NATIONAL LEGISLATIVE ISSUES

Nonprofit Hospitals Face Increasing Pressure to Justify Tax Breaks

Nonprofit hospitals are under increasing pressure to justify the tax breaks they receive.

Sen. Charles Grassley, the senior Republican on the Senate Finance Committee, believes that lawmakers should be asking questions about whether some wealthy nonprofit hospitals can justify their tax-exempt status.

For example, Northwestern Memorial Hospital, in Chicago, which reported spending $20.8-million on care for the needy in 2006, is less than 2 percent of its revenue and far less than what the Center for Tax and Budget Accountability, a Chicago nonprofit organization estimates the group receives in tax breaks.

The hospital has also been under fire for what many consider to be excessive executive compensation and renovation projects.  The hospital’s former chief executive officer, received $16.4-million payout in 2006, and the hospital recently completed a $1-billion building project.

New standards adopted by the Internal Revenue Service, scheduled to take full effect in 2009, will require nonprofit hospitals to report to the public more details about what they do to serve their communities.

Congress Urges Foundations to Curtail Tax Fraud

A key figure in Congress’s recent efforts to curb abuse in the nonprofit world says foundations need to become much more aggressive in stopping tax fraud.  Otherwise, foundations could soon be in the cross hairs of federal lawmakers.

A top aide to Sen. Charles Grassley of Iowa, said that some members of Congress are concerned about family foundations that are paying family members for administrative or board positions and that private foundations are being used as a tax shelter by some wealthy donors.

Estate Tax Reforms Included in the Federal Budget Resolutions

Before breaking off for spring recess, the House and Senate passed separate $3 trillion FY 2009 budget resolutions that lay out a blueprint on spending and tax issues.

Both resolutions would enhance non-defense discretionary spending above the president’s baseline: $23 billion in the House and $18 billion in the Senate, respectively.  Each resolution supports the extension of middle-class tax cuts and produces a budget surplus in 2012 and 2013.

Both resolutions also support the reforming of the estate tax.  The House version calls for the estate tax to be eliminated to all except a small fraction of Americans.  An amendment to the Senate resolution supports the continuation of the estate tax at the 2009 levels: $3.5 million individual exemption, $7 million for couples; and a 45-percent tax rate.

The two resolutions will go to a House-Senate conference committee, where differences between the two resolutions will be worked out.

Senate Leader Considers Tougher Penalties for Mistakes on Tax Form

Sen. Charles Grassley, the senior Republican on the powerful Finance Committee, says tougher penalties are possible if charities do not take steps to improve their reporting on the Form 990 informational tax return.

Mr. Grassley and his staff will be paying attention to what degree charities comply with upcoming changes to the Form 990.  Many nonprofit groups will have to fill out an updated version of the form beginning in 2009.

Mr. Grassley said the new form – as well as the Pension Protection Act of 2006 – will make it easier for the public and the government to monitor the financial effectiveness of charities

Congress Considers Requiring Charities to File Fund-Raising Details With Postal Service

Lawmakers who want to discourage charities from spending most of the money they bring in on fund-raising costs are considering introducing legislation to require nonprofit groups to post information for donors to a Postal Service Web site, including the ratio of their fund-raising costs to program spending.

Rep. Danny K. Davis – chairman of the House Subcommittee on the Federal Workforce, Postal Service, the District of Columbia – pointed out that under current law nonprofit organizations are not required to disclose much information to their donors.  A central database with information on all charities would provide potential donors with the information they would need to make informed decisions on which charities to support.

Rep. Henry Waxman, a California Democrat who oversaw recent hearings on veteran’s charities of the House Committee on Oversight and Government Reform, agreed.

House Passes IRA Rollover/Senate Considering Legislation

The House of Representatives passed a bill on May 21, that included an extension of the IRA Rollover provision.

The provision would allow donors age 70 ½ to “roll over” funds (up to $100,000) from their Individual Retirement Accounts (IRAs) and contribute them tax-free directly to a charity.  The provision expired at the end of 2007, but the new provision would extend the bill for one year until Dec. 31, 2008, and make it retroactive to Jan. 1, 2008.

The bill, H.R. 6049, the Renewable Energy and Job Creation Act, also contains a number of other tax incentives that have expired.

It is unlikely the Senate will consider H.R. 6049, but instead is working on its own bill of tax extenders.  The Senate Finance Committee is currently considering S. 2886, the Alternative Minimum Tax and Extenders Tax Relief Act, which also include the IRA Rollover provision, although the Senate’s version would extend the provision for two years to the end of 2009.

The Senate is expected to pass S. 2886 or similar legislation in the near future, and then the two bodies of Congress will meet in a conference committee to iron out one final bill of tax extenders.

Congress Extends Tax Break for Land Gifts

Nonprofit organizations have won an extension of a generous tax incentive for donations of land or historically important property under a law recently approved by Congress.  A two-year extension of the so-called conservation easement deduction was included in a bill to protect farmers, which became law over President Bush’s veto.

The provision, created as a temporary, two-year incentive under the Pension Protection Act, expired at the end of last year.  Conservation groups, including the Land Trust Alliance – a Washington group with 1,100 member land trusts – lobbied Congress to make the provision permanent, saying it does much to spur donations of property.

More than a million acres of land have been protected from development as a result of the expanded tax incentive.  Landowners now have until December 31, 2009, to take advantage of the tax break when they donate ranches, wetlands, forests, and other properties for conservation.

Senator Steps Up Pressure on College Endowments

Sen. Charles Grassley of Iowa is considering proposing legislation that would require colleges and universities to distribute at least 5 percent of their endowments each year in order to make higher education more affordable.

Several major universities – including Harvard University, Yale University and Stanford University – have announced plans in recent months to reduce tuition costs and increase aid to students from lower – and middle-income families.  Those plans followed a Finance Committee hearing last fall in which Mr. Grassley and others called for more scrutiny of college endowments.

But Grassley is not yet convinced that all colleges and universities are doing enough to justify their tax-exempt status.  Not only are higher-education institutions exempt from federal taxes, but their endowments are tax-free.

                                                STATE LEGISLATIVE ISSUES

States Consider New Legal Designation For Charities Which Make Profits

Momentum is building in several states for a new legal designation that would identify organizations whose primary mission is charitable and yet are also able to make a profit.

The designation would be for low-profit, limited liability companies (L³C) that would have to pay taxes on their profits, but could distribute those profits to owners or investors.  An L³C’s organizing documents would have to state that its primary mission is charitable and that making a profit is a secondary concern.

A bill that would create the new L³C designation has already been approved by Vermont’s House of Representatives and is being considered by the State Senate.  Similar legislation is also being considered in Georgia, Michigan, Montana and North Carolina.

The intent of the designation would be to encourage foundations to increase the number of program-related investments (or PRIs) they make, which would in turn hopefully spur private funds to those investments as well.

Currently, foundations can make public-related investments in businesses that offer a significant social benefit, such as a for profit that employs local workers in an economically depressed city.  However, because entities that can accept PRIs are so difficult to identify, very few are actually ever made, and most foundation simply offer loans to such enterprises.

For a foundation’s investment in a company to be considered a PRI and counted toward the 5 percent payout requirement, the investment must be made to accomplish a charitable purpose and without a substantial expectation of gain.

States Making Cuts To Social Service Programs

According to the Center on Budget and Policy Priorities, at least 25 states face severe budget shortfalls in fiscal year 2009.  The rising costs of health care and energy, along with falling property values and lethargic sales, have all contributed to the state budget crisis.  With all the states except Vermont required by law to balance their budgets each year, state legislators and governors have already begun making cuts to important social service programs.

Health and human service organizations – the largest sub-sector of the nonprofit community—are particularly at risk.  As a response to the declining economy, nine states responded by slashing their Medicaid programs, many of which benefited children.  California and Virginia are focusing cuts on education programs, which make up the second-largest sub-sector of the nonprofit community.  In all, 17 states have proposed or already passed budget cuts that will affect services for children, the elderly, and people with disabilities.

During the last recession in 2001, 35 states cut eligibility for public health programs, leaving more than one million people without health coverage.  With 40-plus million people already without basic health insurance, a repeat of this would exacerbate the problem.

MA Lawmakers Target $1B College Endowments

Massachusetts lawmakers desperate for additional revenue are eyeing the endowments of deep-pocketed private college to bolster the state’s coffers by more than $1 billion a year, asserting that the schools’ rising fortunes undercut their nonprofit status.

Legislators have asked state finance officials to study a plan that would impose a 2.5 percent annual assessment on colleges with endowments over $1 billion, an amount now exceeded by nine Massachusetts institutions.  The proposal, which higher education specialists believe is the first of its kind across the country, drew surprising support at a debate on the State House budget and is attracting attention in higher education circles nationally.

University leaders criticized the plan as a gimmick that would backfire by hurting institutions that are pivotal to the state.

The plan was introduced amid a national debate over whether elite colleges are hoarding their endowments.  Members of Congress, including Senator Charles Grassley, Republican of Iowa, have questioned why elite universities do not spend more of their vast reserves to defray the cost of tuition.

The Massachusetts plan has also brought to the fore a more radical notion: whether certain colleges have amassed so much wealth that they no longer deserve to be tax-exempt.

In addition to Harvard, the legislation would affect Amherst College, Boston College, Boston University, Massachusetts Institute of Technology, Smith College, Tufts University, Wellesley College, and Williams College.

The plan has garnered support among those who believe many top-tier colleges are managed more like corporations than non-profits and are not doing enough to reach out to low- and middle-income students and the communities around them.

                                                IRS ISSUES AND RULINGS

IRS Updates Policy Regarding Loss of Tax-Exempt Status

The IRS recently issued a final rule providing factors that it will consider in determining whether a 501(c)(3) organization that engages in excess benefit transactions will lose its tax-exempt status.  The final rule adds onto the existing “intermediate sanctions” regulations.

The new guidance stresses that tax-exempt organizations that become involved in excess benefit transactions with disqualified persons will be in better shape if they discover the problem and take corrective action before the IRS gets involved.  When deciding whether to revoke an exemption, the Service will look at the excess benefit transactions in relation to the size and scope of the organization’s regular exempt purpose activities; whether the organization has engaged in multiple excess benefit transactions; whether it implemented safeguards to prevent excess benefit transactions; and whether the excess benefit transaction has been corrected.

The new regulation finalized a proposed rule that was issued in September 2005.

IRS to Stop “Egregious’ Violations of Politicing Rules

The Internal Revenue Service, in this election year, is making extensive efforts to educate charities and churches about federal law that bans their political campaign activity.  The tax agency also plans to enforce the law with a focus on cases involving allegations of egregious violations.

By law, churches and charities may not participate in, or intervene in (including the publishing or distributing of any statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

The IRS is sending letters to the national political party committees that explain the law’s prohibition about churches and charities.  In March, a letter from the revenue service was published in the Federal Election Commission’s monthly newsletter, asking candidates to ensure that their contacts with charities do not inadvertently jeopardize their tax-exempt status.

The tax agency also has posted on its Web site a “program letter” to its employees who work in its exempt organizations office that explains its objectives this year.  Among other things, the letter explains how IRS officials should review cases in which churches and charities post communications on their Web sites.

IRS Is Monitoring Tax Deductions for Charitable Gifts

The IRS is reminding both fundraisers and donors about recent changes in tax deductions for charitable gifts.

One of the most important changes relates to receipts of cash gifts.  Donors wishing to deduct cash gifts of any size must now have a proper receipt, no matter the size of the gift, and the receipt must be a “bank record” such as a canceled check or a bank statement with the name of the charity, the date and amount.

For gifts of artwork, the deduction is no longer simply related to the cost of the piece but how it’s being used.  If a piece of artwork is used by the charity for a purpose related to its tax-exempt status, such as being displayed, the appreciated value may be deducted.  However, if it’s sold at an auction, only the cost of the artwork can be deducted.

For gifts of vehicles, donors may only deduct the sale price of the vehicle, not the vehicle’s fair market value.  However, if the claimed deduction is $500 or less, the fair market value can be deducted.

IRS to Offer Second Chance to Charities That Miss Disclosure Deadline

The Internal Revenue Service will introduce a new program this year for charities in jeopardy of losing their tax-exempt status for failure to file informational tax returns, called Forms 990.

Organizations will be allowed to file their missing forms without penalty, paying only a small fee based on their size.

The program is a response to a tough new rule contained in the Pension Protection Act of 2006 that calls for any organization that fails to file its required tax returns for three consecutive years to automatically lose its tax exempt status.  Since the rule went into effect starting with the 2007 tax year, 2010 will be the first year that charities could have their status revoked.

The IRS especially wants to help small nonprofit groups that may no even know about the filing requirement, which directs tax-exempt organizations with at least $25,000 in annual revenue to submit the Form 990 each year.  An IRS study in 2006 found that in nearly one-quarter of the cases where groups did not file a form, the person responsible for maintaining the organization’s books and records was unaware of the obligation to submit an annual return.

As it now stands, the penalty for last filings of the Forms 990 can run as high as $10,000 a year for small organizations and $50,000 a year for big ones.  Under the program, the delinquent tax forms will still need to be filed, but late fees will be waived and the charities will retain their tax-exempt status.


IRS Updates Rulings on Disclosing Business Activities

The Internal Revenue Service has updated its guidelines that explain how charities must make public their Form 990-T filings, which list business activities not directly related to charity’s mission.

As part of the Pension Protection Act of 2006, charities that file the Form 990-T must now make their filings available for public inspection.

The new IRS reporting guidelines clarify the rules behind this requirement.  Most notably, the guidelines say nonprofits must make filings available for three years after their filing date.  The requirement applies to all Form 990-T filings made after August 17, 2006.

IRS Denies Tax-Exempt Status to Group That Spends Too Little on Charitable Programs

In a ruling that could have implications for many charities, the Internal Revenue Service has denied a tax exemption to an organization in part because the group did not spend enough of its money on charitable programs.

This is the first public sign that the revenue service is measuring how much charities spend by using a controversial approach that the government has recently decided to apply.  The IRS said the organization did not carry on a charitable program “commensurate in scope” with its financial resources.

As is its policy, the IRS did not identify the group.  But the organization was identified as the National Foundation of America, in Franklin, Tenn., by the Web site of a state government receiver in Tennessee.

In its private-letter ruling the IRS said the organization had said in its application for tax-exempt status that it planned “to coordinate and conduct, through its staff, evangelistic campaigns in a number of countries wherein the people are receptive to the Gospel of Jesus Christ.”  The group’s initial two-person board of directors was a husband and wife.

But the revenue service said the organization’s primary focus, described on the organization’s Web site, was helping families create a “financial legacy” through “asset exchange programs.”  The programs allowed people to exchange annuities, real estate, securities, bonds, and cash for a “tax-deductible installment plan” with a guaranteed payout for a period of time.

The IRS said records that the organization filed with a state government showed that money the organization received and counted as contributions over a year was “primarily from the sale of annuity plans.”  These state records also showed that the money that the organization reported spending on its charitable program during the year was less than one-half of 1 percent of its total revenue and about 3 percent of its total expenses.

In its ruling, the IRS concluded that the organization did not qualify as a charity because it was organized and operated for the primary purpose of running a business.

                                                USPS ISSUES AND RATES

Non Profit Postal Rates Increased on May 12, 2008

The U.S. Postal Service’s new postage rates for nonprofit organizations and other mailers took effect of May 12.  Under the proposal, postage for nonprofit standard mail, mostly letter-size pieces, increased by an average of 0.7 percent, and nonprofit periodical mail went up by an average of 2.7 percent.

Postage on some pieces of standard nonprofit mail increased by more than the average:  Nonprofit standard pieces known as “flats” that cannot be processed in the Postal Service’s automated mail-handling equipment, for example, increased by 7.6 percent.

These new rates are the first to be set under a new system, by which the Postal Service can raise rates annually but is required to keep any increases at or below the rate of inflation.  In setting the new rates, postal officials used the latest 12-month average for inflation, which was 2.9 percent.  Nonprofit rates increased by less than that percentage due to a long-standing law that provides charitable organizations with discounted postage.

Attached to the end of this report is a summary of these new postage rates.

USPS Planning to Issue National Authorization Numbers

A new national authorization number, tentatively scheduled to be introduced this summer, will replace the primary and additional office authorizations required to mail at Nonprofit Standard Mail rates.

The national number will simplify the process for the issuance and administration of an authorization to mail at the non-profit rates, allowing authorized nonprofits to enter a mailing at the N.P. rate at any post office.

The PostalOne! System will provide a seven-digit national number for nonprofits, which will no longer have to submit a Form 3623 for nonprofit privileges at additional post offices.

The primary authorization number issued to existing nonprofits will become the national number for the organization.  Prior to implementing the new system, USPS will send a letter to each mailer authorized to mail at the non profit rate at additional offices, reminding them of the new national number.

Introduced in 1951, Nonprofit Standard Mail required an organization to submit an application (Form 3624) to mail at each post office where they wanted to mail at Nonprofit Standard rates.  The Postal Service introduced “additional mailing office” authorization during the 1980’s allowing nonprofits already authorized to enter the Nonprofit Standard Mail to submit an application to mail at another post office without submitting another application.

The additional office authorization was subject to revocation if not used at least once every two.

* AADC for letters/ADC for flats.

NOTES:

1.       Max piece weight for rates shown: 1^st Class: 1 oz., Standard (both regular and non-profit): 3.3 ozs.  Rates are higher for heavier pieces.

2.       For presort or basic 1^st Class pieces weighing more than 1 oz., add 17 cents for each additional oz., or fraction of an oz. For automation 1^st Class pieces weighing more than 1 oz., add 12.5 cents.

3.       Both Standard regular and non profit pieces weighing more than 3.3 ounces are subject to both per piece and per pound rates.

4.       Non machinable 1^st Class letters are subject to a 20 cent/non-machinable surcharge for both presort and non-presort pieces.

5.       Non machinable 1^st Class flats are now charged at the Parcel rate.

6.       The maximum weight for machinable letter preparation is 3.3 ounces.

7.       Letter size mail: 3 ½” x 5” min; 6 1/8” x 11 ½” max; thickness .007” - .25”.

8.       Post cards: 3 ½” x 5” min., 4 ¼” x 6” max., thickness .007” - .016”.

9.       Flat size mail: more than 11 ½” long or more than 6 1/8” high or more than .25” thick, but no more than 15” long, 12” high or .75” thick.

10.    To be machinable, flats must be rectangular, uniform in thickness, and meet USPS flexibility requirements.

11.    A mail piece may be non machinable if it has any of these characteristics : polybags; clasps, buttons or similar closures; rigid composition; uneven thickness; delivery address parallel to the piece’s shorter dimension; a bound edge that’s the shorter dimension or is at the top of the piece.

12.    In Standard mail, non machinable flats are treated as a new processing category called “Not Flat-Machinable”; Non machinable letters have their own rate structure, no surcharge.  See other side for these new rates.