Senate Consideration Possible in the Next Few Weeks
The bill. News reports on the various charitable tax-incentive bills have focused on a nonitemizer charitable deduction and tax-free rollovers of IRAs to make outright and life-income charitable gifts. The Senate Finance Committee’s bill has those provisions, but also has numerous other charitable tax incentives. The deductions are in the details. Comprehensive coverage starts on page 2 of this expanded issue.
Background. In July, 2001, the House of Representatives passed the Community Solutions Act of 2001 (H.R. 7). Among its provisions were a most-limited non-itemizer charitable deduction and a tax-free IRA rollover for outright and life-income charitable gifts. The bill also had a number of faith-based provisions that didn’t survive in the Senate Finance Committee the following summer. After the CARE Act of 2002 was reported out of the Senate Finance Committee, the Senate couldn’t agree on a rule that would have allowed limited debate and limited amendments. So the bill died.
Some "observers" believe that the bill recently reported out of the Finance Committee will soon be taken up by the Senate. Finance Committee chairman Charles E. Grassley (R-IA) said that although the bill has bipartisan support, it is likely to face the same challenges as last year’s version. He predicts floor debate on hiring practices of religious organizations that limit employment to members of the faith and said that he will seek to limit floor debate on the measure.
The constitution. Revenue bills, of course, have to originate in the House. So if the CARE Act passes in the Senate, it would be "held at the desk." When an appropriate House-passed revenue bill arrives at the Senate, any Senator could ask for unanimous consent to append the House legislation to the CARE Act, and send it back to the House. That’s the easy procedural issue. The political and substantive considerations are another matter.
Trouble in the House? Some House Republican leaders have already expressed concern that the Senate bill doesn’t explicitly allow faith-based organizations that receive federal funds to restrict their hiring to individuals who share their faith.
That old devil budget. The CARE Act also has to fit into the overall budget framework.
SUGGESTED IMMEDIATE ACTION
The Senate. Thank the members of the Senate Finance Committee for reporting out The CARE Act of 2003. Tell them how important the legislation would be to charities and the people they serve. Ask the Finance Committee members to urge their colleagues in the Senate to support the bill. (See list of Finance Committee members and their tax aides—with phone and fax numbers—on page 23). Naturally, urge your own senators—whether or not on the Finance Committee—to support and champion the measure.
The House. Ask members of the Ways and Means Committee to get the bill rolling and pass a charitable tax incentive measure similar to the Senate’s CARE Act of 2003. Make sure that all the Republican committee members are contacted. See list on page 22.
The House Republican leadership. Those people control the agenda so contact all of them. See page 23.
Who should do the urging? Most effective are high-ranking executives of the charities, board members and contributors to the members of Congress. The most meaningful contacts come from within a congressperson’s district and from a senator’s own constituents (unless there is some other rapport).
Although the CARE Act has been "reported out" of the Senate Finance Committee, the legislative language is now being drafted and some additional provisions are being added.
The following is the information available at press time based on materials prepared by the Joint Committee on Taxation’s staff. A bill number has not yet been assigned.
CHARITABLE DEDUCTION FOR NONITEMIZERS
Explanation. The bill would allow a "direct charitable deduction" from adjusted gross income for cash contributions. The deduction would be in addition to the standard deduction.*
Limitations—floor and ceiling. The deduction would be available only for that portion of contributions made during the year that in the aggregate exceed $250 ($500 on a joint return). The maximum deduction would be $250 ($500 on a joint return).
No carryover. Contributions that are below the minimum or above the maximum couldn’t be carried over for purposes of a subsequent year’s calculation of the direct charitable deduction.
Current 5-year carryover for itemizers. The bill wouldn’t alter present-law rules on the carryover of contributions to or from a taxable year, including a taxable year in which the taxpayer elects the standard deduction.
Substantiation. The direct charitable deduction would be subject to the substantiation requirements for itemizers.
The alternative minimum tax. The nonitemizer deduction would be allowed in computing alternative minimum taxable income.
Required Treasury study. The Treasury would be required to study the effect of the nonitemizer deduction on increased charitable giving, and of taxpayer compliance (by comparing compliance by itemizers and nonitemizers). The Treasury is required to report to the House Ways and Means and Senate Finance Committees by December 31, 2004.
Effective. Only for years 2003 and 2004.
*Historical footnote. The Economic Recovery Tax Act of 1981 permitted individual taxpayers who didn’t itemize to claim deductions from gross income for a specified percentage of their charitable contributions. The maximum deduction was $25 for 1982 and 1983, $75 for 1984, 50 percent of the amount of the contribution for 1985, and 100 percent of the amount of the contribution for 1986. The nonitemizer deduction terminated after 1986.
TAX-FREE IRA ROLLOVERS FOR CHARITABLE PURPOSES
Explanation. An exclusion from gross income would be allowable for otherwise taxable IRA distributions for "qualified charitable distributions." Special rules would apply in determining the amount of an IRA distribution that is otherwise taxable. The present-law rules regarding taxation of IRA distributions and the deduction of charitable contributions would continue to apply to distributions from an IRA that aren’t qualified charitable distributions.
Qualified charitable distribution. An IRA distribution that is made directly by the IRA trustee either to (1) an organization to which deductible charitable contributions can be made (a "direct distribution"), or (2) a "split-interest entity."
Split-interest entities are: charitable remainder annuity trusts and charitable remainder unitrusts (together referred to as a "charitable remainder trusts"), pooled income funds and charitable gift annuities.
No commingling of CRTs. For a charitable remainder trust to be eligible to receive qualified charitable distributions, the charitable remainder trust would have to be funded exclusively by those distributions. Thus, an IRA owner could not make qualified charitable distributions to an existing charitable remainder trust that was funded with assets that weren’t qualified charitable distributions.
Direct distributions—eligibility. The exclusion is available only if made on or after the date the IRA owner attains age 70½.
Distributions to a split-interest entity—eligibility. The exclusion is available only if made on or after the date the IRA owner attains age 59½. And no one may have an income interest in the split-interest entity other than the IRA owner, his or her spouse, or a charitable organization.
Limitations. The exclusion applies to direct distributions only if a charitable deduction for the entire distribution would otherwise be allowable, determined without regard to the generally applicable percentage limitations. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion wouldn’t be available. Similarly, the exclusion would apply to a direct distribution to a split-interest entity only if a charitable contribution deduction for the entire present value of the charitable interest (for example, a remainder interest) is allowable, determined without regard to the generally applicable percentage limitations.
Consequences of failure to properly substantiate. A donor rolls over a $1 million IRA to his college and doesn’t get the required receipt (Thank you for your $1 million gift. No goods or services were given in exchange for your gift). The entire $1 million would be taxable to the donor.
Special rules for IRA owner who has any IRA that includes nondeductible contributions. In determining the portion of a distribution that is includible in gross income (but for the special IRA charitable rollover exclusion) and thus is eligible for qualified charitable distribution treatment, the IRA owner would aggregate all IRAs to determine eligibility for the exclusion. Under the special rule, the distribution would be treated as consisting of income first, up to the aggregate amount that is includible in gross income (but for the IRA charitable rollover provision) if all amounts were distributed from all IRAs otherwise taken into account in determining the amount of IRA distributions during the year that is includible in income. In determining the amount of subsequent IRA distributions includible in income, adjustments would be made to reflect the amount treated as a qualified charitable distribution under the special rule.
Taxation of income received from a charitable remainder trust. All payments would be treated as ordinary income to the beneficiary, notwithstanding how the payments normally are treated under the four-tier provision of IRC §664(b).
Pooled income funds—special requirements. A pooled income fund would be eligible to receive qualified charitable distributions only if the pooled fund accounts separately for amounts attributable to those distributions. All distributions from the pooled income fund that are attributable to qualified charitable distributions would be treated as ordinary income to the beneficiary (that’s the current rule). Qualified charitable distributions to a pooled income fund wouldn’t be includible in the fund’s gross income.
Taxation of gift annuity payments. Payments from a charitable gift annuity purchased with a qualified charitable distribution from an IRA would all be taxable as ordinary income. Thus the portion of the distribution from the IRA used to purchase the annuity wouldn’t be an investment in the annuity contract—so the usual exclusion ratio rules wouldn’t apply.
Tax-free IRA rollovers wouldn’t limit other charitable deductions. Any amount excluded from gross income on an IRA rollover wouldn’t be taken into account in determining the deduction for charitable contributions under IRC §170.
Qualified charitable distributions—examples. These examples from the SFC (with my editing) show the portion of an IRA distribution that is a qualified charitable distribution, and the application of the special rules for a qualified charitable distribution for split-interest gifts. In each example, it is assumed that the requirements for qualified charitable distribution treatment are otherwise met (e.g., the applicable age requirement and the requirement that contributions are otherwise deductible), and that no other IRA distributions occur during the year.
Example 1. Arnold has an IRA with a balance of $100,000, consisting solely of deductible contributions and earnings. He has no other IRA. The entire IRA balance is distributed directly to a charity. Under present law, the entire $100,000 distribution would be includible in his gross income. Under the SFC bill, the entire $100,000 is a qualified charitable distribution. Thus no amount is included in Arnold’s income and the distribution isn’t taken into account in determining Arnold’s charitable deductions for the year (under the adjusted gross income ceilings and carryover rules).
Example 2. The facts are the same as in Example 1, except that the entire IRA balance of $100,000 is distributed to a charitable remainder unitrust that has no other assets. Arnold is entitled to receive 5% ofthe value of the trust each year. As in Example 1, the entire $100,000 distribution is a qualified charitable distribution and no amount is included in Arnold’s income. And the distribution isn’t taken into account in determining the amount of Arnold’s charitable deductions for the year. Further, any distributions from the charitable remainder unitrust to Arnold will be includible in his gross income as ordinary income regardless of the character of the distributions under the usual rules for the taxation of CRT distributions.
Example 3. Betty has an IRA with a $100,000 balance, consisting of $20,000 of nondeductible contributions and $80,000 of deductible contributions and earnings. Betty has no other IRA. In a direct distribution to a charitable organization, $80,000 is distributed from the IRA. Under present law, a portion of the distribution from the IRA would be treated as a nontaxable return of nondeductible contributions. The nontaxable portion of the distribution would be $16,000, determined by multiplying the amount of the distribution($80,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Thus, under present law, $64,000 of the distribution ($80,000 minus $16,000) would be includible in Betty’s gross income.
Under the SFC bill, notwithstanding the present-law tax treatment of IRA distributions, the distribution would be treated as consisting of income first, up to the total amount that would be includible in gross income (but for the SFC bill) if all amounts were distributed from all IRAs otherwise taken into account in determining the amount of IRA distributions. The total amount that would be includible in her income if all amounts were distributed from the IRA is $80,000. Thus, under the SFC bill, the entire $80,000 distributed to the charitable organization is treated as includible in income (before application of the SFC bill) and is a qualified charitable distribution. As a result, no amount is included in Betty’s income as a result of the distribution. And the distribution isn’t taken into account in determining the amount of Betty’s charitable deductions for the year. For purposes of determining the tax treatment of other distributions from the IRA, $20,000 of the amount remaining in the IRA is treated as Betty’s nondeductible contribution.
SPLIT-INTEREST TRUSTS FILING REQUIREMENTS
Explanation. The penalty on split-interest trusts for failure to file tax returns and for failure to include any of the required and correct information would be increased. The penalty would be $20 for each day the failure continues up to $10,000 for any one return. For a split-interest trust with gross income over $250,000, the penalty would be $100 for each day the failure continues up to a maximum of $50,000. In addition, if a person (meaning any officer, director, trustee, employ-ee, or other individual who is under a duty to file the return or include required information) knowingly failed to file the return or include required information, that person would be personally liable for the penalty and the penalty would be imposed in addition to the penalty that is paid by the organization. Information regarding beneficiaries that are not IRC §170(c) charitable organizations would be exempt from the requirement to make information publicly available. Further, the SFC bill would repeal the present-law exception to the filing requirement for split-interest trusts that are required in a taxable year to distribute all net income currently to beneficiaries. That exception would still apply to trusts other than split-interest trusts that are otherwise subject to the filing requirement.
Effective. Generally, for taxable years starting in 2004.
CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY
Background. Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis (typically, cost) in the inventory. But for certain inventory, C corporations (not S corporations or individuals) may claim an enhanced deduction equal to the lesser of (1) basis plus one-half of the item’s appreciated value and (2) two times basis.
To get the enhanced deduction, the contributed property generally must be: (1) the taxpayer’s inventory; (2) contributed to an IRC §501(c)(3) charity (but not a private nonoperating foundation); and (3) the donee must (a) use the property consistent with the donee’s exempt purpose solely for the care of the ill, the needy, or infants, (b) not transfer the property in exchange for money, property, or services, and (c) give the taxpayer a written statement that the donee’s use of the property will be consistent with those requirements. And for property subject to the Federal Food, Drug, and Cosmetic Act, the property must satisfy the applicable requirements of the act on the date of transfer and for 180 days prior to the transfer.
To qualify for the enhanced deduction, the taxpayer must establish that the fair market value of the donated item exceeds basis. The valuation of food inventory has been the subject of ongoing disputes between taxpayers and the IRS. In one case, the Tax Court held that the value of surplus bread inventory donated to charity was the full retail price of the bread rather than half the retail price, as the IRS asserted.
Explanation. Any taxpayer, whether or not a C corporation, engaged in a trade or business would be eligible for an enhanced deduction for food-inventory gifts. For taxpayers other than C corporations, the total deduction for food-inventory gifts in a taxable year generally may not exceed 10% of the taxpayer’s net income for the year from its trade or business (or interest therein) from which contributions are made. For example, if a taxpayer is a sole proprietor, an S corporation shareholder, and a partner in a partnership, and each business makes charitable contributions of food inventory, the taxpayer’s deduction for food-inventory gifts would be limited to 10% of the taxpayer’s net income from the sole proprietorship, and the taxpayer’s interests in the S corporation and partnership. However, if only the sole proprietorship and the S corporation made food-inventory gifts, the taxpayer’s deduction would be limited to 10% of the net income from the trade or business of the sole proprietorship and the S corporation, but not the partnership.
Usual adjusted gross income ceiling not affected. The 10% limitation wouldn’t affect the application of the generally applicable percentage limitations. For example, if 10% of a sole proprietor’s net income from the proprietor’s trade or business was greater than 50% of the proprietor’s adjusted gross income, the available deduction for the taxable year (for contributions to public charities) would be 50% of the proprietor’s AGI. Consistent with present law, those contributions could be carried forward because they exceed the 50% limitation. Contributions of food inventory by a non-corporation taxpayer that exceed the 10% limitation but not the 50% limitation could not be carried forward.
Special basis rule. For purposes of calculating the enhanced deduction, taxpayers who don’t account for inventories under IRC §471 and who are not required to capitalize indirect costs under IRC §263A would be able to elect to treat the basis of the contributed food as equaling 25% of the food’s fair market value.
Qualifying food. Under the SFC bill, the enhanced deduction would be available only for food that qualifies as "apparently wholesome food." That’s food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, etc.
The fair market value of donated apparently wholesome food that cannot or will not be sold solely due to the taxpayer’s internal standards or lack of market would be determined without regard to those internal standards or lack of market, and by taking into account the price at which the same or substantially the same food items are sold by the taxpayer at the time of the contribution or, if not so sold at that time, in the recent past.
Effective. Contributions made after the date of enactment;
CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF BOOK INVENTORY
Background. First see the "background" discussion above for food inventory contributions.
Additional background. Under present law, taxpayers sometimes are denied an enhanced deduction for charitable contributions of their book inventory, in part because of the requirement that the inventory be used for the benefit of the ill, the needy or infants. For example, that requirement generally denies enhanced tax benefits for donations to public libraries and adult literacy programs.
Explanation. The SFC bill would modify the present enhanced deduction for C corporations so that it equals the lesser of fair market value or twice the taxpayer’s basis for qualified book contributions. The bill provides that the fair market value for this purpose is determined by reference to a bona fide published market price for the book (using the same printing and same edition) published within seven years preceding the contribution.
The bona fide published market price of a book would be a price that was reached in an arm’s length transaction within the seven years preceding the contribution, and for which the book was customarily sold. A publisher’s listed retail price for a book would not meet that standard unless the publisher could demonstrate to IRS’s satisfaction that the price was one at which the book was customarily sold.
Example. A publisher contracted with a local school district to sell textbooks six years prior to making a qualified contribution of the textbooks. The publisher could use as a "bona fide published market price" the price at which those books were regularly sold to the school district under the contract. By contrast, if a publisher listed a "suggested retail price," in a catalog or elsewhere, but books frequently sold at that price, the publisher couldn’t use the "suggested retail price" to determine the fair market value of the book to get the enhanced deduction.
The bona fide published market price must be independently verifiable by reference to actual sales within the seven-year period preceding the contribution, and not to a publisher’s own price list.
Example of calculating the enhanced deduction. A C corporation that made a qualified book contribution with a bona fide published marketprice of $10 and a basis of $4 could take a deduction of $8 (twice basis). If the taxpayer’s basis is $6 instead of $4, then the deduction is $10. Also, in the latter case, if the book’s bona fide market published price was $5 at the time of the contribution but was $10 five years before the contribution, then the deduction is $10.
Definitions. A qualified book contribution means a charitable contribution of books to: (1) an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled student body in attendance at the place where its educational activities are regularly carried on; (2) a public library; or (3) an organization described in IRC §501(c)(3) (but not a private nonoperating foundation) that is organized primarily to make books available to the general public at no cost or to operate a literacy program. The donee must: (1) use the property consistent with the donee’s exempt purpose; (2) not transfer the property in exchange for money, other property, or services; (3) provide the taxpayer with a written statement that the donee’s use of the property will be consistent with those requirements, and also that the books are suitable, in terms of currency, content, and quantity, for use in the donee’s educational programs and that the donee will use the books in those programs.
Effective. Contributions made after the date of enactment.
EXPANDED CHARITABLE CONTRIBUTION FOR SCIENTIFIC PROPERTY USED FOR RESEARCH AND FOR COMPUTER TECHNOLOGY AND EQUIPMENT
Background. For a charitable contribution of inventory or other ordinary-income or short-term capital gain property, the amount of the charitable deduction generally is limited to the taxpayer’s basis in the property. The deduction for contributions of tangible personal property is limited to the taxpayer’s basis in the property if the use by the charity is unrelated to its tax-exempt purpose.
Present law also limits a taxpayer’s deduction for contributions of scientific property used for research and for contributions of computer technology and equipment to the taxpayer’s basis (typically, cost) in the property. However, certain corporations get an enhanced deduction for a "qualified research contribution" or a "qualified computer contribution." That deduction is for the lesser of (1) basis plus one-half of the item’s appreciated value or (2) two times basis.
A qualified research contribution. That’s a gift of tangible-personal- property inventory. The contribution must be to a qualified educational or scientific organization and be made not later than two years after construction of the property is substantially completed. The original use of the property must be by the donee, and be used substantiallyfor research or experimentation, or for research training in the U.S. in the physical or biological sciences. The property must be scientific equipment or apparatus, constructed by the taxpayer, and may not be transferred by the donee in exchange for money, other property, or services.
A qualified computer contribution. That’s a gift of any computer technology or equipment that meets standards of functionality and suitability as established by IRS. The contribution must be to certain educational organizations or public libraries and made not later than three years after the taxpayer acquired the property or, if the taxpayer constructed the property, not later than the date construction of the property is substantially completed. The original use of the property must be by the donor or the donee, and if by the donee, must be used substantially for educational purposes related to the donee’s purposes. The donee may not transfer the property in exchange for money, other property, or services, except for shipping, installation, and transfer costs. To determine whether property is constructed by the taxpayer, the rules applicable to qualified research contributions apply. Contributions may be made to private foundations under certain conditions.
Explanation. Property assembled by the taxpayer, in addition to property constructed by the taxpayer, would be eligible for either enhanced deduction.
Effective. Starting in 2003.
CONTRIBUTIONS OF REAL PROPERTY FOR CONSERVATION PURPOSES
Background. Generally, income, gift and estate tax charitable deductions aren’t allowed if the donor transfers an interest in property to a charity while also either retaining an interest in that property or transferring an interest in that property to a noncharity for less than full and adequate consideration.
Exceptions are provided for: remainder interests in charitable remainder annuity trusts, charitable remainder unitrusts, and pooledincome funds, present interests in the form of a guaranteed annuity or a fixed percentage of the annual value of the property, and qualified conservation contributions.
Qualified conservation contributions—more background. Those contributions are not subject to the "partial interest" rule that generally bars deductions for charitable contributions of partial interests in property.
Qualified conservation contribution defined: Why, that’s a contribution of a "qualified real property interest" to a qualified organization exclusively for conservation purposes.
So what’s a qualified real property interest? That’s a gift of (1) a donor’s entire interest other than a qualified mineral interest (a plethora of qualifieds); (2) a remainder interest; or (3) a restriction granted in perpetuity on the use that may be made of the real property.
Qualified organizations include: certain governmental units, public charities that meet certain public support tests, and certain supporting organizations.
Conservation purposes include: (1) the preservation of land areas for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem; (3) the preservation of open space (including farmland and forest land) where that preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly delineated federal, state, or local governmental conservation policy; and (4) the preservation of an historically important land area or a certified historic structure.
Qualified conservation contributions are now subject to the same limitations and carryover rules of contributions of other long-term capital gain property (securities, real estate).
Explanation. The 30% AGI limitation on deductions for contributions of capital gain property by individuals wouldn’t apply to qualified conservation contributions (as defined under present law). Thus, individuals could include the fair market value of any qualified conservation contribution in determining the amount of the charitable contributions subject to the 50% limitation. That’s the limitation for cash and short-term property (deductible at cost-basis only).
The carryover for qualified conservation contributions that exceed the 50% limitation would be for up to 15 years (compared to the usual 5-year carryover). The 50% AGI limit would apply first to contributions other than qualified conservation contributions and then to qualified conservation contributions.
Example. An individual with $100,000 of AGI makes a qualified conservation contribution of property with an $80,000 fair market value and makes other charitable contributions of $60,000. He is allowed a deduction of $50,000 in the current taxable year for the other contributions (50% of his $100,000 AGI) and is allowed to carryover the excess $10,000 for up to 5 years. No current deduction would be allowed for the qualified conservation contribution, but the entire $80,000 qualified conservation contribution could be carried forward for up to15 years.
Farmers and ranchers—super duper rule. For an eligible farmer or rancher, a qualified conservation contribution would be deductible up to 100% of the taxpayer’s AGI (after taking into account other charitable contributions). This rule would apply both to individuals and corporations. In addition, the donors would be allowed to carryover any "excess" qualified conservation contributions for up to 15 years.
The 100% AGI would apply first to contributions other than qualified conservation contributions (to the extent allowable under other percentage limitations) and then to qualified conservation contributions.
Example. Rancher Blanch (or Farmer Fran) with a $100,000 AGI makes a qualified conservation contribution of property with a fair market value of $80,000 and makes other charitable contributions of $60,000. She would be allowed a $50,000 deduction in the current taxable year for the other contributions (50% of her $100,000 AGI) and would be allowed to carryover the excess $10,000 for up to 5 years. She would also be allowed a $50,000 deduction in the current taxable year for the qualified charitable contribution (the amount of the remaining AGI measure). The remaining $30,000 qualified con-servation contribution could be carried forward for up to 15 years.
Definition—an eligible farmer or rancher. A taxpayer (other than a publicly traded C corporation) whose gross income from the trade or business of farming or ranching is at least 51% of the taxpayer’s gross income for the taxable year.
Effective. Contributions made after the date of enactment.
EXCLUSION OF 25% OF CAPITAL GAIN FOR CERTAIN SALES MADE FOR QUALIFYING CONSERVATION PURPOSES
Background. Gain from the sale or exchange of land held more than one year generally is treated as long-term capital gain and taxed at a maximum 20% rate.
Explanation. The SFC bill would provide a 25% exclusion from gross income of long-term capital gain from the qualifying sale or exchange of land (or an interest in land or water rights), provided that the land(or interest in land or water rights) constitutes an interest in real property that has been held by the taxpayer or the taxpayer’s family at all times during the five years preceding the date of sale. The qualifying sale must be made to a qualified organization that intends that the acquired property be used for qualified conservation purposes in perpetuity.
Qualifying interests. The 25% exclusion would apply only to sales or exchanges of real property interests in land or water rights that constitute the entire interest of the taxpayer, or that constitute qualified real property interests as defined in IRC §170(h), specifically: (1) the entire interest of the taxpayer other than a qualified mineral interest; (2) a remainder interest; or (3) a restriction (granted in perpetuity) on the use which may be made of the real property. Partial interests in property that aren’t the taxpayer’s entire interest or a qualified real property interest wouldn’t qualify for the exclusion. For example, a taxpayer who owns land and related mineral rights but who sells only the mineral rights is not eligible for the exclusion. However, a taxpayer who owns only mineral rights is eligible for the 25% exclusion if the taxpayer sells his or her entire interest in the mineral rights and satisfies the other requirements of the bill.
More requirements. Generally, an undivided interest that constitutes the taxpayer’s entire interest in the property would be eligible for the exclusion. A partial interest (for example, an undivided interest) that constitutes the taxpayer’s entire interest in the property, however, wouldn’t qualify for the exclusion if the property in which that partial interest exists was divided in an attempt to avoid the partial interest rules.
Qualifying gain. The exclusion would apply only to long-term capital gain. Gain treated as ordinary income (e.g., under depreciation recapture provisions) wouldn’t be eligible. Gain attributable to certain improvements, such as buildings or structures that don’t further a qualified conservation purpose ("disqualified improvements"), also wouldn’t qualify for the exclusion. The bill provides that the maximum amount of gain that may be excluded by a shareholder in the case of a sale or exchange of a controlling stock interest is 25% of the shareholder’s proportionate share of the C corporation’s underlying gain attributable to qualifying land, water rights, or interests therein held by the C corporation.
Relationship with other provisions. For an individual, the exclusion applies both for purposes of the regular tax and the alternative minimum tax. For a corporation, the present alternative minimum tax provisions apply without modification.
Bargain sales. If a real property interest is sold to a qualified organization for less than the property’s fair market value, the charitable deduction would be determined under the bargain sale rules, and the taxpayer wouldn’t fail to qualify for a contribution deduction under those rules solely because the taxpayer gets a tax benefit from the partial exclusion of long-term capital gain from the sale.
Example. A taxpayer sells qualifying land with a fair market value of $100,000 and an adjusted basis of $10,000 to a qualified organization for a sales price of $95,000 (or alternatively, for a sale price of $50,000), the taxpayer’s basis of $10,000 would be allocated between the sale and the contribution components under the bargain sale rules, and the tax savings resulting from the 25% exclusion of long-term capital gain on the sale wouldn’t reduce the portion of the transfer treated as a charitable contribution under the bargain sale rules.
More requirements. The present-law rules on the charitable contribution component of the transfer, including the recordkeeping, substantiation, and appraisal provisions of Reg. §1.170A-13 would have to be satisfied.
Effective. For sales or exchanges occurring after the date of enactment.
COST SHARING PAYMENTS UNDER THE PARTNERS FOR FISH AND WILDLIFE PROGRAM
Background. Under present law, gross income doesn’t include the excludable portion of payments made to taxpayers by federal and state governments for a share of the cost of improvements to property under certain conservation programs. Those programs include payments received under (1) the rural clean water program authorized by section 208(j) of the Federal Water Pollution Control Act, (2) the rural abandoned mine program authorized by section 406 of the Surface Mining Control and Reclamation Act of 1977, (3) the water bank program authorized by the Water Bank Act, (4) the emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978, (5) the agriculture conservation program authorized by the Soil Conservation and Domestic Allotment Act, (6) the great plains conservation program authorized by section 16 of the Soil Conservation and Domestic Policy Act, (7) the resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act, (8) the forestry incentives program authorized by section 4 of the Cooperative Forestry Assistance Act of 1978, (9) any small watershed program administered by the Secretary of Agriculture which is determined by the Secretary of the Treasury or his delegate to be substantially similar to the type of programs described in items (1) through (8), and (10) any program of a State, possession of theUnited States, a political subdivision of any of the foregoing, or the District of Columbia under which payments are made to individuals primarily for the purpose of conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife.
Explanation. The bill would expand the types of qualified cost-sharing payments to include payments under the Partners for Fish and Wildlife Program.
Effective. Payments received after the date of enactment.
BASIS ADJUSTMENT TO STOCK OF S CORPORATION CONTRIBUTING PROPERTY
Background. Under present law, when an S corporation contributes money or other property to a charity, each shareholder takes into account the shareholder’s pro rata share of the contribution in determining his or her own income tax liability. A shareholder of an S corporation reduces the basis in the stock of the S corporation by the amount of the charitable contribution that flows through to the shareholder.
Explanation. The bill provides that the basis adjustment to the stock of an S corporation for charitable contributions made by the corporation would equal the shareholder’s pro rata share of the adjusted basis of the property contributed.
Example. S corporation has one individual shareholder who makes a charitable contribution of stock with a basis of $200 and a fair market value of $500. The shareholder will be treated as having made a $500 charitable contribution (or a lesser amount if the special rules of IRC §170(e) apply), and will reduce the basis of the S corporation stock by $200.
Effective. Contributions made after the date of enactment.
ENHANCED DEDUCTION FOR CHARITABLE CONTRIBUTIONS OF LITERARY, MUSICAL, ARTISTIC AND SCHOLARLY COMPOSITIONS
Background. Charitable contributions of literary, musical, and artistic compositions created by the donor’s personal efforts are considered ordinary income property and the deduction is limited to the taxpayer’s basis (typically, cost).
Explanation. The SFC bill provides an enhanced deduction for "qualified artistic charitable contributions" increasing it from basis to fair market value at the time of the contribution.
Limitations. The increased deduction couldn’t exceed the donor’s adjusted gross income for the taxable year attributable to: (1) income from the sale of property created by the donor’s personal efforts that is of the same type as the donated property; and (2) income from teaching, lecturing, performing, or similar activities with respect to the property. In addition, the increased deduction couldn’t be carried over and deducted in future years.
Definition—qualified artistic charitable contribution. That’s a charitable contribution of any literary, musical, artistic, or scholarly composition, or similar property, or the copyright thereon (or both) that meets these requirements: First, the contributed property must havebeen created by the personal efforts of the donor at least 18 months before the contribution. Second, the donor must obtain a qualified appraisal of the contributed property, a copy of which is required to be attached to the donor’s income tax return for the taxable year in which the contribution is made. The appraisal must include evidence of the extent (if any) to which property created by the personal efforts of the taxpayer and of the same type as the donated property is or has been owned, maintained, and displayed by certain charitable organizations and sold to or exchanged by persons other than the taxpayer, donee, or any related person. Third, the contribution must be made to a public charity or to certain limited types of private foundations. Finally, the use of donated property by the recipient organization must be related to the organization’s charitable purposes and the donor must receive a written statement from the organization verifying that use.
Under the bill, the tangible property and the copyright on the property are treated as separate properties for purposes of the "partial interest" rule. Thus, a gift of artwork without the copyright or a copyright without the artwork wouldn’t constitute a gift of a partial interest and would be deductible. Contributions of letters, memoranda, or similar property that are written, prepared, or produced by or for an individual while the individual is an officer or employee of any person (including a government agency or instrumentality) wouldn’t qualify for a fair market value deduction unless the contributed property is entirely personal.
Effective. Contributions made after the date of enactment.
EXCLUSION FOR MILEAGE REIMBURSEMENTS TO CHARITABLE VOLUNTEERS
Background. Under present law, unreimbursed out-of-pocket expenditures made incident to providing donated services to a qualified charitable organization—such as out-of-pocket transportation expenses necessarily incurred in performing donated services—may constitute an itemized deduction for charitable contributions. A charitable deduction isn’t allowed for traveling expenses (including expenses for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel. In determining the amount treated as a charitable contribution where a taxpayer operates a vehicle in providing services to a charity, the taxpayer either may deduct actual out-of-pocket expenditures or may use the charitable standard mileage rate. The taxpayer may also deduct (under either computation method), any parking fees and tolls incurred in rendering the services, but may not deduct any amount (regardless of the computation method used) for general repair or maintenance expenses, depreciation, insurance, registration fees, etc.
The charitable standard mileage rate is set by statute at 14 cents per mile. The standard mileage rate for charitable purposes is lower than the standard business rate because the charitable rate covers only the out-of-pocket operating expenses (including gasoline and oil) directly related to the use of the car in performing the donated services that a taxpayer may deduct as a charitable contribution. The charitable rate doesn’t include costs that are not deductible as a charitable contribution such as general repair or maintenance expenses, depreciation, insurance, and registration fees. Those costs are, however, included in computing the business standard mileage rate (the rate allowed for business use of an automobile), which is 36 cents per mile.
Volunteer drivers who are reimbursed for mileage expenses have taxable income to the extent the reimbursement exceeds deductible travel expenses. Employees who are reimbursed for mileage expenses under a qualified arrangement that pays a mileage allowance in lieu of reimbursing actual expenses generally have taxable income to the extent the reimbursement exceeds the amount of the business standard mileage rate multiplied by the actual business miles.
Explanation. Reimbursement by public charities and private foundations to a volunteer for the costs of using an automobile in connection with providing donated services would be excludable from the gross income of the volunteer, provided that (1) the reimbursement doesn’t exceed the business standard mileage rate prescribed for business use (as periodically adjusted), and (2) recordkeeping requirements applicable to deductible business expenses are satisfied. The bill wouldn’t permit a volunteer to claim a deduction or credit for excludible expenses.
Effective. Taxable years beginning after the date of enactment.
MODIFICATION OF TAX ON UNRELATED BUSINESS TAXABLE INCOME OF CHARITABLE REMAINDER TRUSTS
Background. Charitable remainder annuity trusts and charitable remainder unitrusts are exempt from federal income tax unless the trust has any unrelated business taxable income for the taxable year. Unrelated business taxable income includes certain debt-financed income. A charitable remainder trust that loses exemption from income tax for a taxable year is taxed as a regular complex trust. As such, the trust is allowed a deduction in computing taxable income for amounts required to be distributed in a taxable year, not to exceed the amount of the trust’s distributable net income for the year. Taxes imposed on the trust are required to be allocated to corpus.
Explanation. The bill would impose a 100% excise tax on the unrelated business taxable income of a charitable remainder trust. That would replace the present rule that takes away the CRT’s income tax exemption for any year in which it has any unrelated business taxable income. Consistent with present law, the tax would be treated as paid from corpus. The unrelated business taxable in-come would be considered income of the trust for purposes of determining the character of the distribution made to a CRT beneficiary.
The bill has provisions dealing with:
Improving the Oversight of Tax-Exempt Organizations
Other Charitable and Exempt Organization Provisions
Authorizes Appropriations to the Treasury Secretary of $80
Understatement of taxpayers liability by income tax return preparer
House Ways and Means Committee
Republicans Tax Staff Telephone* Fax*
Democrats Tax Staff Telephone Fax
Republicans Tax Staff Telephone* Fax*
Charles Grassley (IA) Mark Prader 4-4515 4-5920
Democrats Tax Staff Telephone* Fax*
Max Baucus (MT) Pat Heck 4-5315 8-0554
House of Representatives - Republican Leadership
Member - Title - Key Staff Aide - Telephone* - Fax*
J. Dennis Hastert (R-IL), Speaker of the House, Scott B. Palmer, Tel-5-0600 Fax-6-1996
Tom Delay (R-TX), House Majority Leader, Tim Berry, Tel-5-4000 Fax-6-8100
Roy Blunt (R-MO), House Majority Whip, Brian Gaston, Tel-5-0197 Fax-5-5117
Eric I. Cantor (R-VA), Chief Deputy Majority Whip, Steve Stombres, Tel-5-7100, Fax-6-1115
Deborah Pryce (R-OH), House Conference, Kathryn H. Lehman, Tel-5-5107, Fax-5-0809
Christopher Cox (R-CA), House Policy Committee, Paul Wilkinson, Tel-5-6168, Fax-5-0931
January-5.4% May-6.0% September-4.6%
Two-month look-back. For income, gift and estate tax charitable deductions, the donor may use the rate for the month of the transfer or the rate for either of the two preceding months. Back reference: Split-Interest Valuation Regulations, Taxwise Giving, July '94, page 2.
For charitable remainder trusts and gift annuities, the higher the rate the larger the charitable contribution. For remainders in personal residences, remainders in farms, and charitable lead trusts, the lower the rate the larger the charitable contribution.
Deemed rate of return for young pooled income funds. If a pooled fund has less than three taxable years' experience, a deemed rate of return is used to compute the charitable deduction. Donors use the deemed rate for the actual year of the gift. For 2002, it was 6.6%. For 2001, it was 6.6% and for 2000, it was 6.8%. IRS recomputes the deemed rate each calendar year. It determines each year's deemed rate by subtracting 1% from the highest annual average of the monthly rates for the three prior calendar years, rounded to the nearest 0.2%. Back reference: Split-Interest Valuation Regulations, Taxwise Giving, July '94, page 2.
Mature pooled income funds. Donors to funds with more than three taxable years' experience compute the deduction using the highest rate of return from the fund's three previous years.