Tax Bill Shows Appeal of Charities

Many provisions to foster giving made final version — or came close

President Clinton hates the tax bill Congress passed this month

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How Charities and Foundations Fared in the Congressional Tax Bill

because he thinks its tax cuts are too charitable to the rich.

But the bill is a big hit with many of the nation’s non-profit organizations — which received numerous benefits in the legislation. Among the most popular: a provision to allow donors to make tax-free withdrawals from individual retirement accounts to benefit charity.

Even with the prospect of a Presidential veto of the bill, charity officials are already declaring a measure of victory. They say it is a good sign for future tax debates that a number of charity benefits made it into the final bill — or came very close to being included in the compromise measure that passed the House and the Senate.

Two provisions that the Senate approved, but that were deleted in last-minute negotiations, had the potential to attract significant donations to charity: Senators would have offered a new tax break to people who don’t itemize on their tax returns and would have gradually increased the percentage of income that individuals and corporations are allowed to write off each year in charitable deductions.

Not so pleasing to many fund raisers is a provision in the House-Senate measure that would eventually eliminate estate taxes — a move that might put a damper on charitable gifts from estates of wealthy donors.

With the bill, Congress demonstrated that it wants to help non-profit groups raise more and more money — in part so that charities can relieve some of the burdens on government. Politics was another reason charities did so well: In recent months several of the candidates for the 2000 Presidential nomination have called for increases in support for non-profit organizations (The Chronicle, August 12).

“The mood of the country is changing,” said Milton Cerny, a Washington lawyer who represents non-profit organizations. “In recent years there has been an aggressive mood in Congress against charities — attacks on them,” he said, including efforts to restrict lobbying by non-profit organizations. “But what I see in this legislation is more of the government creating a partnership with the non-profit community and individuals to work together to carry out the concept of a civil society.”

Sheldon E. Steinbach, vice-president of the American Council on Education, a coalition of colleges and universities, compared the scope of the provisions debated during the drafting of the tax bill to the big changes to charity and foundation laws that Congress made in 1969.

But he noted that the changes made then were to restrict charities and foundations, because Congress thought they were misusing money and tax privileges.

This summer’s tax legislation represents a vast difference in the approach and attitude of lawmakers, Mr. Steinbach said. “One could say this is the high-water mark for the charitable community in the last 30 years,” he said.

“If you are looking for the tax agenda for the not-for-profit community, the items that are in the bill — and even those that were significantly curtailed or deleted from it — will be the focus in coming years,” he added. “‘Even if there is no tax bill enacted this year, getting this far will serve as a platform from which to work in the future. The proposals are out there, the revenue estimates have been made, Congress has thought about it. We’ll be back.”

After Congress returns to work after Labor Day, lawmakers are expected to try to negotiate with President Clinton to create a tax package that he would be willing to sign. Such a deal could include many of the provisions in the bill the House and Senate passed, but it is possible that the negotiations will fail and that no tax bill will be passed this year.

In perhaps the most far-reaching provision in the House-Senate bill, lawmakers voted to allow people age 70 ½ and older to make tax-free withdrawals from individual retirement accounts for donations made directly to charities, effective for distributions made on or after January 1, 2003.

Under federal law, Americans may withdraw funds without penalty from I.R.A.’s when they reach age 59 ½. But people are subject to income tax on the amount taken out, even if they give funds immediately to charity.

The legislation would allow people age 70 ½ to roll over I.R.A. assets directly to charities without having the funds count as taxable income.

An earlier version of the legislation would have given the option to more people — permitting those ages 59 ½ and older to roll over their I.R.A. assets. Congress apparently settled on the higher age threshold because of concern that younger people might withdraw too much retirement money for charity and find themselves years later with insufficient income. Older people presumably would have a better sense of their retirement-income needs and how much retirement money they could really afford to give away.

Still another version of the bill that was eventually dropped would have allowed people to make tax-free contributions from retirement accounts through such planned gifts as charitable remainder trusts. Congress eventually decided that only gifts made directly to charity would be allowed under the measure.

Some charity leaders privately questioned whether the narrowing of the provision — the higher age limits and rejection of planned gifts — had so watered down the measure that non-profit organizations would not see much benefit.

But most officials were enthusiastic. Janne G. Gallagher, deputy general counsel of the Council on Foundations, said her organization hoped that the provision would encourage people to use their I.R.A. assets to establish funds at community foundations.

“We’d prefer that people be able to use planned-giving techniques,” said Ms. Gallagher, “but the fact that this is in the bill at all is a huge step forward.”

Others said that they thought the I.R.A. provision got a needed lift as it moved through the Republican-led Congress when George W. Bush, the GOP Governor of Texas, listed its adoption as one of his top priorities if he is elected President.

The House-Senate provision to phase out the estate tax over the next decade worries fund raisers who say that wealthy donors have often been motivated to give as a way to reduce the amount of their estate taxes.

But Matthew Hamill, vice-president for public policy at Independent Sector, a national coalition of charities and grant makers, pointed out that economists do not agree on what would happen if the estate tax were eliminated.

“There are some who argue that repeal of the estate tax would negatively affect charitable giving, but there are others who have looked and have reached either a neutral or opposite conclusion,” he said. “So we just don’t know for sure what to expect.”

Donors in all income brackets came tantalizingly close to seeing Congress adopt another provision long sought by charities: allowing people who do not itemize on their federal income-tax returns to claim a charitable deduction for donations.

The Senate last month voted to allow people who don’t itemize to claim deductions for donations of up to a total of $50 for individuals and $100 for married couples, at an estimated cost of $1.3-billion over three years. But the House did not vote on the matter, and a conference committee that ironed out the differences between the Senate and House bills abandoned the provision.

People who don’t itemize were allowed to claim charitable deductions until 1986. But they lost that option after the tax code was overhauled that year, and non-profit organizations have tried to get it back ever since.

Even with the defeat, “organizations should feel good that the effort to talk about giving non-itemizers a charitable deduction is beginning to bear fruit,” said Mr. Hamill of Independent Sector, pointing out that that topic, too, has popped up on the Presidential campaign trail. “You are starting to see an idea that’s been discussed and promoted by non-profits begin to take hold.”

Charity officials also have hopes for the eventual passage of another provision that cleared the Senate only to be eliminated from the final bill: a gradual increase in the percentage of income that individuals and corporations may claim each year in charitable deductions, a step that could encourage donors to increase their donations over time.

On matters concerning charities, Congress did not focus entirely on fund-raising issues. Among other things, lawmakers decided to relax restrictions on the amount of lobbying that charities can do.

A provision in the final bill would remove limits on the amount that organizations could spend on “grassroots lobbying” — efforts to rally popular opinion in support of or in opposition to a bill. Charities are now allowed to spend no more than 25 per cent of their total lobbying expenditures on grassroots advocacy. Mr. Hamill said charities welcomed the change. “It would give non-profits the flexibility they may need to involve themselves in the public-policy process,” said Mr. Hamill.

Members of Congress also delved into foundation matters. In fact, a pair of controversial provisions — one passed by the Senate and one by the House — took private foundations by surprise and left observers scrambling to figure out the effects.

One drew national attention before it was deleted from the compromise bill. The proposal would have allowed private foundations to increase their holdings of publicly traded voting stock of a corporation that it receives by bequest from the maximum of 20 per cent — a limit in place since Congress made major tax-law changes in 1969 — to 40 per cent in 2007, and to 49 per cent in 2008.

The idea was drafted by Sen. Bob Kerrey, a Nebraska Democrat, to help foundations increase their assets. But, according to Congressional Quarterly, Senator Kerrey had another goal: helping Warren Buffett, the Omaha investor and philanthropist, use a private foundation to shelter his stock in a holding company — that is, to keep the stock safe from estate taxes and other encroachments by the Internal Revenue Service after his death. Mr. Buffett, who owns about 40 per cent of the holding company Berkshire Hathaway, did not return a call seeking comment.

Although the proposition died, Mr. Cerny, the lawyer for non-profit groups, said the topic is likely to resurface another day — and not just because of Mr. Buffett’s personal interests.

“With the rising stock market, the value of these investments become more and more important,” said Mr. Cerny. “With the shifting of wealth between generations upon us — and the success of Silicon Valley entrepreneurs — the tax-policy issue arises as to why a foundation shouldn’t be able to hold on to more stock as long as it is beneficial to the organization and does not lead to someone getting an improper benefit. The question will come up again.”

The other proposal watched by private foundations as it passed the House and made it into the final bill wasn’t sought by any coalition of funds but would affect them if it became law. The provision would allow the Secretary of the Treasury to effectively grant exemptions from penalty taxes to private foundations — and people with close ties to them — that participate in self-dealing transactions.

The law currently does not allow the Treasury Secretary to waive the prohibition on self-dealing for organizations or people who inadvertently violate the rules. Nor can the government exempt those who engage in — or who plan to do so — even if such transactions are arguably beneficial for the foundation.

For instance, if an official of a foundation offered to rent space to his fund at a below-market price, he would be self-dealing by using his position to secure a financial benefit. But the foundation would probably have to pay more for space owned by another landlord.

Under the provision, the government would have to publish a notice saying that it was considering an exemption and was soliciting comments.

Some observers speculated that the provision was drafted to help a specific foundation that Congress did not identify in the bill. Even so, they said it was a common-sense idea that should be effective and helpful to funds.

But others were not so pleased. Conrad Rosenberg, a former I.R.S. official, wrote in the EO Tax Journal that he expected that most private foundations would be reluctant to ask the government for an exemption for self-dealing acts because they would not want to attract the I.R.S.’s attention and become possible targets for audits.

Mr. Rosenberg said he feared any tinkering with the long-standing self-dealing rules, which were enacted in the 1969 tax law. The new provision, he said, would essentially ask the government “to make too many subjective judgments in which it either gets rolled by the organization that is in possession of all the facts, or gets balky and ties up proposed transactions that may indeed be, if all the facts be known, a no-harm, no-foul kind of deal.”