Washington Snapshot - February 6, 2015

Ways & Means Committee Passes Charitable Bills

The House Ways and Means Committee met Wednesday to markup several important bills focused on the charitable sector. The actions included making permanent charitable “tax extenders,” such as the IRA charitable rollover and simplifying the private foundation excise tax on investment income to a single rate of 1 percent. All four bills were passed out of the Committee, and will move to a full House of Representatives vote. Council staff attended the markup hearing for a first-hand look at the action.

Here is a full list of the charitable bills passed by the Committee on Wednesday:

• H.R. 637, “To amend the Internal Revenue Code of 1986 to make permanent the rule allowing certain tax-free distributions from individual retirement accounts for charitable purposes.”
• H.R. 640, “To amend the Internal Revenue Code of 1986 to modify the tax rate for excise tax on investment income of private foundations.”
• H.R. 644, “To amend the Internal Revenue Code of 1986 to permanently extend and expand the charitable deduction for contributions of food inventory.”
• H.R. 641, “Conservation Easement Incentive Act of 2015.”

Council President and CEO Vikki Spruill released the following statement after Wednesday’s markup:

The Council on Foundations applauds the Members of the House Ways and Means Committee for their commitment to supporting a strong philanthropic sector. We would like to thank them for reintroducing these measures so quickly in the new Congress, in order to provide much needed certainty to both donors and foundations. The four charitable bills passed by the Committee today will encourage charitable giving and strengthen philanthropy’s ability to serve communities across the country.

Simplifying the private foundation excise tax to a flat rate of one percent will allow private foundations to spend more resources on communities in need, rather than on tax compliance. The measure will lift an administrative burden and direct more focus to the work of the foundation rather than navigating a complicated tax provision that creates a perverse incentive to give less, not more, in times of need. We would like to thank Congressman Erik Paulsen and Congressman Danny Davis in particular for sponsoring this bill.

We are also especially pleased that the Committee voted to make the IRA charitable rollover permanent. This provision has long been a priority of the Council, and we thank Congressman Aaron Schock for his leadership on this bill. A permanent IRA charitable rollover will give individual donors certainty when planning their charitable gifts, which means more money will flow to charitable causes.

We thank the Members of the House Ways and Means Committee for moving these bills forward, and we look forward to working with the full House of Representatives to move these provisions toward becoming law as quickly as possible.

You can read more about the markup in the alert we sent on Wednesday night. Though the date has not been announced, House Majority Leader Kevin McCarthy (R-CA-23) has said these bills will come to the floor next week.

President's Budget Caps Deduction - Again

On Monday, President Obama unveiled his Fiscal Year 2016 Budget, which focuses on “Middle Class Economics.” The $4 trillion Budget, which sets forth the Administration’s spending and policy priorities for the coming year, calls for a cap on itemized deductions for the sixth year in a row—including the charitable deduction. Itemized deductions are capped at 28 percent for individuals who earn more than $200,000 and couples who earn more than $250,000. As with past Budgets, the Administration’s stated purpose behind the proposed cap is to “make the tax code more equitable” by limiting the amount that wealthy individuals or families can deduct.

There are several other proposals in the Budget that would impact charitable organizations. Significantly for Council members, the Budget would simplify the private foundation excise tax to 1.35 percent, as it has in past years The Budget also repeats the proposed requirement for Form 990s to be filed electronically. It also lays out the President’s plan, discussed in the State of the Union address, to close a “trust fund loophole,” subjecting appreciated assets to tax at the owner’s death but creating an exemption for inherited assets that are donated to charity.

Further, the Budget also proposes changing the base limit for certain charitable contributions. The contribution base for gifts of cash to public charities would remain at 50 percent, while a base of 30 percent would now apply to all other types of gifts to charitable organizations other than public charities. In addition, it would allow contributions that exceed these base limitations to be carried forward for 15 years, up from the current 5-year carry forward period. Finally, the Budget would permanently extend the land conservation easement “tax extender” provision, while proposing some reforms to the provision.

In her statement on the proposed Budget, Council President and CEO Vikki Spruill expressed support for the private foundation excise tax simplification, while noting that proposing to cap the charitable deduction is “misguided” and would “cost our most vulnerable communities the most, and we would see the loss of billions of dollars of charitable investment." She concluded her statement by asking both the Administration and lawmakers to work with foundations in tax policy debates:

Philanthropy has a proven track record of delivering measurable impact for America’s communities. The Council hopes that President Obama and other policymakers advance proposals that help sustain their work, and that requires that they view foundations as partners.

The Council looks forward to working with the Administration and Members of Congress to develop policies that allow philanthropy to continue building a strong, resilient economy and thriving communities.

The Charitable Giving Coalition sent a letter to the President in response to his repeat proposal to cap the charitable deduction, stating in part: “As charities struggle to raise additional funds to meet increased demands for their services, we ought to encourage Americans to be more generous, not signal that giving is less important.” The letter concludes by strongly urging the President to withdraw his proposed deduction cap.

For more details on program-related proposals in the Budget, check out Rick Cohen’s Nonprofit Quarterly analysis of proposed funding levels and policy changes on issues like immigration reform and climate change.

Other News from the Hill

Senate Tax Reform Working Groups Assignments

Several weeks ago we reported to you on the five newly commissioned Senate Finance Committee tax reform working groups. We received reports this week regarding the makeup and timeline for each of these working groups. We’re expecting that the groups will provide preliminary ideas for policy changes in March or April but that any legislative text would not come before May.

The working groups that we expect to most closely relate to our issues are those looking at individual income tax and the business income tax. The individual income tax group will be co-chaired by Senators Grassley (R-IA), Enzi (R-WY), and Stabenow (D-MI). Members will include Senators Crapo (R-ID), Cornyn (R-TX), Toomey (R-PA), Schumer (D-NY), Nelson (D-FL), Menendez (D-NJ), and Bennet (D-CO). The business income tax group will be co-chaired by Senators Thune (R-SD) and Cardin (D-MD). Members will include Senators Roberts (D-KS), Burr (R-NC), Isakson (R-GA), Portman (R-OH), Toomey (R-PA), Coats (R-IN), Stabenow (D-MI), Carper (D-DE), Casey (D-PA), Warner (D-VA), Menendez (D-NJ), and Nelson (D-FL).

As we receive more details on these working groups, their timelines, and priorities, we will continue to keep you informed.

Chairman Hatch Announces Hearing to Revisit 1986 Tax Reform

Senate Finance Committee Chairman Orrin Hatch (R-UT) announced a hearing that will take place next week on Tuesday to take a look back and see what lessons can be learned from the passage of the 1986 Tax Reform Act – the last time Congress successfully passed a comprehensive tax reform package. Witnesses at the hearing will include former Senate Finance Chairman Bob Packwood (R-OR) and former Senate Finance Committee member Senator Bill Bradley (D-NJ).

This should be an interesting hearing with much to be learned from a past tax reform process. We will report back to you next week about it. If you are interested, you can watch it live at 10AM ET on Tuesday.

Trending in Legal Affairs

Naming Donor Advised Fund Successors

A community foundation was approached by one of its donor advised fund holders wondering if the foundation could add his or her grandchildren as another generation of successor advisors to the fund. The couple’s original agreement named only their children as successors.

Legal Affairs was asked: Is the addition of successive generations of advisors an issue of excessive donor control?

The Council’s legal team recommends designating all successor advisors when the fund is first established so there is no question the foundation is allowing donors to exercise later control over the fund. While this recommendation may not always be possible, given the complexity and diversity of each donor’s family planning, if the donor’s request is the only reason for making the addition, it may be evidence of continued donor control over the fund. Such a practice is contrary to the idea of a completed gift, and the IRS generally frowns upon this. However, if the original donor, who is still alive, suggests adding successors and the foundation feels the additions are necessary or a good idea to better utilize the fund, it is Legal Affairs’ opinion that such an addition is permissible.

For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at legal@cof.org.

Access to the Council’s legal team is a valuable member benefit. Council attorneys are available to discuss your legal questions and to provide legal information by telephone, email and through our various publications and newsletters. This information is intended for educational purposes and does not create 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.

Philanthropy News and Op-Eds

Court Requires IRS Release Computer-Readable 990s

On January 29, a federal judge in the U.S. District Court of the Northern District of California ordered the IRS to release computer-readable Form 990s. This decision could have significant implications for research and analysis of nonprofit data as 990 information becomes more readable and easily accessible. It is unclear whether the IRS will appeal this ruling.

The goal of obtaining more readable and accessible Form 990 information has gained traction among policymakers. As we noted in our discussion of the President’s Budget, the President has proposed making Form 990 e-filing mandatory over the past few years, a proposal which was also included in Chairman Camp’s Tax Reform Act of 2014.

The decision would require the IRS to develop protocols and train staff to remove confidential data at a time when the agency has suffered significant cuts in staffing and been forced to freeze projects because of lack of funds. Yet, an article in The Chronicle of Philanthropy quotes U.S. District Judge William Orrick refuting this concern, “The fact that an agency may be under significant financial distress because it is underfunded does not excuse an agency's duty to comply with the [Freedom of Information Act].”