A New Effort to Spur Giving

Congress passes tax breaks for donors, fights abuses

Congress has passed legislation that contains a

series of provisions designed to stimulate charitable giving and cut down on abuses of charity tax laws by donors and nonprofit organizations.

The legislation’s chief incentive for charitable gifts would allow donors age 70 ½ and older to withdraw up to $100,000 each year from their individual retirement accounts tax-free if they give the money directly to a charity.

The legislation — parts of which drew mixed reactions from charity leaders — is expected to be signed into law by President Bush. Over all, said Brian A. Gallagher, president of United Way of America, “these reforms and new tax incentives will strengthen the nation’s charities.”

The legislation has seven major provisions intended to encourage charitable giving, or in other ways assist charities, and 17 key provisions that were written to crack down on abuses by charities or donors, or make other changes, according to the House Committee on Ways and Means.

“It makes sense to tighten areas of abuse while increasing incentives for charitable giving,” said Sen. Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee and who is a major proponent of the legislation. “Americans are very generous with their donations. They deserve to know that their money helps the needy, not the greedy.”

Congress did not include a provision, which it has considered for years, that could spur charitable giving by allowing people who do not itemize deductions on their returns to write off a portion of their charitable donations.

Provision Expires in 2008

But nonprofit officials were pleased that Congress included the provision to promote charitable giving through individual retirement accounts — which would be in effect for two years (through 2007) — because they say that making it easier for people to donate their retirement funds to organizations would cause a significant amount of money to flow to charity.

At the same time, some charity leaders were not happy that the retirement-account provision has a $100,000 annual cap and does not apply to younger donors or to planned gifts, such as charitable remainder trusts.

Three years ago, the Senate passed a bill — which was never enacted into law — that would have allowed people 59 ½ and older to withdraw money each year from their individual retirement accounts to make donations through planned gifts, without paying tax.

“While this [new] version of the incentive is narrower than we had hoped for, we believe that it still represents an important step forward,” said a statement from Independent Sector, a Washington coalition that represents 550 charities and foundations.

Some charity officials were dismayed that the IRA provision does not include gifts made to donor-advised funds and supporting organizations. Donor-advised funds allow people to give cash, stock, or other assets to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how, when, and to which charities the money in the account should be distributed. Supporting organizations are created to finance the work of specific charities.

“Congress does not understand the important role of foundations, and particularly the significance of donor-advised funds and supporting organizations, in strengthening American communities,” said Steve Gunderson, president of the Council on Foundations, which represents 2,000 grant makers. “The process for the passage of this legislation was fatally flawed in that it was secretive and closed. There was no opportunity for us to amend, change, or correct those sections that negatively impacted the philanthropic sector.”

The legislation approved by Congress would require the Treasury Secretary to study the operation of donor-advised funds and supporting organizations to see if new restrictions are in order. In addition, the measure would extend to donor-advised funds (and to certain supporting organizations) federal rules that currently are used to restrict the business holdings of private foundations.

Some members of Congress have criticized donors who take a deduction for gifts they make to donor-advised funds but delay — or never make — the contribution to charity. Supporting organizations have drawn fire from lawmakers who worry that people who have set them up have made loans to themselves and improperly benefited in other ways.

Other parts of the legislation that Congress passed to stop abuses by nonprofit organizations include provisions requiring that very small charities provide the Internal Revenue Service with information about their operations each year; allowing the public to see the Form 990-T returns of charities that report business income unrelated to the charities’ missions; tightening rules for appraisals of donated property; and establishing additional standards for tax-exempt status for nonprofit credit-counseling groups.

The legislation would require donors of cash — regardless of the amount — to retain bank records (such as cancelled checks) or receipts from charities in order to prove they made donations to charity. The bill also would allow the IRS to share with state regulatory officials more information about actions taken against nonprofit organizations in an attempt to improve enforcement of charity laws.

Other parts of the legislation that were devised to spur charitable giving include new tax incentives for businesses that donate food, and for ranchers and family farmers who contribute development rights to their land. In addition, the legislation would change the way income tax is applied to payments to charities by for-profit subsidiaries.

The charity provisions are part of a broader piece of legislation (HR 4) that focuses mostly on tightening rules for the country’s private pension system.

A detailed explanation of the legislation’s charity provisions has been prepared by staff members of the Congressional Joint Committee on Taxation and is available on the committee’s Web site (http://www.house.gov/jct/x-38-06.pdf).

A summary of the charity provisions has been written by the House Committee on Ways and Means and is available on the committee’s Web site (http://waysandmeans.house.gov/media/pdf/tax docs/072806pensionsummary.pdf).

Meanwhile, Senate Democrats blocked an effort by Republican members to pass separate legislation that would reduce the estate tax. Many charity officials worry that a reduction or repeal of the estate tax would eliminate a powerful incentive for wealthy donors to make charitable bequests.

Congress may reconsider the estate-tax legislation later this year.