Washington Snapshot - February 26, 2016
News from the Hill
This Week in Tax Reform...
Yesterday, the Brookings Institute held an event entitled Tax Policy in 2016: What’s New and What’s Next. Council Vice President for Public Policy Hadar Susskind attended this event, where keynote addresses were given by Ways and Means Chairman Kevin Brady (R-TX-8)—pictured right with Hadar—and Ranking Member of the Senate Finance Committee Ron Wyden (D-OR).
On par with his remarks during Wednesday’s hearing, Representative Brady expressed his intent to pass international tax reform legislation this year. Following the hearing, the Chairman of Ways and Means Subcommittee on Tax Policy Charles Boustany (R-LA-3) noted that he hopes to release a draft for international tax reform by the end of March.
Separately in the Senate, Chairman of the Senate Finance Committee Orrin Hatch (R-UT) is working to craft his own tax reform proposal that, like the Ways and Means plan, would aim to “lessen pressures [for] businesses to relocate abroad,” according to a BNA article.
Momentum is building toward comprehensive reform—which is expected to take root in 2017 following the election of a new President. Comprehensive tax reform presents an opportunity for revising policies that hinder philanthropy’s ability to positively impact the communities it serves, and to implement new policies that create an enabling environment for philanthropy.
Congress Grows More Skeptical of Universities
On Wednesday, Chairman of the Ways and Means Oversight Committee Peter Roskam (R-IL-6) announced that his committee will hold a hearing entitled, Protecting the Free Exchange of Ideas on College Campuses, which will be held on Wednesday, March 2nd at 10:00 AM ET.
During this hearing, the committee intends to discuss whether tax-exempt colleges are using 501(c)3 status to constrain free speech and suppress the open-exchange of ideas. The announcement of this hearing follows an incident on the campus of Georgetown University Law Center where a group of students’ request to set up a campaign table outside one of the classroom buildings was rejected by the University.
Roskam cites this incident in his announcement of the hearing, stating that “Freedom of expression is a critical underpinning of university teaching and research. Lately, we’ve noticed a disturbing trend of institutions stifling free speech and otherwise inhibiting the free exchange of ideas to shield their own viewpoints from criticism.”
Roskam’s sentiments reflect a trend of skepticism among policymakers about the role of universities in society, and the endowments that fund these institutions. The Council remains engaged on this issue and will continue our work to educate Members of Congress and their staff on the implications of policy decisions on philanthropy.
Executive & Regulatory News
FASB Seeks Foundation Input
Recently we reported that the Financial Accounting Standards Board (FASB) met with the Council to gather input on how possible changes to nonprofit accounting guidance might affect the programmatic and investment activities of foundations.
Specifically, FASB is working to determine whether there is a need to clarify when a nonprofit entity that is a general partner of a for-profit limited partnership should consolidate that LLP (or similar vehicle).
If you would like to learn more about these proposed changes, or give insight about how this would impact your organization, please contact Associate Director of Social Innovation John Cochrane.
Single Portal Filing Project Seeks Information
The Multistate Registration and Filing Portal, Inc. (MRFP) is an organization that works with the National Association of State Charity Officials (NASCO) and the National Association of Attorneys General (NAAG) to consolidate the information and data requirements of all states that require registration of nonprofit organizations performing charitable solicitations within their jurisdictions.
This group recently posted a request for information (RFI) to inform the development and launch of an online platform to facilitate this single portal filing project. MRFP will be hosting an informational call on March 15th at 3:00 PM ET, and the RFI will remain open until April 1st.
The Council plans to give input on this process. If you have questions, or would like to share your thoughts with us about this project, please contact us at govt@cof.org.
Trending in Legal Affairs
Accepting Promissory Notes and Other Debt Instruments
A community foundation inquired about accepting a contribution of a promissory note into an existing donor advised fund. The note represented a receivable from a third-party debtor to the potential donor. Unsure of how to handle this donation, and what legal documents were required to make a completed gift, the community foundation contacted the Council for guidance.
The Council’s legal team advised that, generally, promissory notes, debt instruments, and other assets such as these may be held in a donor advised fund. This is, of course, unless the foundation’s gift acceptance policy prohibited such a donation.
When accepting promissory notes, the legal team recommend foundations consider the following issues:
- Secured or Unsecured Note?
Foundations should ask donors if the note is secured by real estate or any other collateral. If it is secured, a mortgage should accompany it. The legal team advises foundations that both the note and the mortgage should be assigned to the foundation. - Assignability
Are there any provisions in the promissory note (or mortgage) that would restrict the note’s transfer assignability to the foundation? - Transferability
Relatedly, is the note non-transferrable? This means the foundation cannot sell or convert the note to cash before it is paid by the debtor. If it is non-transferrable, the foundation’s options are limited. Many gift acceptance policies prohibit this type of illiquid gift. - Default
Regardless of whether the promissory note is secured or not, foundations must decide whether they want to take the risk of a default. In the event of a default, will the foundation pursue foreclosure on the collateral (if applicable)? If the note was unsecured, the foundation runs the risk of not being able to collect the principal. If it is secured, however, the legal team advises that foreclosures can be both expensive and time consuming. Additional complications may arise if the collateral is residential property because there will be extra requirements in order to foreclose. - Other Mortgages on the Property?
If the property that is securing the promissory note has other mortgages on it, foundations need to know their priority. A mortgage’s priority is usually determined by the time it was placed on the property. Thus, a senior interest holder(s) to the mortgage may affect the likelihood of the foundation collecting in the event of a default. - Valuation of the Note
The promissory note will need to be valued for purposes of the donor’s tax deductibility. The legal team recommends an independent third party familiar with financial instruments to determine present day fair market value, which may be different (or possibly less) than the face value of the note. As an alternative, foundations may be able to acknowledge to the donor each time a payment is made from the third party, and the donor can take a charitable deduction for the value of each payment once they are received.
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.
Happening in the States
Exclusive from our colleagues at the National Council of Nonprofits.
Giving Incentives on State Legislative Agendas
2016 may be a break from the trend in recent years that saw state legislatures looking to score budget savings by curbing charitable giving incentives and other itemized deductions.
Nonprofits and foundations across the country responded to efforts to cap or alter charitable deductions in multiple states in 2013 and in several others in 2015, most notably Maine, North Carolina, and Vermont. Only in Maine were legislators successful in diverting resources from charitable works, and that may be changing soon. The Maine Joint Standing Committee on Taxation is scheduled to vote on Monday on a bill to remove the cap on itemized deductions enacted in 2015. In a budget deal last year, legislators extended an existing cap to also cover charitable donations. The current bill to remove the cap on itemized deductions has the support of the Maine Association of Nonprofits and the broader nonprofit and philanthropic communities.
One of the lead arguments in Maine for removing the cap on charitable giving is the adverse effects experienced in Michigan after the Legislature in 2011 repealed three tax credits that supported the work of community foundations, homeless shelters and food banks, and universities. Some good news in Michigan is that a key committee recently approved a package of bills that would restore the repealed tax credits that were lost in 2011.
A bill has again been reintroduced in Colorado that would create an individual income tax credit equal to 25% of contribution to an eligible endowment or institutional fund of a Colorado nonprofit. The bill has the strong support of community foundations and the Colorado Nonprofit Association. In Minnesota, a similar bill would create an early education tax credit for donations to a “qualified foundation,” which is defined as a 501(c)(3) organization participating in the program.
Not all measures promote charitable donations, and some can be categorized as purely partisan or motivated by social causes. A Kansas bill carried over from last year would prohibit the state, school districts, and other local governments from using their payroll systems to collect union dues, charitable and most other deductions from employee paychecks. The Arizona Senate is considering a measure to prohibit payroll deductions by state employees for any charitable nonprofit that perform a "nonfederally qualified abortion." The Governor had previously taken Planned Parenthood off the list of nonprofits eligible for government employee giving programs. Finally, an Oklahoma piece of legislation, that may be an entrant in the “Worst Bill of the Year” contest, seeks to prohibit animal rights nonprofits from soliciting contributions in Oklahoma for programs or functional expenses outside the state or for “political purposes” inside or outside the state.
