Washington Snapshot - April 1, 2016
News from the Hill
House Tax Policy Subcommittee to Hold Next Tax Reform Hearing
Chairman of the House Ways and Means Tax Policy Subcommittee Charles Boustany (R-LA) announced this week that the series of hearings on tax reform will continue, with the next hearing scheduled for Wednesday, April 13th. This hearing will focus on income-based tax reform proposals.
Executive & Regulatory News
Council Submits Input on Multistate Registration and Filing Project
This week, the Council submitted a letter in response to a request for information (RFI) issued in February by the Multistate Registration and Filing Project (MRFP).
Our comments reflected the Council’s own experience as a multistate filer, as well as our members’ experiences creating single portals for things like scholarship and grant applications. Additionally, our input cites legal considerations, data-security challenges, and user-friendliness factors that could impact the multistate filing work.
If you have questions, or would like to learn more about this topic, please contact our legal team at legal@cof.org.
Trending in Legal Affairs
Accepting Donations for Individuals is Not Charitable
Community foundations are often asked if they can establish funds for individuals who have experienced tragedy or hardships and need help with finances in the aftermath. The idea is that a donation to a community foundation would be preferable to a direct gift to the individual because the donation to the community foundation would be tax-deductible for the donor.
The legal team wants to remind foundations that, despite the well-intentions of such a fund, collecting donations for a pre-identified individual is not a charitable undertaking and could jeopardize the charitable tax deduction for the donor as well as the tax exempt status of the foundation.
Generally, the Internal Revenue Code provides that in order to qualify as a charitable activity, grants to individuals must be awarded on an “objective and nondiscriminatory basis.” Conversely, accepting donations on behalf of a specific, pre-identified individual, who has not applied for assistance through an objective and non-discriminatory process, would primarily benefit a private interest rather than the charitable purpose of the foundation. When gifts are made to an intermediary charitable organization, but earmarked for a particular individual, the risk is that the IRS may disregard the intermediary, and consider the donation a non-deductible gift made directly by one individual to another, resulting in a denial of the donor’s tax deduction. This explains why many funds for individuals are set up at banks rather than foundations.
While community foundations may not be the best option for collecting donations for the benefit of specific individuals, some community foundations have established Good Samaritan funds in which needy individuals in the community may apply for assistance through a process that is consistent with the rules for such charitable activities. For more information on Good Samaritan funds, please see a past Trending in Legal Affairs on that topic.
For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs Team at legal@cof.org.
Access to the Council’s legal team is a valuable member benefit. Council attorneys are available to discuss your legal questions and to provide legal information by telephone, email and through our various publications and newsletters. This information is intended for educational purposes and does not create an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.
Happening in the States
Exclusive from our colleagues at the National Council of Nonprofits.
Connecticut Challenges Reflect National Trends
Virtually all segments of the nonprofit and philanthropic communities in Connecticut are dealing with policy challenges that have been, or likely will be, seen elsewhere in the country because of fiscal challenges and misunderstanding about how the sector operates. State policymakers are struggling to close deficits of $266 million in the current fiscal year, which ends in three months, and nearly $900 million next year. Nearly $78 million in rescissions of previously appropriated funds have already been ordered, targeting services provided by community nonprofits. Legislators are also looking at taxing institutions of higher education by requiring those with property worth more than $2 billion to pay property taxes on parcels that generate revenue from admissions to sporting and entertainment events, rent charged, and goods produced.
Yale University is targeted in legislation that would require it to pay unrelated business income taxes on increases to higher education endowments that exceed $10 billion. The tax would be levied on the amount of endowment growth year-to-year after mission-related expenses are deducted. A Yale official testified against the measure saying that the Legislature would be sending “the signal that charities, including independent colleges and universities, can no longer rely on a compact that reaches as far back as the founding of Connecticut as a colony.” The bill prompted the Florida Governor to invite Yale to move to his state, noting the “news that the Connecticut Legislature wants to unfairly tax one of the nation’s most renowned universities to deal with the state’s budget shortfall.”
Finally, the state capitol of Hartford reportedly is near bankruptcy with revenues only covering 70 percent of the annual budget. A bill under consideration would create a commission with extraordinary powers to, among other things, negotiate with the largest nonprofit property owners in the city and then levy a tax on their property based on a percentage they would otherwise pay if not tax exempt.
North Carolina Legislators Recommend Taxing Donors on Gifts from IRAs
The North Carolina legislative committee recently recommended a draft bill that would require donors to pay taxes on some contributions to nonprofits from their individual retirement accounts. This proposal comes just months after Congress made permanent the IRA charitable rollover, allowing individuals aged 70 ½ and older to make contributions from their IRAs to most nonprofits free from federal taxation.
The law change would mean that North Carolina donors who use the IRA charitable rollover would become liable for up to $5,800 in state taxes on their charitable contributions. The General Assembly is expected to act on the proposed legislation soon after its 2016 regular session begins on April 25.
