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Home > Services & Resources > Legislative Update
Preview the new Form 990 for public charities on the IRS Web site. Note: the 990-PF for private foundations has no changes. Do you know how the Pension Protection Act affects your foundation? CURRENT UPDATE Foundations with Offshore Investments Institutions and persons holding foreign bank accounts must file a Report of Foreign Bank and Financial Accounts Form (known as the “FBAR”). Recently, three IRS officials made a public presentation that appeared to broaden its interpretation of which offshore investment accounts qualify as Foreign Bank Accounts and trigger the filing of the FBAR form. Furthermore, staff and board of the organizations who have signing authority over the accounts would have to file FBAR forms as individuals. This has created a small panic for the subset of nonprofit organizations & foundations with offshore investments as the deadline for filing these forms is June 30, 2009. On June 24, the IRS posted a response to an FAQ from a taxpayer that stated forms could be filed under certain cases as late as September 23, 2009. To understand the details of the filing, download the memo by O’Connor Davies Munns & Dobbins, LLP. For information on filing after June 30, 2009, see question #43 on the IRS questions and answers document.
The Association of Small Foundations seeks to provide members with information about pending policy changes and also seeks to be an “honest broker” of information to policymakers. Fallout From Madoff We continue to track reactions by regulators and legislators to the Madoff fraud. In our last newsletter, we asked for your help in chasing down related rumors, and we have continued our own inquiries. Recent interactions with key staff on Capitol Hill, offices of attorneys general, top charity lawyers, and the IRS indicate that responses will be measured. We don’t expect to see many, if any, attempts to prosecute boards as imprudent for not having caught the fraud. Attorneys general may target those who sat on nonprofit boards and earned fees from Madoff for referring the nonprofit organizations to him. There are two straightforward lessons here: First, adopt conflict of interest procedures that address situations in which a board member may benefit from recommending a particular investment, especially through fees or having a personal stake in the investment. Second, adopt an investment policy statement that sets your investment allocation and processes for evaluating the assets you hold. See www.smallfoundations.org/Primers for “Policymaking Made Clear: Eleven Foundation Policies Your Board Should Consider” and “Creating a Strategy and Plan for Your Foundation’s Investing: Developing and Using an Investment Policy Statement”—written resources on both of these issues. Charitable Deduction Reduction In his first budget presented to Congress, President Obama would raise the top two rates of income tax to 39.4% and 35% but would cap deductions for charitable donations at 28%. In effect, for donors in the top tax bracket, for every $100,000 donated, the donors would pay federal tax of $11,400 on the amount given away. The Presidential Administration has equated the charitable giving incentive with other incentives such as the mortgage interest deduction; we think this is a mistake, as the charitable incentive reduces a donor’s personal wealth for the benefit of others while the mortgage deduction increases an individual’s personal wealth. Typical estimates for how much the proposal hurts charities are $6 billion per year in lost revenues. The Administration has yet to release estimates of how much charities would save in health care expenses, which is the stated purpose for raising new taxes. More specifically, the Administration has argued for the change to pay for health care for the uninsured. Democratic leaders in the Senate have stated concerns with attempting to pay for health benefits by levying new taxes on housing and charity. Key tax staff on Capitol Hill report that the proposal has no real support yet, but the idea remains in play out of respect for the President. March 23, 2009 I encourage you to become active in your communities around ways that nonprofits can help to repair and stimulate our economy. Foundations and nonprofits can be next to invisible among the for-profit interests that swirl around our legislatures when there is money to be spent. With the first federal bill underway, action moves to the state and local levels. The stimulus package does help education and health care—both priorities of many While certainly there are important lessons to be learned from the Madoff scandal, I’ve heard statements in recent weeks that seem to be exaggerations built on kernels of truth—and meant to frighten foundation trustees into paying attention to their investments. They include claims that the IRS is doubling its audits of foundations, the Senate Finance Committee is launching investigations of foundation boards, state attorneys general are pursuing lawsuits against foundation board members, and top foundation staff are liable for lost assets plus a 10% penalty. The audit increase most likely refers to the recognition of late that the IRS should collect information on jeopardizing investments, combined with the recent and routine IRS mini-audit of 400 private foundations—a sampling that ended with the IRS complimenting foundations for their high degree of compliance. I checked with two CPAs who handle nearly 300 foundation audits between them, and they report no signs of an audit increase. And even if the IRS were doubling its audit rate, it would mean an increase from one audit per thousand foundations to two. As for Senate Finance staff, indeed they should be looking into the Madoff affair. They are likely to make public statements to that effect, and if they decide to escalate, they will send requests for information to those under investigation and meet with them privately. If they find evidence of fraud or complicity that has wider policy or political value, they may seek hearings with media coverage. The Securities and Exchange Commission has received the brunt of Congress’ ire. December 3, 2008 Tax reform is on the way – a term that Congress uses to refer to a large scale review of the tax laws. Estate taxes, capital gains tax, and alternative minimum tax are all topics to be considered, and Senate and House leaders promise that charities are also on the table. There may be an opportunity to lower the tax altogether, possibly reducing its impact on foundations by applying it to a broader base of all nonprofits or all endowments. COF has yet to factor this option into its plans. With tax reform on the way, we beg your indulgence to raise two scenarios: the proverbial gloom and doom. This is a departure from our traditional approach to filter the goings-on of Here’s our pitch to you: Adopt a member of Congress. Meet him or her. Shake hands. Visit. Listen. Be helpful. Be a little prickly, too, if he or she proposes something that can harm the sector. And don’t ignore the other party. Argue de Tocqueville’s claims for what makes Above all, be visible. And be sure to let us know who you’ve adopted. Call us at 888-212-9922 or e-mail asf@smallfoundations.org. It’s the dog days of summer here in Washington, when the city is sweltering and activity in Congress is slowing. Allow for some leeway this month to reflect on recent news. On July 2, based on a tiny bit of leaked information, the New York Times reported that Leona Helmsley left instructions for her estimated $5-$8 billion charitable trust to be directed toward the care and welfare of dogs – celebrity news of how, once again, Helmsley was sticking it to people by favoring animals. The news immediately triggered images of lawmakers waving dog collars and railing about wasted money. For advocates of philanthropic freedom, this one is likely to come back to bite us.
But while some will criticize Helmsley for favoring the needs of dogs, what about the thousands of abused and abandoned animals rescued by the ASPCA and The Humane Society of the United States? What about more dogs in nursing homes, or as service animals for children with autism? What about a local veterinarian whose charity organizes volunteers to care for the pets of hospice patients, at a time when pets are so important? We need to remember that good emerges from many corners and from many motives. And even then, a little math tells us that even if the trust hits $6 billion, a 5% payout wouldn’t cover much more than the cost to staff one person dedicated to the care and welfare of dogs in each county of the nation; it’s not much, and that person would need to get busy to inspire others to give. The first challenge for trustees in the Helmsley case is to properly guide the sale of Helmsley’s real estate, not an easy task in this market, for they could be seriously criticized if they fail to maximize the value of assets destined for the trust. Eventually, the trustees will need to walk a line between donor intent and charitable purpose if the trust is to maintain its nonprofit status, conforming to laws of the state and the nation. While not at all pleased that someone leaked information prematurely in the Helmsley case, as it’s likely to cost us on the Hill next year, we will continue to work hard at ASF to ensure that cool heads make our charity laws. June 20, 2008 On Capitol Hill, the legislative season has been clipped short by the election and a breakdown of bipartisanship at high levels. At the staff level, however, key staff for Chairman Baucus (D-MT) and Senator Grassley (R-IA) of the Senate Finance Committee are working collaboratively. We expect approval this year of a one-year extension of the IRA charitable rollover. We’re also likely to see at least one hearing to continue pressure on university endowments, nonprofit hospitals, and foundation and charity administrative expenses.Both at the Senate Finance Committee and in the House, concerns continue to be raised about whether nonprofits and donors are “warehousing” assets – receiving tax exemptions in the current year but not flowing benefits to the public for decades – and leaving the government to increase spending (and borrowing) to fund current needs. This could lead to a payout requirement on charity endowments and, in Massachusetts, state legislators are talking about a 1% tax on endowments outright. In addition, legislators continue to question who benefits from charitable giving, and we can expect ongoing accusations that donors focus on charities that also benefit the donor (e.g., a ballet patronized by the donor, the private school of a donor’s child). Senator Baucus has expressed concern that rural people don’t receive an equitable proportion of philanthropic dollars. In California, this topic has blossomed into a bill known as Assembly Bill 624 which would track the ethnicity of the boards and grantees of the state’s 40 largest foundations. In other news, enhanced disclosure on foundation tax forms is coming. It might be next year, or five years out, but it’s on the way. For the 2008 tax year, for example, public charities will use a new Form 990 more detailed than a foundation’s current Form 990-PF. Visit the IRS Web site for the new Form 990. We can expect similar changes to catch up to foundation tax forms eventually. ASF will advocate strongly to create an EZ version of the tax form for foundations; smaller public charities have the option of completing a Form 990-EZ. -Tim Walter- March 20, 2008
The IRA charitable rollover – the engine driving new nonprofit legislation – expired last year. This program allows retirees to donate IRA assets directly to charities without first cashing the assets and having taxes withheld. The program was a two-year program, and both houses seem to favor at least a one-year extension. Watch for it this year. Issues that carry forward from last year include pressure on nonprofit hospitals to provide more charity care, university endowments to raise their payout rates, and the tax exemption of revenues earned by nonprofit investments in hedge funds. We don’t know yet what’s in store for older issues such as trustee compensation, creation of a new 990-PF tax form, or relaxing the restrictions on donor advised funds. In -Tim Walter- June 9th, 2007
By the fall, we expect to see some legislation offered to mandate additional disclosures on the 990-PF, as well as the possibility of some caps on executive and board compensation. There continues to be talk of non-controversial legislation to fix some components of last year's legislation, and the possibility of a provision to encourage education philanthropy to be paid for by taxing nonprofits' offshore hedge fund investments. We'll let you know when any of these become more likely. November 21, 2006 Rumors of a Short Lame Duck Predictions of No New Legislation Flawed Congress returns from Thanksgiving recess on December 5th, but observers now report that legislators may produce only minimal legislation, passing a continuing resolution to keep the government functioning, plus a few noncontroversial tax breaks that are expiring this year. They may then adjourn within a week. The Chronicle on Philanthropy is reporting (unwisely, we think) that the next Congress will be less likely to take up nonprofit reforms because Max Baucus, the new Democratic leader of the Senate Finance Committee, has not listed this as one of his "top 10" priorities. Nonprofits did make it into the top 10 priorities of the Senate leadership 18 months ago when the CARE Act was flagged as a priority. It is our view that Senator Grassley's unfinished agenda relating to board duties, self-dealing, and compensation can be addressed in short provisions that can be inserted in virtually any tax bill. The regulations would be constructed as "revenue raisers," making them very tempting to legislators, especially if the Democrats adhere to balanced budget rules. As a matter of legislative strategy, these issues may actually be easier to pass if they don't draw a lot of attention as a "top 10" priority. Furthermore, the community foundation lobby is correctly pushing to fix some of the provisions from HR4, and the fundraising community (the vast majority of nonprofits) will by lobbying to extend the IRA charitable rollover which expires after 2007. We fully expect to be involved with new legislation in the coming two years. -Tim Walter- October 22, 2006 LAME DUCKS CAN STILL LEGISLATE Congress adjourned for the election recess without taking up any new tax bills. It's possible that several bills will be considered during the lame duck sessions now scheduled for both November and December. Due to uncertainty with the elections, it's now more difficult than usual to predict what may happen. For fun, though, here are some of the possibilities. After that, we'll share with you what the Senate Finance Committee is considering for the next round of legislation, items that promise to be of significant importance to many foundations. We're not expecting new nonprofit provisions to be attached to the lame duck session bills. 1. Estate Tax Bill: Some political observers are saying that this chronically stuck piece of legislation to raise the amount of an estate that is sheltered from estate taxes might acutally move if Democrats win the House in November. Negotiators have been close on this before, maybe in the $5 million exemption per person range. 2. Tax "Extenders" Bill: Earlier this fall, a set of "sure-thing" tax breaks was dropped from what became the Pension Protection Act. These were noncontroversial and included something for everyone, seemingly, so they were being "held hostage" to be attached to more controversial legislation in an effort to boost passage (like the Estate Tax Bill). There's a good chance that extenders will move in the fall as many businesses have been counting on the breaks to have been included. 3. Pension "Corrections" Bill: Usually corrections bills are passed after complicated tax bills to fix typos and glaring mistakes. The Pension Act corrections would include these, but there's also been fiece lobbying to fix what some are saying are unintended consequences and unclear meanings. The situation has become intense, and observers now think Corrections won't be taken up until 2007 when things have cooled off a bit. Next Round of Legislative Proposals Love 'em or hate 'em, Senator Grassley and his primary counsel on nonprofit issues, Dean Zerbe, are pretty consistent in producing legislation they say they're going to. The main frustration is usually that the timing is uncertain. Zerbe was clear with us about which provisions he was prioritizing for the Pension Act, and they did appear in the Act, namely focusing on community foundations, supporting organizations and donor advised funds. This go around, Zerbe has named issues relating to compensation for staff and trustees (especially family members), audits, how big or small a board can be and who can be on it, and board processes for setting compensation. Even if the Democrats take control of the Senate, Senator Grassley will remain a powerful member of the Senate Finance Committee. Foundations should expect a continued drive for new regulations from him. In addition, components in the Pension Reform Act expire every two years, and many nonprofits will return to the Hill regularly to request extension of these, namely the IRA charitable rollover provision. -Tim Walter- August 17, 2006 The new rules will affect your foundations grantmaking, operations, and taxes. Learn what the new rules mean for private foundations. August 4, 2006 BUSH EXPECTED TO SIGN NEW LAWS INTO EFFECT Last night, the Senate approved charitable reforms, accepting the House's version, meaning that the legislation should be enacted into law by President Bush without further delay. The legislation immediately prohibits grants from foundations to certain "supporting organizations" (see entry for August 2, 2006). Foundations will need to change their due diligence and approval processes to ensure that their new grantees are not incorporated under the prohibited legal structure. In addition, holders of "donor advised funds" that use the funds to pay for grantmaking-related expenses are also targeted in the legislation. Other information on the legislation can be found below. ASF worked hard to bring forward serious concerns on provisions related to new IRS powers. We appreciate the responsiveness to our concerns shown by the senior staff at the Ways and Means and the Senate Finance committees. Details on our next round of conference calls, and tip sheets on the new legislation, will be circulated on this Web site and via e-mail to ASF members on Tuesday, August 8. August 2, 2006 HOUSE PASSES CHARITABLE REFORMS In a midnight vote last Friday, the House of Representatives approved a package of charitable reforms roughly equivalent to what the Senate Finance Committee has been promoting since last year. This dramatically increases the likelihood of the package being enacted into law as early as this week, or by the end of September. Foundations need to be aware of a provision that would take effect immediately, prohibiting grants to certain types of "supporting organizations." The legislation may still change, but we provide a summary of a few key provisions below. The approval of the package was a surprise given that House Ways and Means Chair Bill Thomas had expressed slight interest in charitable reforms before the House had held hearings on the issues being promoted by the Senate Finance Committee. Thomas did attach the provisions to the Pension Protection Act but moved some very popular tax breaks to another bill (Estate Tax); Senate Finance Chair Charles Grassley had been expecting to keep the charitable reforms and tax breaks together. Setting aside the political to and fro, there's a decent chance the Senate could approve the House version of Pension/Charitable Act this week, so enactment might be upon us soon. There are two more windows in the Congressional calendar this year during which legislation might be enacted: three weeks in September prior to the election recess, or in a lame duck session after recess. Even with tepid support of the charitable provisions on the House side, the prospects for charitable reform passage this year are at least 50-50. The Senate might accept the House version verbatim this week. If not, maneuvers in coming weeks could result in changes to the charitable provisions. But, for now, here is the status of a group of provisions most related to private foundation operations: 1) Foundations need to be aware of a provision that will be effective immediately upon enactment, a new prohibition against making grants to certain "supporting organizations." Foundations will immediately want to change their grant applications and grant agreements to screen for supporting organizations among their grantees. ASF will distribute more extensive guidance on this should this provision be enacted. For those who are curious about supporting organizations, here's a bit more: Supporting organizations are legitimate public charities whose legal structure is formed under the auspices of a parent public charity (the parent is the "supported" organization). Supporting organizations are one of three types (I, II or III) relating to the degree of control the parent has over the supporting organization. The type can be hard to determine from public documents such as the organization's 990, so additional information from the grantee may be required. Some supporting organizations are known as "functionally integrated" with the parent, such as a blood bank operated with a hospital or an endowment operated under a college. Foundations would immediately be prohibited from making a grant to any Type III supporting organization that is not "functionally integrated." Foundations would also be prohibited from giving grants to Type I or II supporting organizations if foundation insiders also control the supporting organization's parent. 2) Regarding the issue of the IRS communication with states Attorney General, an issue prioritized by ASF, the House version agrees with the Senate version that the IRS be allowed to proactively contact a state Attorney General and provide the AG with information on ongoing investigations of a nonprofit. The House version changed the circumstances under which the IRS is allowed to act, however, limiting the proactive release of information to situations when a nonprofit has violated a state law. This narrows the Senate version under which the IRS would be allowed to release information if doing so merely helped the IRS gain power to compel a nonprofit to settle a federal case. 3) Unchanged in the House version is a doubling of a variety of penalty taxes such as those for self-dealing, failing to distribute the required 5%, and so on. Generally, this increase is viewed as focusing attention on these violations, most of which are viewed by experts in the field as inadvertent violations rather than intentional; thus, through education, violations are expected to decline. 4) The bill also increases types of revenues that are subject to the 1%-2% income excise tax, in part by taxing gains on the sale of charitable-use property (e.g., paintings sold by a foundation that formerly had been on loan to a museum, or the sale of a building a foundation owns that is used free of cost by public charities). The House version is less taxing than the initial proposal by the Senate, so the new tax will apply when the charitable asset is converted to an investment asset. The increase also applies taxes to some other forms of foundation investment income that previously were exempted, namely related to hedge instruments and rental property. While the House version is an improvement, any excise tax increase continues to rankle foundations, as roughly 90% of the excise taxes go into the general treasury rather than to fund enforcement of charitable regulations. 5) The bulk of the reforms focus on new regulations for community foundations, namely penalties and grant restrictions for holders of donor advised funds and supporting organizations. The Council on Foundations opposes the legislation on the basis of these restrictions. COF has produced a more extensive summary of the charitable provisions [PDF]. July 26, 2006 - 5:45PM The Senate and House are rumored to have come to an agreement on nonprofit reforms. The provisions have apparently been attached to the Estate Tax repeal bill. The Estate Tax bill is controversial, and its passage may still represent a major challenge for Republicans. However, what's significant is that House Ways and Means Chair Bill Thomas will have agreed to a set of nonprofit reforms, and if the reforms don't pass as part of the Estate Tax bill, they might be attached to other legislation later in the year. Thomas' consent would represent a major change in the prospects for the legislation. ASF and the nonprofit community anxiously await reading of the legislation which, as of now, remains secret. Independent Sector (I.S.) has launched an urgent phone campaign to support the legislation and to have the nonprofit reforms removed from the Estate Tax bill and switched to the Pension Reform bill which is also in play. Apparently I.S. may not support the Estate Tax bill, so the organization would be in the unfortunate position of opposing the larger piece of legislation which carries the nonprofit reforms they desire. In addition, the Pension Bill, while also still somewhat controversial, is more likely to pass than is the Estate Bill. June 28, 2006 The Senate Finance Committee, headed by Chairman Charles Grassley, approved a bill that includes some of the charitable regulations that Senator Grassley has been promoting for some time. These provisions have largely been passed before in other pieces of legislation, so their re-approval by the Committee is mostly symbolic. This bill is called the Telephone Excise Tax Repeal Act. You may have read that foundation organizations succeeded in getting an excise tax increase pulled from this legislation, but that victory likewise is largely symbolic. The increase was already passed in an earlier tax bill, so the increase is still a live possibility. Congress will likely pass some form of tax legislation before elections in November, and whether charitable provisions have been approved in one Senate bill or several, the provisions can ultimately be inserted into the final legislation. Thus, the active question remains the same: "What does the House Ways and Means Committee really think of all this?" and "What's going to happen in Conference Committee between Chairman Grassley and Chairman Thomas?" May 11, 2006 The budget reconciliation bill was split into two parts this week, with a set of tax cuts bundled into the first part. This first part is now being fast-tracked through both chambers and will likely be signed into law within days as a $69 billion tax relief package. The second part is now essentially a legislative caboose that has been unhooked from the rest of the train. This second part is where the nonprofit provisions are riding. We'll soon see the language of the Conference Committee, but what happens next is far from streamlined. The Senate will be allowed to debate at length and amend the Conference language, and many observers feel that this will ultimately doom the bill. But, never say never. If not this bill (the caboose), there are other finance bills on the calendar into which the nonprofit provisions can be inserted. In the near term, we'll be curious to see what language emerges when the second part is released from the Conference Committee. Namely, we remain concerned about an increase in the excise tax base, and we're increasingly concerned about a provision that will allow the IRS to intimidate a nonprofit it is auditing by trying to initiate a duplicate, simultaneous investigation by a state Attorney General. We feel this provision should be removed entirely or narrowed to limit the new power to be applied to nonprofits that are seriously fraudulent. (Our concerns do not extend to similar provisions that will allow a state Attorney General to ask for cooperation by the IRS on specific cases the AG is already investigating.) April 5, 2006 Conference Committee Still Wrestling with Nonprofit Provisions After months of "hurry up and wait" we expect to see some news on the tax reconciliation bill before the Easter recess. Numerous legislative and political priorities have delayed the progress of the tax reconciliation bill. Immigration reform, lobbying reform, among other issues, have inhibited the work of House-Senate conferees as they try to comprise on differences in their versions of the bills. We continue to hear that the House is unsure that they are ready to consider nonprofit provisions in the tax bill. Senator Grassley has begun already testing the waters on a second round of legislation that could be introduced later in the spring. If the first round of nonprofit provisions, which passed the Senate but not the House, is not included in the tax bill compromise, it is possible to incorporate it into subsequent bills. The next round of legislation is expected to address excess compensation and board composition, among other items. ASF has become increasingly concerned about a provision in the Senate bill which would allow the IRS to proactively contact state Attorneys General while the IRS is auditing a nonprofit and considering the imposition of penalties on the nonprofit, but prior to the IRS issuing a final ruling on the nonprofit's culpability. In other words, in order to strengthen its hand vis a vis the nonprofit's in a settlement negotiation, the IRS can seek to or threaten to seek to instigate a duplicate attorney general investigation before the nonprofit is actually proven to be guilty of an infraction. In certain circumstances, enhanced cooperation between a state Attorney General and the IRS can be very useful for tracking down fraudulent activity and halting the damage caused by scam artists, among others. ASF has asked the Joint Tax Committee and the Senate Finance Committee to consider that the legislation be more narrowly targeted to cases where significant misuse of charitable assets are at stake or when violators pose the risk of flight from state jurisdictions. February 8, 2006 Members of the House and Senate tax-writing committees are expected to meet in the next few weeks to try to resolve differences between tax bills passed in each chamber. As we go to press, it is uncertain if the Senate-passed provisions to raise excise tax collections, raise penalties on self-dealing, and deputize state Attorneys General to pursue IRS violations will survive these negotiations. The fate of these provisions are far from certain as the House appears not entirely convinced of their merits; for example, there has been concern among some members of the House that the Senate proposals affecting donor advised funds overreach. The House and Senate would like to resolve their differences in a conference report agreement by President’s Day and send that to the President for approval. It seems unlikely that they will be able to move that swiftly, however, and that agreement on a tax bill will not occur until late March or early April. Regardless of what happens with this current tax legislation, Chairman of the Senate Finance Committee, Senator Charles Grassley (R-IA), has made it clear that he intends to continue his work in the tax exempt area and, as it pertains to foundations, the compensation of staff and presumably trustees. This is consistent with press reports last fall that he would continue to examine the tax-exempt sector in a piecemeal but sustained way. ASF continues to watchdog the charitable reform legislation. We encourage you to join fellow members on our routine conference calls; contact the ASF office at 202-580-5650 to register. December 20, 2005 The House did pass its version of S.2020, but without charitable reforms. We now await the formation of a House-Senate Conference Committee to hammer out the differences in the bills. The charitable provisions are only one area of difference among many, and some of the differences are on major national policy matters. Therefore, the Conference is not expected to be easy, which is why work has not begun before the holidays. The House does not reconvene until the State of the Union address, and while we can't say with absolute certainty, we don't expect movement on the Conference until late January if that early. (Don't be confused as you will notice that before the holidays Congress is working to pass spending cuts as part of the budget reconciliation process and pass a defense bill, but our charitable provisions are in tax cut portions of the reconciliation process.) ASF is working to ascertain the positions of key lawmakers on the provisions that we're tracking, as noted below (excise taxes, and the release of information from the IRS to state Attorneys General). We'll advise you further when we have more background and concrete information. Issues of concern to many community foundations appear to be on the path to being resolved with Senate staff. Remember, your legislators are home for the holidays, so we repeat our request that you seek appointments to let them know of your work and that you're watching what happens in the charitable reform area. November 18 Third Update (8PM) The Tax Relief Act of 2005 (S.2020) passed today, and contains two important provisions that relate to private foundations: increasing penalties for certain A copy of this memo and 8 pages of background on the two key provisions is available here. [removed] For the most part, we saw Senate Finance Committee Chairman Charles Grassley being fairly straightforward in his communications with us over the last three weeks with regard to what he predicted he would do and then having that appear in legislation. However, there have been some surprises that warrant continued caution. First, he did accelerate to this bill certain provisions that we would have expected to see in future legislation. For instance, he inserted a number of low-dollar revenue raisers relating to conflicts of interest in donor advised funds. This ran contrary to his stated intentions of looking for revenue items in the $1-to-$2 billion range, and one suspects Chairman Grassley was just looking for ways to place restrictions on donor advised funds and used this tax vehicle to do so. (For those interested in the provisions related to community foundations, we suggest you the analysis provided by the Council on Foundations.) Second, the Senator exerted his power at the last minute when he submitted his "manager's amendment" late in the voting on the floor, and in so doing, added some new provisions and reinserted provisions that had been removed by his own committee the previous day. His amendments (affecting much of the bill) then passed the Senate on a voice vote. These actions give us a view of the power afforded a committee chair. Before we give our views of the two key provisions in this bill, we want to remind you of several other items that we’ve actively been pursuing with Senate Finance staff. These did not surface in legislation but might in the spring: ensuring the rights of foundation donors to name the composition and size of the board; ensuring that board members will be allowed to work as staff of the foundation; and questioning the data used by the Panel on the Nonprofit Sector in its audit recommendations. These issues require continued monitoring and communication with Senate staff. Returning to S. 2020, on the first issue of penalties, certain foundation expenditures can be ruled "taxable expenditures," essentially requiring a penalty "tax." For instance, if self-dealing has occurred, the foundation must repay the funds and the foundation and responsible persons may pay a penalty. In current law, the penalty started at a fairly mild amount, about 5%, but rose to up to 200% if the matter was not settled expeditiously. The new legislation would raise these initial penalty levels to as much as 25% and would raise the penalty cap (generally $10,000 to $20,000). More detail follows in the attached pages. ASF provided guidance to the Senate Finance Committee, saying that most foundations were deterred from violations simply by the threat and embarrassment of an IRS or Attorney General audit, not by penalties. Raising penalties would focus interest and education on the underlying laws, helping improve compliance by eliminating some unintentional violations. However, ASF and other foundation advocates emphasized to the Finance Staff that, because many violations are unintentional, penalties should be eligible for abatement. The use of abatement is included in the new legislation, although not 100%. On the issue of increasing excise tax collections by expanding the applicability of the taxes to more categories of a foundation's revenues, the Association did not provide specific guidance on this particular tactic. Instead, we emphasized that the foundation community was dismayed that today so little of the excise tax revenue (about 10%) is actually applied to the purpose of the tax, which is the oversight of the nonprofit sector, and therefore, taking more funds from foundations is inconsistent with public intent. Again, the excise tax expansion is explained in the attached pdf file. Future Steps: Chairman Grassley and a delegation from the Senate will meet in Conference Committee with the House’s delegation led by Representative Bill Thomas of California. This may take place in the next few days. The House bill is not expected to contain charitable provisions, and Thomas is said to be "uninterested" in such provisions at this time. We know Chairman Grassley has been making overtures to Chairman Thomas, but whether Thomas is moving is unclear. Again, once we fully digest the bill and can actually review the approved language we'll know more about whether the foundation community will react to the Senate's efforts of last night. In the attached file we provide excerpts from guidance from the Joint Committee on Taxation's analysis of the penalty and excise tax provisions which you will find fairly easy to understand. We also have copies of the actual amendments as passed last night which are quite difficult to comprehend for non-lawyers, but contact us if you want a copy. November 18 Second Update (11AM) We are in the process of excerpting the relevant elements of the legislation which passed late last night. It appears that penalty increases for self-dealing and other "taxable expenditures" did pass, and that Senator Grassley did reintroduce the expansion of the excise tax (not the rate, but what the tax applies to) in his late amendment. Other items of interest include the ability for the IRS to provide information to state attorneys general to assist the AG's in their investigations. Please check back at the end of the day today. -TW- November 18 First Update (12:30AM) The Senate has passed its version of the reconciliation bill, S 2020. We will post a summary of the charitable reform provisions when available. -TW- November 17 (10:30 PM) The Senate has begun voting on numerous amendments offered throughout the day on the Tax Relief Act of 2005. Language is unavailable on these amendments, most of which will fail, anyway. We will post amendments and the underlying bill when available. The underlying bill appears to have included a number of proposals focused on community foundations, placing far-reaching new conflict of interest procedures that may make it difficult for the foundations to administer donor advised funds in smaller towns. This is extremely concerning to our community foundation members. About 8PM tonight, Senator Santorum was speaking positively about the bill, saying he and Grassley were 90% of the way there, and touting provisions for IRA roll-over and non-itemizer charitable deduction incentives. His qualified support may mean that the concerns of community foundations have been rectified. Grassley is scheduled to introduce his "manager's amendment" later tonight, as the next to last amendment offered. Although the term "amendment" sounds like a minor change to a single provision, in fact, the "manager's amendment" can be comprehensive and can replace the entire bill. Within it would be the bulk of any changes Grassley, Baucus, Santorum, and others have negotiated. The underlying bill also does raise penalties for most of the "taxable expenditures" of foundations, such as failure to spend the requisite 5% or self-dealing. Again, as of this hour, we are unaware of amendments that either removed this penalty provision or which might have returned the excise tax expansion that Senator Baucus successfully removed from the bill yesterday. To the citizen observer, this process is extremely messy, but typical of the budget reconciliation. It gains a degree of sanity when one considers that eventually, Senator Grassley will sit in conference with Representative Thomas, both with a limited number of staff and colleagues, and together they will craft the final legislation to be brought forward to both chambers. -TW- November 16 Update (4:30 PM) ASF's political consultant Anne Urban gives us a little tongue-in-cheek update of what the Senate started today as of 4:30PM: "The Senate has begun debate on the tax reconciliation bill. Under reconciliation rules, there is a total of twenty hours allowed for debate on the bill. Once that time expires there generally occurs what is known on Capitol Hill as the vote-a-rama which is back to back votes that can go on for HOURS. We expect them to work off 5 or 6 of the twenty hours tonight and then take the bill back up early next morning with the vote-a-rama occurring late tomorrow or on Friday. Again, we will be watching the floor and will keep you posted." Literally dozens of amendments are offered during the "vote-a-rama." Over Thursday and Friday, we'll be closely watching for results related to the expansion of the excise tax and increasing of penalties. We're assuming the bill will pass. Democrats have objected to extending tax rate reductions for capital gains prior to the year these favored rates expire (2007). As there's still time to extend the rates in future bills, we don't foresee the issue as a stopper for legislators. November 16 Update (12:30AM) The Senate Finance Committee did pass a version of the budget reconciliation act and intends to send it to the Senate floor as early as November 16th (Tax Relief Act of 2005). The bill contains a number of provisions related to the operation of donor advised funds and supporting organizations, two products frequently found at community foundations. The regulations would elevate the cost of running a community foundation by requiring more stringent monitoring (and outright prohibiting) of transactions between an enlarged set of disqualified persons. However, it is unclear (to us) how these provisions will survive in the final bill as they seem to be outside of what is typically found in budget reconciliation legislation. As for the issues we raised below, on expansion of excise revenue and increasing penalties, we have mixed news. Apparently, Senator Max Baucus had the foundation excise tax expansion provision (see below) removed without objection for technical reasons. We are unclear tonight as to the fate of the increased self-dealing penalties and whether these have survived or will in the final bill. Please be aware the situation is still fluid, and even though something is removed, it can be brought back. There appears to be forward motion on allowing IRA's to be rolled-over to charitable organizations without forcing tax withdrawals. The legislation may move to the Senate floor on Wednesday the 16th. It is common for Senators to introduce "revenue raisers" (like taxes and fees) at the last minute on the floor, so please stay tuned for what transpires. -TW- Previous Updates
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offenses and taxing the sale of charitable-use assets (such as a foundation's office building). There are a number of other charitable giving items in the bill, and a provision that allows the IRS to forward information to state Attorneys General to assist in ongoing investigations. We won’t expand on these here. In a few days, once we fully digest the bill and can actually review the approved language, we'll know more about how the foundation community will react to the Senate's efforts of last night. In this memo, we’ll cover some of the politics that emerged during the past few days, and focus on the increased penalties and taxes.