exempt Operating Foundations
• Under current law, private operating foundations are
exempt from the excise tax on failure to distribute
income (the 5% minimum distribution requirement).
• Also, exempt operating foundations are exempt from
the excise tax on net investment income.
• The tax reform discussion draft proposes to repeal both
of these exceptions.
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Anti Abuse:
Self-Dealing Transactions
• Proposal to impose 2.5% excise tax on private foundations that
engage in a self-dealing transaction, 10% when it involves
• Proposal also eliminates safe harbor for reliance on professional
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Charitable Deduction Reforms
• Charitable contributions made after close of tax year deductible until April 15.
• Charitable contributions deductible only to the extent they exceed 2% of AGI.
• Percentage limitations for gifts of cash and property to public charities reduced from 50%
to 40%; gifts to private foundations reduced from 30% to 25%.
• The separate, lower 30% and 20% limits for contributions of capital gain property would
be repealed.
• Value of deduction generally limited to adjusted basis.
• Conservation easement incentive made permanent.
• No deduction for land to be used for golf courses
“The economic growth in this plan will increase charitable giving by $2.2
billion annually. … Allows roughly 95 percent of filers to get the lowest
possible tax rate by simply claiming the standard deduction (no more
need to itemize and track receipts).”
-Ways and Means Committee Press Release (Feb. 26)
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Anti Deferral:
Donor-Advised Fund Distributions
• Proposal would require donor-advised funds to distribute contributions
within five years of receipt.
• Failure to distribute results in an excise tax of 20% of the undistributed
• Behavioral response:
• Reduce overall charitable giving (which would raise revenue)
• Increase private foundation giving (which would raise revenue from
investment income tax), offset by donor preference for DAFs to avoid hassle
of private foundations.
• Increase donations to non-DAF sponsoring public charities (revenue neutral)
• Increase donations to Type I supporting organizations (revenue neutral)
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Anti Deferral:
Supporting Organizations
• Proposal to eliminate Type II and Type III Supporting
• Only Supporting Organizations that are “operated,
supervised, or controlled” by a publicly supported
organization would qualify.
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High Compensation Excise Tax
• Under current law, exempt organizations may pay compensation exceeding $1
million if it is reasonable.
• Proposal: 25% excise tax on compensation over $1 million
• Payable by employer with respect to top five employees
• Includes deferred compensation and parachute payments
“Given that exemption from Federal income tax constitutes a significant
benefit conferred upon tax-exempt organizations, the case for discouraging
excess compensation paid out to such organizations’ executives may be even
stronger than it is for publicly traded companies.”
–W&M Majority Tax Staff, Section by Section Summary
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UBTI Loss Basketing
• Each unrelated trade or business treated separately from the
others for tax purposes—i.e., the business is put in a “basket” or
• Losses from one unrelated business may only be used to
offset income from that unrelated business.
• This rule is similar to the way gambling winnings/losses and
hobby gains/losses are treated for tax purposes.
“[T]he IRS issued a report detailing how colleges and universities were abusing the
[UBIT] rules by using loss-generating business activities to shelter gain from profitable
businesses. The discussion draft would modify the UBIT rules to address these and
similar loopholes.”
–W&M Majority Tax Staff, Section by Section Summary
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Corporate Sponsorship
Certain Arrangements Taxed as UBTI
• Proposal to treat corporate sponsorship payments as
UBTI if the sponsor acknowledgement refers to
sponsor’s product lines.
• Proposal to treat exclusive sponsorship of large events
(>$25,000) as UBTI
(a sponsor’s name and logo may not be treated more
favorably than others at such events)
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Royalties from Name/Logo License
Treated as UBTI
• Tax royalties from sale/license of organization’s name
or logo (including trademarks and copyrights related to
such name or logo) as UBTI per se.
“Many organizations, such as AARP, are now earning significant
profits licensing their own names to for-profit businesses (which
is not taxable to an exempt organization) to avoid engaging in an
active trade or business themselves.”
–W&M Majority Tax Staff, Section by Section Summary
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Treasury and IRS Update
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New Appointments at IRS
• Stephen Martin is now Acting Head of EO Rulings &
• Nan Downing is now Assistant Deputy Commissioner, TE/GEGE/Shared Support
• Eric San Juan has moved from the Taxpayer Advocate Service to
join IRS TEGE as Senior Technical Advisor
• Sarah Hall Ingram, Director, Services and Enforcement
Affordable Care Act Office, retired at the end of April.
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Reorganization of Tax Exempt and
Government Entities Branch
• IRS announced on March 20 that certain legal functions will move from
TE/GE Division to IRS Office of Chief Counsel.
– TE/GE rulings and interpretative staff will move to Chief Counsel
– TE/GE headquarters will move to Cincinnati
– EO Exam remains in Dallas
– Tax Exempt Bonds (TEB) unchanged
“TE/GE is one of the few places in the IRS where published
guidance, private letter rulings and technical advice memoranda
are worked on outside of Chief Counsel. This change will bring
TE/GE in alignment with the other three IRS business operating
divisions, which use Counsel for their guidance and legal work.”
IRS Statement (March 20, 2014)
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April 8 TE/GE Memo
Limits Cases Transferred to National Office
• Cases transferred to EO Technical include
– Applications from exempt hospitals subject to Section 501(r)
(until technical training is completed for EO Determinations
– Applications and technical assistance requests under the
Optional Expedited Process for Certain Exemption
Applications under Section 501(c)(4).
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Proposed 501(c)(4) Regulations
• IRS received more than 160,000 comments, such as:
– Definition of “candidate-related political activity” too narrow because it
treats nonpartisan voter education activities as political
– Definition is also too broad because it treats the mere mention of an
incumbent’s name on a nonprofit’s website within 60 days of an election
or 30 days of a primary as political activity
• “It is likely that we will make some changes to the
proposed regulation in light of the comments we have
received. Given the diversity of views expressed and the
volume of substantive input, we have concluded that it
would be more efficient and useful to hold a public hearing
after we publish the revised proposed regulation.”
– IRS statement of May 22, 2014
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President’s Budget Proposals
• Make e-Filing Mandatory for Exempt Organizations and Impose a Penalty for
Failure to Comply with Electronic Filing Requirements
• Reform Tax Based on Investment Income of Private Foundations
• Increase the Standard Mileage Rate for Automobile Use by Volunteers
• Limit deductibility of charitable contributions for high income taxpayers.
• Enhance and Modify the Conservation Easement Deduction
– Enhance and Make Permanent Incentives for the Donation of Conservation
– Eliminate the Deduction for Contributions of Conservation Easements on Golf
– Restrict Deductions and Harmonize the Rules for Contributions of Conservation
Easements for Historic Preservation
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Priority Guidance Plan
• Guidance under §4941 regarding a private foundation's investment
in a partnership in which disqualified persons are also partners.
• Final regulations under §4944 on program-related investments.
Proposed regulations were published on April 19, 2012.
• Guidance regarding the new excise taxes on donor advised funds
and fund management as added by §1231 of the Pension
Protection Act of 2006.
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Form 1023-EZ
Submitted for OMB review on March 31, 2014 (see 79 Fed. Reg.
18124). Application expected to be ready this summer.
Organizations that may use the short form include automatically
revoked organizations with less than $200,000 gross receipts and
which meet the requirements of sections four and seven of Rev.
Proc. 2014-11.
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Form 1023-EZ Instructions
Eligibility Worksheet
Are your projected annual gross receipts expected
to exceed $200,000 in any of the next 3 years or
have your annual gross receipts exceeded $200,000
in any of the past two years?
Do you have total assets in excess of $500,000?
Were you formed under the laws of a foreign
Are you a successor to, or controlled by, an entity
suspended under 501(p)?
Are you a limited liability company (LLC)?
Are you a successor to a for-profit entity?
Were you previously revoked or are you a
successor to a previously revoked organization
(other than automatic revocation for failure to file
Form 990)?
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Are you a church or a convention or association of
churches described under IRC 509(a)(1) and
Are you requesting classification as a school,
college, or university under IRC 509(a)(1) and
10. Are you requesting foundation classification under
IRC 509(a)(1) and 170(b)(1)(A)(iii) as a hospital or
medical research organization?
11. Are you applying for exemption as a cooperative
hospital service organization under section 501(e)?
12. Are you applying for exemption as a cooperative
service organization of operating educational
organizations under section 501(f)?
13. Are you applying for exemption as a charitable risk
pool under section 501(n)
Form 1023-EZ Instructions
Eligibility Worksheet (cont’d)
14. Are you requesting classification as a supporting
organization under IRC section 509(a)(3)?
19. Are you an HMO (health maintenance
15. Is a substantial purpose of your activities to
provide assistance to individuals with credit
counseling activities such as budgeting, personal
finance, financial literacy, mortgage foreclosure
assistance, or other consumer credit areas?
20. Are you an ACO (accountable care organization),
or do or will your activities include ACO activities?
16. Are you investing or do you plan to invest 5% or
more of your total assets in securities or funds that
are not publicly traded?
21. Are you a sponsoring organization as defined in
section 4966(d)(1) that maintains or intends to
maintain one or more Donor Advised Funds?
22. Are you organized and operated exclusively for
testing for public safety and requesting a
foundation classification under IRC 509(a)(4)?
17. Do you or will you participate in joint ventures,
including partnerships or limited liability
companies treated as partnerships, in which you
share profits and losses with partners other than
section 501(c)(3) organizations?
If you answered “Yes” to any of the above
questions, you are not eligible to apply for
exemption under IRC section 501(c)(3) using
Form 1023-EZ. You must apply on Form 1023.
If you answered “No” to all of the above
questions, you may apply using Form 1023EZ.
18. Do or will your activities include selling carbon
credits or carbon offsets?
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Type III Supporting Organizations
Final and Temporary Regulations: TD 9605 (Dec. 28, 2012)
All supporting organizations must continue to meet:
– organizational test
– operational test
– disqualified person control test, and
– relationship test
The Final Regulations revise the relationship test for Type III SOs by requiring three criteria:
– notification requirement
– responsiveness test
– integral part test
The Final Regulations also create specific definitions of “functionally integrated” and “nonfunctionally integrated” Type III supporting organizations as part of the revised integral part
test (although other parts of the revised integral part test are contained in the Temporary
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Distribution Requirement for NonFunctionally Integrated Type III SOs
• Temporary regulations set the annual distributable
amount at the greater of 85% of adjusted net income or
3.5% of the fair market value of non-exempt-use assets.
Issued as temporary and proposed to allow for
additional comments.
• The regulations specifically do not address whether
PRIs are counted toward the distributable amount.
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Notice 2014-4
• Reliance on written representations or opinions of counsel
addressing whether a Type III SO was functionally integrated.
• For grants made after December 28, 2012, a Type III SO must
meet the functionally integrated requirements described in the
2012 final regulations (specifically Reg. § 1.509(a)-4(i)(4)), or the
functionally integrated requirements of Section 3.01 of Notice
2014-4 for a Type III SO that supports a governmental
organization, to be considered “functionally integrated” for
purposes of a representation or opinion of counsel on which a
grantor may rely.
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Perspectives on the National Tax Policy Debate
Eugene Steuerle
The Urban Institute
June 9 2014
Washington Update
Council on Foundations – Philanthropy Exchange
2014 Annual Conference
Tax Policy and Charities website: http://www.urban.org/taxandcharities/index.cfm
Dead Men Ruling website: http://www.deadmenruling.com
Government We Deserve Blog: http://blog.governmentwedeserve.org
Broad Budget and Tax Reform Goals
Usually Unrelated to Charity
Charity not the primary issue in many proposals
President Obama
Fix budget (leads to revenue raising proposals)
 Pay for spending he favors (leads to tax increases)
 Only raise taxes on high income (leads to cap)
Chairman Camp
Broaden base to show maximum rate reductions (leads to
multiplicative efforts)
 Simplify taxes (leads to fewer itemizers)
 Concern over enforcement (also leads to floors, fewer itemizers)
 Go after abuses, real & perceived
Yet All Recent Major Budget and Tax Reform
Proposals Affect the Nonprofit Sector
President Obama (2011)
-- Limit value of each itemized
deduction to 28% of the
expense for families making
over $250,000 a year
Chairman Camp (2014)
-- Lower rates
-- Few itemizers
-- 2% AGI floor
-- 40% max deduction
-- Cap gains (+ & -)
-- excise taxes (e.g.,
foundation ex. tax)
-- restrict donor advised
--other regulations
Bowles-Simpson (2010)
-- In lieu of a deduction,
allow all taxpayers a tax
credit equal to 12% of their
donations, subject to a 2%
AGI floor
Loss of Control over Budget: Why Every Major Budget and Tax
Proposal Tends to Raise Revenues from Charities
The Effect of Reform Varies Widely Within the Nonprofit Sector
Revenue Sources by Sector
Arts, Culture,
Gov’t grants/ Other revenue
Source: National Center for Charitable Statistics calculations based on the Urban Institute, National Center for Charitable Statistics,
Core Files (2009); Internal Revenue Service, Statistics of Income Division, Exempt Organizations Sample Files (2007); American
Hospital Association Survey, 2009; and the Centers for Medicare & Medicaid Services, National Health Accounts.
Can We Favor Some Types of Charities?
Government does favor some charities through
direct spending
 The charitable tax deduction: the one incentive
where individuals choose, signal priorities, and
fill in gaps that government will not or cannot
Some Effects on Total Charitable Giving
--Excludes Gains from Broader Reform--
Total GDP, 2013 = $16 trillion
Individual giving, 2012 = $229 billion (Giving USA)
Total Tax Subsidies, 2013 = $48 billion (Urban-Brookings Tax Policy Center)
Reduction in giving from different proposals: (Urban-Brookings Tax Policy Center)
Camp Total of Several Provisions
(Excluding 40% cap & cap gains)
 Rate structure
 Standard deduction/personal exemption
 Itemized deductions (other than charity)
 2% floor
-6% to -12%
-1% to -2%
-1% to -2%
-1% to -3%
-2% to -4%
President Cap Only
-2% to -4%
Effects of Camp Proposal on Giving Incentives
Average Subsidy per $100 of Charitable Contributions
Change (by itself only) due to:
Deduction / Deductions
$22.70 $11.90 -$1.50
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-3).
Effects of Camp Proposal on Giving Incentives
Change in Total Charitable Contributions (billions of $2012)
Change due to:
Deduction /
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-3).
Effect of 28% Cap in FY2015 Budget
on Charitable Contributions ($ billions)
Low Response
Total Change on Charitable
(billions of 2013 dollars)
High Response
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0613-3). Note: high response is elasticity of -1.0
and low response is -0.5.
Them Against Us?
And who are we? The “them’s” or the “us’s”?
The real goals should be to strengthen the nation’s
 Fiscal
 Tax system
 Charitable Sector
We all have a stake in each sector’s success
 Charities
take big hits from
 Spending
 Weakened economy
 Government
will have increased responsibility with a
weakened charitable sector
Budget & Tax Battles Not Easily Compromised
If a sector fights all cut-backs, then limited gain to elected
officials to make trade-offs
Charitable sector sometimes viewed as just another interest group
If sector compromises, it fears only revenue gainers will be
picked off, e.g., in some future deficit reduction package
A Better Way:
Replace Less Effective With
More Effective Incentives
--Rough Ranking of Potential & Actual Incentives-(from Highest to Lowest Charitable Yield Per Dollar Spent)
Compliance efforts (including legal restrictions)
Allow giving until April 15 or filing of tax return
Perhaps $3 to $6 dollars of giving gained per dollar of revenue pick up
Allowing a deduction instead of a credit (current law)
 Greater loss of charitable giving if higher-income givers more “price” sensitive
Removing the excise tax on foundations
 $1 gain in charitable output per $1 loss in revenues
Allowing a non-itemizer deduction
 Lower response if lower-income givers less “price” sensitive
Avoiding a floor (e.g., 1% of income) under charitable giving (current law)
 Extremely limited gains in charitable giving per dollar of revenue pick up
Combinations of Proposals:
Example of Two Options to Change the Charitable Deduction, 2011
(High response rate)
Cash Income Percentile
Revenue effect ($ billions)
Total change in
contributions ($billions)
22% Cap
Deduction with
1.7% AGI Floor
Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0411-2). Note: high response (elasticity of -1.0).
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