Washington Snapshot - January 9, 2015
114th Congress Kicks Off
The 114th Congress converged on D.C. this week, with many new lawmakers among them. Fifty-eight new members of the House of Representatives and twelve new Senators started their new jobs this week. Check out National Journal’s interactive guide to the new members of Congress for more information about these newly-minted lawmakers.
As its first order of business, the House reelected Representative John Boehner (R-OH-8) as Speaker. Twenty-five representatives voted against Boehner’s reelection. The Washington Post points out that this was “the largest revolt against a House speaker in more than a century, and the rebels were within striking distance of the 29 votes they would have needed to deny Boehner the speakership.”
Nonetheless, Boehner held onto the Speaker position, and along with his counterpart in the Senate, Majority Leader Mitch McConnell, assumed his leadership for the new Congress.
Chairman Ryan Announces First Ways and Means Hearing
New House Ways and Means Chairman Paul Ryan (R-WI-1) announced the tax-writing Committee’s first hearing of the 114th Congress this week. The focus of the hearing will be “the state of the U.S. economy and policies that can promote job creation and economic growth.”
The hearing will be held on Tuesday, January 13, 2015, at 10:00 AM, and can be watched live via C-SPAN.
Meanwhile, Chairman Ryan’s predecessor Dave Camp (R-MI-4) was hailed “Tax Person of the Year” for 2014 by Tax Notes – a well-deserved recognition for the retiring Congressman. We wish Chairman Camp the best and look forward to working with Chairman Ryan and his staff in the months to come.
Tax News from the Hill
House Republicans Pass Dynamic Scoring Bill
On Tuesday, the new House passed a bill to adopt what is known as “dynamic scoring” on major bills that are introduced in Congress.
Under the new rule, when the Congressional Budget Office (CBO) or the Joint Committee on Taxation (JCT) are considering how much revenue a bill will cost the federal government, they must consider how the bill will impact the economy in their calculation. Specifically, the rule now requires that they consider any economic growth, employment, investment income and “other macroeconomic variables” when scoring major bills.
The rule change means that any major tax bills introduced this year—including those that affect foundations and other nonprofits—will be scored differently than past bills, with a broader range of factors considered when CBO or JCT advise lawmakers on what the bills would cost the government. While this shift may seem technical, it provides us with a new framework within which we can broaden our narrative to include information such as the economic impacts of our work and the costs taken on by the nonprofit sector that would otherwise be undertaken by the federal government.
The bill passed with a vote of 234 to 172, mainly along party lines. Dynamic scoring has long been sought by Republicans who view it as a way of demonstrating the real-world, macroeconomic impact of bills. A New York Times piece on the issue notes that dynamic scoring could “ease passage of major tax cuts by showing that their impact on economic growth would substantially reduce their cost to the Treasury.”
On the other side of the aisle, many Democrats have vocally opposed dynamic scoring, going so far as to label it “tax fraud.” Representative Sandy Levin (D-MI-9), Ranking Member on the House Ways and Means Committee, expressed his outrage about the scoring change. “Republicans today are extending their embrace of voodoo economics by wrapping their arms around voodoo scorekeeping. Again, it's not about more information, but it's able to cook the books to implement their long-held discredited notion that tax cuts pay for themselves," he said.
Chairman Hatch Pushes for Tax Reform
As we noted before the holidays, new Senate Finance Committee Chairman Orrin Hatch (R-UT) released a 340-page “in-depth” analysis of areas that are ripe for tax reform. The analysis is intended to “continue the conversation on tax reform.”
This week, the Chairman published an op-ed in the National Review, “It’s Time to Rebuild the Tax Code.” The op-ed reiterates Senator Hatch’s principles for reform, especially “those followed by President Reagan nearly 30 years ago when Congress last acted to overhaul the tax code: economic growth, fairness, and simplicity.”
The Chairman also acknowledges the need for increased certainty in the code, which is critical for charitable giving incentives like the IRA charitable rollover. He concludes by emphasizing his dedication to pursuing reform. “The 114th Congress is set to begin, and I’m hopeful that a path to real bipartisan tax reform will take shape,” he says. “I plan to help move the conversation forward in the coming weeks and months by engaging with members of both parties and unveiling additional steps.”
Representative Goodlatte's Tax Code Termination Act, Again
As he has done in past sessions of Congress, Representative Bob Goodlatte (R-VA-6) introduced the Tax Code Termination Act (H.R. 27) this week.
While it has been referred to the House Committee on Ways and Means for further consideration, the bill is not expected to advance. Yet, it is yet another signal from a member of Congress that tax reform is necessary and overdue.
The bill is intended to force Congress to undertake tax reform by sunsetting the current tax code by December 31, 2019. In his press release about the bill, Representative Goodlatte stated: “Even though tax reform has been discussed for many years, we have yet to see any major actions to simplify the tax code. We must force Congress to tackle tax reform head on. The best way forward is to scrap the current tax code and start fresh.”
News from the Administration
Rules on Government Cost Reimbursement to Nonprofits Finalized
The White House Office of Management and Budget (OMB) has finalized new rules on government grantmaking that will benefit nonprofits that receive government dollars. The rules apply to new written agreements (whether called “contracts” or “grants”) signed after December 26, 2014.
Under these rules, all levels of government (local, state and federal) are now required to reimburse nonprofits that they contract with for the reasonable indirect costs (“overhead” or “administrative” costs) they incur when federal dollars are part of the funding stream. In addition, the new OMB Uniform Guidance streamlines and clarifies cost allocation and other rules related to government grants and contracts, treating more of a nonprofit’s expenses as direct (reimbursable) costs.
Our colleagues at the National Council of Nonprofits have been very active on this issue and have kept us informed of important developments. They released a statement in support of the rule changes, stating in part that the rules “represent the federal government’s official recognition that all governments entering into written agreements with nonprofits to deliver services to the public have an affirmative duty to pay their fair share of the costs that those nonprofits incur. The changes promised by the new rules are a major victory for people who depend on nonprofits every day.”
The National Council of Nonprofits also encourages foundations to alert grantees about the rules to ensure that they take advantage of the beneficial changes. For more information on the new rules, see their website.
Revised Political Activity Rules Delayed
Originally anticipated early in 2015, the IRS now says that the revised rules on political activity for 501(c)(4) organizations will be delayed until at least late Spring, perhaps later. It has also been reported that the revised rules are also likely to include broader changes to how the IRS regulates the political activity of other nonprofit organizations, including 501(c)(3)s.
As our readers will recall, the original draft rules came out at the end of 2013 and provoked a record number of comments, with most commenters avidly opposed to the broader definition of political activity for social welfare organizations proposed in the rules. This overwhelming criticism prompted the IRS to revoke the rules, promising to redraft them for release in early 2015.
Even if the agency releases a draft of the rules this year, it will be difficult to solicit comments and finalize the rules before the 2016 election cycle, ProPublica reports. This challenge will be further compounded by the Republican-controlled Congress. Last year, the Republican-controlled House introduced numerous bills that would have prevented the implementation of the rules. None of these bills passed the then-Democratic-led Senate.
We will delve into the new rules when they come out and keep you posted on how they impact you.
Trending in Legal Affairs
Fiscal Sponsorships and the Importance of Charitable Purpose
Happy New Year from Legal Affairs!
A popular subject the team is fielding early this year relates to fiscal sponsorships.
Fiscal sponsorships arise when a person or group seeks financial support from a nonprofit or government agency. Either by law or preference, the funder will only distribute the funds to an organization with 501(c)(3) tax status. The person or group seeking the support will then look for a 501(c)(3) sponsor to receive the funds and pass them on to the project.
One member asked us recently about a situation involving a local nonprofit that lost its 501(c)(3) status for failure to file. The now-decertified nonprofit owned a building which it planned to donate to a local Head Start to provide low-cost child care. During the process, the nonprofit discovered that back payroll taxes had not been paid.
Our foundation member wondered whether it was permissible for the nonprofit to use an agency fund maintained at the foundation to help pay its legal bills and help transfer the building to Head Start. The nonprofit contemplated asking a church to act as the fiscal sponsor.
The Council’s legal team concluded that because the church was an appropriate fiscal sponsor, the grants could be made to the nonprofit from the agency fund through the church. We also suggested that it would be the fiscal sponsor’s (church’s) responsibility to ensure that the grants are used for charitable purposes. Operational costs, including things like payroll taxes, can be considered charitable.
In this instance however, we cautioned that because the fund was created with gifts from multiple donors, the foundation may have a donor relations problem if it allowed the fund assets to be used for debts and other expenses that may not appear to be related to the charitable mission of the nonprofit.
For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at legal@cof.org.
The information contained here is being provided for informational purposes only and not as part of an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.
