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Bar News - January 5, 2007

Tax Law: New Charitable Provisions of the Pension Protection Act Explained



The Pension Protection Act of 2006 (PPA) contains many charitable reform provisions. These are designed to curb certain charitable giving abuses and strengthen the transparency, governance and accountability of tax-exempt organizations, similar to what we are seeing in the for-profit sector.


The reforms come on the heels of extensive investigations by the IRS and by a national independent panel convened at the request of Congress. Exempt organizations that previously had no annual filing requirement now do so and many others have new filing or greater disclosure requirements. Increased funding has allowed the IRS to enlarge its tax-exempt division by more than 30 percent to enable it to better enforce charitable and tax exempt laws. The PPA also contains new charitable giving incentives. Most of the PPA provisions are effective from Aug. 17, 2006 through Dec. 31, 2007.


Below is a highlight of the more common provisions affecting individuals and exempt organizations that your clients, colleagues, family or friends may inquire about, followed by a list of the less common provisions.


Provisions Affecting Charitable Contributions


Tax-Free IRA Distributions for Charity


Individuals age 70½ or older may now annually gift up to $100,000 directly from their IRAs to qualified charities without having to include the distribution in gross income and dilute it by income taxes. These distributions are not counted as charitable contributions, thus allowing philanthropic higher-income taxpayers to make additional charitable gifts. In addition, they are treated as distributions for purposes of the required minimum distribution rules.


Cash Contributions—Stricter Substantiation


Beginning Jan. 1, 2007, individuals who make cash contributions must keep either a bank record (e.g., a cancelled check) or a written communication from the donee stating the donee’s name, the date of the gift, and the amount of the gift. For businesses and other entities, the new requirement is effective for contributions made in taxable years beginning after Aug. 17, 2006. Electronic filing of income tax returns has made it easier for the IRS to audit these gifts as demonstrated in recent tax cases.


Clothing and Household Items


In response to more than $9 billion in charitable deductions for clothing and household items in the calendar year 2003 and the difficulties of monitoring these types of gifts, only clothing and household items in good,  used condition or better may qualify for the charitable deduction. Taxpayers may claim a deduction of $500 or more for a single item in any condition if the taxpayer includes a qualified appraisal with his return substantiating its value. Gifts of food, paintings, antiques, collections and other objects of art, jewelry and gems are excluded from this rule.


Appraisers and Appraisals—New Standards


Taxpayers who claim a charitable deduction over $5,000 for donated property generally must obtain a qualified appraisal to substantiate the deduction. Under the PPA, a qualified appraisal must be prepared by a qualified appraiser, and a qualified appraiser must now have professional credentials or meet certain education requirements and be competent to value the property being appraised. The PPA creates new penalties for appraisers who misrepresent the values of charitable gifts.


Donee Reporting Obligation Lengthened for Dispositions of Donated Property


Before the PPA, charities that disposed of donated property within two years of receipt were required to report the proceeds to the IRS. The PPA extends the disposition time period to three years.


Provisions Affecting Tax-Exempt Organizations


Small Exempt Organizations—New Annual Notice Requirement


            For periods beginning after 2006, small organizations that are exempt from filing Form 990 because their annual gross receipts are normally less than $25,000 must now file an annual notice with the IRS reporting the organization’s name, its mailing and Web site addresses, the name and address of its principal officer, and evidence of its continuing basis for its exemption. Failure to file the notice or Form 990 (if applicable) for three consecutive years will cause the organization to lose its exempt status.

            Unrelated Business Taxable Income Returns of 501(c)(3) organizations must now be made publicly available with their annual information returns (Form 990).

            Greater IRS Disclosure of Organizations’ 501(c)(3) Information to State Officials must be given to enable states to better enforce their charitable laws.


Private Foundation Excise Taxes Doubled

            Excise taxes imposed on private foundations for failure to distribute income, self-dealing, excess business holdings, jeopardizing investments, and taxable expenditures have been doubled, as have the dollar amounts of penalties. For public charities, the maximum dollar amount that may be imposed on organization managers that knowingly approve excess benefit transactions has been doubled from $10,000 to $20,000 per act.


Donor Advised Funds—Significant Changes

            Donor-advised funds are funds (other than endowment funds) in which donors transfer money to sponsoring organizations and the donors or their advisors make nonbinding recommendations about fund investments and distributions for exempt purposes. They are becoming a popular tax-efficient philanthropic vehicle in place of private foundations and supporting organizations (charities that would otherwise be classified as private foundations but for their support of publicly-supported charities). The PPA contains new rules for these types of charities and their supporters, including new substantiation and disclosure requirements and new excise taxes for transactions between donors and these charities.


Less-Common Provisions


Conservation Contributions Deductible Up to 100 percent of Taxable Income

            Individuals who donate land for conservation purposes may deduct up to 50 percent of their AGI (up from 30 percent) and may carry any excess amount forward 15 years rather than five. Qualified farmers and ranchers that donate land to be “made available for” (but not necessarily used for) agriculture or livestock production may deduct up to 100 percent of their taxable income and carry any excess forward 15 years.


Basis Adjustment for S Corp. Shareholders


Shareholders of S corporations that donate appreciated property may now reduce their stock basis by the corporation’s basis in the property, not the property’s fair market value, which had caused shareholders to recognize the appreciation in income. This puts S corporation shareholders in parity with individuals, partners in partnerships, and members in LLCs.


Other provisions include:


  • The PPA extends the enhanced deduction for food donations by businesses and book donations by C corporations.
  • A controlled entity’s payment of interest, annuities, royalties or rents to an exempt parent is no longer “unrelated business taxable income” if made pursuant to a written contract in effect on Aug. 17, 2006 (or renewed thereafter under similar terms) and represents a fair allocation between the two organizations.
  • The PPA tightened the threshold for imposing the valuation misstatement penalties on taxpayers who misrepresent the values of charitable gifts.
  • New rules exist for gifts of fractional interests in tangible personal property and taxidermy property.
  • New restrictions exist for conservation easements in historic districts (façade easements alone are no longer deductible) and reductions for rehabilitation tax credits taken.
  • The PPA requires taxpayers to recapture charitable deductions taken for gifts of tangible personal property donated for an exempt purpose but not used for such purpose.
  • The PPA expands the definition of a private foundation’s gross investment income to include certain capital gains for purposes of the 2 percent excise tax on net investment income.
  • The PPA eliminates the annual filing exemption for split-interest trusts (e.g., charitable remainder trusts, charitable lead trusts and pooled income funds) described under §4947(a)(2) that distribute all of their income annually. Now all split-interest trusts must annually file Form 1041A.
  • Conventions or associations of churches are now statutorily defined to include associations that have individuals as members who may or may not have voting rights.


Attorney Joy V. Riddell specializes in estate planning and tax-exempt organizations at the law firm of Shaheen & Gordon. To contact her with your comments, e-mail her at





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