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| home > policy/legislation > through 2006 > comments from the charitable community > Response to JTC
Response to Joint Committee’s Tax Gap Study On January 27, 2005, the staff of the Joint Committee on Taxation released a report listing a number of potential tax increases and new regulatory requirements for nonprofit organizations, among others. An urgent legislative priority of the Alliance is to respond to these Joint Committee proposals, which we are concerned could threaten the essential functions served by charities and foundations when used as “revenue raisers”. Yet we recognize that some of these proposals address very real problems and we are eager to help solve them. In that spirit, the following are four specific policy proposals of the Alliance for Charitable Reform that address areas covered in the Joint Committee’s Study.
Specific Policy Proposals
The Joint Committee on Taxation has proposed that all charities and foundations be required to file a substantial package of information every five years to justify their continued tax exemption. In addition to the regular annual Form 990-PF and 900, every foundation and charity would have to file detailed operational, managerial and financial information to the IRS. The Alliance opposes theis new 5-year filing requirement. Rather, the Alliance believes that the proper basis for improved financial reporting and financial transparency by charities already exists: the Form 990 information returns filed by every public charity with annual revenue over $25,000, and the similar Form 990 PF returns filed by every private foundation. The Joint Committee on Taxation, picking up on suggestions made by others, has proposed that all charities be required to file a separate, additional form every five years to justify their continued tax exemption. The Alliance believes that a more efficient A better approach than the 5-year filing requirement would be for private foundations and charities simply to include the necessary information about their financial activities in the Form 990/990 PF. This would keep the relevant financial information in the same place for public review, and avoid the costs of additional redundant paperwork, thereby maximizing the resources available for charitable and philanthropic work. In a similar vein, the Joint Committee on Taxation has proposed that charities be required to obtain an independent auditor’s or counsel’s certification that unrelated business income liability has been properly reported. Again, rather than “doubling up” on audit and reporting requirements, the Alliance urges Congress and the IRS to keep all necessary enhanced reporting in the “four corners” of the Form 990/990-PF (plus the 990 T unrelated business tax return where tax liability exists). The 990 series of forms is the universal, well-understood vehicle for financial reporting by private oundations and charities – the Alliance urges that it be made more comprehensive and more informative. In addition, in the interest of public disclosure and accountability, the Alliance urges the IRS to expand and speed up the process of allowing Form 990/990 PF to be filed online by all charities and foundations.
The Alliance urges Congress and the IRS to reduce unnecessary legal and regulatory burdens on charitable organizations, in order to free up more resources for charitable and philanthropic activities. A necessary and important corollary of our policy proposals is that when charities and their managers do not act charitably, penalties should be increased. As a result, the Alliance supports the Joint Committee proposals to double the first-tier excise taxes imposed on private foundations for willful, improper acts such as self-dealing and non-charitable expenditures, as long as these acts have well-understood “bright line” tests for wrongdoing. Conversely, the Alliance would not support increased penalty taxes in areas where liability is based on ill-defined subjective standards, such as “jeopardy investments”. Any enhanced penalties in this area should be accompanied by bright line rules for liability. The Alliance believes, however, that enhanced penalty taxes should be subject to abatement for inadvertent violations. Moreover, the Alliance strongly urges Congress to sequester the taxes collected from foundations and charities, and devote the revenue solely to IRS exempt organization enforcement activities and taxpayer guidance projects, consistent with the original intent of Congress when these taxes were enacted in 1969. The Alliance agrees with the Joint Committee in concept that charities and foundations should be encouraged to use independent, objective review procedures to assure that executive compensation decisions, property purchases and sales, and other transactions are fair and reasonable. However, the Alliance disagrees with the Joint Committee proposal to eliminate the presumption of correctness that law extends to certain public charity review procedures, known as the “rebuttable presumption”. Thiese so-called “rebuttable presumption” rules has been the law sincewere enacted in 1996, and have been a very beneficial spur to charities’ adoption of and as a result has led to many charities adopting strict internal review procedures for executive compensation and property transactions.
Currently, private foundations pay a 1-2% excise tax on their net investment income. The Alliance opposes the Joint Committee’s proposal to expand the definition of the types of net investment income of private foundations subject to this tax, and thereby effectively increase the tax. Increasing the tax on net investment income, via expansion of the tax base, will clearly restrict the funds available for charity and philanthropy. Rather, the Alliance supports reducing the tax to 1% (as passed by the House last year as part of the CARE Act and included in the President’s FY’06 budget) and redirecting the existing tax on net investment income of private foundations to the purpose it has been intended for since 1969 – IRS enforcement and guidance activities of in the tax-exempt sector. Increasing this tax, via a expansion of the base, will clearly restrict the funds available for charity and philanthropy generally. Specifically, the tax would apply to the appreciation of assets held. Charities will not have the ability to pay this tax on appreciation without possibly selling the appreciated asset. This is akin to the problems with the estate tax, which is a tax levied on appreciated assets. In many cases, the family farm or the ranch or the family home has to be sold to pay for the taxes owed.
Core principles of the Alliance are to support policies that encourage philanthropy and increase the resources available for charity and philanthropy. For this reason, the Alliance strongly opposes the Joint Committee’s proposals to restrict or eliminate the deduction for the fair market value of non-cash charitable contributions such as land, artwork, stock in family companies, and all other non-cash assets except publicly traded stocks and bonds. The Joint Committee would limit the deduction to the donor’s basis in the assets. Restricting charitable deductions to basis rather than current value would be devastating to public charities nationwide, especially in parts of the country where family wealth is concentrated in assets such as farmland and ranchland. One of the Joint Committee options would allow market value deductions for certain gifts of “charitable use” property (gifts of artworks to a museum for display, for example), but even this deduction would be restricted, and donations of such items would still dwindle. The Joint Committee mentions difficulties in determining the fair value of some donated assets, but administrative concerns cannot justify the drastic harm this change would cause to public charities and individual donors. The answer to valuation concerns is to give the IRS appropriate funding to enforce appraisal requirements and other donation rules, not to destroy the incentive for charitable giving. That funding can come from sequestering the excise taxes collected from the nonprofit sector and devoting them, as Congress originally intended, to IRS enforcement and guidance activity in the exempt organization area, including enforcement of appraisal and valuation requirements. |
Improve and expand the information reported by charities and foundations in their annual Form 990 and Form 990 PF tax returns, before imposing any new, costly filing burdens. Make better use of the Forms 990/990 PF already being filed.
Increase penalty taxes for improper behavior by foundations, charities, and their officials. But allow abatement for inadvertent violations, and encourage – don’t restrict – the use of internal review processes such as the “rebuttable presumption” procedure.
Redirect the proceeds from the tax on private foundations net investment income to IRS enforcement of existing laws.
Continue to allow charitable donors to deduct the fair market value of non-cash contributions such as land, artwork, and stock in family companies. Make sure IRS has the resources to enforce appraisal requirements for non-cash donations.