by Kevin R. Laskowski
by Kevin R. Laskowski
On August 17, 2006, President Bush signed the Pension Protection Act of 2006, also known as H. R. 4, into law. (The bill's full text is available here.) Containing a number of unexpectedly added provisions, and designed to encourage charitable giving and curb abuses in the nonprofit sector, the Act came as a surprise to many in the sector and has donors and charities alike trying to make sense of a new regulatory landscape. While some contend the incentives in the bill could encourage more than $1 billion in additional charitable donations, others counter that the Act's limitations will dissuade many donors from taking advantage of them. While some applaud the law's efforts to curb abuses in foundations, donor-advised funds and supporting organizations, others are concerned that more regulation will simply mean more anxiety and more paperwork. With the Treasury Department poised to clarify some of the Act's provisions, and more reform legislation possibly on the horizon, giving families will need to acquaint themselves with the new regulations and prepare for a new regulatory environment.
As a prelude to a
special report coming soon from the National Center which will examine the Act
from the perspective of donors and giving families, this month’s Family
Giving News is a brief guide to the provisions of the Act and what giving
families can do to respond to its passage.
The Act itself is some 900 pages long with 14 titles addressing a number of issues from "Funding Rules for Single-Employer Defined Benefit Pension Plans" (hence, the Act's name) to "Technical corrections relating to mine safety" (see Title XIII) to charitable reform. Here is a digest of some of the major charitable reform provisions:
For the first time, the Act provides a statutory definition of a donor-advised fund. The Act defines a "donor-advised fund" as any fund or account, with a few exceptions:
which is separately identified by reference to the contributions of a donor or donors
which is owned and controlled by the sponsoring organization; and
with respect to which a donor or person appointed by the donor has or reasonably expects to have advisory rights with respect to investments or distributions.
The Act details permitted and prohibited grants, specifies grants requiring expenditure responsibility, and applies the private foundation excess business holdings rule to donor-advised funds. The Act also orders the Treasury Department to conduct a one-year study to examine the appropriateness of charitable deductions for gifts to advised funds, the possibility of a payout requirement, and the appropriateness of the retention of advisory rights in light of the gifts' treatment as a completed gift. The general effect is that of making donor-advised funds subject to some of the same sorts of requirements as private foundations, with possibly more to come.
As with donor-advised funds, supporting organizations face significant new rules designed to weed out abuses of these vehicles by shaping them to be more like private foundations. The Act directs the Treasury Department to adopt regulations requiring Type III supporting organizations, other than those that are "functionally integrated," to distribute a percentage of either income or assets to the supported organizations each year. The term "functionally integrated" supporting organization refers to an organization that performs functions, carries out purposes, or that conducts activities that would normally be performed by the supported organization if the Type III did not exist. The Act applies the private foundation excess business holdings rule to Type III supporting organization (unless they are functionally integrated) and to Type I supporting organizations if the supported organization is controlled by the supporting organization's donors. The Act outlines excess benefit transactions, expenditure responsibility requirements, and reporting requirements.
This incentive, projected to encourage $1 billion in charitable gifts through 2007, permits people who have reached 70 1/2 years of age to exclude from income of up to $100,000 a year in retirement plan assets if contributed to a qualified charity.
The Act covers a number of other charitable issues:
Penalty Excise Taxes. The Act significantly increases penalty excise taxes for self-dealing, failure to distribute the minimum amount required, excess business holdings, and jeopardizing investments.
Fractional-Interest Gifts. Fractional-interest gifts, usually gifts of artwork made over a period of years, must now be completed in ten years, and the deductibility of such gifts is limited.
Clothing and Household Items. Gifts of clothing and household items to charity must be in good condition in order to be eligible for a deduction.
Small Gifts. Receipts are now required for all cash gifts, even those of less than $250.
Giving families thus find themselves in a new environment and must contend with a spidery set of new rules governing their charitable action. What can your family do to navigate this new environment?
Making a difference through giving alongside parents, siblings, spouses, and children is a joy of philanthropy in itself. However, Congress has seen how some giving vehicles have been misused to enrich donors and family members at charitable expense. Take care to assure that your family understands the rules so as not to let legitimate family involvement in philanthropy become the kind of activity that attracts the attention of the IRS. Significantly greater penalties now apply.
Even as charities begin to sort through what
H.R. 4 will mean for them, community foundations review their donor-advised
funds, and private foundations and supporting organizations negotiate a new
regulatory environment, they will quickly find themselves on a moving playing
field. Already, the Treasury Department has
been asked to provide
clarification on some provisions of the Act, with more to come. The
study of the donor-advised funds is also forthcoming. Stay in touch with
your advisors, with your local community foundation and regional association of
grantmakers,
with infrastructure organizations of which you might be a member, and to
newspapers and newsletters like this one about the latest developments.
The dust has not yet settled.
For a number of years and for a number of reasons, not the least of which is their commitment to their charitable missions, nonprofits have often been reactive when it comes to regulation. This has been changing as organizations have banded together to take a more active role in the legislation that governs their charitable action, but many nonprofits, foundations, and funds still feel as though new regulations catch them by surprise and saddle them with new responsibilities, new paperwork, and new headaches. One solution, as many have found, is to become more involved with the business of nonprofit regulation.
Simply knowing who the key players are, how to contact them, and then contacting them with your concerns when they do arise can go a long way toward feeling more in control of the legislative situation. Keep in touch with local officials, state attorneys-general, congresspersons, and senators. Many nonprofits and philanthropies already collaborate with local, state, and federal officials as part of their charitable work. It is time to collaborate in the important work of sensibly protecting the integrity of the sector. The Forum of Regional Associations of Grantmakers and the Council on Foundations recently published The Value of Relationships between State Regulators and Philanthropy which can help you reflect more on the possibilities of collaboration.
Increased media scrutiny has tuned the ears of Congress and the general public to stories of abuse even as gifts of unprecedented proportions capture the public's imagination. The charitable sector no longer has a free pass on its good intentions. These good intentions must now be backed up by information about results, so talk about your philanthropy's accomplishments. "Go public" with your goals, intentions, actions, and results so that Congress and the general public hear about the successes as well as the challenges that are parts of any human enterprise.
For more information on how you might develop or improve your philanthropy's communication strategy, tune in to this month's National Center teleconference, "Telling Your Story: Options for Communicating with the Public."
The Pension Protection Act of 2006, in its way, tells the story of a number of regulatory loopholes, once exploited and now closed. But there is another story to be told and retold - that of the power of generous individuals and families to make a difference in the lives of others. Insofar as the law protects that spirit without unduly burdening it, philanthropies can welcome such regulation.
For those who want to see the bill's provisions in full, the full text of the Pension Protection Act of 2006 is available from the House Ways and Means Committee.
Several infrastructure organizations have produced summaries of the legislation. Visit the Council on Foundations, Independent Sector (of which the National Center is a member), the Association of Small Foundations, and the United Way of America for their respective summaries of and analysis of the legislation for their members.
For another set of views on the issue, various firms are preparing memos for their clients. Visit Patterson Belknap Webb & Tyler LLP and Quarles & Brady LLP for more information.
Please note that this edition of Family Giving News is an initial look at the Pension Protection Act of 2006. The information presented is subject to change, and is not a substitute for expert legal, tax, or other professional advice. This information may not be relied upon for the purposes of avoiding penalties that may be imposed under the Internal Revenue Service.
Family Giving News is published monthly by the
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