Charitable Reform Provisions of The Pension Protection Act
Richard G. Cummings and Larry R. Garrison
2007 - President George W. Bush signed the Pension Protection
Act of 2006 into law on August 17, 2006. While its major emphasis
is on pension reform, the Act also includes an extensive section
on new rules regarding charitable donations and increased
reporting and oversight over certain tax-exempt organizations.
Subtitle A of the Act is titled “Charitable Giving Incentives.”
Subtitle B, titled “Reforming Exempt Organizations,”
is divided into three parts: “General Reforms,”
“Improved Accountability of Donor Advised Funds,”
and “Improved Accountability of Supporting Organizations.”
Giving Incentives (See Sidebar)
distributions from individual retirement plans for charitable
purposes. Section 1201 of the Act, amending
IRC section 408, excludes from income an otherwise taxable
distribution from an IRA that is a qualified charitable
distribution. This exclusion is limited to $100,000 and
applies to traditional and Roth IRAs. Distributions from
IRC section 408(k) simplified employee pensions (SEP) or
from section 408(p) savings incentive match plan for employees
(SIMPLE) IRAs are not subject to the exclusion rules. A
qualified charitable distribution is defined as a distribution
made directly by the IRA trustee to an IRC section 170(b)(1)(A)
charitable organization other than certain IRC section 509(a)(3)
private foundations or section 4966(d)(2) donor-advised
funds. The distribution must also be made on or after the
date that the individual for whose benefit the plan is maintained
has turned 70 Qs .
to section 1201(a) of the Act, a distribution is treated
as a qualified charitable distribution only to the extent
the distribution would be includible in gross income without
regard to this new provision. In addition, a distribution
is treated as a qualified charitable distribution only if
a deduction for the entire distribution would be allowable
as a charitable contribution under IRC section 170.
to section 1201(a) of the Act, for IRAs with nondeductible
contributions, the entire amount of the distribution is
treated as includible in gross income to the extent the
amount does not exceed the aggregate amount that would have
been includible if all amounts distributed from all IRAs
were treated as one contract for determining the amount
included under the IRC section 72 annuity rules. The proper
adjustments are to be made in applying IRC section 72 to
other distributions made in the taxable year and subsequent
Taxpayer T is more than 70 Qs years old and has a traditional
IRA with a balance of $150,000. The balance consists of
nondeductible contributions of $50,000 and deductible contributions,
along with earnings of $100,000. T made a direct contribution
of $100,000 to a qualified charity. Under the new provision,
the distribution is treated as includible in gross income
to the extent the amount does not exceed the aggregate amount
that would have been includible if all amounts distributed
from all IRAs were treated as one contract. Because T has
a single IRA, the total amount includible in T’s income
if all amounts were distributed is $100,000. Therefore,
the entire $100,000 distribution to the charitable organization
is treated as includible in T’s income and also as
a qualified charitable distribution. Under
the new provision, T would not report the $100,000 distribution
from the traditional IRA in gross income and would not take
the $100,000 as a charitable deduction for the year. This
provision does not apply to nontaxable IRA distributions.
new rules in sections 1201(a) and (c) of the Act regarding
tax-free distributions from IRAs for charitable purposes
apply to distributions made in taxable years beginning after
December 31, 2005, and do not apply to distributions made
in taxable years beginning after December 31, 2007. Thus,
this new tax provision will have limited benefit, because
only taxpayers 70 Qs years old will be able to benefit.
Nevertheless, these taxpayers can avoid the prior limitations
on AGI and the phase-outs on charitable deductions. Because
the qualified charitable distribution under the new provision
will not be included in income, it has the potential to
provide the taxpayer an effective higher threshold for phasing
out exemptions, a lower AMT, and possibly a lower state
income tax liability.
Act also modifies the reporting rules for information returns
filed by certain trusts. Under prior law, split-interest
trusts and trusts claiming certain charitable contributions
were not required to file the usual information return if
they were required to currently distribute all of their
income. Under section 1201(b) of the Act, IRC section 4947(a)(2)
split-interest trusts must file the required information
return under IRC section 6034(a).
addition, for trusts claiming certain charitable deductions,
every trust not required to file an information return but
claiming a deduction under IRC section 642(c) for the taxable
year must furnish the following information, using the appropriate
Amount of the deduction taken under IRC section 642(c)
within the year;
Amount paid out within such year which represents amounts
for which deductions under IRC section 642(c) have been
taken in prior years;
Amount paid out of principal in the current and prior
years for the purposes described in IRC section 642(c);
Total income of the trust in the year, and expenses attributable
to the income; and
Balance sheet showing assets, liabilities, and net worth
to a trust as of the beginning of the year.
1201(b) of the Act also provides that a trust claiming certain
charitable deductions does not have to furnish the above
information if all net income for the year is required to
be distributed currently to the beneficiaries, or if the
trust is described in IRC section 4947(a)(1).
Section 1201(b)(2) of the Act increases the penalty related
to the failure to file an information return and the failure
to include the required information by split-interest trusts.
The penalty is $20 per day, with a maximum penalty of $10,000.
In the case of a split-interest trust with gross income
in excess of $250,000, the penalty is $100 per day, with
a maximum penalty of $50,000. If the person required to
file the return knowingly fails to file the return, the
penalty is also imposed on that person, who will be personally
liable for the penalty.
new rules regarding returns apply to returns for taxable
years beginning after December 31, 2006.
deduction for contributions of food inventory.
Amending IRC section 170(e)(3)(D)(iv), section 1202 of the
Act extends to December 31, 2007, the modification of the
charitable deduction for contributions of food inventory
enacted as part of the Katrina Emergency Tax Relief Act
of 2005 (KETRA). (The end date had been December 31, 2005.)
The modification under KETRA allowed for a contribution
deduction equal to the lesser of the adjusted basis of the
food inventory plus one-half of the profit that would have
been realized if the inventory had been sold at fair market
value, or twice the basis of the food inventory. Recipients
of food donations need not, however, have been affected
by Hurricane Katrina.
adjustment to stock of an S corporation contributing property.
Amending IRC section 1367(a)(2), section 1203
of the Act states that the amount of the reduction in the
shareholder’s basis in S corporation stock by reason
of a charitable contribution of property made by the S corporation
is equal to the shareholder’s pro rata share of the
adjusted basis of the property. Prior law allowed for a
reduction in the basis of the stock for the amount of the
charitable contribution that flowed through to the shareholder.
The new rule applies to contributions made in taxable years
beginning after December 31, 2005, but does not apply to
contributions made in taxable years beginning after December
deduction for contributions of book inventory.
Amending IRC section 170(e)(3)(D)(iv), section 1204 of the
Act extends to December 31, 2007, the modification of the
charitable deduction for contributions of book inventory
enacted as part of KETRA. (The end date had been December
31, 2005.) The modification under KETRA allowed for a deduction
equal to the lesser of the adjusted basis of the contributed
book inventory plus one-half of the profit that would have
been realized if the inventory had been sold at fair market
value, or twice the basis of the book inventory. Recipients
of book donations need not, however, have been affected
by Hurricane Katrina.
treatment of certain payments to controlling exempt organizations.
In section 1205, the Act amends IRC section
512(b)(13) by modifying the tax treatment of certain payments
to controlling exempt organizations. Under prior law, IRC
section 512(b)(13) treats income items such as interest,
annuities, royalties, or rents as unrelated business income
if the income is received from a taxable or tax-exempt subsidiary
that is 50% controlled by the tax-exempt parent corporation.
The controlling corporation includes the payment as an item
of gross income derived from an unrelated trade or business
to the extent the payment reduces the net unrelated income
of the controlled entity or increases any net unrelated
loss of the controlled entity. The Act modifies the treatment
so that IRC section 512(b)(13) applies only to the portion
of the qualifying specified payment received or accrued
by the controlling organization that exceeds the amount
that would have been paid or accrued if the payment met
the IRC section 482 requirements regarding allocation of
income and deductions among taxpayers.
conjunction with this modification regarding excess payments,
section 1205(a) of the Act imposes a 20% penalty tax on
the larger of the excess determined without regard to any
amendment or supplement to a return of tax, or the excess
determined with regard to all such amendments and supplements.
1205(c)(1) of the Act sets forth amendments to the IRC regarding
certain excess payments that apply to payments received
or accrued after December 31, 2005.
1205(b) of the Act includes reporting requirements so that
each controlling organization includes on their return:
Any interest, annuities, royalties, or rents received
from each controlled entity;
Any loans made to each controlled entity; and
Any transfers of funds between the controlling organization
and each controlled entity.
U.S. Secretary of the Treasury is required under the Act
[section 1205 (b)(2)] to submit to the Senate Finance Committee
and the House Ways and Means Committee a report on the effectiveness
of the IRS in administering the above changes and the extent
to which the payments by controlled entities to controlling
organizations meet the requirements of IRC section 482.
The report must include the results of any audit of any
controlling organization or controlled entity and recommendations
relating to the tax treatment of payments from controlled
entities to controlling organizations.
1205(c)(2) of the Act includes amendments regarding reporting
requirements that apply to returns with a due date after
August 17, 2006.
of capital gain real property made for conservation purposes.
The current 30% contribution base limitation is increased
to 50% by section 1206 of the Act, amending IRC section
170(b)(1), for qualified conservation contributions of capital
gain property by individuals. The Act states that any qualified
conservation contribution is allowed to the extent the aggregate
of the contributions does not exceed the excess of 50% of
the taxpayer’s contribution base (generally, AGI)
over the amount of all other charitable contributions allowable
under IRC section 170(b)(1). Any qualified conservation
contributions in excess of the 50% limitation may be carried
over for up to 15 years.
section 1206(a)(1) of the Act, a qualified farmer or rancher
is allowed a qualified conservation contribution to the
extent the aggregate of the contributions does not exceed
the excess of 100% of the taxpayer’s contribution
base over the amount of all other allowable charitable contributions.
A qualified farmer or rancher is a taxpayer whose gross
income from the trade or business of farming is greater
than 50% of the taxpayer’s gross income for the taxable
to section 1206(a)(2), if the qualified farmer or rancher
is a corporation whose stock is not readily tradable on
an established securities market, then a qualified conservation
contribution is allowable up to 100% of the excess of the
corporation’s taxable income, computed under IRC section
170(b)(2), over the amount of all other allowable charitable
contributions. Excess contributions may be carried forward
for up to 15 years as a contribution subject to the 100%
Act includes an additional requirement [section 1206(a)(1)]
for any contribution of property used in agriculture or
livestock production. The 100% limitation does not apply
to any contribution of property used in agriculture or livestock
production, or available for such production, unless the
contribution is subject to a restriction that the property
remain available for production. This additional requirement
applies to contributions of property made after August 17,
to section 1206(a)(1) of the Act, except as noted in the
above paragraph, the amendments apply to contributions made
in taxable years beginning after December 31, 2005, and
do not apply to contributions made in taxable years beginning
after December 31, 2007.
tax exemption for blood-collector organizations.
Section 1207(a) of the Act, amending IRC section 4041(g),
provides that certain blood-collector organizations are
exempt from certain excise taxes with respect to activities
related to blood collection. The Act includes an exemption
from the IRC section 4041 diesel fuel and special motor
fuels tax on the sale of any liquid to a qualified blood-collector
organization for the organization’s exclusive use
in the collection, storage, or transportation of blood.
Act amends IRC section 4221(a) to provide an exemption from
the Chapter 32 manufacturers excise tax on the sale of an
article to a qualified blood-collector organization for
the organization’s exclusive use in the collection,
storage, or transportation of blood [section 1207(b)].
1207(c) of the Act, amending IRC section 4253, includes
an exemption from the IRC section 4251 communications excise
tax on any amount paid by a qualified blood-collector organization
for services or facilities furnished to the organization.
Act amends IRC section 4483 and provides for an exemption
from the IRC section 4481 excise tax on certain motor vehicles
[section 1207(d)]. The Act states that no tax will be imposed
on the use of any qualified blood-collector vehicle by a
qualified blood-collector organization. A qualified blood-collector
vehicle is a vehicle at least 80% of the use of which during
the prior taxable period was by a qualified blood-collector
organization in the collection, storage, or transportation
of blood. If the vehicle is first placed in service in a
taxable period, a vehicle is treated as a qualified blood-collector
vehicle if the qualified blood-collector organization certifies
that it reasonably expects at least 80% of the use of the
vehicle will be in the collection, storage, or transportation
1207(f) of the Act defines a qualified blood-collector organization
as an organization that is—
Described in IRC section 501(c)(3) and exempt from tax
under section 501(a);
Primarily engaged in the activity of the collection of
Registered with the U.S. Secretary of the Treasury for
purposes of excise tax exemptions; and
Registered with the U.S. Food and Drug Administration
(FDA) to collect blood.
to section 1207(g), the Act’s provisions generally
take effect on January 1, 2007, except for the provisions
related to the exemption from the excise tax on vehicles
used in blood collection, which applies to taxable periods
beginning on or after July 1, 2007.
on certain acquisitions of interests in insurance contracts.
Prior law contained no reporting requirements
for acquisitions by exempt organizations of interests in
insurance contracts. Section 1211(a)(1) of the Act adds
IRC section 6050V, thereby including a reporting requirement
as well as requiring a published report by the U.S. Department
of the Treasury with respect to acquisitions of interests
in insurance contracts in which certain exempt organizations
hold an interest. For acquisitions subject to the reporting
requirements occurring between August 17, 2006, and August
18, 2008, an applicable exempt organization that makes a
reportable acquisition must file an information return.
A general failure-to-file penalty is assessed if the information
return is not filed, with a penalty of 10% of the value
of the benefit of any contract being assessed if the failure
to file is due to intentional disregard of the filing requirement.
acquisition is defined by section 1211(c)(1) of the Act
as “the acquisition by an applicable exempt organization
of a direct or indirect interest in any applicable insurance
contract in any case in which such acquisition is a part
of a structured transaction involving a pool of such contracts.”
An applicable insurance contract is defined as “any
life insurance, annuity, or endowment contract with respect
to which both an applicable exempt organization and a person
other than an applicable exempt organization have directly
or indirectly held an interest in the contract (whether
or not at the same time).” The Act directs the U.S.
Secretary of the Treasury to undertake a study on the use
by tax-exempt organizations of applicable insurance contracts
for the purpose of sharing the benefits of the organization’s
insurable interest in insured individuals under such contracts
with investors, and on whether such activities are consistent
with the tax-exempt status of such organizations.
in penalty excise taxes. Section 1212 of the
Act, amending IRC sections 4941–4945 and 4958, doubles
the amount of the penalty assessed under current law in
the form of excise taxes relating to public charities, social
welfare organizations, and private foundations. Increased
penalty percentages and increased dollar limitation amounts
apply to self-dealing and excess-benefit transactions by
exempt-organization managers. Penalty percentages and dollar
limitations are also doubled for a failure to distribute
income, having excess business holdings, holding investments
that jeopardize the charitable purpose, and taxable expenditures.
The increased penalties are applicable for tax years beginning
after August 17, 2006.
of certain easements. Section 1213 of the
Act, amending IRC section 170(h)(4), allows for the charitable
contribution of easements of buildings located in a registered
historic district, effective after July 25, 2006. To qualify
for deductibility, the easement must include a restriction
that preserves the entire exterior of the building and prohibits
any change in the exterior of the building that is inconsistent
with the historical character of the exterior.
Act also provides that, for contributions relating to a
registered historic district made in a tax year beginning
after August 17, 2006, a taxpayer must include a qualified
appraisal, a photograph of the entire exterior of the building,
and a description of all restrictions on the development
of the building. Failure to include all of this documentation
with the return will result in disallowance of the deduction.
the Act requires the donor and the donee to enter into a
written agreement certifying, under penalty of perjury,
that the donee is a qualified organization with a purpose
of environmental protection, land conservation, open-space
preservation, or historic preservation, and has the resources
to manage and enforce the restriction and a commitment to
the new law, no deduction in excess of $10,000 is allowed
for a qualified conservation contribution with respect to
the exterior of a building located in a registered historic
district unless a $500 filing fee is paid with the return
[section 1213(c) of the Act, amending IRC section 170(f)(13)].
If the fee is not paid, the deduction is disallowed. This
rule is in effect for contributions made after February
addition, section 1213(d) of the Act, amending IRC section
170(f)(14), states that the charitable deduction is reduced
if a rehabilitation tax credit has been claimed with respect
to the donated property for contributions made after August
contributions of taxidermy property. Section
1214 of the Act amends IRC sections 170(e)(1)(B)(iv) and
170(f), dealing with the contribution of taxidermy property.
Under prior law, charitable contributions are subject to
rules which state that, for appreciated property, the deduction
is equal to the fair market value if the property is used
to further the donee’s exempt purpose. The deduction
is equal to the donor’s basis if the property is not
used to further the donee’s exempt purpose. If the
property is depreciated such that the fair market value
is less than the taxpayer’s basis in the property,
the taxpayer may generally deduct the fair market value
of the contribution regardless of whether or not the property
is used for the donee’s exempt purpose.
the Act, the taxpayer’s basis in the donated taxidermy
property is limited to the cost of preparing, stuffing,
or mounting the taxidermy property. The amount allowed as
a charitable contribution of taxidermy property contributed
by the person who prepared, stuffed, or mounted the property,
or by any person who paid or incurred the cost of such preparation,
stuffing, or mounting, is the lesser of the taxpayer’s
basis in the property or the fair market value of the property.
This rule applies to contributions made after July 25, 2006.
benefit for contributions of exempt-use property not used
for an exempt purpose. The Act provides for
a recapture of the previous tax benefit received from a
prior contribution deduction by stating that if a donee
organization makes an “applicable disposition”
of “applicable property,” then the donor of
the property includes in income in the taxable year in which
the applicable disposition occurs an amount equal to the
excess, if any, of the amount of the allowed deduction over
the donor’s basis at the time of contribution [section
1215 of the Act, amending IRC sections 170(e), 170(e)(1)(B)(i),
and 6050L(a)]. The Act defines “applicable disposition”
as any sale, exchange, or other disposition by the donee
of applicable property after the last day of the taxable
year of the donor in which the property was contributed
and before the last day of the three-year period beginning
on the date of the contribution of the property unless the
donee makes a proper certification. “Applicable property”
is charitable deduction property defined under IRC section
6050L(a)(2)(A), which is tangible personal property, the
use of which is identified by the donee as related to the
purpose or function constituting the basis of the donee’s
exemption and for which a deduction in excess of the donor’s
basis is allowed.
recapture is necessary if proper certification is made.
Proper certification is a written statement signed under
penalty of perjury by an officer of the donee organization
which certifies that the use of the property by the donee
was related to the purpose or function constituting the
basis for the donee’s exemption, describing how the
property was used and how the use furthered such purpose
or function, and certifying that the intended use has become
impossible or infeasible to implement. The recapture rule
applies to contributions made after September 1, 2006.
1216 of the Act, adding IRC section 170(f), provides that
for identifications made after August 17, 2006, a $10,000
penalty is assessed for the fraudulent identification of
for clothing and household items. The new
law disallows a deduction for any contribution of clothing
or a household item unless the item is in good used condition
or better [section 1216(c) of the Act, adding IRC section
170(f)]. The Act does not define “good used condition,”
but defines household items as furniture, furnishings, electronics,
appliances, linens, and other similar items. The Act states
that household items do not include food, paintings, antiques,
other objects of art, jewelry, gems, or collections. The
new law also states that the IRS may disallow a deduction
for any contribution of clothing or household item with
minimal monetary value. A deduction is allowed for any contribution
of an item of clothing or a household item not in good used
condition or better if the amount claimed for the item is
more than $500 and the taxpayer
includes with the return a qualified appraisal with respect
to the property. This rule applies to contributions made
after August 17, 2006.
requirements for certain charitable contributions. The
IRC section 170(f) recordkeeping requirements are amended
by section 1217 of the Act, which provides that no deduction
shall be allowed for any contribution of a cash, check,
or other monetary gift unless the donor maintains as a record
of the contribution a bank record or a written communication
from the donee showing the name of the donee organization,
the date of the contribution, and the amount of the contribution.
This new rule applies for contributions made in tax years
beginning after August 17, 2006.
new requirement means that, regardless of amount, any cash
contribution must be substantiated by a cancelled check,
a listing on a bank statement, or a credit card statement.
interests in tangible personal property. Section
1218 of the Act, amending IRC sections 170, 2055, and 2522,
adds special rules for contributions, bequests, and gifts
of fractional interests in tangible personal property. No
deduction is allowed for a contribution of an undivided
portion of a taxpayer’s entire interest in tangible
personal property unless all interest in the property is
held immediately before the contribution by the taxpayer
or the taxpayer and the donee. Exceptions may be made where
all persons who hold an interest in the property make proportional
contributions of an undivided portion of the entire interest
held by such persons. For the valuation of subsequent gifts,
the fair market value of an additional contribution is determined
by using the lesser of the fair market value of the property
at the time of the initial fractional contribution, or the
fair market value of the property at the time of the additional
Act also provides for the recapture of the amount of any
deduction allowed with respect to any contribution of an
undivided portion of a taxpayer’s entire interest
in tangible personal property in any case in which the donor
does not contribute all of the remaining interest in the
property to the donee before the earlier of 10 years after
the date of the initial fractional contribution, or the
date of the death of the donor. Recapture will also occur
if the donee has not had substantial physical possession
of the property and used the property in a use that is related
to the organization’s exempt purpose or function.
The tax benefit would be recaptured along with interest
and a 10% penalty.
and gross overstatements of valuations. The
prior law imposed accuracy-related penalties on taxpayers
making a substantial valuation misstatement or gross valuation
misstatement relating to an underpayment of the income tax.
The IRC also provided for an accuracy-related penalty imposed
on taxpayers who make a substantial or gross estate- or
gift-tax valuation understatement. A penalty could also
be assessed on persons for aiding or abetting another taxpayer’s
understatement of tax.
Act lowers the threshold for accuracy-related penalties
imposed on taxpayers for returns filed after August 17,
2006 [section 1219 of the Act, amending IRC sections 6662(e)
and (g)]. It lowers the substantial valuation misstatement
percentage for income taxes from 200% to 150%, and raises
the substantial valuation misstatement percentage for estate
or gift taxes from 50% to 65%. The increased gross valuation
misstatement percentages for income taxes and estate and
gift taxes are likewise changed.
Act establishes a new civil penalty on any person who prepares
an appraisal to be used in conjunction with a return or
a claim for refund who knows, or reasonably should have
known, that the claimed value of the appraised property
results in a substantial valuation misstatement or a gross
appraiser penalty is equal to the lesser of the following:
The greater of 10% of the amount of underpayment attributable
to the misstatement, or $1,000; or
125% of the gross income received by the appraisal for
preparation of the appraisal.
to section 1219(b)(1) of the Act, which adds IRC section
6695A(a), the penalty is waived if the appraiser can establish
that the appraised value was more likely than not to be
the proper value. The penalty applies to appraisals prepared
with respect to returns or submissions filed after August
Standards for Credit Counseling Organizations
law provided for the possible exemption of a credit counseling
organization as a charitable or educational organization
under IRC section 501(c)(3) or as a social welfare organization
under section 501(c)(4). Section 1220 of the Act establishes,
in addition to general pre-Act exemption rules, certain
requirements that a
credit counseling organization must meet in order to operate
as an exempt organization under IRC section 501(c)(3) or
receive or maintain tax-exempt status, an organization with
credit counseling services as its substantial purpose must
satisfy the following criteria:
The organization must not solicit contributions from consumers
during the initial counseling process or while the consumer
is receiving services from the organization; and
The aggregate revenues of the organization from payments
of creditors of consumers of the organization attributable
to debt-management plan services must not exceed 50% of
the total revenues of the organization.
services include services related to the repayment, consolidation,
or restructuring of a consumer’s debt, along with
negotiation with creditors of lower interest rates, the
waiving or reduction of fees, and the marketing and processing
of debt management plans. Sections 1220(a) and 1220(b) of
the Act amend IRC section 501 and specify that debt-management
plan services are unrelated business income for any organization
that is not a credit counseling organization.
new requirements are effective for tax years beginning after
August 17, 2006, for new organizations, and effective for
tax years beginning after August 17, 2007, for existing
organizations. The new law also provides for a four-year
Base of Tax on Private Foundation Net Investment Income
law assessed tax-exempt private foundations a 2% excise
tax on net investment income. Taxable private foundations
are subject to an excise tax based on net investment income
and unrelated business income. For both tax-exempt and taxable
private foundations, net investment income is defined as
the amount by which the sum of gross investment income and
capital gain net income exceed the deductions relating to
the production of gross investment income.
1221 of the Act, amending IRC section 4940, changes the
definition of gross investment income to include capital
gains, notional principal contracts, annuities, and other
substantially similar forms of investment income. The revised
definition applies to tax years beginning after August 17,
or Associations of Churches
1222 of the Act, amending IRC section 7701, clarifies the
definition of a “convention or association of churches”
by providing that an organization that otherwise is a convention
or association of churches does not fail to so qualify merely
because the membership of the organization includes individuals
as well as churches, or because individuals have voting
rights in the organization. The clarification is effective
on August 17, 2006.
Requirement for Entities Not Currently Required to File
that do not have an annual filing requirement because their
gross receipts are less than $25,000 must file an annual
notice with the IRS [section 1223(a) of the Act, amending
IRC section 6033] containing:
The legal name of the organization;
Any name under which the organization operates or does
organization’s mailing address and website address,
The organization’s taxpayer identification number;
The name and address of the principal officer; and
Evidence of the continuing basis for the organization’s
exemption from the filing requirements.
an organization fails to file the required annual return
or notice for three consecutive years, the organization’s
exempt status will be considered revoked on and after the
date set for filing of the third annual return or notice
[section 1223(b) of the Act, amending IRC section 6033].
A retroactive reinstatement is provided for if reasonable
cause for failure to file can be shown.
1223(e) and (f) of the Act, amending IRC section 6033, direct
the U.S. Secretary of the Treasury to notify in a timely
manner every organization described under IRC section 6033
of the notice requirement. This new requirement applies
to notices and returns for annual periods beginning after
to State Officials Relating to Exempt Organizations
the new law [section 1224(a) of the Act, amending IRC section
6104], the IRS may disclose the following information to
an appropriate state official:
A notice of proposed refusal to recognize an organization
as tax-exempt or a notice of proposed revocation of an
organization’s tax-exempt status;
Issuance of a letter of proposed deficiency of tax; and
Names, addresses, and taxpayer identification numbers
of organizations that have applied for recognition as
information may be disclosed or inspected only upon written
request by an appropriate state officer and for the purpose
of, and only to the extent necessary to, the administration
of state laws regulating such organizations. The disclosure
provisions apply to a written request by an appropriate
state official on or after August 17, 2006.
1224(a) of the Act specifies that the “appropriate
state officer” includes:
The state attorney general;
The state tax officer;
Any other state official charged with overseeing organizations
described in IRC section 501(c)(3); and
The head of an agency designated by the state attorney
general as having primary responsibility for overseeing
the solicitation of funds for charitable purposes for
organizations other than IRC section 501(c)(1) or (c)(3)
Disclosure of Information Relating to UBIT Returns
prior law, an organization described in IRC section 501(c)
or 501(d) had to make available for public inspection its
Form 990, Return of Organization Exempt From Income Tax,
and the applicable exempt-status application materials.
1225 of the Act, amending IRC section 6104(d)(1)(A), extends
the public inspection and disclosure requirements applicable
to the Form 990 to IRC section 501(c)(3) organizations filing
Form 990-T, Exempt Organization Business Income Tax Return.
Form 990-T reports the unrelated business taxable income
(UBTI) of an otherwise tax-exempt organization. The expanded
disclosure requirements apply to returns filed after August
Funds and Supporting Organizations
fund is a fund established by a charitable organization
where the donor provides advice regarding distributions
from the fund or the investment of fund assets.
1226(a) of the Act requires the U.S. Secretary of the Treasury
to undertake a study on the organization and operation of
IRC section 4966(d)(2) donor-advised funds and organizations
described in IRC section 509(a)(3). The study is to specifically
consider the following:
Whether the deductions (income, gift, or estate taxes)
allowed for charitable contributions to IRC section 4966(d)(1)
sponsoring organizations of donor-advised funds, or to
IRC section 509(c)(3) organizations, are appropriate in
The use of contributed assets, including the type,
extent, and timing of such use, or
The use of the assets of such organizations for the
benefit of the person making the charitable contribution
or of a person related to such person.
Whether donor-advised funds should be required to distribute
a specified amount (whether determined by income or assets)
for charitable purposes in order to ensure that the sponsoring
organization with respect to the donor-advised fund is
operating consistent with the purposes or functions constituting
the basis for its exemption under IRC section 501 or its
status as an IRC section 509(a) organization.
Whether the retention by donors to donor-advised organizations
of rights or privileges with respect to amounts transferred
to such organizations is consistent with the treatment
of such transfers as completed gifts that qualify for
a deduction for income, gift, or estate taxes.
Whether the above are also issues with respect to other
forms of charities or charitable donations.
1226(b) of the Act specifies that the study is to be submitted
to the Senate Committee on Finance and the House Ways and
Means Committee, along with recommendations, not later than
one year after August 17, 2006.
Accountability of Donor-Advised Funds (See
addition to the required Treasury study mentioned above,
the Act amends several IRC provisions reflecting a concern
that donors may be abusing the current provisions regarding
donor-advised funds. A section of the Act is titled “Improved
Accountability of Donor Advised Funds” and includes
the following five sections (Act Sections 1231-1235):
taxes. Section 1231(a) of the Act adds IRC
section 4966 to IRC chapter 42, subchapter G, “Donor
Advised Funds.” This new law imposes a 20% excise
tax on the sponsoring organization on each taxable distribution.
A taxable distribution is defined as any distribution from
a donor-advised fund to a person if the distribution is
for any purpose other than one specified under the charitable
contribution definitions of IRC section 170(c)(2)(B), or
if the sponsoring organization does not exercise expenditure
responsibility as defined under IRC section 4945(h) with
respect to such distribution.
addition, under the new IRC section 4966, the Act imposes
a 5% excise tax to be paid by the fund manager who agreed
to make the taxable distribution knowing it was a taxable
1231(a) of the Act also adds section 4967 to IRC chapter
42, subchapter G. Under IRC section 4967, the Act imposes
an excise tax on prohibited benefits. An excise tax is imposed
on the donor, donor advisor, or a related person who gives
advice to a sponsoring organization making a distribution
from a donor-advised fund that results in the donor, donor
advisor, or related person receiving, directly or indirectly,
a more than incidental benefit as a result. The excise tax
is equal to 125% of the benefit.
section 4967 imposes a 10% excise tax on a fund manager
who agrees to make the taxable distribution knowing it would
confer a prohibited benefit.
new excise taxes are effective for taxable years beginning
after August 17, 2006.
transactions. Section 1232 of the Act, amending
IRC section 4958(f) expands the definition of disqualified
persons for purposes of the excise tax on excess-benefit
transactions to donors, donor advisors, and investment advisors
of donor-advised funds and sponsoring organizations. The
provisions apply to transactions occurring after August
business holdings. The Act expands the application
of the excise tax on excess business holdings to donor-advised
funds. The amendments to IRC section 4943 made by section
1233 of the Act apply to taxable years beginning after August
of charitable contribution deductions. Section
1234(a) of the Act, amending IRC section 170(f), provides
that contributions to certain sponsoring organizations with
respect to a donor-advised fund are deductible if the sponsoring
organization is not one of the following types of entities:
IRC section 170(c)(3) war veterans organization;
IRC section 170(c)(4) domestic fraternal lodge;
IRC section 170(c)(5) cemetery organization; or
A Type III supporting organization as defined in IRC section
4943(f)(5)(A) that is not a “functionally integrated”
type III supporting organization as defined in IRC section
1234(b) and (c) of the Act, amending IRC sections 2055(e)
and 2522(c), respectively, include similar language regarding
contributions to donor-advised funds for estate and gift
provisions apply to contributions made after February 13,
of, and applications for recognition by, sponsoring organizations.
Section 1235(a) of the Act requires that sponsoring
organizations to donor-advised funds include the following
on their annual return filed under the amended IRC section
A list of the total number of donor-advised funds owned
at the end of the taxable year;
The aggregate value of assets held in such funds at the
end of the taxable year; and
The aggregate contributions to and grants made from such
funds during the taxable year.
1235(b) of the Act, amending IRC section 508, requires that
sponsoring organizations give notice in their exempt-status
application as to whether the organization maintains or
intends to maintain donor-advised funds, and the manner
in which the sponsoring organization plans to operate such
new provisions apply to organizations’ returns filed
for taxable years ending after August 17, 2006, and applications
for exempt status filed after this date.
Accountability of Supporting Organizations
addition to donor-advised funds, the Act’s provisions
also address supporting organizations related to donor-advised
for supporting organizations. Section 1241
of the Act, amending IRC section 509, requires supporting
organizations to provide such information as required by
the U.S. Secretary of the Treasury to ensure that the supporting
organization is responsive to the needs or demands of the
supported organization. The new provisions take effect August
transactions. The definition of disqualified
persons for purposes of the excise tax on excess-benefit
transactions to supporting organizations is expanded by
section 1242(a) of the Act, amending IRC section 4958(f).
The amendments made by section 1242(a) apply to transactions
occurring after August 17, 2006.
new law expands the definition of certain transactions treated
as excess-benefit transactions [section 1242(b) of the Act,
amending IRC section 4958(c)]. For supporting organizations,
the term includes any grant, loan, compensation, or other
similar payment provided by the organization to a substantial
contributor to the organization, a member of the family
as determined under IRC section 4958(f)(4), or a 35% controlled
entity; or any loan provided by such organization to a disqualified
1242(b) of the Act, amending IRC section 4958(c), defines
a substantial contributor as any person who contributed
or bequeathed an aggregate amount of more than $5,000 to
the organization, if such amount is more than 2% of the
total contributions and bequests received by the organization
before the close of the taxable year. These amendments apply
to transactions occurring after July 25, 2006.
business holdings. Section 1243 of the Act,
amending IRC section 4943, expands the application of the
excise tax on excess business holdings to supporting organizations.
The amendments apply to taxable years beginning after August
paid to supporting organizations by private foundations.
Section 1244 of the Act, amending IRC section
4942(g), concerns taxes on the undistributed income of a
private foundation. The term “qualifying distributions”
no longer includes certain distributions by nonoperating
private foundations to supporting organizations. It applies
to distributions and expenditures made after August 17,
of supporting organizations. Supporting organizations
to donor-advised funds must, under section 1245 of the Act,
amending IRC section 6033, do the following on their annual
return filed under IRC section 6033:
List the IRC section 509(f)(3) supported organizations
to which the organization provides support;
Indicate whether the organizations meet the requirements
of IRC section 509(a)(3)(B)(i), (ii), and (iii); and
Certify that the organization meets the requirements of
IRC section 509(a)(3)(C).
new provisions apply to organizations’ returns filed
for taxable years ending after August 17, 2006.
G. Cummings, PhD, CPA, is an assistant professor
of accounting at the University of Wisconsin–Whitewater,
Larry R. Garrison, PhD, CPA, is a professor
of taxation in the department of accountancy at the University
of Missouri–Kansas City, Kansas City, Mo.