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Perry Wasserman

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August 2006 Charity Reform Update: House Approves Charitable Giving Incentives and Reforms


Last week, on July 28, the House of Representatives approved a package of charitable giving incentives and reforms as part of pension reform legislation (H.R. 4). [Editor's note: President Bush signed H.R. 4, the Pension Protection Act of 2006, into law on August 17, 2006.] The charitable package is, in many respects, a watered-down version of provisions that were advanced by Senate Finance Committee chairman Chuck Grassley and the Panel on the Nonprofit Sector.

H.R. 4 now moves to the Senate for consideration, but passage is far from certain.

Charitable Giving Incentives. H.R. 4 contains seven separate giving incentives, all of which would run through the end of 2007. These incentives, according to a summary prepared by House Ways and Means Committee staff, include:

  • Tax-Free Distributions from IRAs for Charitable Purposes. The IRA "rollover" provides an exclusion from gross income for certain distributions of up to $100,000 from a traditional individual retirement account (IRA) or a Roth IRA, which would otherwise be included in income. To qualify, the charitable distribution must be made to a tax-exempt organization to which deductible contributions can be made.

  • Contributions of Food Inventory. For donations of food inventory, the provision extends an enhanced deduction for all trades and businesses.

  • Certain Payments to Controlling Exempt Organizations. Under current law, rent, royalty, annuity, and interest income paid to a tax-exempt organization by a controlled taxable subsidiary is generally treated as unrelated business income, which is taxable to the tax-exempt parent organization. The provision provides that payments received or accrued by certain exempt parents from taxable controlled subsidiaries will not be treated as unrelated business taxable income.

  • Qualified Conservation Contributions. The provision raises the charitable deduction limit from 30 percent of adjusted gross income to 50 percent of adjusted gross income for qualified conservation contributions, provided that such contribution does not prevent the use of the donated land for farming or ranching purposes. The charitable deduction limit is raised to 100 percent of adjusted gross income for eligible farmers and ranchers.
Charitable Reforms. H.R. 4 also contains nearly 20 reforms designed to increase regulation of exempt organizations. According to the House Ways and Means summary, these reforms include:

  • Life Insurance Contracts. Under the provision, charitable organizations must report certain acquisitions of interests in certain insurance contracts for two years beginning on the date of enactment. The IRS is required to issue a report within 30 months after the date of enactment examining if acquisitions of applicable insurance contracts is consistent with the tax-exempt purposes of those charitable organizations that acquire such contracts.

  • Clothing and Household Items. The provision specifies that no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better. In addition, the IRS may deny a deduction for any item with minimal monetary value.
  • Fines and Penalties Applicable to Charitable Organizations. The provision doubles the amount of excise taxes applicable to certain activities, such as taxes on self-dealing and excess benefit transactions, failure to distribute income, and excess business holdings, by charities, social welfare organizations, private foundations, and exempt organization managers.

  • Notification Requirement for Exempt Organization. The provision requires certain exempt organizations to file an annual notice with the IRS containing basic contact and financial information. The requirement applies to organizations that currently do not have an annual filing requirement because their gross receipts are less than $25,000.

  • Public Disclosure of Information Relating to Unrelated Business Income Tax Returns. The provision extends the present-law public disclosure requirements applicable to Form 990 to the unrelated business income tax returns of Section 501(c)(3) organizations.

  • Donor-Advised Funds. The provision applies an excess benefits transaction tax on any grant, loan, compensation, or other similar payments from a donor-advised fund to a person that with respect to such fund is a donor, donor adviser, or a related person, and from a supporting organization to a substantial contributor or a related person. The provision imposes excess business holdings rules on donor-advised funds and Type III supporting organizations. Transition rules apply to the present holdings of donor-advised funds and supporting organizations. Supporting organizations that are functionally integrated with their charity would not be subject to any excess business holdings rules.
Perry Wasserman, 501(c) STRATEGIES
© 2006, 501(c) STRATEGIES

Perry Wasserman is managing director of 501(c) STRATEGIES, a Washington, D.C.-based government relations and communications firm representing GuideStar and other nonprofits on federal public policy issues. For more information on their work and services, please visit www.501cStrategies.com.

Charity Reform Update


Legislation that would enhance charitable giving incentives and crack down on nonprofit abuses of the tax law is still pending in Congress, and the chance for passage this year remains uncertain.

With Congress in recess until early next week, Senate Finance Committee chairman Chuck Grassley (R-Iowa) and House Ways and Means chairman Bill Thomas (R-Calif.) continue to discuss whether the charitable giving incentives and reforms will move as part of a forthcoming tax "extenders" package.

Representative Thomas has said that some of the charitable provisions Senator Grassley supports—particularly some of the reforms—require further study and may not be ready to move anytime soon. Whether the extenders package includes charitable provisions or not, it is widely expected to include several other provisions that were pushed out of the final tax reconciliation bill, the Tax Relief Act of 2005 (H.R. 4297), signed into law on May 17, 2006.

In recent weeks, Senator Grassley and Representative Thomas have said the extenders package may move as part of pension reform legislation (H.R. 2830), which is currently in Senate-House conference negotiations.

Lawmakers are hopeful they can work out the differences between the Senate and House versions of the pension bill when they return from recess next week. If, however, agreement cannot be reached on the pension bill, Senator Grassley and Representative Thomas could try to attach the extenders package—which may or may not include the charitable provisions—to another bill.

As this process continues to unfold in Congress, key lawmakers and national nonprofits continue to debate the merits of the various charitable provisions under consideration. For example, several members of the House have circulated letters expressing concerns over several of the charitable reforms, particularly how they might affect smaller nonprofits. In contrast, last week more than 100 charities sent a letter to Congressional leaders supporting the full package of giving incentives and reforms in front of Senator Grassley and Representative Thomas.

Also last week, a House subcommittee held a hearing on charitable giving incentives where Representative Roy Blunt (R-MO.), the Majority Whip, urged Congress to move on several incentives this year, including a provision that would allow people age 70½ and older to withdraw money from their individual retirement accounts and donate it directly to charity without having to pay adverse tax consequences as well as a provision that would allow donors who do not itemize deductions on their tax returns to write off a portion of their charitable contributions. Representatives from Independent Sector and the Association of Fundraising Professionals also testified at the hearing and strongly endorsed these two incentives.

Perry Wasserman, The Vivero Group, June 2006
© 2006, The Vivero Group

The Vivero Group is a Washington, D.C.-based government relations and communications firm representing GuideStar and other nonprofits on federal public policy issues. For more information, please visit www.viverogroup.com.