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Senate Finance Committee Staff Issues Exempt Organizations, Charitable Giving Tax Reform Options Paper

By Bruce R. Hopkins, EditorJuly 17, 2013 | Print

The staff of the Senate Finance Committee, on June 13, issued a comprehensive paper on tax-exempt organizations and charitable giving law reform. These are tax reform options for senators’ discussion. Here are the highlights.

Political Activity and Lobbying

One proposal is to limit political activity by tax-exempt social welfare organizations (IRC § 501(c)(4) entities), labor organizations (IRC § 501(c)(5) entities), and business leagues (IRC § 501(c)(6) entities). The paper gives an example of a limitation of 10 percent of expenditures. Another proposal is that these organizations be required to disclose the amount and percentage of their annual expenditures for political campaign activities.

Still other proposals are to create a new category of exempt organizations that engage in political activities, eliminate tax exemption for social welfare organizations, require an organization involved in political campaign activity to qualify as a political organization (an IRC § 527 entity), and deny exempt status to labor unions if members’ dues are used in a political campaign.

A proposal is to clarify that payments to social welfare organizations are excluded from gift taxation. Another is to expand the prohibition on these organizations in engaging in lobbying from receiving federal funds by means of contracts.

Still other proposals include requiring additional reporting by tax-exempt organizations involved in election-related activity, ensuring that members of exempt organizations are notified of the portion of their dues used for lobbying and political activities, and requiring exempt organizations supporting political activities to disclose their donors.

Taxation of Business Activities

Proposed reforms in this context are to tax all commercial activities of tax-exempt organizations, revise the requirements for exempt status for organizations engaged in commercial activity, revise the unrelated business rules, and tighten the rules on conversion from exempt to for-profit status. (This last one is strange because there aren’t any such rules.)

As to the second of these categories, proposals include disallowance of exempt status for organizations engaged in “business activities” (such as hospitals and credit unions) and, in the case of service provider charities, impose a requirement to provide services irrespective of ability to pay, charge reasonable fees, and have an independent governing body.

As to the third of these categories, proposals include classification of certain activities as unrelated businesses (such as university athletic programs), permanent exemption from taxation of certain forms of investment income from controlled organizations, allowing exempt organizations to directly invest in debt-financed securities and commodities, and addressing the use of foreign blocker corporations to avoid the debt-financed investment income rules.

The paper states that, “[u]nder current law, charities are allowed to reorganize as for-profit entities, when doing so may avoid federal income tax on assets that are unrelated to the charitable mission.” (We are unfamiliar with this body of law.) The proposal is to “tighten” the rules as to conversion to for-profit status by, for example, imposing a termination tax on the conversion of assets.

Another proposal is to eliminate the tax-exempt status now available for professional sports leagues as part of the definition of business leagues (IRC § 501(c)(6)).

Other Tax-Exempt Organizations Issues

Two proposals pertain to private foundation law. One is to replace the two rates of tax on foundations’ net investment income with a single rate (e.g., 1.4 percent). The other is to allow foundations to own more than 20 percent of the stock of a for-profit corporation where the business was acquired by gift or bequest, the foundation is independent of the donor’s family, and the corporation distributes all of its net profits to the foundation.

As to endowments, one proposal would require a 5 percent minimum payout. A like proposal pertains to supporting organizations and donor-advised funds.

Another proposal is to introduce a “reason to know” standard in the intermediate sanctions context and replace the rebuttable presumption with a minimum due diligence requirement. A proposal would impose an excise tax at the entity level. Still another would require disclosure of compensation studies.

Concerning reporting requirements, proposals would mandate electronic filing of annual information returns, allow charities with up to $1 million in gross receipts to file a simpler annual return, and require all exempt organizations to make their unrelated business income tax returns public.

A proposal is to develop enforcement methods other than revocation of exempt status as the penalty for noncompliance.

Charitable Deduction Proposals

The list of the many proposals in the realm of deductible charitable giving starts with a proposal to repeal all of them. Many other proposals are commonly known, such as a cap on the amount or value of the income tax charitable deduction (e.g., 28 percent), conversion of the deduction to a credit, placement of a floor under the deduction, and allowance of the deduction by non-itemizers.

Many proposals would limit the deduction for noncash contributions. They include limitation of this deduction to the lesser of the donor’s basis or the property’s fair market value, taxation of the capital gain inherent in gifted appreciated property, limitation of the deduction for gifts of clothing and household items, and modification of the rules regarding contributions of fractional interests in tangible personal property.

Proposals would modify the deduction for contributions of conservation easements, by repealing it, expanding it, and making the expansion permanent, and replacing the deduction with a refundable tax credit, perhaps capped at a dollar amount. Other proposals would eliminate the deduction for personal residences, forgone upward development of historic buildings, and partial interests in property to be used as a golf course. Still other proposals would strengthen the qualification requirements for organizations receiving donated conservation easements by requiring that the organization be certified by a public agency (such as the IRS) to receive conservation easements and/or by suspending a land trust’s ability to accept new donations of easements if an audit reveals repeated failures to enforce easements or an unsustainable ratio or easements held in relation to available resources.

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