Congress Adopts Charitable Reforms

A resource of the Evangelical Council for Financial Accountability
This article provided by the Engstrom Institute

After several years of discussing charitable reform, Congress passed a set of incentives and reforms as part of the "Pension Protection Act of 2006" (H.R. 4). The President signed the bill on August 17, 2006.

One of the key provisions of the legislation is the IRA Charitable Rollover provision for gifts totaling up to $100,000. It was hoped this provision would not have a dollar limit. The bill did not include the so-called nonitemizer charitable deduction. Neither did it include a provision permitting charitable volunteers to exclude from income certain mileage reimbursements provided to them by a charity for volunteer services.

The bill includes reasonable safeguards intended to strengthen the work of charities by deterring potential abuse of tax-exempt organizations and create additional protections to ensure that donated funds are used for charitable purposes.

The IRA rollover provision, as well as other recommendations, was identified by work accomplished in part by ECFA involvement in The Panel on the Nonprofit Sector. The Panel was an independent effort by charities and foundations that included 25 top executives and national leaders, including ECFA President Emeritus Paul Nelson.

The following are the details on the provisions of the legislation with the most significant impact on ECFA members and their donors:

• IRA rollover. This provision permits taxpayers age 70-1/2 or older to make tax-free distributions directly to charitable organizations (except donor advised funds, supporting organizations, private foundations, or charitable remainder trusts) from traditional Individual Retirement Accounts (IRAs) or a Roth IRA of up to $100,000 per year through December 31, 2007.
• Taking Advantage of the IRA Rollover Opportunities
  
• IRA Rollover Opportunities for Churches
  
  
• Stranger-owned life insurance. Charities must report to the Secretary of the Treasury certain acquisitions of life insurance contracts for two years beginning on August 17, 2006. The Secretary is required to issue a report indicating whether such transactions are consistent with the tax-exempt purposes of those charitable organizations that acquire these contracts. For the last several years, ECFA has strongly cautioned against participating in life insurance programs where policies are taken out on a charity's specified donors that provide death benefits to the charity and investors share some of the policy proceeds. This provision represents the effort by Congress to control these insurance programs.
  
  
• Recapture of tax benefit ontangible personal property. Under the old law, gifts to charity of appreciated tangible personal property, unlike gifts of stock or real estate, were deductible at fair market value only if the property was used in the charity's program. Gifts valued over $500 triggered filing a Form 8283 by the donor and for gifts valued at more than $5,000, a qualified appraisal by an independent appraiser was required. If the charity disposed of the property within two years, the charity was required to file Form 8282 with the IRS, giving the IRS an opportunity compare the deduction with the sales price of the donated property.
  
  The new law, which became effective on August 17, requires a charity to file Form 8282 if it disposes of the property within three years and a deduction of the fair market value of the property may only be claimed if the charity uses the property for its exempt purpose for three years after the date of the gift. Otherwise, the donor can only deduct the adjusted basis in the property. There is an exception if the charity certifies that the property was used in its charitable program or that such use was intended but became impossible or infeasible.
  
  
• Clothing and household item donations. Rejecting the Senate's proposal for a national list of values of used clothing and household items, the bill specifies that no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better. The IRS by regulation may deny a deduction for any item with minimal monetary value. A donor who contributes a single item of clothing or a household item for which a deduction of more than $500 is claimed will be required to file a qualified appraisal of the donated property with the donor's tax return. This provision is effective for contributions made after August 17, 2006.
  
  
• Substantiation of contributions. Under current law, "other reliable written records" may suffice to document gifts of cash. Under the new law, the taxpayer must have a bank record or written acknowledgment from the charity. Other records will not be sufficient.
  
  This provision is effective January 1, 2007 and primarily will impact churches. Loose cash in the offering plate will no longer qualify for a tax deduction—underscoring the need for churches to use offering envelopes.
  
  
• Appraisal reform. Current law imposes an accuracy-related penalty if a taxpayer overvalues a claim for a contribution deduction. The new law lowers the threshold on the percentage of misstatement for purposes of applying a penalty. This provision generally applies to individuals' tax returns filed for 2006.
  
  
• Disclosure to state official of proposed action related to exempt organizations. The IRS would be permitted to disclose to appropriate State officers certain information about investigations related to refusal to recognize an organization as tax-exempt or revocation of tax exemption. The IRS would only be permitted to disclose this information to State officials charged with overseeing tax-exempt organizations and the information could only be used in connection with the administration of state laws regulating tax-exempt organizations or facilitate the resolution of Federal or State issues relating to the tax-exempt status of an organization.
  
  
• Donor advised funds (DAFs) and supporting organizations. The legislation requires the Treasury Secretary to study the operation of DAFs and supporting organizations to see if new restrictions are in order. In addition, the measure would extend to DAFs and to certain supporting organizations federal rules that currently are used to restrict the business holdings of private foundations.
  
  
• Public disclosure of Forms 990-T. The present public inspection and disclosure requirements for Form 990 are extended to the unrelated business income tax returns (Form 990-T) including the current law protections from disclosure of proprietary information. A certification provision in the Senate version of the Tax Relief Act applicable to charitable organizations with total gross revenues or gross assets of at least $10 million was dropped from the bill.

This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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