In late February 2014, House Ways and Means Committee Chairman Dave Camp (R-Mich.) released a nearly 1,000 page discussion draft addressing tax reform. Chairman Camp’s proposal includes changes to numerous sections of the Internal Revenue Code (Code), including changes with respect to the taxation of individuals, capital gains and businesses. The discussion draft also includes changes relating to charitable giving and tax-exempt organizations, including tax-exempt hospitals and their foundations.
The current sense of most political prognosticators is the Camp proposal has little chance of being enacted into law in the near term. Moreover, while Chairman Camp recently announced his intention to leave Congress at the end of 2014, that is unlikely to increase the chances that his proposal will become law. Notwithstanding the proposal is likely a “dead letter” in its current form, it is significant because it may well provide a framework for future tax legislation, including provisions impacting charitable contributions and tax-exempt organizations.
Charitable Giving. Chairman Camp’s proposal includes several potential changes to the rules applicable to charitable giving, including:
- Extension of Time to Make Contributions. Taxpayers would be able to deduct charitable contributions made after the close of a tax year, but before the due date of the return for such year. For individuals, contributions made as late as April 15 could be treated as made in the prior year. A similar “look back” rule already applies to contributions to Individual Retirement Accounts.
- AGI Percentage Limitations. Under current law, percentage limitations apply with respect to the percentage of an individual’s adjusted gross income (AGI) that may be deducted as a charitable contribution in any given year. The applicable percentage depends on the type of property contributed and the type of organization receiving the contribution. The proposal would change the current 50 percent limitation for cash contributions and the 30 percent limitation for contributions of capital gain property to public charities and certain other donees to a single limit of 40 percent and change the current 30 percent limitation for cash contributions and 20 percent limitation for capital gain property contributions to private foundations to a single limit of 25 percent.
- Value of Deduction Generally Limited to Adjusted Basis. The amount of any charitable contribution of property would be reduced by the amount of gain which would have been realized if the property had been sold, which would make the deduction equal to the adjusted basis of contributed property that has appreciated. For tangible property related to the purpose of the donee, qualified conservation contributions, qualified inventory contributions, qualified research property and publicly traded stock, the deduction would be equal to the fair market value of the property contributed less the amount of the gain that would not have been long-term gain if the property had been sold.
- Two Percent Floor. Charitable contributions by an individual could be deducted only to the extent they exceed two percent of the taxpayer’s AGI.
Tax-exempt Organizations. Chairman Camp’s proposal also includes changes impacting tax-exempt organizations, including:
- Excise Tax on Excessive Executive Compensation. A 25 percent excise tax would apply at the entity level on executive compensation in excess of $1 million paid to any of an organization’s five highest employees.
- Unrelated Business Income Tax. The unrelated business income tax (UBIT) would be extended and the manner in which it is calculated would be changed. This would include an increase in the specific deduction from $1,000 to $10,000. In addition, all name and logo licensing would be subject to UBIT, net unrelated business taxable income would no longer be calculated on an aggregate basis, income from fundamental research that is not made available to the public would be subject to UBIT, and certain sponsorship payments also would be subject to UBIT.
- Expansion of Excess Benefit Transaction Rules. The excess benefit transaction rules that currently tax certain “insider” transactions for charitable and social welfare organizations would be expanded to apply to labor, agricultural and horticultural organizations described in Code section 501(c)(5) and business leagues, chambers of commerce and trade associations described in Code section 501(c)(6). In addition, an excise tax of ten percent would apply at the entity level, which would be avoidable if an organization followed certain minimum due diligence standards, but the safe harbor presumption of reasonableness under existing Treasury Regulations no longer would apply. Further, a manager at an organization no longer would be able to rely on the current professional advice safe harbor. Finally, the definition of “disqualified persons” subject to the intermediate sanctions rules would be expanded to include athletic coaches and investment advisors.
- Expansion of Self-dealing and Simplification of Private Foundation Excise Tax. Under current law, excise taxes are imposed on “disqualified persons” (e.g., substantial contributors and other “insiders”) who engage in an act of self-dealing with a private foundation and “foundation managers” (e.g., officers, directors and trustees) who knowingly approve an act of self-dealing. The proposal would impose an excise tax of 2.5 percent on private foundations for each act of self-dealing and the excise tax rate would be 10 percent for an act of self-dealing involving compensation. Further, a foundation manager no longer would be able to rely on the current professional advice safe harbor. In addition, the current two-tiered private foundation excise tax would be changed to a flat one percent rate.
- Five-Year Payout Requirement for Donor Advised Funds. Failure to distribute contributions from an individual donor advised fund within five years would subject the sponsoring organization to a 20 percent excise tax on the amount not distributed.
- Private Operating Foundations Subject to Distribution Requirements. Private operating foundations, which under current law are not subject to any minimum distribution rules, would be subject to the same distribution rules currently applicable to private nonoperating foundations.
- Excise Tax on Certain Colleges and Universities. A one percent excise tax would be imposed on private colleges and universities with investment assets that exceed $100,000 per full-time student.
- Repeal of Tax-exempt Status for Professional Sports Leagues. Professional sports leagues, which currently are exempt under Code section 501(c)(6), would lose their tax-exempt status.
- Repeal of Type II and Type III Supporting Organizations. Type II and Type III supporting organizations would be eliminated. Such organizations would have to be modified before 2016 to qualify as Type I supporting organizations that are operated, supervised or controlled by one or more public charities or as another type of public charity, or be reclassified as a private foundation.
- Social Welfare Organization Changes. Under current law, social welfare organizations described in Code section 501(c)(4) are not required to request a formal determination of their tax-exempt status. A Code section 501(c)(4) organization would be required, within 60 days of formation, to notify the Internal Revenue Service that it is operating as such. In addition, social welfare organizations would be permitted to seek declaratory judgments in the same manner as Code section 501(c)(3) organizations. Finally, the rule under current law requiring social welfare organizations to list on Schedule B of Form 990 any donor contributing $5,000 or more would be changed to provide for listing of each donor contributing $5,000 or more and who is either an officer or director of the organization or one of the five highest compensated employees of the organization for the current or any preceding tax year. A Schedule B filed by a social welfare organization would continue to be excluded from public disclosure.
- Mandatory Electronic Filing of Form 990. All organizations required to file Form 990 (Return of Organization Exempt from Income Tax) would have to file the form electronically and the IRS would have to make such returns publicly available electronically.
Considerations. As noted above, Chairman Camp’s discussion draft could be the starting point for tax reform, including any major change with respect to charitable giving and tax-exempt organizations. Whether there will be bipartisan cooperation or cooperation between the House and Senate with respect to tax reform anytime soon remains to be seen, but those interested in charitable giving and tax-exempt organizations would be well served to understand these proposals and the motivations and observations that led to their consideration.