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| home > policy/legislation > through 2006 > comments from the charitable community > oppose senate provision increasing the tax base
Oppose the Senate Provision Increasing the Tax Base on Private Foundation’s Net Investment Income Feb. 2, 2006 Background Section 4940 of the U.S. tax code imposes an excise tax on the net investment income of a private foundation. This tax generates approximately $400-500 million a year and, according to the purposes described by the JCT, was intended to fund the Exempt Organizations Division of the IRS – the division that identifies the “bad apples” in the charitable sector. Of this $ 400-500 million, only approximately $40 million actually goes to the Exempt Organizations Division of the IRS, thus expanding the income subject to this excise tax would seem to be contrary to the JCT’s intentions. Net Investment Income Provision in the Senate Bill Section 322 of the Senate’s Tax Reconciliation Bill would amend the tax code’s definition of “gross investment income” to include income from sources similar to interest, dividends, rents, payments with respect to securities loans, and royalties. Under this definition, payments with respect to annuities, income from notional principal contracts and other substantially similar income from ordinary and routine investments would be included in gross investment income. Furthermore, the definition of capital gain net income would be amended to include capital from the sale of property used for the production of gross investment income. According to this provision, the gain on the disposition of assets which are of a type that do not generally produce interest, dividends, rents, royalties or similar income would be included in capital gain net income. Extension of the Net Investment Income Tax Base is a Direct Attack on Private Foundations This provision serves as a disincentive for nonprofit organizations to continue to serve their communities. If an organization can no longer offer below market-value rent to other nonprofit organizations without having to pay an excise tax on those proceeds, nonprofits would have no incentive to offer beneficial rents to charities or private foundations. Additionally, this provision in S. 2020 would overturn a long-standing court decision (Zemurray Foundation v. U.S., Fifth Circuit). As a result, only gains and losses from the sale or other disposition of property used for the production of income are currently included in capital gain net income. As stated earlier, the Joint Committee on Taxation proposed this excise tax as a way to provide funds to identify organizations that were engaging in questionable tax practices. The total revenue from this tax is currently around $400-500 million – several times the total annual budget for the Exempt Organizations Division of the IRS. The Alliance for Charitable Reform does not oppose providing additional revenues for enforcement efforts in the Exempt Organizations Division of the IRS; in fact, the revenue that this tax currently produces should be redirected to its original enforcement purposes to accomplish this goal. |
