Editor's Note

Now that the holidays are over, and everyone is well-rested and refreshed, let's take a moment to brush up on the recent tax incentives and restrictions passed by the Senate Finance Committee that will impact many types of donations and nonprofit organizations.

In this issue, Harvey Limpman reviews the key provisions of the Senate bill in an article that first ran in the November 24, 2005 edition of The Chronicle of Philanthropy.

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The following article first appeared in the November 24, 2005 edition of The Chronicle of Philanthropy.

The Senate Finance Committee has passed legislation containing incentives designed to encourage charitable giving while also taking steps to ensure that donors are not inflating their tax write-offs.

Among the new giving incentives: People who do not itemize deductions on their returns would be allowed to write off a portion of their charitable donations.

Individuals could write off the sums above $210 that they donate each year to nonprofit organizations; couples filing jointly could write off the amount that exceeds $420.

The measure would also allow older people to withdraw funds from their individual retirement accounts and donate them to charity tax-free, a provision that charity fund raisers say could provide significant contributions to their organizations.

Representatives of nonprofit organizations said they were for the most part pleased with the bill, although community foundations expressed concerns that some of the language in it might inadvertently make it harder for them to support some charities.

"Ninety-five percent of what's in it we're very pleased with," said Diana Aviv, president of Independent Sector, a Washington coalition of about 600 nonprofit groups and foundations. "We do believe these reforms are necessary."

Diane Canova, vice president for government relations and public policy at the Council on Foundations, agreed, but said the unintended consequence of some of the provisions would be that some community foundations would have to cut back services they provide to donors and charities.

The House has also been working on a tax measure, but a version passed by the House Ways and Means Committee doesn't include any provisions on charitable giving. If both measures are passed, a conference committee of both chambers would work out the differences and decide whether any charity provisions should be included in a final version. That worries some nonprofit representatives.

"We're cautiously optimistic, but our expectation is that the House will simply take the Senate-passed bill and go to conference where a very small number of members will be deciding which of these reforms to keep in," Ms. Canova said. "The House will not have the opportunity to deliberate fully on specific charitable reforms."

The Senate Finance Committee's measure would affect many types of donations and nonprofit organizations.

To address concerns that many donors are taking overly generous tax deductions for gifts of clothes, household items, and other noncash goods, one key section of the measure directs the Internal Revenue Service to publish a list of such items and assign a value to each one. People would not be allowed to take a deduction for an item that was higher than the value listed, unless they got an independent appraisal showing the value of the item donated.

In addition, the legislation contains several provisions designed to make sure noncash gifts to charities are used for a charitable purpose.

Dave Barringer, vice president of marketing and communications at Goodwill Industries International, said his group was pleased that the Senate and the IRS have agreed that Goodwill, along with several other charities that rely heavily on clothing gifts, will participate in developing the list for donors. Aides to the Finance Committee "agreed that we should be at the table, since we know what the donations are worth when we resell them," he said.

Among the other key provisions designed to cut down on what Senators say are abuses of charity tax laws:

• Tax-exempt organizations would be subject to penalties for participating in tax-shelter transactions prohibited by the Internal Revenue Service.
• Charities that operate donor-advised funds would be required to distribute at least 5 percent of the net assets in their donor-advised funds to nonprofit causes each year, and award at least $250 from each account every three years. None of the money could be distributed to donors, their family members, or advisers.
• Certain supporting organizations — known as Type III organizations — would be required to distribute at least 85 percent of their income or 5 percent of their net assets annually, whichever is greater.

Type III supporting organizations are charities that donors can create to benefit another charity; in some cases, the beneficiary does not know about the supporting organization or have any connection to it. Such organizations have been subject to substantial abuse, say lawmakers and officials at the Internal Revenue Service. A Chronicle investigation in 2004 found many instances in which the donors who created the supporting organizations borrowed back virtually all the assets for their personal use (The Chronicle, February 5, 2004).

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