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Congressional Committee Proposes New Limits on Charitable Deductions

(Feb. 14, 2005) A new report by the Joint Committee on Taxation in Congress includes proposals to limit or eliminate certain types of deductions for charitable giving.

The 435-page report, 'Options to Improve Tax Compliance and Reform Tax Expenditures,' describes a number of proposals aimed at reducing the deficit and ensuring greater compliance with current tax laws. Section VIII of the report addresses charitable organizations.

One of the most critical proposals for charities is a limitation on the deduction individuals can take for in-kind contributions, such as clothing or household items. Deductions for such property would be capped at $500 annually with no carry-over to the next year for excess gifts. Only paintings, antiques and other art objects would be exempt.

In its reasoning, the committee pointed to concerns and abuses with the valuation process. It also noted that it considered completely eliminating the deduction for these types of gifts, but felt that limiting the deduction would be sufficient.

Eliminating Deductions for Gifts of Appreciated Property?

The report contains several proposals related to the charitable deduction for gifts of appreciated property. Under one option, the committee would limit the deduction for such gifts to the donor's tax basis in the property (i.e. what he or she paid for it) or the fair market value, whichever is lower. The report also suggests enhanced standards for appraisals, limiting the deduction to the disposition amount, and eliminating deductions for property altogether.

These proposals would not apply to publicly traded securities and certain other property already addressed in previous legislation, i.e., intellectual property and vehicles. However, gifts of real estate, S corp stock and privately traded securities would be affected.

Problems and abuses in the valuation of these types of gifts was the rationale the committee gave for these proposasl. It also stated that a primary goal of the charitable deduction should be to encourage gifts that are most useful to a charity. Gifts that require the charity to divert resources or 'incur substantial transaction costs' should not be encouraged.

'Congress is hunting far and wide to find ways to slash the deficit and create additional funding for itself,' said AFP President & CEO Paulette Maehara, CFRE, CAE. 'But not only do these provisions raise minimal revenue, they slash important incentives for people to give. We are seeing a gradual eroding of the tax laws that form the basis of our system for charitable giving, and AFP will be aggressively lobbying against these changes.'

Other Provisions

The committee report also includes the following provisions:

  • Require all public charities and private foundations (except 'houses of worship') to undergo a review of their tax-exempt status every five years. Even organizations not required to file an annual information return must submit a notice every five years or risk loss of tax-exempt status.
  • Eliminate the 'rebuttable presumption' rules for intermediate sanctions and establish due diligence procedures that apply to public charities and private foundations when reviewing issues of self-dealing.
  • Increase the amount of excise taxes imposed on public charities, social welfare organizations, and private foundations for acts of self-dealing.
  • Eliminate the deduction for contributions of conservation and façade easements relating to personal residence properties, and substantially reduce the deduction for other qualified conservation contributions. New standards for appraisals and appraisers regarding the valuation of such contributions would also be imposed.
  • Extend the present-law public inspection and disclosure requirements applicable to the Form 990 to an organization's Form 990-T. Organizations that normally have annual total gross revenues or gross assets of at least $10 million must include with its Forms 990 and 990T filings a certification by an independent auditor or by an independent counsel.
  • Expand the base of the tax on private foundation net investment income. This proposal would amend the definition of gross investment income to include income from notional principal contracts, annuities, and other substantially similar income from ordinary and routine investments.

Altogether, the proposals regarding charitable organizations would raise about $7 billion for the federal government over the next 10 year. Some of them will probably serve as the basis for future legislation from the Senate Finance Committee.

A copy of the entire report (PDF format; 435 pages) is available at the Joint Committee on Taxation website. Most of the provisions affecting charities begin on page 220.

AFP's U.S. Government Relations Committee is currently reviewing the report in further detail. The association has been contacting both House and Senate offices regarding these proposals and working to educate members of Congress and their staff on their potential impact. AFP will alert members when legislation has been introduced and grassroots action is needed.

For more information, contact the Public Affairs Department at paffairs@afpnet.org.

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