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1 Council on Foundations 2014 Annual Conference Washington Update June 9, 2014 Alexander Reid 202.739.5941

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Presentation on theme: "1 Council on Foundations 2014 Annual Conference Washington Update June 9, 2014 Alexander Reid 202.739.5941"— Presentation transcript:

1 1 Council on Foundations 2014 Annual Conference Washington Update June 9, 2014 Alexander Reid

2 © Morgan, Lewis & Bockius LLP 2 Legislative Update

3 © Morgan, Lewis & Bockius LLP Expiring Tax Provisions (a/k/a “Extenders”) – Senate The current extenders provisions expired at the end of Senate Finance Committee marked up the Expiring Provisions Improvement, Reform, and Efficiency Act of 2014 (EXPIRE) (S. 2260) and voted it out of committee on April 3, The bill extends the following through 2015: –deduction for contributions of capital gain real property made for conservation purposes; –tax-free distributions from individual retirement accounts (IRAs) for charitable purposes; –the tax deduction for contributions of food inventory by taxpayers other than C corporations; –the basis adjustment rule for stock of an S corporation making charitable contributions of property; –extension of modification of tax treatment of certain payments to controlling exempt organizations 3

4 © Morgan, Lewis & Bockius LLP Expiring Tax Provisions (a/k/a “Extenders”) – House of Representatives House Ways and Means Committee approved a package of legislation on May 29, 2014 that would make the following extenders permanent: –Conservation easements (HR 2807), –Charitable distributions from IRAs (HR 4619), –Contributions of food inventory (HR 4719), and –Bonus depreciation (a non-charity related extender) In addition, the package included two new provisions: –Extension of charitable gifts to April 15 (HR 3134), and –Private Foundation investment income excise tax to 1% (HR 4691) House Ways and Means Committee previously voted to make six tax extenders permanent on April 29, 2014, including the basis adjustment for S corporations. Rep. Camp’s Tax Reform Act of 2014 discussion draft revises and extends only two of the charity related extenders: conservation contributions and basis adjustment for S corporations 4

5 © Morgan, Lewis & Bockius LLP Tax Reform of 2014 Discussion Draft Overview Released by Rep. Dave Camp (R-MI), chairman of the House Ways & Means Committee, on Feb. 26, Proposes New Tax Rate Structure: Two tax brackets of 10% and 25%; 10% surtax for income over $450,000; Corporate rate reduced to 25% Standard Deduction increased to $11,000 for individuals and $22,000 for married couples (inflation adjusted) Repeal Alternative Minimum Tax Long-term capital gains and dividends taxed as ordinary income (40 percent of such income exempted from tax) Other: larger child tax credit, consolidated education benefits, modernized international system, permanent R&D credit, infrastructure investment, repeal medical device tax. 5

6 © Morgan, Lewis & Bockius LLP Total Revenue Raised from Exempt Organizations: ~$12 Billion Provision ($billions) Excise Tax on Executive Compensation Exceeding $1M4.0 Compute UBTI Separately for Each Trade or Business3.2 Royalties from Name and Logo Treated as UBTI1.8 Tax on Private University Endowments1.7 Repeal Type II and III Supporting Organizations1.4 Impose UBIT on Income from Private Research0.7 Repeal Exemption for Professional Sports Leagues0.1 Donor Advised Fund 5 Year Distribution Requirement0.05 Revisions to Charitable Deduction* Simplification of Private Foundation Excise Tax-1.6 * included in $858.4 billion estimate for modifications to itemized deductions 6

7 © Morgan, Lewis & Bockius LLP Compare with Other Business Tax Reform Proposals Provision ($billions) Reform Accelerated Cost Recovery System269.5 Amortize Research and Experimentation192.6 Treatment of Deferred Foreign Income170.4 Amortize Advertising Expenses169.0 Reform Subpart F115.6 Financial Institution Excise Tax86.4 Repeal Last In First Out Accounting Method79.1 Repeal Like Kind Exchanges40.9 Limit Cash Method Accounting23.6 Make Research Credit Permanent

8 © Morgan, Lewis & Bockius LLP Simplification: Private Foundation Excise Tax Proposal to reduce excise tax on private foundation net investment income to 1% and repeal exception for exempt operating foundations. “The net investment excise tax on private foundations has long been a source of confusion and frustration for taxpayers. Private foundations, both large and small, recommended to the Committee’s Tax Reform Working Group on Charitable/Exempt Organizations that the net investment tax be reduced to a flat 1 percent to ease compliance.” –W&M Majority Tax Staff, Section by Section Summary 8

9 © Morgan, Lewis & Bockius LLP Anti Deferral: Private Operating Foundations and Exempt Operating Foundations Under current law, private operating foundations are exempt from the excise tax on failure to distribute income (the 5% minimum distribution requirement). Also, exempt operating foundations are exempt from the excise tax on net investment income. The tax reform discussion draft proposes to repeal both of these exceptions. 9

10 © Morgan, Lewis & Bockius LLP Anti Abuse: Self-Dealing Transactions Proposal to impose 2.5% excise tax on private foundations that engage in a self-dealing transaction, 10% when it involves compensation. Proposal also eliminates safe harbor for reliance on professional advice. 10

11 © Morgan, Lewis & Bockius LLP Charitable Deduction Reforms Charitable contributions made after close of tax year deductible until April 15. Charitable contributions deductible only to the extent they exceed 2% of AGI. Percentage limitations for gifts of cash and property to public charities reduced from 50% to 40%; gifts to private foundations reduced from 30% to 25%. The separate, lower 30% and 20% limits for contributions of capital gain property would be repealed. Value of deduction generally limited to adjusted basis. Conservation easement incentive made permanent. No deduction for land to be used for golf courses “The economic growth in this plan will increase charitable giving by $2.2 billion annually. … Allows roughly 95 percent of filers to get the lowest possible tax rate by simply claiming the standard deduction (no more need to itemize and track receipts).” -Ways and Means Committee Press Release (Feb. 26) 11

12 © Morgan, Lewis & Bockius LLP Anti Deferral: Donor-Advised Fund Distributions Proposal would require donor-advised funds to distribute contributions within five years of receipt. Failure to distribute results in an excise tax of 20% of the undistributed amount. Behavioral response: Reduce overall charitable giving (which would raise revenue) Increase private foundation giving (which would raise revenue from investment income tax), offset by donor preference for DAFs to avoid hassle of private foundations. Increase donations to non-DAF sponsoring public charities (revenue neutral) Increase donations to Type I supporting organizations (revenue neutral) 12

13 © Morgan, Lewis & Bockius LLP Anti Deferral: Supporting Organizations Proposal to eliminate Type II and Type III Supporting Organizations Only Supporting Organizations that are “operated, supervised, or controlled” by a publicly supported organization would qualify. 13

14 © Morgan, Lewis & Bockius LLP High Compensation Excise Tax Under current law, exempt organizations may pay compensation exceeding $1 million if it is reasonable. Proposal: 25% excise tax on compensation over $1 million Payable by employer with respect to top five employees Includes deferred compensation and parachute payments “Given that exemption from Federal income tax constitutes a significant benefit conferred upon tax-exempt organizations, the case for discouraging excess compensation paid out to such organizations’ executives may be even stronger than it is for publicly traded companies.” –W&M Majority Tax Staff, Section by Section Summary 14

15 © Morgan, Lewis & Bockius LLP Commerciality: UBTI Loss Basketing Each unrelated trade or business treated separately from the others for tax purposes—i.e., the business is put in a “basket” or “silo” Losses from one unrelated business may only be used to offset income from that unrelated business. This rule is similar to the way gambling winnings/losses and hobby gains/losses are treated for tax purposes. “[T]he IRS issued a report detailing how colleges and universities were abusing the [UBIT] rules by using loss-generating business activities to shelter gain from profitable businesses. The discussion draft would modify the UBIT rules to address these and similar loopholes.” –W&M Majority Tax Staff, Section by Section Summary 15

16 © Morgan, Lewis & Bockius LLP Corporate Sponsorship Certain Arrangements Taxed as UBTI Proposal to treat corporate sponsorship payments as UBTI if the sponsor acknowledgement refers to sponsor’s product lines. Proposal to treat exclusive sponsorship of large events (>$25,000) as UBTI (a sponsor’s name and logo may not be treated more favorably than others at such events) 16

17 © Morgan, Lewis & Bockius LLP Royalties from Name/Logo License Treated as UBTI Tax royalties from sale/license of organization’s name or logo (including trademarks and copyrights related to such name or logo) as UBTI per se. “Many organizations, such as AARP, are now earning significant profits licensing their own names to for-profit businesses (which is not taxable to an exempt organization) to avoid engaging in an active trade or business themselves.” –W&M Majority Tax Staff, Section by Section Summary 17

18 © Morgan, Lewis & Bockius LLP Treasury and IRS Update 18

19 © Morgan, Lewis & Bockius LLP New Appointments at IRS Stephen Martin is now Acting Head of EO Rulings & Agreements Nan Downing is now Assistant Deputy Commissioner, TE/GE- GE/Shared Support Eric San Juan has moved from the Taxpayer Advocate Service to join IRS TEGE as Senior Technical Advisor Sarah Hall Ingram, Director, Services and Enforcement Affordable Care Act Office, retired at the end of April. 19

20 © Morgan, Lewis & Bockius LLP Reorganization of Tax Exempt and Government Entities Branch IRS announced on March 20 that certain legal functions will move from TE/GE Division to IRS Office of Chief Counsel. – TE/GE rulings and interpretative staff will move to Chief Counsel (TE/GE) – TE/GE headquarters will move to Cincinnati – EO Exam remains in Dallas – Tax Exempt Bonds (TEB) unchanged “TE/GE is one of the few places in the IRS where published guidance, private letter rulings and technical advice memoranda are worked on outside of Chief Counsel. This change will bring TE/GE in alignment with the other three IRS business operating divisions, which use Counsel for their guidance and legal work.” IRS Statement (March 20, 2014) 20

21 © Morgan, Lewis & Bockius LLP April 8 TE/GE Memo Limits Cases Transferred to National Office Cases transferred to EO Technical include – Applications from exempt hospitals subject to Section 501(r) (until technical training is completed for EO Determinations personnel) – Applications and technical assistance requests under the Optional Expedited Process for Certain Exemption Applications under Section 501(c)(4). 21

22 © Morgan, Lewis & Bockius LLP Proposed 501(c)(4) Regulations IRS received more than 160,000 comments, such as: – Definition of “candidate-related political activity” too narrow because it treats nonpartisan voter education activities as political – Definition is also too broad because it treats the mere mention of an incumbent’s name on a nonprofit’s website within 60 days of an election or 30 days of a primary as political activity “It is likely that we will make some changes to the proposed regulation in light of the comments we have received. Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation.” – IRS statement of May 22,

23 © Morgan, Lewis & Bockius LLP President’s Budget Proposals Make e-Filing Mandatory for Exempt Organizations and Impose a Penalty for Failure to Comply with Electronic Filing Requirements Reform Tax Based on Investment Income of Private Foundations Increase the Standard Mileage Rate for Automobile Use by Volunteers Limit deductibility of charitable contributions for high income taxpayers. Enhance and Modify the Conservation Easement Deduction – Enhance and Make Permanent Incentives for the Donation of Conservation Easements – Eliminate the Deduction for Contributions of Conservation Easements on Golf Courses – Restrict Deductions and Harmonize the Rules for Contributions of Conservation Easements for Historic Preservation 23

24 © Morgan, Lewis & Bockius LLP Priority Guidance Plan Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners. Final regulations under §4944 on program-related investments. Proposed regulations were published on April 19, Guidance regarding the new excise taxes on donor advised funds and fund management as added by §1231 of the Pension Protection Act of

25 © Morgan, Lewis & Bockius LLP Form 1023-EZ Submitted for OMB review on March 31, 2014 (see 79 Fed. Reg ). Application expected to be ready this summer. Organizations that may use the short form include automatically revoked organizations with less than $200,000 gross receipts and which meet the requirements of sections four and seven of Rev. Proc

26 © Morgan, Lewis & Bockius LLP 26

27 © Morgan, Lewis & Bockius LLP 27 Form 1023-EZ Instructions Eligibility Worksheet 1.Are your projected annual gross receipts expected to exceed $200,000 in any of the next 3 years or have your annual gross receipts exceeded $200,000 in any of the past two years? 2.Do you have total assets in excess of $500,000? 3.Were you formed under the laws of a foreign country? 4.Are you a successor to, or controlled by, an entity suspended under 501(p)? 5.Are you a limited liability company (LLC)? 6.Are you a successor to a for-profit entity? 7.Were you previously revoked or are you a successor to a previously revoked organization (other than automatic revocation for failure to file Form 990)? 8.Are you a church or a convention or association of churches described under IRC 509(a)(1) and 170(b)(1)(A)(i)? 9.Are you requesting classification as a school, college, or university under IRC 509(a)(1) and 170(b)(1)(A)(ii)? 10.Are you requesting foundation classification under IRC 509(a)(1) and 170(b)(1)(A)(iii) as a hospital or medical research organization? 11.Are you applying for exemption as a cooperative hospital service organization under section 501(e)? 12.Are you applying for exemption as a cooperative service organization of operating educational organizations under section 501(f)? 13.Are you applying for exemption as a charitable risk pool under section 501(n)

28 © Morgan, Lewis & Bockius LLP 28 Form 1023-EZ Instructions Eligibility Worksheet (cont’d) 14.Are you requesting classification as a supporting organization under IRC section 509(a)(3)? 15.Is a substantial purpose of your activities to provide assistance to individuals with credit counseling activities such as budgeting, personal finance, financial literacy, mortgage foreclosure assistance, or other consumer credit areas? 16.Are you investing or do you plan to invest 5% or more of your total assets in securities or funds that are not publicly traded? 17.Do you or will you participate in joint ventures, including partnerships or limited liability companies treated as partnerships, in which you share profits and losses with partners other than section 501(c)(3) organizations? 18.Do or will your activities include selling carbon credits or carbon offsets? 19.Are you an HMO (health maintenance organization)? 20.Are you an ACO (accountable care organization), or do or will your activities include ACO activities? 21.Are you a sponsoring organization as defined in section 4966(d)(1) that maintains or intends to maintain one or more Donor Advised Funds? 22.Are you organized and operated exclusively for testing for public safety and requesting a foundation classification under IRC 509(a)(4)? If you answered “Yes” to any of the above questions, you are not eligible to apply for exemption under IRC section 501(c)(3) using Form 1023-EZ. You must apply on Form If you answered “No” to all of the above questions, you may apply using Form EZ.

29 © Morgan, Lewis & Bockius LLP Type III Supporting Organizations Final and Temporary Regulations: TD 9605 (Dec. 28, 2012) All supporting organizations must continue to meet: – organizational test – operational test – disqualified person control test, and – relationship test The Final Regulations revise the relationship test for Type III SOs by requiring three criteria: – notification requirement – responsiveness test – integral part test The Final Regulations also create specific definitions of “functionally integrated” and “non- functionally integrated” Type III supporting organizations as part of the revised integral part test (although other parts of the revised integral part test are contained in the Temporary Regulations). 29

30 © Morgan, Lewis & Bockius LLP Distribution Requirement for Non- Functionally Integrated Type III SOs Temporary regulations set the annual distributable amount at the greater of 85% of adjusted net income or 3.5% of the fair market value of non-exempt-use assets. Issued as temporary and proposed to allow for additional comments. The regulations specifically do not address whether PRIs are counted toward the distributable amount. 30

31 © Morgan, Lewis & Bockius LLP Notice Reliance on written representations or opinions of counsel addressing whether a Type III SO was functionally integrated. For grants made after December 28, 2012, a Type III SO must meet the functionally integrated requirements described in the 2012 final regulations (specifically Reg. § 1.509(a)-4(i)(4)), or the functionally integrated requirements of Section 3.01 of Notice for a Type III SO that supports a governmental organization, to be considered “functionally integrated” for purposes of a representation or opinion of counsel on which a grantor may rely. 31

32 URBAN INSTITUTE Perspectives on the National Tax Policy Debate Eugene Steuerle The Urban Institute June Washington Update Council on Foundations – Philanthropy Exchange 2014 Annual Conference Tax Policy and Charities website: Dead Men Ruling website: Government We Deserve Blog:

33 Broad Budget and Tax Reform Goals Usually Unrelated to Charity  Charity not the primary issue in many proposals  President Obama Fix budget (leads to revenue raising proposals) Pay for spending he favors (leads to tax increases) Only raise taxes on high income (leads to cap)  Chairman Camp Broaden base to show maximum rate reductions (leads to multiplicative efforts) Simplify taxes (leads to fewer itemizers) Concern over enforcement (also leads to floors, fewer itemizers) Go after abuses, real & perceived

34 Yet All Recent Major Budget and Tax Reform Proposals Affect the Nonprofit Sector President Obama (2011)Chairman Camp (2014)Bowles-Simpson (2010) -- Limit value of each itemized deduction to 28% of the expense for families making over $250,000 a year -- Lower rates -- Few itemizers -- 2% AGI floor -- 40% max deduction -- Cap gains (+ & -) -- excise taxes (e.g., foundation ex. tax) -- restrict donor advised funds --other regulations -- In lieu of a deduction, allow all taxpayers a tax credit equal to 12% of their donations, subject to a 2% AGI floor

35 Loss of Control over Budget: Why Every Major Budget and Tax Proposal Tends to Raise Revenues from Charities

36 The Effect of Reform Varies Widely Within the Nonprofit Sector Revenue Sources by Sector Private Contribu- tions Private Payment Gov’t grants/ payments Other revenue Arts, Culture, Humanities 44%34166 Education Environment, Animals Healthcare Human Services Source: National Center for Charitable Statistics calculations based on the Urban Institute, National Center for Charitable Statistics, Core Files (2009); Internal Revenue Service, Statistics of Income Division, Exempt Organizations Sample Files (2007); American Hospital Association Survey, 2009; and the Centers for Medicare & Medicaid Services, National Health Accounts.

37 Can We Favor Some Types of Charities?  Government does favor some charities through direct spending  The charitable tax deduction: the one incentive where individuals choose, signal priorities, and fill in gaps that government will not or cannot address

38 Some Effects on Total Charitable Giving --Excludes Gains from Broader Reform--  Total GDP, 2013 = $16 trillion  Individual giving, 2012 = $229 billion (Giving USA)  Total Tax Subsidies, 2013 = $48 billion (Urban-Brookings Tax Policy Center)  Reduction in giving from different proposals: (Urban-Brookings Tax Policy Center)  Camp Total of Several Provisions (Excluding 40% cap & cap gains) -6% to -12% Rate structure -1% to -2% Standard deduction/personal exemption-1% to -2% Itemized deductions (other than charity)-1% to -3% 2% floor-2% to -4%  President Cap Only -2% to -4%

39 Effects of Camp Proposal on Giving Incentives Current Law Camp Proposal Change (by itself only) due to: Rate Structure Standard Deduction / Personal Exemptions Itemized Deductions (excluding charity) 2% Floor $22.70$11.90-$1.50-$1.40-$2.00$-3.40 Average Subsidy per $100 of Charitable Contributions Source: Urban-Brookings Tax Policy Center Microsimulation Model (version ).

40 Effects of Camp Proposal on Giving Incentives Camp Pro- posal Change due to: Rate Structure Standard Deduction / Personal Exemptions Itemized Deductions (excluding charity) 2% Floor Low Response -$15b High Response Change in Total Charitable Contributions (billions of $2012) Source: Urban-Brookings Tax Policy Center Microsimulation Model (version ).

41 Effect of 28% Cap in FY2015 Budget on Charitable Contributions ($ billions) Low ResponseHigh Response Total Change on Charitable Contributions (billions of 2013 dollars) -$4b-$8b Source: Urban-Brookings Tax Policy Center Microsimulation Model (version ). Note: high response is elasticity of -1.0 and low response is -0.5.

42 Them Against Us?  And who are we? The “them’s” or the “us’s”?  The real goals should be to strengthen the nation’s  Fiscal situation  Tax system  Charitable Sector  We all have a stake in each sector’s success  Charities take big hits from Spending cuts Weakened economy  Government will have increased responsibility with a weakened charitable sector

43 Budget & Tax Battles Not Easily Compromised  If a sector fights all cut-backs, then limited gain to elected officials to make trade-offs Charitable sector sometimes viewed as just another interest group  If sector compromises, it fears only revenue gainers will be picked off, e.g., in some future deficit reduction package

44 A Better Way: Replace Less Effective With More Effective Incentives --Rough Ranking of Potential & Actual Incentives-- (from Highest to Lowest Charitable Yield Per Dollar Spent)  Compliance efforts (including legal restrictions)  Allow giving until April 15 or filing of tax return  Perhaps $3 to $6 dollars of giving gained per dollar of revenue pick up  Allowing a deduction instead of a credit (current law)  Greater loss of charitable giving if higher-income givers more “price” sensitive  Removing the excise tax on foundations  $1 gain in charitable output per $1 loss in revenues  Allowing a non-itemizer deduction  Lower response if lower-income givers less “price” sensitive  Avoiding a floor (e.g., 1% of income) under charitable giving (current law)  Extremely limited gains in charitable giving per dollar of revenue pick up

45 Combinations of Proposals: Example of Two Options to Change the Charitable Deduction, 2011 (High response rate) Cash Income Percentile22% Cap on Deduction "Above-the-Line" Deduction with 1.7% AGI Floor Revenue effect ($ billions)10.4 Total change in contributions ($billions) Source: Urban-Brookings Tax Policy Center Microsimulation Model (version ). Note: high response (elasticity of -1.0).

46 For more material on charitable issues, visit For Gene’s column on public policy issues, visit For Gene’s latest book on public policy, visit


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