In 2004, $248.5 billion was given to charity by individuals, corporations and foundations.
Approximately 80 percent of those charitable dollars were given by individuals. More likely than not, a few of your hard earned dollars are included in that number. With your personal philanthropy in mind, I thought you might be interested in changes to the charitable sector.
No matter whether you work in the business, charitable or government sector, charitable reform legislation is looming which will affect how you donate, volunteer or work – possibly as soon as this month.
Over the past three years significant review and research on the charitable sector has taken place in Senate Finance, House Ways and Means, IRS’s Exempt Organizations Section and in many private nonprofit nongovernmental organizations.
The focus of the review and research has been on wrongdoing or the appearance of wrongdoing in the charitable sector and how to ensure a clean and compliant sector which is transparent and accountable.
This activity is the result of articles in newspapers such as Boston Globe and Washington Post which have highlighted wrongdoing (95 percent of which was and is illegal under current law, but not pursued because of IRS’ lack of resources.)
Combine the articles with a growing budget deficit and an appetite to close the $300 billion tax gap (expected tax revenues less actual receipts) and you have two reasons for legislators to legislate.
While many of the proposals originally floated by Senate Finance or the Joint Budget Committee and others will not become part of the legislation, many of the proposals will, including some of the 120 issues addressed by Independent Sector’s Panel on the Nonprofit Sector. A few of the changes you may see include:
Donor Advised Fund Reform. Community foundations, like the one in our town, are donor advised funds whereby an individual or institution makes a donation to the fund and then has a say, but not final authority, over how the funds are used for a charitable purpose.
Donor Advised Fund reform will likely make annual or periodic charitable payout mandatory.
Under current law, an individual may donate a sum of money, take a charitable deduction in the year of donation and then never request that it be paid out for a charitable purpose.
Noncash Contributions/Valuation Reform. The IRS has a difficult time with noncash items. This includes the family farm, works of art and closely held stock. The problem is it is difficult to value the item, and when the donator does that person generally seeks an appraisal which is favorable to the donator. The receiving charity does not care about the value declared by the donator because it gets the item which it would not otherwise have. The government does care because those valuation differences are a significant source of the tax gap, and therefore, unrealized government revenue.
Conservation easements, donations of art, land and other items may suffer a similar fate as car donations. Last year, Congress addressed the issue of automobile donations in an effort to address valuation issues and close the tax gap.
Before the new law, effective Jan. 1, the donor could take fair market value for the car based on Kelley Blue Book or some other valuation regime. Now, the donor may only take as the charitable deduction what the auto is sold for at auction, unless the auto, itself, is used for a charitable purpose. That law has led to a significant decline and in some cases elimination of auto donation programs at public charities.
Private Foundations and Administrative Expenses. Private foundations may see some new rules with regard to qualifying distributions. A private foundation must pay 5 percent of its assets toward charity in a given year.
A significant rewrite is not expected because members of Congress addressed the issue of Direct Charitable Activities in the Charitable Giving Act which was introduced, but not passed into law in 2003. Also, members have been made aware of the good work being done through Direct Charitable Activities by numerous private foundations across the country.
Type III Supporting Organizations. These are organizations which are afforded their charitable status based on their stated mission to support one or more public charities. It has been found some of these organizations have failed to pay out or support the organizations they indicate support for. As a result, Congress will likely introduce mandatory minimum payout requirements and an affirmative acknowledgment from the supported organizations.
990 Reform. Public charities and private foundations use form 990 as their tax information reporting form. While more of an issue for the IRS than Congress, we will see 990 reform, including e-filing, to encourage transparency, and accountability to make monitoring and enforcement easier.
These are a few of the changes which are likely to be seen. Comprehensive legislation will include other provisions also, so please keep your eye out for this legislation in September.
If you are interested in finding out more, I recommend the following Web sites: www.acreform.com; www.nonprofitpanel.org; http://finance.senate.gov/ go to hearings 4-5-05, 7-21-04 and 6-22-04, and www.waysandmeans.house.gov, go to oversight subcommittee.
Kyle Hybl is general counsel to El Pomar Foundation.