PITTSBURGH PLANNED GIVING COUNCIL LEGISLATIVE ALERT MARCH 2011 47th ANNUAL WASHINGTON Another theme at the Conference was the recently-passed tax legislation, which kept the NONPROFIT LEGAL & "Bush tax cuts" and significantly changed the TAX CONFERENCE federal estate and gift tax. The Tax Relief, Unemployment Insurance Reauthorization, and I recently attended an annual conference in Jobs Creation Act of 2010 ("2010 Tax Act") was Washington, D.C. which brings me up-to-date a focus of discussion, with the Conference on legal developments for tax-exempt covering the provisions favorable to charities, organizations. I am happy to report that I am such as the IRA direct transfer and enhanced primed with the latest and greatest tax and deductibility of certain gifts including food legal information affecting tax-exempt inventory, book inventory, computer organizations. The point of this newsletter is to equipment given to schools, and S corporation highlight, in a quick read, matters of which appreciated gifts. On the subject of estate and nonprofits should be concerned, and to allow gift taxes, many speakers commented about the nonprofits to delve further into such topics of gift tax exemption being raised to $5M need or interest (for example, ways to raise (previously $1M), and the consensus is that this charitable donations!). change opens the door for planning opportunities involving charitable gifts. For While I cannot possibly summarize all the instance, the ability to give more to family could learning derived from 2½ days of meetings, I mean more split interest gifts, such as can highlight a few themes that came from the charitable gift annuities, and charitable lead or Conference, and some of the IRS's regulatory remainder trusts, which involve significant gifts emphasis. to family and charity. The increase in the $5M exemption is through December 31, 2012, when As far as themes go, I think most readers can the estate and gift tax again goes into an expect that there is an ongoing strong emphasis uncertain legislative environment. The on nonprofit governance, as best reflected in consensus of speakers was that donors and the revamped IRS Form 990. Also, legislative charities should work closely over the next 2 developments continue in the areas of tax years to close gifts while the $5M gift reform, tax rates, and simplification of the exemption is definitely available. I have given Internal Revenue Code, which are at the up making any predictions on what Congress forefront of legislative hearings. The Senate might do in the future, and I will not therefore Finance Committee has recently announced try to say what might happen after December that it will conduct a series of seven hearings on 31, 2012. comprehensive tax reform, with the focus on ways to make the Internal Revenue Code more An interesting presentation was made on the competitive and fair, while making it less effect of the changes in the income tax rates. complex. One of the seven hearings will focus Laura Peebles, CPA/PSF from Deloitte Tax, LLP, on tax-exempt organizations. The House of made a compelling presentation that, in Representatives' Ways & Means Committee general, as we move past December 31, 2012, also plans to hold several hearings on tax the effect of the 3.8% Medicare Unearned reform, although no definite information has Income Tax and the planned return of various yet been released. phase outs and reductions in itemized deductions is to erode the benefits of the charitable deduction. While the numbers always must be run in every situation, it appears that charitable donations will generally Governance - the IRS will continue to be better in 2011 and 2012 than they will be in analyze data derived from Form 990 2013 and future years, assuming that the "Bush and from its use of the IRS agent tax cuts" are not continued. With the favorable governance check sheet. estate and income tax environment ending in Form 990 as a compliance tool - the IRS 2012, there thus appears to be better tax will continue to use the redesigned reasons for making charitable gifts now than Form 990 to identify noncompliant tax- there will be after December 31, 2012 (again exempt organizations for audits, assuming no further changes in the law). develop targeted compliance projects (likely involving compensation) and As far as IRS and Treasury Department plans, inform and supplement IRS educational IRS and Treasury are continuing to put a strong efforts. emphasis on governance, compensation and Colleges and universities - the IRS various "study" initiatives that have been in continues to analyze data derived from operation, including the following: its responses to its university compliance questionnaire, and Executive compensation compliance currently has over 30 initiative - the IRS will continue to colleges/universities under audit evaluate tax-exempt organizations' examination. Much of the focus of this compensation and loan arrangements, review is on compensation and thereby assessing the intermediate endowments. sanction penalty and employment taxes Academic institutions initiative - the IRS when appropriate. is continuing its efforts to prepare Charitable spending initiative - The future nonprofit leaders by providing Exempt Organizations Division of the training about federal tax law IRS will be continuing its examination of responsibilities. The IRS is conducting tax-exempt charities with high levels of academic programs that involve fundraising expenses, organizations collaborations with college and reporting unrelated business activities universities that have degree programs with relatively low levels of program pertaining to the law of tax-exempt service expenditures, organizations organizations (IRS Announcement 2009- with high ratios of officer compensation 26). in comparison to programs service Charity care compliance by tax-exempt expenditures, and organizations with hospitals - this compliance check low levels of program service project is still ongoing. Schedule H of expenditures in comparison to total IRS Form 990 also focuses on this area revenue. and there was considerable discussion Consumer crediting counseling project on the Patient Protection and and mortgage foreclosure assistance Affordable Care Act (commonly known organizations - the IRS continues to as "Obamacare") provisions that have examine and revoke the tax-exempt new substantive requirements which a status of consumer credit counsel charitable hospital must satisfy to organizations, and is closely studying maintain tax-exempt status. whether mortgage foreclosure assistance organizations are simply the In the charitable giving area, there was again same as credit counseling organizations. discussion over donors claiming charitable gift From the tone of most speakers, the IRS deductions where the substantiation will likely start to revoke the tax- requirements were not satisfied. In Friedman v. exempt status of mortgage foreclosure Commissioner, the Tax Court denied charitable assistance organizations. tax deductions for gifts of property with a value of $435,000 where the substantiation was inadequate, leading to $162,000 in tax deficiencies and $32,000 in accuracy-related penalties. In Lord v. Commissioner, the Tax Court denied a charitable deduction for the gift of a conservation easement with an ostensible value of $242,500 because the appraisal did not meet the IRS requirements. There is a strong IRS focus on the denial of charitable tax deductions where donors have not satisfied the For more information, please contact: strict letter of the substantiation requirements. Jack Owen, Esq., PPGC's Chairman, Legislative Affairs Committee All in all, this annual Conference is a great way at: for me to keep up with changes in the laws affecting tax-exempt organizations. I am always Rhoades & Wodarczyk, LLC excited to make this information available to The Grant Building the tax-exempt community, and you are Suite 1030, 330 Grant Street encouraged to call me with any questions. Pittsburgh, PA 15219 Telephone: 412.765.1020 Facsimile: 412.765.2240 2011 Emerging Philanthropy E-Mail: email@example.com Conference Online registration is now open for the Emerging Philanthropy Conference on April 27- 28, 2011, at the Hilton Garden Inn at Southpointe. This annual Conference is hosted jointly by the Pittsburgh Planned Giving Council and AFP. It is a great opportunity for professional development, networking, planned giving updates and in general, helps you to recharge your fundraising batteries. To learn more about the Emerging Philanthropy Conference and to register, please visit www.emergingphilanthropy.org. If you decide to register, please take advantage of the friendraiser feature that allows you to spread the word and invite your colleagues to attend the best regional fundraising conference in Southwestern Pennsylvania. I hope to see you at the 2011 Emerging Philanthropy Conference.