Tax Exempt Organizations and Charitable Giving PENSION PROTECTION ACT OF

Tax-Exempt Organizations and Charitable Giving PENSION PROTECTION ACT OF 2006 CONTAINS CHARITABLE GIVING INCENTIVES TO ENCOURAGE DONATIONS AND PROVIDES FOR CHARITABLE REFORMS The Pension Protection Act of 2006 (H.R. 4) was signed by the President on August 17, 2006. It contains significant charitable-giving incentives that are designed to encourage increased charitable donations. It also provides for additional regulation of exempt organizations. Several of these significant provisions are described below. CHARITABLE GIVING INCENTIVES 1. Tax-Free Distributions up to $100,000 from IRAs for Charitable Purposes. Through 2007, certain distributions from a traditional individual retirement account (IRA) or a Roth IRA, which would have been taxable, will be excluded from gross income if made to a taxexempt organization. 2. Extension of Enhanced Charitable Deductions for Contributions of Food Inventory. For donations of food inventory, the legislation extends— through 2007—the current enhanced deduction equal to the lessor of (i) the taxpayer’s basis plus one-half of the difference between fair market value and the basis, or (ii) twice the taxpayer’s basis in the contributed inventory. 3. Extension of Charitable Deduction for Contributors of Book Inventory. The legislation extends through 2007 the inclusion of public schools in the list of eligible donees for the enhanced deduction for contributions of qualified book inventory by C corporations. August 18, 2006 Chicago 312.876.8000 Kansas City 816.460.2400 Los Angeles 213.623.9300 New York 212.768.6700 Phoenix 602.508.3900 San Francisco 415.882.5000 Short Hills, NJ 973.912.7100 St. Louis 314.241.1800 Washington, DC 202.408.6400 West Palm Beach 561.833.2410 4. Enhanced Deduction for Contributions of Qualified Conservation Easements. For donations of qualified conservation easements through 2007, the legislation increases the aggregate charitable deduction limit to 50 percent (100 percent in the case of Taxation Practice Sonnenschein Nath & Rosenthal LLP www.sonnenschein.com eligible farmers and ranchers) and allows a 15-year carryforward. 5. Payments to Controlling Exempt Organizations. For payments paid or accrued between January 1, 2006 and December 2007, the legislation provides that certain payments of interest, annuities, rents, and royalties by a taxable controlled subsidiary to the controlling exempt organization will be excluded from unrelated business taxable income to the extent such payments do not exceed fair market value. CHARITABLE GIVING REFORM 1. Taxidermy. Effective for charitable contributions made after July 25, 2006, donors of taxidermy property who prepared, stuffed, or mounted the property (or paid another for doing so) may deduct only the lesser of basis or fair market value. A donor’s basis in donated taxidermy property is also limited to the cost of preparing, stuffing, or mounting the animal; other costs, such as costs related to transportation, hunting, or killing the animal, are excluded. 2. Recapture of Tax Benefit. Effective for contributions made after September 1, 2006, if a donor contributes appreciated tangible property for which a deduction of more than $5,000 is claimed and the donee disposes of the property within three years of the date of donation, the donor generally must include in income the excess of the deduction over the donor’s basis in the property, unless the donee certifies to the IRS in detail how the property was used for exempt purposes. 3. Donations of Clothing and Household Items. Effective for contributions made after the enactment date, no deduction is allowed for charitable contributions of clothing and household items (such as furniture, electronics, appliances, furnishings, etc.) if such items are not in good or better used condition. In addition, IRS may deny a deduction for any item with minimal monetary value. These rules do not apply to any contribution of a single item of clothing or a household item for which donor claims a deduction of more than $500 if the donor includes a qualified appraisal of the property with his return. This provision does not apply to food, antiques, jewelry, and other art objects. 4. Modification of Recordkeeping Requirements for Certain Charitable Contributions. Effective for contributions made after the enactment date, no deduction is allowed for cash, check, or other monetary gift, regardless of the amount, unless the donor substantiates the contribution by cancelled check, bank record or receipt from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution. 5. Appraisal Reform. The legislation lowers the thresholds for imposing accuracy-related penalties on a taxpayer who claims a charitable contribution deduction for donated property for which a qualified appraisal is required, and redefines the terms qualified appraiser and qualified appraisal. CHARITABLE ORGANIZATION REFORM 1. Treasury Study on Certain Life Insurance Contracts. The Treasury Secretary is required to issue a study within 30 months after the date of enactment examining whether acquisitions by charitable organizations of interests in certain life insurance contracts is consistent with the Taxation Practice Sonnenschein Nath & Rosenthal LLP www.sonnenschein.com tax-exempt purposes of those organizations. In order to enable the Treasury Department to gather information for that study, the legislation further requires that, for two years beginning on the date of enactment, charitable and governmental organizations (including religious, charitable, and educational organizations, and Indian tribal governments) must report to the IRS certain acquisitions of interests in life insurance contracts with respect to which both the organization and a person other than the organization have held an interest (whether or not at the same time). 2. Treasury Study on Donor-Advised Funds and Supporting Organizations. The legislation provides that, within one year after the enactment date, Treasury will report on the organization and operation of donor-advised funds and supporting organizations, including an analysis of whether charitable deductions for donations to such organizations are consistent with the purposes or functions constituting the basis for their tax-exempt status. 3. Increase in Excise Tax Penalties for Private Foundations. The legislation generally doubles the excise tax penalties imposed on private foundations and foundation managers with respect to self-dealing, failure to distribute income, excess business holdings, jeopardizing investments, and taxable expenditures. 4. Increase in Intermediate Sanctions Excise Tax on Organization Managers. The legislations doubles (from $10,000 to $20,000) the limit on the excise tax imposed on an organization manager who knowingly participates in an excess benefit transaction. 5. Expansion of Reporting Requirements for Tax-Exempt Organizations. The legislation requires organizations that are not required to file a Form 990 each year because their revenues do not exceed the filing threshold to file an annual notice with the IRS containing certain basic information. Failure to file annual information returns or notices for three consecutive years may result in revocation of exemption. 6. Expansion of Disclosure of Information Regarding Tax-Exempt Organizations. The legislation expands the scope of information that the IRS is permitted to share with State officials. The legislation also requires tax-exempt organizations to publicly disclose Forms 990-T filed after the date of enactment. 7. Additional Regulation of Certain Supporting Organizations. The legislation imposes additional requirements on certain “type III” supporting organizations. A type III supporting organization is an organization that is treated as a public charity, rather than a private foundation, because it is “operated in connection with” one or more organizations that are public charities. The legislation distinguishes between “functionally integrated type III supporting organizations,” which conduct activities in support of the supported organizations, and all other type III supporting organizations. The Treasury Department is required to promulgate regulations that will require minimum payments by type III supporting organizations that are not functionally integrated. In addition, the legislation expands the definitions of “disqualified person” and “excess benefit transaction” for purposes of applying the intermediate sanctions excise tax to type III supporting organizations and generally treats type III supporting organizations that are not functionally integrated as private foundations for purposes of the excess business holdings limitations. Taxation Practice Sonnenschein Nath & Rosenthal LLP www.sonnenschein.com If you have questions about the subject matter of this e-Alert, please contact Lauren Mack (lmack@sonnenschein.com), Candace Quinn (cquinn@sonnenschein.com), Bruce Davison (bdavison@sonnenschein.com), Andrea Sharetta (asharetta@sonnenschein.com) or your regular Sonnenschein attorney. To unsubscribe to this Taxation Practice e-Alert, please send an e-mail to Sonnenschein_Marketing@sonnenschein.com with the words "unsubscribe Taxation Practice" in the SUBJECT field of your reply. These materials should not be considered as, or as a substitute for, legal advice and they are not intended to nor do they create an attorney-client relationship. Because the materials included here are general, they may not apply to your individual legal or factual circumstances. 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