Friday, November 30, 2007

IRS Changes Towards Charities

On November 10, 2007, Steven T. Miller, Internal Revenue Service Commissioner for Tax Exempt and Government Entities, spoke about "The IRS’s Role in an Evolving Charitable Sector" (PDF, 7 pages), in a presentation before the Philanthropy Roundtable.

These remarks, along with his testimony on "Oversight of Tax-Exempt Organizations" (PDF, 14 pages), on July 24, 2007, before the House Ways and Means Committee, address the renewed intentions & objectives of the IRS in its regulation of tax-exempt organizations.

That hearing had investigated the effectiveness of past IRS regulation of tax-exempt organizations, according to a posting by Gene Takagi, Esq., entitled "Congressional Hearing on Tax-Exempt Charitable Organizations - July 24", on his "Nonprofit Law Blog":

The Subcommittee questioned the witnesses about a June 2, 2007 GAO Report ["Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes"] stating that "nearly 55,000 exempt organizations had almost $1 billion in unpaid federal taxes as of September 30, 2006."

Miller responded that his office lacks sufficient resources to properly monitor all charities and requested Congress' support for the President's 2008 budget which provides for a 10.8 percent increase to TE/GE.

He also identified five areas of concern: (1) charitable contribution overvaluation, (2) charities established to benefit the donor, (3) a blurring of the line between tax-exempt and commercial sectors, (4) executive compensation and inurement, and (5) regulation and reporting of political activities.
Summaries & resource links regarding that hearing are available on the website of the Alliance for Charitable Reform here.

For more practical guidance about recent significant changes already in place, I highly recommend an article that appeared in the December 1, 2007, issue of the
American Bar Association Journal, also posted online, entitled "The IRS Gets Less Charitable", by Samuel L. Braunstein, Esq., & Carol F. Burger, Esq.

This article looks at tax-exempt regulation from the other side of the coin -- that of the charitable donors & charitable recipients. This article is an excellent summary of the effects of "new tax rules for charitable deductions [that] create hurdles to taxpayer philanthropy".

Generosity is a noble trait shared by many Americans. Traditionally, this generosity has been rewarded with favorable tax treatment by the Internal Revenue Code and Internal Revenue Service reg­ulations, primarily in the form of deductions pegged to qualifying charitable contributions of cash or property. * * *

But the federal tax laws are getting stingy in their treatment of charitable donations—one of the few remaining deductions available to a broad range of taxpayers—as part of a larger effort to clamp down on the tendency of taxpayers to “exaggerate” deductions. Business expenses claimed by self-employed taxpayers are also getting more attention from the IRS. * * *
The article reviews some sources for recently implemented restrictions in charitable giving:
  • New restrictions on deductions for charitable donations contained in the Pension Protection Act of 2006.
  • Renewed Treasury Depart­ment attention to the "donor-advised fund" vehicle for charitable giving.
  • New rules on contributions of used vehicles, boats and airplanes.
The article contrasts charitable gifts consisting of cash versus appreciated property (to avoid capital gains tax), and mentions limitations in certain situations applicable to gifts involving substantial capital gains.

The article addresses the "hot topic" of valuation & reporting of tangible personal property donated to charities, as affected by the charity's subsequent use of that property. It also notes other specialized areas for concern, including donated assets burdened by mortgage or partnership liabilities, donated securities of a corporation in liquidation or buyout, and partial interest (fractional or time-limited) gifts of property.

The article concludes by mentioning, in some detail, the new limitations placed upon the operations of charities, which began with the issuance of Executive Order 13224 on September 23, 2001, in response to threats from foreign terrorists.

Of course, the Internal Revenue Service offers its official, updated guides & summaries, along with source documentation, for many of the recent changes affecting charitable contributions.
See: "Pension Protection Act of 2006 Revises EO Tax Rules"; Publication 526 ("Charitable Contributions -- 2007"); and "Tax Information for Charities & Other Non-Profits".

Given the charge for more security & less abuse, there will be further restrictive changes to come for charitable organizations & their donors.