Policy Update
Federal Budget, E-filing, Advocacy, Charitable Deductions, Political Intervention and More
12/15/2005
Source: Independent Sector
1) Charitable Giving Incentives and Reforms Included in Tax Bill
In the early hours of November 18, the Senate passed a tax reconciliation bill (S. 2020) containing a number of significant charitable reforms and giving incentives. The legislation is consistent with many of the reforms recommended by the Panel on the Nonprofit Sector, (http://www.nonprofitpanel.org/), to curb abuse within the charitable sector, including penalties for involvement in tax shelter transactions; increased punishment for self-dealing and excess benefit transactions; reform of donor-advised funds and supporting organizations; new restrictions on credit counseling organizations; limits on deductions for façade easements and donations of clothing and household items; and new standards and penalties for appraisals of property donations.
Among the charitable giving incentives, many of which were also included in the CARE Act, (http://www.independentsector.org/programs/gr/CAREAct2005.html), is a measure that would allow taxpayers 70½ and older to make tax-free distributions from IRAs directly to charitable organizations. In addition, the bill would permit all taxpayers to deduct charitable contributions totaling $210 or more ($420 for joint filers).
Taxpayers who do not itemize deductions would be permitted to deduct only their cash contributions, while those who do itemize would be permitted to include both cash and non-cash contributions in calculating their deductions.
With assistance from our members, Independent Sector has identified concerns about specific provisions in the legislation and is now working to have those areas revised, either as technical changes by legislative staff or through negotiations between the House and the Senate.
The House plans to consider its tax reconciliation bill -- H.R. 4297, (http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.04297:), which does not include any charitable measures, during the week of December 5. It is not clear whether the House and Senate will have time to resolve differences between their bills before adjourning for the year.
2) Anti-Terrorism Certification Approved, Treasury Guidelines Expected
On November 7, the Office of Personnel Management issued a final rule, (http://www.independentsector.org/programs/gr/CFC.htm), on compliance certification language for the Combined Federal Campaign, a workplace giving program for federal employees.
The new regulation, effective 2006, requires that organizations certify whether they are in compliance with anti-terrorism financing laws, but does not require that they check employees’ names against government watch lists, as the CFC required in 2004 and 2005. This change reflects the efforts of charitable organizations, including Independent Sector, that filed comments with the CFC in May 2005 urging that the list-checking requirement be dropped.
The CFC final rule, (http://www.treas.gov/offices/enforcement/key-issues/protecting/charities-intro.shtml), also encourages charities to adhere to the U.S. Treasury Department’s voluntary Anti-Terrorist Financing Guidelines, (http://www.treas.gov/offices/enforcement/key-issues/protecting/charities-intro.shtml). Charities throughout the sector expressed concern with the original guidelines and have worked closely with the Treasury Department on a revised version, which was released yesterday.
The new guidelines will immediately replace the 2002 guidelines; however, Treasury will not finalize the document before considering public comments submitted prior to February 1, 2006. The Treasury Department has said the new guidelines include principles similar to the “Principles of International Charity,” (http://www.independentsector.org/programs/gr/international.html), developed by a wide-ranging group of charitable organizations, including Independent Sector.
3) Independent Sector Joins Amicus Brief on Nonprofit Advocacy
Independent Sector has joined a coalition of 35 charities in filing an amicus brief, (http://www.independentsector.org/programs/gr/WRTLamicus.html), in a case the U.S. Supreme Court will hear early next year involving a Federal Election Commission rule about electioneering communications by 501(c) organizations. The coalition includes national organizations such as OMB Watch, Alliance for Justice, Center for Lobbying in the Public Interest, and the National Council of Nonprofit Associations, as well as state nonprofit associations from California, Maryland, Michigan, North Carolina, and Pennsylvania.
The electioneering communications rule bans corporations, both nonprofit and for-profit, from running broadcast ads that refer to a candidate for federal office within 30 days of a primary, or 60 days of a general, election. The brief argues that the rule unconstitutionally restricts nonprofit grassroots lobbying ads and stresses the importance of allowing the full participation of nonpartisan voices in the public debate of important policy issues.
The case, which the Court will hear January 17, 2006, involves ads run in 2004 by Wisconsin Right to Life that urged Senators Russ Feingold (D-WI) and Herb Kohl (D-WI) to oppose filibusters of judicial nominees. At the time, Senator Feingold was campaigning for reelection, but the ads did not refer to his candidacy or the elections. The court will be considering two issues: 1) whether challenges to specific applications of the electioneering communications rule are allowed, and 2) whether WRTL's grassroots lobbying ads must be exempted from the rule for constitutional reasons.
4) IRS Investigations of Political Intervention Continue
According to Martha Sullivan, who will be resigning as director of the IRS Exempt Organizations Division at the end of this year, the IRS is investigating approximately 130 cases of 501(c)(3) organizations that, during the 2004 presidential election, potentially violated rules prohibiting them from engaging in political intervention.
Of the cases, 50 focus on churches, including one in Pasadena, California, that the IRS is examining to determine whether a former pastor’s anti-war sermon implicitly supported Senator John Kerry’s (D-MA) presidential bid. Sullivan said the IRS hopes to release additional guidance on political intervention regulations before the next election season, especially for small churches that are often unaware of the rules.
IRS representatives at an American Law Institute-American Bar Association conference on December 1, 2005, told attendees that the IRS’s Political Intervention Project (PIP) will prove to Congress and exempt organizations that the agency intends to operate in an impartial manner, despite arguments claiming the contrary.
As part of the project, the agency will offer plain language guidance for organizations in the form of examples of what type of political advocacy is and is not permissible by 501(c)(3) groups. The IRS has now posted on its website a memorandum, (http://www.irs.gov/pub/foia/ig/tege/tege_4_0305_02.pdf) sent to IRS agents and managers in March 2005, outlining the type of information IRS agents should obtain from organizations under examination and offering sample tracking documents and letters for agents’ use.
5) Tax Foundation Report Criticizes Deduction for Charitable Giving
The Tax Foundation, a conservative research group, has released a new report, (http://www.taxfoundation.org/files/f565bad1ee24ff21063eb7b81e0ea19e.pdf), exploring the economic justification for subsidizing charities by permitting donors to take a tax deduction for their charitable contributions. The authors argue that the size and scope of the current charitable deduction cannot be justified economically and should be dramatically reduced.
They say that “most 501(c)(3) charities now benefiting from the charitable deduction are neither charitable, in the sense of relying on nonaltruistic gifts, nor providers of public goods.” They suggest that lawmakers consider limiting the definition of tax-exempt entities to exclude organizations that are “benefiting unfairly from the deduction at taxpayer expense.” While agreeing that there are other ways to justify the charitable deduction, the authors focus solely on an economic justification and a narrow definition of “public good.”
6) Federal Budget Update
On November 3, the Senate approved by a vote of 52-47 its spending reconciliation bill -- S. 1932, (http://thomas.loc.gov/cgi-bin/bdquery/z?d109:s.01932:), which will cut $39.1 billion over five years in programs such as Medicare, Medicaid, and student lender subsidies. The House of Representatives passed its $50 billion spending cut package -- H.R. 4241, (http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.04241:), late on November 17 by a slim vote of 217-215.
House Democrats and several moderate Republicans strongly opposed provisions to make more significant cuts to mandatory programs including food stamps and Medicaid. Significant differences between the House and Senate bills will have to be resolved if a spending reconciliation measure is going to be enacted into law.
7) E-Filing Guidance from IRS
The Internal Revenue Service issued guidance, (http://www.irs.gov/pub/irs-drop/n-05-88.pdf), in November outlining steps tax-exempt organizations can take to seek waivers from electronic filing requirements. Temporary regulations issued in January for tax year 2005 state that tax-exempt organizations with assets totaling $100 million or more or that file 250 or more returns per year are required to file their annual information returns (Forms 990) electronically.
For tax years ending on or after December 31, 2006, the requirement will be expanded to include organizations with $10 million or more in total assets and all private foundations and charitable trusts.
According to the IRS’s latest guidance, organizations that cannot meet the electronic filing requirements due to technology constraints or that would suffer from undue financial burden may seek a waiver.
8) Heritage Foundation Reports on Federal Budget
The Heritage Foundation, a conservative think tank, has just released a report arguing that the outlook for the federal budget is even grimmer than it appears. “Entitlement-Drive Long-Term Budget Substantially Worse Than Previously Projected," (http://www.heritage.org/research/budget/bg1897.cfm), claims that the assumptions used by the Congressional Budget Office do not realistically portray trends in Social Security, Medicare, and Medicaid spending, or reflect funds needed for Hurricane Katrina recovery and the war on terror.
According to the report, unless the government reforms Social Security, Medicare, and Medicaid as soon as possible, the country will be faced with three painful choices: 1) raise taxes every year until they consume 57 percent of GDP; 2) eliminate every federal program aside from Social Security, Medicare, and Medicaid; or 3) run “massive” deficits.