July 30, 1998 | Read Time: 2 minutes
President Clinton last week signed into law an overhaul of the Internal Revenue Service that contains several provisions of interest to charities.
Among them:
Burden of proof. The I.R.S. will now shoulder the burden of proof in court cases with charities. Under previous law, the revenue service was presumed to be correct when it tangled over taxes in judicial proceedings; the burden has been on charities to prove the I.R.S. wrong.
Charities must continue to do things like keep records and cooperate with reasonable requests from the service for documents.
Tax-exempt bonds. Charities that use tax-exempt bonds to raise money for new-building and renovation projects will get a new advantage in their dealings with the I.R.S. in the event the service decides to revoke a bond’s tax-exempt status.
Under previous law, the remedy for challenging such a decision belonged to individual bond holders.
“Bond issuers often choose to negotiate with the I.R.S. to avoid the public-relations nightmare of having taxes assessed against individual bond holders,” says James J. McGovern, former top charity regulator at the service. “The I.R.S. understands this negotiating advantage and has used its leverage to settle cases on its terms.”
The new law directs the revenue service to give issuers of tax-exempt bonds the right to challenge a decision to revoke a bond’s status by obtaining a review of the case by the agency’s Appeals Office. “The ability of issuers to seek an impartial hearing will have a significant impact on I.R.S. audit tactics,” says Mr. McGovern, who now works for the accounting firm KPMG Peat Marwick.
Capital gains. Investors will have to hold stocks or other assets for only a year — rather than 18 months — before selling them to qualify for a reduced capital-gains tax rate of 20 per cent. Investors pay the tax on profits from the sale of stocks, bonds, and real estate.
The conventional wisdom is that reductions in capital-gains taxes discourage some taxpayers from making charitable gifts because lower rates could lead donors to decide to pay the taxes rather than seek ways to avoid the levies by giving to charity. But others argue that changes in the rate have little effect on giving.
