The following is a brief summary of the provisions of the Senate-passed CARE Act.
I. Charitable Giving Incentives.
A. Non-Itemizer Deduction.
The legislation expands the tax deduction for charitable giving so that it apples even to taxpayers who do not itemize their deductions. This expansion of the deduction is limited — it applies only to charitable donations made by a non-itemizing taxpayer that exceed $250 ($500 for married taxpayers filing jointly) and that do not exceed $500 ($1,000 for married taxpayers filing jointly).
B. IRA Distributions.
Under the bill, certain amounts donated to charities from traditional individual retirement accounts ("IRAs") or Roth IRAs may be excluded from a taxpayer’s gross income. The bill sets forth procedures to apply in order to determine whether a charitable contribution will qualify for the exclusion. In general, amounts made directly from an IRA trustee will qualify for the exclusion if they are made to a charitable organization that is qualified to receive deductible contributions. In addition, donations made to certain charitable trusts, pooled income funds, or gift annuities also may qualify for the exclusion.
C. Other Incentives.
Other key incentives to charitable giving that are contained in the CARE Act include expanding the deduction for contributions of food inventories, book inventories, and scientific property for educational purposes. Further, the tax treatment of donations made for conservation purposes based on benefits received from land sales, exchanges or contributions is made more favorable to donors. The bill alters the method of valuing literary, musical, artistic and scholarly compositions donated for charitable purposes. Also, the amounts received by individual volunteers as reimbursement for mileage expenses are excluded from the individuals’ gross income. Finally, the bill extends a tax deduction for donations of inventory to private schools so that it applies to similar contributions of inventory made to public schools.
II. New Disclosures for Tax-Exempt Organizations.
A. Written Determinations.
The bill would increase the disclosure of information that the Internal Revenue Service ("IRS") has on hand with reference to tax-exempt organizations and entities seeking recognition of tax-exempt status. Currently, tax-exempt organizations (under Code Sections 501(c), 501(d) and 527) and the IRS are required to make available approved applications for recognition of exempt status and annual information returns (Form 990, Form 990EZ, or Form 990-PF). Further, the IRS currently is required to disclose the text of any written determination (ruling, determination letter, technical advice memorandum, or Chief Counsel advice), but such disclosures do not include any identifying details or other private information about the exempt-organization taxpayer that is the subject of the determination. According to the applicable IRS regulations (See Treas. Reg. §§ 301.6110-1(a) and 301.6104(a)-1(i)), among the information from and about tax-exempt organizations (under Code Sections 501(c), 501(d) and 527) not currently publicly disclosed is:
- Unfavorable rulings or determination letters issued in response to applications for tax exemption;
- Rulings or determination letters revoking or modifying a favorable determination letter;
- Technical advice memoranda relating to a disapproved application for tax exemption or the revocation or modification of a favorable determination letter;
- Any letter or document filed with or issued by the IRS relating to whether an organization participated in certain transactions prohibited by Code Section 503;
- Any letter or document filed with or issued by the IRS relating to an organization’s status as a private foundation or private operating foundation, unless the letter or document relates to the organization’s application for tax exemption; and
- Any other letter or document filed with or issued by the IRS which, although it relates to an organization’s tax-exempt status, does not relate to that organization’s application for tax exemption. Under the CARE Act, all of the above-referenced documents would be required to be disclosed by the IRS.
B. Form 990 Disclosures.
The legislation would require that tax-exempt organizations disclose any name under which the organization operates or does business and the Internet web site address of the organization.
C. Capital Transactions.
The CARE Act would amend current-law requirements that private foundations report in detail and make available to the public information about certain capital transactions. Under the proposed legislation, such organizations would still be required to report such detailed information to the IRS through its annual Form 990-PF, but the organizations would be able to provide only summary information about the transactions to members of the public unless the detailed information is explicitly requested.
D. Disclosure about Form 990.
Under the CARE Act, the IRS would be required to "notify the public in appropriate publications and other materials" of the extent to which Form 990, Form 990-EZ, and Form 990-PF are publicly available.
E. Disclosures to State Officials.
Observers of recent trends in government enforcement of exempt organization activities have likely noticed increased collaboration between state regulators of charities and the IRS. Representatives from the states and IRS exempt organization officials converse frequently about their respective roles, and a recent IRS notice seeking comments on the Form 990 included a number of questions about how to make the form more useful to state regulators. The CARE Act includes provisions that recognize and address the shared roles of state and federal agencies that regulate tax-exempt organizations.
Specifically, the CARE Act provides that the IRS may disclose (upon written request by an appropriate state official): (1) notice of proposed refusal to recognize an organization as a Code Section 501(c)(3) organization or a notice of proposed revocation of tax-exempt status of a Code Section 501(c)(3) organization; (2) the issuance of a proposed deficiency of tax imposed on a private foundation; (3) the names, addresses and taxpayer identification numbers of organizations that have applied for recognition under Code Section 501(c)(3); and (4) returns and return information of organizations to which (1) through (3) above apply.
Further, the CARE Act allows disclosure of similar information with regard to Code Section 501(c)(2), (4), (6), (7), (8), (10), or (13) "to the extent necessary in the administration of State laws regulating the solicitation or administration of the charitable funds or charitable assets of such organizations."
Finally, the legislation allows the IRS to disclose returns and return information in civil administrative and civil judicial proceedings "pertaining to the enforcement of State laws regulation such organizations."
F. Expansion of Penalties.
Preparers of annual information returns (Form 990, Form 990-EZ, or Form 990-PF) would be subject to a penalty of $250 if the preparer omits or misrepresents information with respect to such return that was known or should have been known by the preparer. Further, a preparer would be subject to a $1,000 penalty if he or she recklessly or intentionally misrepresents any information, or recklessly or intentionally disregards any rule or regulation with respect to such return.
G. Notification for Small Exempt Organizations.
Currently, groups (other than private foundations) that normally have gross annual receipts of $25,000 or less are exempted from the Code’s general requirement that all exempt organizations file an annual information return. The CARE Act would require such groups to send an annual notice to the IRS, and such annual notice must include the names under which the organization operates, the mailing address, the Internet web site address, the organization’s taxpayer identification number, the name and address of a principal officer, and evidence of the organization’s continuing basis for its exemption from the generally applicable information return filing requirements. Failure to file such a notice for three consecutive years will result in revocation of the organization’s tax-exempt status. Further, the CARE Act mandates the revocation of tax-exempt status of any organization that is required to file an annual information return and that fails to file such a return for three consecutive years.
H. Terrorist Organizations.
The legislation would automatically suspend the tax-exempt status of an organization for any period of time during which it is designated or identified by the U.S. government as a terrorist organization or a supporter of terrorism.
III. Other Provisions.
A. UBIT for Charitable Remainder Trusts.
The CARE Act would alter the penalty for charitable remainder trusts that have unrelated business income for a given year. Under current law, the penalty is loss of tax-exempt status. The proposed legislation would require instead a 100-percent excise tax on the unrelated business taxable income of the trust.
B. Controlled Subsidiaries and UBIT.
The CARE Act includes a significant provision that would benefit particularly those tax-exempt organizations that have controlled (i.e., controlling more than 50% of votes or stock value, or controlling more than 50 percent of profits, capital or beneficial interests) subsidiaries. Current law (as enacted in 1997) states that interest, rents, royalties, and annuities (forms of income that are otherwise excluded from the unrelated business income tax ("UBIT")) are taxable if such income is paid by a controlled subsidiary to the tax-exempt parent. Specifically, current law requires the tax-exempt parent to treat such income as subject to UBIT to the extent the payment reduces the net unrelated income or increases any net unrelated loss of the controlled entity (treating the controlled entity as tax-exempt for such purposes).
The proposed change would require only the taxation of that portion of the income that is determined to have exceeded fair market value (if any). In other words, if a controlled subsidiary pays rent to its tax-exempt parent (and that rental payment reduces the subsidiary’s net income, as it typically would), then, under current law, the entire rental payment is subject to UBIT. However, under the CARE Act, only that portion of the rental payment that exceeded fair market value would be taxable to the parent, and the parent would not be taxed on the income at all if the rental payment was for the prevailing market rental rate.
Further, the CARE Act states that this tax relief would be retroactive to payments received or accrued after December 31, 2000. (This retroactivity would likely be of benefit to organizations that were not subject to the more stringent rules of the 1997 law because of a transition rule that was a part of that law, but that expired on December 31, 2000.)
C. Simplification of Lobbying Limits.
Code Section 501(c)(3) organizations may engage in only limited lobbying activity. Specifically, the Code states that a Code Section 501(c)(3) organization may not in "substantial part" engage in "carrying on propaganda, or otherwise attempting to, influence legislation." While the "substantial part" test is somewhat vague, Code Section 501(c)(3) organizations may elect to be covered under Code Section 501(h), which provides a "bright-line" test to determine whether or not the organization has exceeded lobbying limits. Section 501(h) differentiates between grassroots and other forms of lobbying. In general, an electing charity’s grassroots activities may not exceed 25 percent of its overall limit on lobbying expenditures. This sub-classification within the general "lobbying" category for Code Section 501(h) has been a cause for confusion for many years.
The CARE Act would eliminate the separate grassroots-lobbying limit for those charities that elect to be covered under Code Section 501(h). Rather, electing charities would simply be subject to the overall limitation on lobbying expenditures, regardless of what percentage of the lobbying activities may be characterized as grassroots lobbying.
D. Other Notable Provisions.
- The CARE Act would allow certain organizations to have their applications for exempt status reviewed on an expedited basis.
- The proposal would expand the right to seek a declaratory judgment with respect to an IRS determination regarding tax-exempt status so that it applies to non-Code Section 501(c)(3) tax-exempt organizations.
- Code Section 501(c)(3) organizations may make payments to a member of the Armed Forces of the United States or to a member of such person’s immediate family by reason of the death, injury, wounding or illness of the member of the Armed Forces without making a specific assessment of need for the payments to be related to the organizations’ exempt purposes.
- The CARE Act authorizes $80 million to be appropriated for each fiscal year (indefinitely) to carry out the administration of exempt organizations by the IRS. The bill also specifically authorizes $3 million for carrying out the provisions of two recently enacted laws relating to Code Section 527 political organizations. (Authorizations are intended to serve as directives to an agency that receives appropriations from Congress, but the enactment of an authorization does not guarantee that sufficient dollars will be appropriated.)
For more information, please contact Mr. Constantine at geconstantine@venable.com, 202/513-4790.