The House of Representatives recently passed legislation (H.R. 7083) to exempt certain public charities from the tax rules that apply to donoradvised funds. The Charity Enhancement Act of 2008, sponsored by Rep. John Lewis (D-Ga.), chairman of the House Ways and Means Oversight Subcommittee, would exempt from the definition of donor-advised funds those that are created, funded and advised solely by one or more public charities or one or more government entities. The legislation, passed on September 27, was considered under a suspension of the rules, which limits debate to 40 minutes, prohibits amendments and requires a two-thirds majority vote for passage. The bill would allow supporting organizations to pay substantial contributors reasonable compensation for services and reimburse reasonable and necessary expenses. H.R. 7083 also would relax the rules on certain scholarship distributions from donor-advised funds, exempting from the tax on distributions any scholarships made by a donor-advised fund if advisory privileges are exercised solely by a social welfare organization and if the scholarship awards constitute substantially all of the distributions from the fund, among other conditions.

No Senate Action for Now

For now, the Senate is not planning to consider H.R. 7083. Sen. Charles Grassley (R-Iowa), the Finance Committee’s ranking member and the leader of reforms of the charitable sector that became law through the Pension Protection Act of 2006 (PPA) (Pub. L. No. 109-280), attacked the bill, noting that some organizations have argued that the 5 percent payout requirement for private foundations and supporting organizations is too burdensome. Perhaps the bill’s biggest issue is a requirements for certain long-standing, fully funded Type III supporting organizations. Organizations that would be excepted include those that: were established before 1970; have not accepted any substantial contributions since 1970; had no donors living when the PPA was enacted; and do not have a donor’s family member serving as an officer, director or trustee.

Believing that the House bill needs more work and is much too broad, Grassley stated that “thousands of organizations would be carved out of the payout requirement and business holdings prohibition, and the bill would unwind regulations implementing the 2006 reforms before the regulations are even finished.” He said the requirement exists to make sure the organization offers some public benefit for the tax exemption they enjoy.

Independent Sector Response

One provision in the bill particularly favored by the Independent Sector is that allowing the IRS to require annual information returns of exempt organizations to be filed electronically for those organizations filing at least five returns with the IRS annually. In a letter to Rep. Lewis, the Independent Sector said the provision will extend improvements to the broader nonprofit community made by the annual return and allow regulators to focus their oversight work on more meaningful education and enforcement efforts. Lewis believes that the bill fixes some of the unintended consequences of the PPA in response to hundreds of pages of written comments submitted to the Oversight Subcommittee by charitable institutions and foundations. According to Lewis, although he agrees that the law should bar individuals from using tax-exempt organizations to shelter assets for personal gain, “the law must reflect the changing needs of the sector and address difficulties charities are having in complying with the Pension Protection Act. The Charity Enhancement Act does this and offers no room for individual misconduct.” He claimed that charitable giving had been constricted as a result of the PPA and that his committee has been asked to help.

IRS Claims the Longer Form 990 Will Reduce Filing Burden on Tax Exempts

According to the IRS, the redesigned Form 990 not only will promote compliance and enhance transparency, but it also will reduce the burden for filing organizations and the public. During a November 4 Tax Talk Today Webcast sponsored by the IRS, it was noted that the piecemeal revisions to the Form made since the last major revision in 1979 had rendered the form outdated and unworkable. The new form is 11 pages, compared to the old form’s 9 pages. The new form has 16 schedules, whereas the older form had 2. The new form provides for a three year transition period for smaller organizations. Most notably, the new form differs in its content and structure. The majority of reporting on the publicly disclosable form now focuses on activities and programs and, therefore, organizations’ financial and programs staffs both should be involved.

More Comprehensive Instructions

According to the IRS, the new format of the Form 990 instructions also will help reduce the filer’s burden. The instructions are intended to be more comprehensive and to be a useful tool. They will include a glossary of key terms, a matrix to assist with comprehension of the compensation section and appendices with instructions geared toward specific types of organizations. Schedule A in particular has been streamlined and now focuses only on the status of the organization as a public charity. Additionally, Schedule A now requires the organization to use the method of accounting it uses for the entire Form 990. The Schedule continues to contain public support test information as well. Schedule F also contains major revisions and will have to be completed by many organizations engaged in foreign activities. The Schedule requires increased information regarding grant-making, fundraising, business activities and investments, all on a regional rather than country basis.

Website Assistance

A five-page background document on the major changes to Form 990 is available online at the IRS website (www.irs.gov), as well as a document on the differences between the old and new forms. After taking into account more than 800 public comments, the redesign of the Form is more than 95 percent completed, and the full new version will be available by early- to mid-December.