Washington Snapshot: Tax Bill Just Days Away from Passage

In This Week's Edition of Snapshot

• Tax Conference Committee Commences as GOP Leaders Announce a Deal
• Congress Avoids Shutdown, Stalls Shutdown Decision
• IRS to Pursue Changes to 1023-EZ in 2018
• Clarification on IRS Notice 2017-73
• In the States: Governors and Lawmakers Prepare for Budget Deficits

News from the Hill

Tax Conference Committee Commences as GOP Leaders Announce a Deal

The tax conference committee held its opening meeting yesterday to formally commence the process of reconciling the differences between the House and Senate versions of the Tax Cuts and Jobs Act. However, this meeting shaped up to be largely ceremonial, as informal negotiations were underway well before that point. In fact, shortly before the opening meeting was scheduled to begin yesterday, Republican leaders in Congress announced that they had already reached a deal on tax reform.

Not all the details of the plan have been released yet, but we do know that there are compromises on:

• The state and local tax (SALT), which would allow taxpayers to either claim a property tax deduction (up to $10,000) or claim a deduction for state and local income taxes (up to $10,000);
• The mortgage interest deduction, which would allow homeowners to deduct interest for mortgages up to $750,000.

Speculation has been swirling around several other unconfirmed provisions, including a corporate tax rate of 21%, a top individual rate of 37%, and the treatment of so-called “pass-through” businesses. It remains unknown whether the Johnson Amendment language will be included under the announced deal. Representative Mark Pocan (D-WI) organized a Dear Colleague letter in support of retaining the Johnson Amendment. You can read the letter on our website.

As far as how this progresses, GOP leaders in Congress are aiming to pass the negotiated version through both the House and Senate, and have it to the President’s desk for signature by next Wednesday. Chairman Kevin Brady (R-TX) of the Ways and Means Committee indicated yesterday at the opening conference meeting that a bill could be put up for a vote before impact estimates from the Joint Committee on Taxation (JCT) or the Congressional Budget Office (CBO) are available. He later announced that the signing of the conference report will take place tomorrow in the Capitol Building.

Congress Avoids Shutdown, Stalls Shutdown Decision

The House and Senate both voted on Thursday, Dec. 7 to pass a two-week continuing resolution (CR) to keep the federal government open through Dec. 22—pushing many of the tough spending decisions down the road until just before Congress recesses for the end-of-year holidays.

At the heart of the anticipated challenges on a spending deal is the ability to strike a balance between Democratic demands and the demands of the conservative wing of the Republican Party. GOP leaders will have to work with Democrats on this legislation, as they need a minimum of 60 votes in the Senate to pass the legislation, but only control 52 seats. Aware of this leverage, Democrats are pushing for a number of their policy priorities to be addressed in the legislation—including a fix for the Deferred Action for Childhood Arrivals (DACA) program. On the other end of the spectrum, conservative members of the GOP want to see increased levels of defense spending with no increases to non-defense discretionary spending—another challenge, as Democrats would seek equivalent spending increases for such discretionary programs.

Executive & Regulatory News

IRS to Pursue Changes to 1023-EZ in 2018

The IRS is expected to revise the Form 1023-EZ Streamlined Application for Recognition of Exemption under Section 501(c)(3), BGov reports. Commissioner of the Tax Exempt and Government Entities Division (TEGE) Sunita Lough announced that the updates will require an activity description, as well as additional questions on gross receipts, asset thresholds, and foundation classifications. These changes are expected in January or February 2018.

Clarification on IRS Notice 2017-73

We received a number of inquiries following our reporting of the IRS Notice 2017-73 last week. Please see below for clarification the Council’s interpretation of that notice:

Notice 2017-73 describes three distinct situations involving donor advised fund (DAFs), which the U.S. Department of Treasury and the IRS plan to address with upcoming regulations. The Notice seeks comments from the field and provides some initial guidance.

One issue in particular—whether donor advised funds can make grants to satisfy pledges made by the donor—has raised some questions. The Notice provides that a DAF sponsor (such as a community foundation) does not need to determine whether a donor/advisor has made a pledge before sending a DAF distribution to a charity, and the distribution will not result in an impermissible benefit to the donor/advisor (even if it turns out that the donor did make a pledge to the charity), provided certain conditions are met:

1. The sponsoring organization makes no reference to the existence of a pledge when making the DAF distribution;
2. The donor/advisor receives no other benefit as a result of the distribution; and
3. The donor/advisor does not attempt to claim a second tax deduction for the distribution to the charity.

The Notice also states that “Taxpayers may rely on the rules described in section 4 until additional guidance is issued.” The Council would caution community foundations not to interpret this Notice as a green light to begin paying donor pledges with DAF funds, or to market the ability to satisfy pledges with DAF funds to donors. Rather, it is our interpretation that this Notice serves as assurance that DAF sponsors and donor/advisors will not be penalized for DAF grants that may be used to satisfy pledges if the sponsoring organization was not fully aware of the existence of a pledge or the status of that pledge as an enforceable obligation of the donor.

If you have any additional questions on this issue, Council members may contact us at legal@cof.org.

Happening in the States

Exclusive from our colleagues at the National Council of Nonprofits.

Governors and Lawmakers Prepare for Budget Deficits

States face lower than expected revenues and budget gaps as accounting forecasts and unclear federal tax policies provide a grim outlook for the second half of the budget year. Minnesota leaders are watching a $188 million budget deficit, which could balloon to $586 million depending on spending decisions over the next few years. Legislators are also concerned about possible funding needs for the Children’s Health Insurance Program should the federal government fail to act quickly.

Kentucky legislators are struggling to find an additional $800 million to pay for deficits in the state and local government retirement plans. Governor Bevin is expected to call a special session to pass a reform bill to address the funding needs. In Vermont, lower-than-anticipated income tax revenues are forcing lawmakers to adjust the current state budget to account for an estimated $45 million shortfall. Rhode Island is headed towards a $60.2 million deficit for the current fiscal year plus a $204 million deficit next fiscal year. Louisiana Governor Edwards is considering a special session to address expiring temporary tax measures totaling $1 billion. “Devastating cuts” to higher education, child-welfare, and other state agencies are proposed should the state fail to agree on a long-term solution. And Oklahoma still doesn’t have a full state budget for the fiscal year that started last July; the Governor has called for a second special session on the issue starting December 18.