“What’s Happening with Charity Reform” – A Presentation by Jane Gallagher of the Council on Foundations

At a January 26, 2006 meeting hosted by the Northern California Planned Giving Council, Janne Gallagher, Vice President and General Counsel of the Council on Foundations, spoke about current legislation affecting the nonprofit sector.  Here are some of the highlights:

S 2020:  Senate Tax Reconciliation Bill

Proposals to Increase Giving

Nonitemizer Charitable Deduction

  • For gifts exceeding $210 ($420 for joint filers)
  • But floor also applies to itemizers
  • Nonitemizer deduction applicable for 2 years; floor for itemizers would be permanent

IRA Charitable Rollover

  • Pemits tax-free distributions from IRAs directly to charitable organizations or split-interest entities after the taxpayer has reached 70 1/2 years
  • Effective only in 2006 and 2007

Conservation Gifts

  • Qualified conservation contribution – deduction to the extent it does not exceed the excess of 50% of the taxpayer’s contribution base over the amount of other charitable contributions allowable under IRC 170(b)

Gifts of Art by Artist

  • Qualified artistic charitable contribution – deduction of FMV of contributed property, qualified appraisal, public charity donee, use of property by donee related to its exempt purpose, written statement by donee representing that its use will be related to its exempt purpose

Reform Proposals Affecting Giving

Historic Easements

  • Easements must preserve the entire exterior and prohibit any change inconsistent with the historical character
  • Donee must be a qualified organization with adequate resources and commitment to enforcement
  • Donor must file with donor’s Form 1040:  (i) full qualified appraisal; (ii) photos of the entire exterior; (iii) description of existing restrictions
  • No deduction for value of structures/land
  • $500 filing fee if the deduction exceeds the greater of (i) 3% of the building value, or (ii) $10,000

Gifts of Tangible Personal Property

  • Limits donors to basis if:  (i) unrelated use; or (ii) sale, exchange, or other disposition within one-year of gift and no donee certification (describing how property used for a related purpose or how intended use became impossible or infeasible – Form 8282)
  • Recaptures deductions exceeding basis if sale, exchange, or other disposition within three years of gift and no donee certification

Gifts of Clothing/Household Items

  • Household items include furniture and furnishings, electronics and applicances, linens, similar items; they do not include food, paintings, antiques, other art objects, jewelry, gems and collections
  • IRS List – annual itemized list of clothing and household items with assigned cash value based on good condition (gifts in good condition get IRS list price, gifts not in good condition get 20% of IRS list price)
  • Where sale by donee (charity), value exceeds $500, sale occurs prior to filing of donor’s return, and charity reports sales price to donor, then amount deductible is the sales price.
  • Substantiation required for value of $250 or more:  number of items contributed, condition of each item, and copy of IRS list or direction on how to obtain price

Substantiation – All Gifts

  • Cancelled check or
  • Writing from donee with name of donor, date of gift, and amount of gift

Donor-Advised Funds

  • Broad definition:  Any account or fund that is:  (i) separately identified by reference to gift of a donor or donors; (ii) owned and controlled by the sponsoring charity, and (iii) donor or nominee because of status as such has or reasonably expects advisory privileges for either distribution or investment of fund assets
  • Sponsor must inform donor in writing of its exclusive control over donated assets
  • Distribution requirements:  (i) Host charity must distribute 5% of its aggregate assets as measured on the last day of the preceding year; (ii) Fund must distribute every 3 years the greater of (a) $250, or (b) 2.5% of the greater of the average required minimum initial gift or the average required minimum balance; (iii) "Illiquid Assets" Fund (any DAF with illiquid assets exceeding 10% of the fund’s total assets) must distribute 5% of the fund’s assets.
  • Permitted distributions:  (i) non-DAF funds of host charity; (ii) units of government; (iii) 170(b)(1)(A) charities except Type III supporting organizations, certain Type I and Type II supporting organizations, any sponsoring organization for a DAF; (iv) payments to host charity for administrative expenses; (v) set-asides if under private foundation rules.
  • Prohibited distributions:  (i) grants to private nonoperating foundations; (ii) grants to non-charities (even for charitable purposes); (iii) grants to foreign charities unless recognized by the IRS or sponsor makes equivalence determination; (iv) payments or expense reimbursements to disqualified persons (donors/advisors/related parties).

Type III Supporting Organizations

  • No more than 5 supported organizations
  • May support only U.S. organizations
  • No gifts to DAFs
  • Initial application must include letter of agreement from each supported organization
  • Form 990 must include acknowledgment letters from each supported organization with respect to the purpose and type of support provided
  • Annual information report must be sent to supporting organizations
  • New repsonsiveness test for Type III trusts
  • Payout equal to the greater of 85% of income or 5% of assets (excluding assets used directly for the charitable purposes of either the supporting or supported organization
  • Excess business holdings rules apply (4943)
  • All disqualified persons of the SO are also disqualified persons of the SD
  • No grants, loans, payments or compensation to SO’s substantial contributor and related parties
  • Ban on private nonoperating foundation grants to SOs
  • Form 990 required for all SOs


The Tax Relief Act of 2005 (S. 2020) passed by the Senate is headed for conference.  The Senate version of this legislation includes the non-itemizer deduction and IRA rollover provision, but the House version (H.R. 4297) does not.  Members of the Senate and the House will work to reach a compromise in conference, and such compromise must be approved by both branches.  The process of forming the conference committee is expected to begin as early as this week.