Background on Charitable Incentives and Reform Provisions
in Tax Legislation

On August 17, 2006, President Bush signed into law the Pension Protection Act (Pub. Law 109-280) that includes a package of charitable giving incentives and safeguard measures.

Earlier a package of charitable incentives and safeguards had been included in the Senate’s version of the tax reconciliation bill (H.R. 4297), but those provision were dropped before final passage in May 2006.

Independent Sector and over 20 other nonprofits sent a letter to members of the tax reconciliation conference committee on May 3, 2006, urging them to include both incentives for charitable giving and reforms in the tax reconciliation legislation. An additional letter was sent from Diana Aviv, IS president and CEO, to Chairmen Grassley and Thomas (R-CA) and Ranking Members Baucus (D-MT) and Rangel (D-NY). However, in May, 2006, Congress passed the final version of the tax reconciliation bill without a package of charitable provisions.

Below is some background on the legislative history of this legislation and earlier efforts of Independent Sector in support of charitable incentives and reforms.

Background
The Senate version of H.R. 4297 (formerly known as S. 2020) included an important package of charitable giving incentives and reforms, many of which mirror recommendations of the Panel on the Nonprofit Sector. The House version did not contain these provisions. Independent Sector supported adoption of the Senate version as long as five specific provisions were amended or dropped from the bill in conference. Our Fact Sheet (PDF) details both our concerns and the components of the bill that we think deserve support. As part our efforts, IS sent a letter (PDF) in February along with 80 other nonprofits to the leaders of the House-Senate conference (Senators Grassley and Baucus, and Representatives Thomas and Rangel) stating our support for the incentives and identifying the specific changes to the reforms that we believe must be made in conference.

Two technical changes were made in a manager's amendment on February 2, 2006. Those changes clarified that the provision allowing taxpayers to deduct charitable contributions above a floor of $210 (or $420 for joint filers) would last only two years for both itemizers and non-itemizers, and that taxpayers could transfer assets from their IRA accounts to split-interest trusts beginning at age 59½ without suffering adverse tax consequences.

With assistance from our members, Independent Sector identified concerns about specific provisions and is asking that they be amended or dropped from the bill in conference. The provisions are:

1. Treatment of Unrelated Business Income: The requirement that organizations with assets or revenues of $10 million or more and unrelated business income liability have their reports of unrelated business income certified by an outside auditor or counsel will impose a costly procedure on charitable organizations without achieving the goal of improved reporting of such liability. The certification requirement should be dropped from the bill.

2. Treatment of Payments to Sponsoring Organizations by Donor- Advised Funds: The boards of sponsoring organizations are in the best position to make responsible decisions about the application of payments from their donor-advised funds to achieve the organization’s overall charitable purposes. The stipulation that payments to sponsoring organizations will not count as qualifying distributions unless they are “designated for use in connection with a charitable purpose” should be dropped from the bill.

3. Restrictions on Gifts to Organizations by Donor-Advised Funds: The bill’s current requirements for grants made by sponsoring organizations of donor-advised funds are more severe than the requirements for private foundations, and will be extremely harmful to funding of critical humanitarian work outside the United States as well as important charitable activities carried out in the U.S. by other types of nonprofit organizations. This provision should be amended to allow sponsors of donor-advised funds to exercise expenditure responsibility when making grants for charitable purposes to organizations that are not organized as public charities.

4. Excess Benefit Transactions of Supporting Organizations: Supporting organizations, like the public charities they were created to support, are subject to the prohibitions on excess benefit transactions outlined in Internal Revenue Code Section 4958. Subjecting supporting organizations to the self-dealing rules applicable to private foundations will significantly impair their ability to provide funding to the charities they support. This provision should be dropped from the bill.

5. Treatment of Amounts Paid to Supporting Organizations by Private Foundations: The bill’s prohibition on applying grants to any supporting organization towards the minimum payout requirements of a private foundation will severely limit funds available to both public and private educational institutions, health care facilities, arts and cultural organizations, and other charitable service organizations. This prohibition should be dropped from the bill.

Previous Action
In November 2005, the Senate passed its reconciliation tax legislation, the Tax Relief Act of 2005, (S. 2020). The bill contains extensions of expiring tax provisions, additional relief for hurricane-affected areas, as well as charitable giving incentives and a number of significant charitable reforms.

As modified by a manager's amendment, the bill reflected many of the reforms recommended by the Panel on the Nonprofit Sector to correct abuses by taxpayers in claiming excessive tax deductions and by individuals who have used charitable organizations for their personal gain. The legislation also includes a significant package of incentives for charitable giving that are also in the CARE Act.

The bill's reforms included 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 was a measure that would allow older taxpayers to make tax-free distributions from IRAs directly to charitable organizations. In addition, the bill would have permitted 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. See fact sheet on Charitable Deduction Changes for Itemizers and Non-Itemizers.

• Joint Tax Committee description of charitable provisions in the Senate Finance Committee bill (PDF)
• CRS Report on Charitable Incentives in Recent Legislation (PDF)...12/1/05
• Letter in Support of the Nonitemizer Provision (PDF)
• Fact Sheet on Charitable Deduction Changes for Itemizers and NonItemizers (PDF)
• CBPP Analysis of Nonitemizer/ Itemizer Provision (PDF)

Last Updated: October 17, 2007

-Top of Page-