| Legislative Affairs |
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Submitted by Les Gordon, Chair - Legislative Affairs
December 8, 2009
NATIONAL LEGISLATIVE ISSUES
The Senate Finance Committee released on September 16th its health care reform bill, America’s Health Future Act. The bill proposes additional requirements for nonprofit hospitals, including the following:
If passed, some of these requirements could directly affect health care philanthropy. For example, the community needs assessment could become the responsibility of development offices and supporting foundations. And ensuring that your health care organization is fully reporting community benefit in their IRS Form 990 will become that much more important with the proposed IRS review.
President Obama’s proposal to limit tax deductions for charitable gifts and other itemized deductions to help pay for a health care overhaul has so far been stalled in Congress. In September, several Senate Finance Committee members proposed adding caps on the value of itemized deductions to their committee’s health-care bill. But that idea did not make it into the bill’s final text which would raise money in other ways, including an excise tax on insurers offering high-end/high-cost health plans. Mr. Obama had proposed limiting the tax breaks for charitable gifts -- and other itemized deductions like mortgage interest and state and local taxes -- to 28 percent of the dollars spent for couples earning more than $250,000 (individuals $200,000). The plan would have taken effect in 2011. The president also proposed raising the highest income-tax bracket from 35 percent to 39.6 percent that year. The House-passed version of the health-care bill would impose a surtax on the wealthiest Americans—families with annual incomes of one million dollars or more.
Sen. Max Baucus, Chairman of the Senate Finance Committee, has agreed to amend his health-care bill to provide a tax credit to help small charities provide health insurance to their employees. His original language would have allowed the credit only for small businesses that pay income taxes, excluding most nonprofit organizations. His new language would allow eligible charities to get a tax credit for some payroll taxes. These include the payments they make to cover income taxes and Medicare taxes withheld from employee paychecks and the Medicare taxes they pay as employers. The credit would be available to employers with no more that 25 full-time-equivalent employees with annual wages averaging no more than $40,000.
The House of Representatives passed its version of health care legislation, the Affordable Health Care for America Act, (H.R. 3962) on November 7th. This bill contains a public option alternative, which will be based on negotiated rates; expands Medicaid to anyone who makes less than 150% of the federal poverty level; and includes a surtax on high-income taxpayers. The bill expands on slightly different versions of legislation reported in July by the House Ways and Means, Energy and Commerce, and Education and Labor panels, each of which has jurisdiction over parts of a health care overhaul. More than 40 House members signed a letter asking House Leaders to ensure that the final health-care-overhaul bill offered relief to small charities that provide health insurance to their employees. The letter highlighted the importance of the nonprofit workforce to the economy and noted that the current House proposal provides tax credits to help small for-profit employers that offer insurance plans. The credit would apply to income taxes, which charities do not pay. On the other hand, the Senate health-care bill provides help to nonprofit employers. It would give credits for certain payroll taxes to charities with no more than 25 full-time-equivalent employees and/or offer subsidies to both for profit and non-profit small employees.
Sen. Charles E. Grassley, the senior Republican on the Senate Finance Committee, is trying to change the way that charities can set compensation of executives and to make sure the Internal Revenue Service can obtain information about governance policies and practices of nonprofit organizations. Mr. Grassley’s ideas come in proposed amendments to the health-care bill pending in his committee. A law enacted in 1996 gives the IRS the authority to fine charity officials for receiving salaries and other benefits that are deemed excessive, as well as to penalize trustees who approve the compensation. Under federal regulations, nonprofit organizations can, by taking certain steps, establish a so-called rebuttable presumption with the IRS in which the government would presume the compensation set by the charity to be reasonable and not an “excess benefit.” The steps include use of data to compare salaries earned by executives at similar charities and for-profit institutions. Mr. Grassley’s amendments would remove the rebuttable presumption “safe harbor” from federal rules. The procedures that now provide an organization with a presumption of reasonableness generally would establish instead that an organization had performed the minimum standards of due diligence, the amendment says. The amendment also would require charities, in their annual filing of the Form 990 informational tax return, to provide “a summary of the comparable information used to determine an executive’s compensation”. Congressional Bill Seeks to Ease Pension Requirements Two Congressmen have introduced a bill that would ease rules that govern how charities and other employers make payments to defined-benefit pension plans, which provide specific amounts of money to retired workers. That’s because the stock-market crash has left many nonprofit organizations struggling to set aside money of future payments to retired employees. “The cornerstone of this bill is temporary pension funding relief that eases an employer’s obligation to make up for the investment losses that pension plans experienced in 2008,” said Rep. Earl Pomeroy, a North Dakota Democrat who is sponsoring the bill with Rep. Patrick J. Tiberi, an Ohio Republican. The House Ways and Means Committee, which has jurisdiction over tax matters, recently held a hearing on challenges faced by employers that offer defined-benefits plans. A federal law, called the Pension Protection Act of 2006, significantly increased the pension obligations of charities and other employers to guarantee that they will have enough money to pay retired workers. The bill introduced by Representatives Pomeroy and Tiberi, which is called the Preserve Benefits and Job Act, would give employers more time to recover their losses in 2008, to meet federal requirements for building up required sums of money.
Senators Thomas Carper (D-DE) and George Voinovich (R-OH) recently introduced estate tax legislation (S.2748) that would make permanent the current 2009 levels ($3.5 million individual exemption; 45% top rate) and index them for inflation. Meanwhile, the House has passed a bill with similar legislation to make the current 2009 estate tax permanent with an exemption level of $3.5 million for individuals and $7 million for couples with a maximum tax rate of 45%. In 2001 Congress passed the current estate tax law which gradually phases out the tax through 2009 and repeals it for 2010. In 2011, without Congressional action, the current law would expire and estate tax levels that applied years earlier ( an exemption of $1 million and a tax rate of 55% would go back into effect.
House lawmakers on the Ways and Means Committee are expected to move on the Tax Extenders Act of 2009 shortly. The approximately $30 billion one-year extenders bill includes $1.2 billion in incentives to encourage charitable giving, such as the IRA charitable rollover, deductions for food donations, and land preservation giving incentives.
House of Representative members have proposed a bill that would simplify the tax code for foundations – a move they think would encourage grant makers to give more during this economic downturn. The bill, HR 4090, which is similar to Senate legislation proposed last March, would change the way foundations pay excise tax on their net investment income. Foundations currently are subject to a 2 or 1 percent tax. They can qualify for the lower rate in any year in which the percentage of assets they directed toward charitable distributions is larger than the average of their distributions during the previous five years. While this two-tier tax was intended as an incentive for foundations to give more, lawmakers argue it has the opposite effect because it pushes foundations not to dramatically raise their grants in any one year since it would raise the average donation amount and require the organization to continue giving at a higher rate in subsequent years to avoid the 2 percent rate. This House bill would eliminate the current two-tier excise tax system and replace it with a flat rate of 1.32 percent. STATE LEGISLATIVE ISSUES
Charities reeling from investment losses are turning to new state laws giving them more leeway to tap into endowments severely shaken by the stock market. The laws, passed by 43 states since 2006, including 17 so far this year, replace strict rules that had prohibited nonprofit groups from taking out money from endowments whose market value had dipped below the original value of the gift in the fund. These laws have moved into the spotlight as charity assets have been decimated by stock market declines and organizations search for ways to salvage their 2009 and 2010 budgets. Thousands of charities rely on distributions from their endowments each year to help pay for operating expenses, scholarships, or programs to carry out their missions. But some charity experts worry that the new laws give nonprofit groups too much discretion and that spending decisions could deplete endowments and fail to honor donors’ wishes to have their gifts grow over time. State laws that guide charities on the management, investment, and spending of endowments are all based on a model statute, called the Uniform Prudent Management of Institutional Funds Act. The act, known as Upmifa, was introduced in 2006, and includes provisions that allow charities in difficult circumstances to dip into “underwater” endowments—funds worth less than the value of the original gifts. The new statute allows groups to spend the amount they deem prudent after considering donors’ wishes the purpose of the fund and relevant economic conditions. The rules apply to gifts considered to be permanently restricted, meaning a donor expected the contribution to be invested to provide a continuing source of income. They do not apply to gifts for which donors set specific spending instructions, such as a prohibition against spending from the principal amount. In those cases, the donor agreement prevails. The Urban Institute estimates that 20,000 nonprofit organizations hold endowments that would be subject to the new laws. Education institutions, which invest millions of endowment dollars to help pay for scholarships, and charities with relatively new endowments -- containing gifts that had not had the chance to mature greatly before the recession—are among those most likely to be grappling with these tough spending decisions.
With the advent of online fund raising, many non profit organizations are probably violating laws in some states because they are collecting donations without letting state authorities know. n the past it wasn’t necessary for many non profits – especially smaller ones – to file registration papers outside their home states. But today it is different and it is estimated that as many as 90 % of all non profits have not complied with all the relevant state registration laws. And some states are starting to crack down. For example, a foundation was recently fined $25,000 by Georgia officials because it failed to register with the state.
After a New Orleans Judge ruled in favor of Tulane University in a donor intent dispute regarding a century old bequest, plaintiffs filed suit in the Circuit Court of Appeals to reverse the judge’s ruling, giving the university full and complete control over how the donation can be used. Josephine Louise Newcomb founded the H. Sophie Newcomb Memorial College in 1886 as a memorial to her daughter, with gifts over the years totaling more than $2 million. It was the first degree-granting institution for women in the country created within an existing university. But it closed in July 2006, as part of the restructuring of Tulane in the aftermath of Hurricane Katrina. Tulane officials believed that Newcomb did not impose conditions on her gifts as long as they were used for educating young women. So after the closing, Tulane established the H. Sophie Newcomb Memorial College Institute, which sponsors programs that the college used to offer. The plaintiffs contend that this case ruling if upheld could set a dangerous precedent for donors who will doubt that they have any legal recourse if a non profit uses their donation for a purpose other than the one they intended, and thus will discourage charitable giving.
A study by the Pew Center warns that ten states are heading toward economic disasters similar to California’s ongoing fiscal crisis which has been marked by IOUs and budget-busting deficits which have adversely impacted many non profits. The budget woes will mean higher taxes, accelerated layoffs of government employees and decrease funding for non profit organizations in the coming year. In addition to California which leads the list of vulnerable states, Arizona, Florida, Illinois, Michigan., Nevada, New Jersey, Oregon, Rhode Island, and Wisconsin are the other states most at risk of fiscal calamities. IRS ISSUES and and RULINGS
The Internal Revenue Service has released proposed regulations that would require a special type of nonprofit group to distribute at least 5 percent of its assets each year for charitable purposes. At issue: so-called supporting organizations—charities that carry out their mission by supporting specific other groups, including hospitals and colleges. The rules, issued by the IRS and the Treasury Department were required by provisions of the federal Pension Protection Act 2006, which Congress passed in an effort to crack down on abuses. The IRS proposal focuses on the so-called Type III supporting organizations, which are groups that are operated in connection with their supported organizations. The Pension Protection Act directed the Treasury Secretary to require those organizations to distribute a minimum amount of their income or assets to charity each year to ensure they were not hoarding money. The proposed IRS regulations would set the annual distribution requirement at 5 percent of non-exempt-use assets.”
The Internal Revenue Service is not doing enough to make sure those donors of motor vehicles – and charities that receive the gifts - are following the law so that donors do not take unsubstantiated tax deductions, according to a report from the Treasury Inspector General for Tax Administration. In 2007, an estimated 92,000+ taxpayers claimed unsubstantiated motor vehicle donations (which can include cars, boats, and airplanes) that totaled $204 million, the inspector general said. An estimated 63,000 of these taxpayers may have avoided paying about $17-million in taxes. The report recommended that the IRS establish additional procedures to identify noncompliance with motor vehicle donation requirements during returns processing. It urged the IRS to “use outreach, educational materials, and other methods to ensure charitable organizations comply” with a requirement to file a return, called a Form 1098-C, with the IRS for each contribution received of a motor vehicle with a claimed value of more than $500.
The IRS says it will raise the fee it charges organizations to apply for tax-exempt status as charities, beginning with applications that are postmarked after January 3, 2010. For organizations with annual gross receipts that average more than $10,000 in four years before they file their application, the fee increases from $750 to $850. For groups with annual gross receipts that average $10,000 or less in the four years before applying, the fee goes from $300 to $400. But the IRS said that it will lower some fees next year after it makes available a Web-based software program, known as Cyber Assistant, that is designed to help organizations “prepare a complete and accurate” application of charity status, which is called the Form 1023. Organizations that use Cyber Assistant to prepare their applications will be charged $200, regardless of their size. Organizations that do not use Cyber Assistant will be required to pay $850, regardless of their size.
The Internal Revenue Service has started a new audit program that will try to stop very rich individuals from using “complex financial arrangements”- including private foundations - to avoid paying taxes. The new Global High Wealthy Industry group will centralize and focus IRS compliance expertise involving high-wealthy individuals and their related entities, which often have an international component. Examples of these complex arrangements include “trust, real-estate investments, royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately held companies and partnerships that require looking at the entire, and often huge, spectrum of transactions and entities.” Initially, the IRS program will examine individuals with tens of millions of dollars of assets or income. USPS ISSUES and RATES
The Postmaster General announced that there will NOT be a price increase for market dominant products in 2010, including, First-Class Mail, Standard Mail, Periodicals, and single-piece Parcel Post. According to the PG, “this is the right decision at the right time for the right reason. Promoting the value of mail and encouraging its continued use is essential for jobs, the economy, and future of both the Postal Service and the mailing industry. While increasing prices might have generated revenue for the Postal Service in the short term, the long term effect could drive additional mail out of the system. We want mailers to continue to invest in mail to grow their business, communicate with valued customers, and maintain a strong presence in the marketplace.” |