Senate Finance Committee Chair Baucus Targets Comprehensive Tax ReformEyes Peeled on Pending Reinstatement of "Pease Limitation" Policy News and Notes Boustany Announces Hearing on Tax-Exempt Organizations Treasury Nominee Says Tax Plan Not DevelopedConsideration of Tax Extenders Likely to Be Coupled With Comprehensive Tax ReformFed Chairman Warns Congress on Expiring Tax Cuts and Looming Spending CutsIRS Examples of Program-Related Investments for Tax-Exempt OrganizationsACR Disappointed by Obama FY13 Budget Proposed Limit on Charitable DeductionObama Budget Again Calls for Cap on Itemized DeductionsState of the Union: Implications for PhilanthropyTax Extenders/ IRA Charitable Rollover"Buffet Rule"/ Proposal to Cap Charitable DeductionsState of the Union Presents Opportunities for Public-Philanthropic PartnershipsCongress Continues to Spar Over Tax Extensions; Senate Rejects Two Bills
Treasury Reports to Congress on Supporting Organizations and Donor-Advised Funds
Treasury Department Releases Study on Supporting Organizations and DAFs
Congress Seeks to Extend Tax Measures
Reps. Schock and Polis Introduce Philanthropic Facilitation Act
Senate Finance Committee Chair Baucus Targets Comprehensive Tax Reform (Council on Foundations, June 18, 2012)
A streamlined system with lower rates and fewer tax breaks that would raise net revenues to reduce the deficit. That’s the brass ring of tax reform for Senate Finance Committee Chairman Max Baucus (D-Mont.). “Every tax provision needs to prove it has a tangible benefit to our economy or society,” Baucus said last week. “If not, it doesn’t belong in the tax code.”
Speaking at the Bipartisan Policy Center, Baucus offered his four goals for a successful tax code overhaul: create jobs, improve business competitiveness, encourage innovation, and increase social mobility. The senator did not offer specifics on the mechanics or timing of a proposal, aside from noting it would be difficult to release a plan before the November election. Baucus urged Congress to begin discussions to “figure out what we want to accomplish with tax reform.”
Baucus also held a closed-door meeting last week with Senate Finance Committee members where they discussed renewing the package of expiring or expired tax provisions. These include the IRA charitable rollover and other giving incentives. Committee members discussed a possible one-year extension of the provisions, which could cost up to $35 billion depending on the scope of the plan. Baucus urged his colleagues to reach consensus before Election Day and to discard potentially divisive provisions such as the expiring 2001 and 2003 tax cuts or the so-called Buffett Rule, which would raise tax rates for the nation’s highest earners.
The committee hosted a hearing on Tuesday, June 19 to examine the year-end fiscal challenges confronting Congress. Witnesses included former White House Budget Director Alice Rivlin and former Senate Budget Committee Chairman Pete Domenici. The two cochaired the Bipartisan Policy Center’s Debt Reduction Task Force, which in 2010 issued recommendations that included replacing the charitable deduction with a tax credit for nonprofits equal to 15 percent of any donation received. For additional information regarding the hearing, visit the Senate Finance Committee’s website.
Eyes Peeled on Pending Reinstatement of "Pease Limitation" (Council on Foundations, 6/4/2012)
The Council continues to follow the scheduled reinstatement of the "Pease limitation" on itemized deductions. That provision, named after the late Rep. Donald Pease (D-Ohio), effectively raised marginal tax rates and particularly hurt high-income taxpayers who made substantial charitable deductions.
Pease's provision reduced most itemized deductions, including charitable contributions, for taxpayers with adjusted gross income (AGI) in excess of a threshold amount that is indexed annually for inflation. Prior to enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pease's provision reduced the total amount of itemized deductions subject to the limit by 3 percent of AGI over the threshold amount, but not by more than 80 percent of itemized deductions subject to the limit.
EGTRRA gradually repealed Pease beginning in 2006, and it disappeared entirely in 2010. However, barring legislative action this year, Pease will be reinstated in 2013. Policy News and Notes (Council on Foundations, 6/4/2012)
Despite the widely held belief that Congress is in stalemate on just about everything, the New York Times reports that many lawmakers want to extend the Bush-era tax cuts—set to expire on January 1, 2013—before the end of the summer. According to the Wall Street Journal, House Majority Leader Eric Cantor (R-Va.) has scheduled a vote on this issue before the August recess.
Meanwhile, Reuters reports that a bipartisan group is working with the cochairs of President Obama's National Commission on Fiscal Responsibility and Reform—former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles, White House chief of staff during the Clinton administration—to craft a plan that forgoes a dreaded "taxmageddon" scenario that would impose automatic tax cuts. A number of economists discussed the potentially disastrous impact of this "fiscal cliff" in Politico.Boustany Announces Hearing on Tax-Exempt Organizations (Council on Foundations, 5/14/12)
Rep. Charles Boustany Jr. (R-La.), chairman of the House Ways and Means Subcommittee on Oversight, said the subcommittee will hold the first in a series of hearings Wednesday to look at the operations of tax-exempt organizations.
"This review allows us to examine the state of the tax-exempt sector, as it currently exists today and consider this information as we continue the Committee's efforts toward comprehensive tax reform," Boustany said. "In both cases the goal is the same—to ensure that the tax-exempt sector is operating in an efficient manner and that the laws governing tax-exempt organizations are being applied fairly and evenly." Treasury Nominee Says Tax Plan Not Developed (Council on Foundations, 5/14/12)
Mark Mazur, nominated to be assistant treasury secretary for tax policy, told the Senate Finance Committee during a hearing last week that the administration hasn't developed a plan to broadly overhaul the tax code and may not do so after this year's elections. Mazur did note, however, that the administration is doing "foundational work" in preparation for tax reform. Lawmakers from both parties believe tax reform should be a priority after the election, but remain divided about the shape of potential proposals.
Consideration of Tax Extenders Likely to Be Coupled With Comprehensive Tax Reform (Council on Foundations, 3/5/2012)
Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, wants to eliminate unnecessary provisions before the House considers the roughly $35 billion tax-extenders package that expired at the end of 2011. Camp said the package, which includes the IRA charitable rollover and other giving incentives, should be whittled down. "It shouldn't just be an automatic extension. I think we want to look at them carefully and decide what provisions deserve to be extended," he said.
While Camp didn't rule out the possibility of the package reaching the House before the fall elections, he stressed that the real opportunity for moving tax legislation will come at the end of the year, alluding to the expiration of the 2001 and 2003 income tax cuts.
Meanwhile,House Democratic Whip Steny Hoyer (D-Md.) is drafting a debt-reduction bill that would lower tax rates while raising more revenue through base-broadening measures. Hoyer said he wants to simplify filing, facilitate ease of compliance, eliminate disparities in treatment, and raise additional revenues while bringing down rates and reducing preferences.
Most observers expect fiscal policy issues to be put on hold until either a lame duck session following the election or the next Congress. It is likely that several expired extenders provisions will be considered as part of a tax-reform measure.
Fed Chairman Warns Congress on Expiring Tax Cuts and Looming Spending Cuts (Council on Foundations, 3/5/2012)
Federal Reserve Chairman Ben Bernanke testified last week before the House Financial Services Committee, warning Congress that expiring tax cuts and looming spending cuts could hurt the economic recovery. The Bush-era tax rates and a payroll tax cut are due to expire on January 1, and $1.2 trillion in spending cuts will be triggered on that date. Bernanke suggested that Congress figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date.
IRS Examples of Program-Related Investments for Tax-Exempt Organizations (Council on Foundations, 3/5/2012)
The anticipated Internal Revenue Service guidance for 2012 is expected to include additional examples to illustrate a wider range of investments that qualify as program-related investments (PRIs). Speaking at a meeting of the American Bar Association Section of Taxation on February 17, Ruth Madrigal, attorney-advisor in the Office of Tax Policy at the Treasury Department, said the guidance will not change the definition of charitable purpose in any new ways. The updated examples have long been sought by exempt practitioners who said the 1973 guidance is outdated and unrealistic.
In November 2011, Reps. Aaron Schock (R-Ill.) and Jared Polis (D-Colo.) introduced the Philanthropic Facilitation Act (H.R. 3420), which directs the IRS to respond promptly to private-letter ruling requests from foundations seeking to make program-related investments and to otherwise facilitate such voluntary ruling requests.
Background: Under current tax law, private foundations may count the value of PRIs as part of their minimum payout obligation, provided they meet specific IRS criteria: (1) The investments must be made for charitable purposes, and (2) they can't be used to produce significant income, for the appreciation of property, or to influence legislation or campaigns. As long as they meet these standards, PRIs may be directed toward for-profit as well as nonprofit and public entities. For foundations seeking to leverage their charitable assets more efficiently, PRIs are an increasingly attractive tool.
In determining whether a specific investment will qualify as a PRI, foundations typically are guided by current regulations, examples published by the IRS, and precedent. However, as foundations explore new applications for PRIs, they may choose to obtain a private-letter ruling from the IRS. In these circumstances, timely responses from the IRS can expedite foundations' use of PRIs to address pressing social problems.
The Council, Americans for Community Development (ACD), and other groups worked with Rep. Schock to craft this legislation. Read the Council's issue paper for a thorough analysis. To date, a companion bill has not been introduced in the Senate, but the Council and ACD are working to identify possible sponsors.
ACR Disappointed by Obama FY13 Budget Proposed Limit on Charitable Deduction (Alliance for Charitable Reform, 2/13/2012)
For the fourth time the President's budget has devalued private giving by proposing a limit on the charitable deduction. The Alliance for Charitable Reform (ACR) and others in the nonprofit sector have repeatedly opposed this proposal because it will diminish a strong incentive to give to charity.
The proposed limit on itemized deductions would reduce the value of the charitable deduction to 28% for families with incomes over $250,000. This would likely result in a drop in private giving. The President has included this in all of his budget proposals and twice as a revenue raiser for other priorities. Also included are recommendations for tax reform, including the "Buffett Rule", which would significantly change the tax structure for higher income earners.Click here to view the full article onthe Alliance for Charitable Reform's website.
Obama Budget Again Calls for Cap on Itemized Deductions; Also Would Reinstate Itemized Deduction Phase-Out, Establish "Buffet Rule," and Create a Simplified Excise Tax for Private Foundations (Council on Foundations, 2/13/2012)
The Obama administration's fiscal year 2013 budget proposal released today includes four provisions relevant to the philanthropic sector. The support for the simplified excise tax and preserving the charitable deduction under the "Buffet" rule are positive developments. Because it is unclear exactly how this support for charitable giving intersects with the continued inclusion of a proposed 28 percent cap and other limits on charitable deductions, the Council will continue to monitor the details as they become available.
1. The president wants to limit the tax value of itemized deductions high-income taxpayers can claim to a maximum of 28 percent, regardless of their marginal tax rate. The proposal is identical to language included in previous Obama administration budgets.
As before, the proposal would apply to married taxpayers filing a joint return with income higher than $250,000 and to single taxpayers with income higher than $200,000. These thresholds would be set "at 2009 levels," and thereafter would be adjusted for inflation. The Obama administration estimates that its proposal to cap the value of itemized deductions, together with limitations on other "tax benefits" for persons with incomes above the specified thresholds, would increase tax revenues by $584 billion over the 10 years from 2013 to 2022.
The Council will continue to oppose a cap on the value of itemized deductions and will be vigilant about any attempts to use this proposal as a revenue source. Although the proposal has virtually no chance to become law prior to the November election, major tax legislation is a distinct possibility in the post-election lame duck session, given the pending expiration of many basic tax code provisions at the end of 2012.
2. The president also has proposed reinstating a limit on itemized deductions that was phased out a decade ago. Reinstating this limitation would reduce the itemized deductions an individual could claim by 3 percent of the amount by which that taxpayer's income exceeded a certain threshold, provided that deductions could not be reduced by more than 80 percent. Though abolished in 2001, the limitation has been scheduled to be reinstated in 2013, and the administration supports letting this occur as scheduled. The administration estimates doing so will raise an additional $123 billion in tax revenue over the next 10 years.
If the limit were in place in 2012, the adjusted gross income floor for the personal exemption phase-out would be $260,500 for married taxpayers filing a joint return and $173,650 for single taxpayers.
3. The administration's FY 2013 budget also includes the "Buffett Rule." The budget overview states that "the president is now specifically proposing that in obser¬vance of the Buffett rule, those making over $1 million should pay no less than 30 per¬cent of their income in taxes. The adminis¬tration will work to ensure that this rule is implemented in a way that is equitable, in¬cluding not disadvantaging individuals who make large charitable contributions. And he is proposing that the Buffett rule should re¬place the Alternative Minimum Tax, which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended."
No technical explanation of the Buffett rule is given, nor is a revenue estimate provided. However, the "Paying a Fair Share Act of 2012," introduced as S. 2059 by Sen. Sheldon Whitehouse (D-R.I.) and as H.R. 3903 by Rep. Tammy Baldwin (D-Wisc.), would implement a version of the Buffett rule that reportedly was developed with input from the administration. That legislation provides that taxpayers with adjusted gross incomes above a certain threshold who have an effective tax rate below 30 percent would be denied itemized deductions altogether, depending on the presence of other factors.
4. The budget also includes a provision calling for a single, 1.35 percent excise-tax rate on investment income of private foundations. Under current law, private foundations are subject to a two-tiered rate structure that generally imposes a 2 percent rate but that allows a foundation to pay only 1 percent if certain requirements are met. Importantly, the president's budget acknowledges what the Council has long argued: that a single flat rate will "simplify the tax laws and encourage increased charitable activity." Taking simplification one step further, the budget proposes a flat rate of 1.35 percent, rather than the revenue-neutral 1.39 percent that the Council has been advocating. The administration estimates that the proposal would result in the loss of $54 million in tax revenues over 10 years.
Materials prepared by the White House detailing its fiscal year 2013 budget proposal, including the proposal to limit the value of itemized deductions, may be found at the following links:
• President's Message: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/message.pdf
• Summary Tables: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf
• Office of Management and Budget Analytical Perspectives: http://www.whitehouse.gov/omb/budget/Analytical_Perspectives
• General Explanations of the Administration's Fiscal Year 2013 Revenue Proposals: http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf
State of the Union: Implications for Philanthropy (Council on Foundations, 1/30/2012)
President Obama delivered his third State of the Union Address to Congress last week. His "Blueprint for an American Economy That's Built to Last" mapped out a vision for boosting the economy and strengthening the middle class. While the president didn't specifically cite the philanthropic sector in his remarks, there were several references to "extenders" and potential changes to the tax code. Here are some of the highlights:Tax Extenders/ IRA Charitable Rollover (Council on Foundations, 1/30/2012)
Before adjourning in December, Congress extended the payroll tax cut until the end of February. However, the IRA charitable rollover and other incentives were not included in that package and have now expired. The extension package did include emergency federal unemployment benefits and the so-called "doc fix," a delay in scheduled payment reductions to doctors who treat Medicare patients.
Some people believe Congress should include several other tax-extenders provisions with the payroll tax cut proposal. The main point of contention is the overall cost of the package. While the president did not specifically address costs in his speech, he did call for the extension of several expired provisions. We'll continue to monitor the situation and will provide an update once details are available.
Nonetheless, the Council remains optimistic that the rollover will be extended in its current form, permitting individuals age 70½ and older to take tax-free distributions from their IRAs of up to $100,000 per taxpayer per taxable year. Specifically, we hope that the proposal will be (1) enacted early this year, (2) retroactive, and (3) part of a larger extenders package."Buffet Rule"/ Proposal to Cap Charitable Deductions (Council on Foundations, 1/30/2012)
The so-called "Buffet Rule" calls for households earning more than $1 million annually to pay a minimum 30 percent federal income tax rate, with no deductions allowed for mortgage interest, health care, retirement savings, or child-care benefits. Charitable contributions and state and local governments would still qualify for tax breaks.
The blueprint document states, "The administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions." This language signals a change in the administration's position and is a win for the sector. It is a clear indication that the philanthropic sector's message about the importance of maintaining the charitable deduction rates is being heard.State of the Union Presents Opportunities for Public-Philanthropic Partnerships (Council on Foundations, 1/30/2012)
The State of the Union referred several times to the need to spur the economy by improving education and developing the workforce. This presents the philanthropic sector with a unique opportunity to partner with government to achieve these goals.
The Council's Public-Philanthropic Partnership (PPP) initiative connects federal government programs with the work of the philanthropic community. Our PPP staff is prepared to assist any members looking for government partners, field innovations, policy or statute analysis, or other assistance related to their work with federally funded programs. We are also interested in knowing any lessons you have learned from your partnership experiences with government agencies at the federal, state, and local levels.
Treasury Reports to Congress on Supporting Organizations and Donor-Advised Funds (Council on Foundations, 12/12/2011)
Last week, the Treasury Department released a report to Congress on how supporting organizations and donor-advised funds (DAFs) distribute funds. The report, which analyzes 2006 IRS data and provides insights from public comments, noted that supporting organizations and DAFs play an important role in the charitable sector. The study revealed the following for tax year 2006:
• 2,398 organizations had 160,000 DAFs
• Supporting organizations paid $11.5 billion in grants
• DAFs housed in financial institutions had an average of $424.5 million in total assets
• The average payout rate across all DAFs—including those sponsored by community foundations—was 9.3 percent
• The average payout rate of DAFs housed in financial institutions was 14.2 percent
The report also notes that it would be "premature" to recommend a payout requirement for DAFs. It further finds that though supporting organizations generally heed the recommendations of donors, they are under no legal obligation to do so.
Sen. Charles Grassley (R-Iowa) released a statement
criticizing the report for failing to include important information such as the number of DAFs that don't pay out anything or whether the pay-outs were to other supporting organizations and donor-advised funds. He also took issue with Treasury's use of five-year-old data.
Congress Continues to Spar Over Tax Extensions; Senate Rejects Two Bills (Council on Foundations, 12/12/2011)
The Senate rejected a plan offered by Majority Leader Harry Reid (R-Nev.) to lower the payroll tax rate to 3.1 percent by a vote of 50-48. Similarly, a bill from Minority Leader Mitch McConnell (R-Ky.) that would have extended the current 4.2 percent rate and been funded by cuts to the federal workforce was rejected, 76-22.
The Council's government relations staff will continue to monitor if Congress will include the renewal of the IRA Charitable Rollover in any end of the year tax extension. The IRA charitable rollover is scheduled to expire December 31.
Congressional leaders are still hoping to begin their holiday recess on December 16 and are reportedly working on a compromise to extend the payroll tax cut.
Treasury Department Releases Study on Supporting Organizations and DAFs (Alliance for Charitable Reform, December 7, 2011)
Finally completing a 2005 request by Senator Charles Grassley (R-IA), the Treasury Department released their study today on how nonprofit supporting organizations and donor advised funds distribute money to charities. The report found that these groups distributed approximately 9 to 12 percent of their assets in 2006, and recommended that there NOT be any federal requirement for annual giving for supporting organizations and donor advised funds, since their giving was high compared to private foundations.
Responding to the substance of the report, Senator Grassley expressed displeasure with report calling it "superficial." According to a Chronicle of Philanthropy article highlighting the report, the Senator said "There's no information on how much money is getting to those who really could benefit from charitable work" and that Treasury "seems to be forgetting that for years, supporting organizations and donor-advised funds were on the IRS's annual ‘dirty dozen' list of tax scams." In light of the Senator's frustration, it is likely that he will call for studies from other research organizations to further examine this issue.
As recently as October of this year Senator Grassley chastised the Treasury for dragging its heels on the study and cited the Kaiser Family Foundation's investments in the failed green energy firm Solyndra as an example of ongoing abuse.