President’s Budget Proposals Affecting Charities

President Obama’s proposed Fiscal Year 2016 Budget (“Proposed Budget”) contains a few provisions affecting charities and charitably minded donors.  The following proposals are of interest. Direct quotes are from either the Proposed Budget or the Department of the Treasury’s General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (“Treasury Explanations”), as indicated.

Limit the Benefit of the Charitable Contributions Deduction

“The Budget would limit the value of most tax deductions and exclusions to 28 cents on the dollar, a limitation that would affect only couples with incomes over about $250,000 (singles with incomes over about $200,000). The limit would apply to all itemized deductions, as well as other tax benefits, such as tax-exempt interest and tax exclusions for retirement contributions and employer-sponsored health insurance.”  Proposed Budget, 56.

Obviously, the charitable contributions deduction is, as in prior years’ budgets proposed by the President, subject to the limitation.  According to Treasury Explanations, the provision “would apply to itemized deductions after they have been reduced by the statutory limitation on certain itemized deductions for higher-income taxpayers.”  Treasury Explanations, 155.

Repeal the Non-Hospital Bond Limitation on Qualified Section 501(c)(3) Bonds

As discussed in Treasury Explanations, “[t]he Tax Reform Act of 1986 established a $150 million limit on the volume of outstanding, non-hospital, tax-exempt section 501(c)(3) bonds. The limit was repealed in 1997 with respect to bonds issued after August 5, 1997, if at least 95 percent of the net proceeds were used to finance capital expenditures incurred after that date. Thus, the limitation continues to apply to bonds more than five percent of the net proceeds of which finance or refinance (1) working capital expenditures, or (2) capital expenditures, incurred on or before August 5, 1997.”  Treasury Explanations, 77.  Treasury believes that the $150 million limitation “results in complexity and provides disparate treatment depending on the nature and timing of bond-financed expenditures,” and that repealing it “would enable nonprofit universities to utilize tax-exempt financing on a basis comparable to public universities.”  Id.  Under the administration’s proposal, “[t]he $150 million limit on the volume of outstanding, non-hospital, tax-exempt bonds for the benefit of any one section 501(c)(3) organization would be repealed in its entirety, effective for bonds issued after the date of enactment.”  Id.

Disallow Deduction for Payments Entitling Payor the Right to Buy College Athletics Tickets

As Treasury Explanations notes, “donors to colleges and universities that receive in exchange for their contributions the right to purchase tickets for seating at an athletic event may deduct 80 percent of the contribution.”  Treasury Explanations, 177. The administration’s proposal would disallow a deduction for any such transfer for the right to buy tickets to sporting events.  See id.

Consolidate AGI-Based Limitations on Charitable Contributions Deduction

Current law limits the charitable contributions deduction to various percentages of a taxpayer’s “contribution base” (basically AGI), depending on the type of charitable donee and the type of donated property.  “The proposal would simplify this complicated set of rules limiting deductions for charitable contributions. Under the proposal, the contribution base limit would remain at 50 percent for contributions of cash to public charities. For all other contributions, a single deduction limit of 30 percent of the taxpayer’s contribution base would apply, irrespective of the type of property donated, the type of organization receiving the donation, and whether the contribution is to or for the use of the organization. In addition, the proposal would extend the carry-forward period for contributions in excess of these limitations from five to 15 years.”  Treasury Explanations, 280.

Modify Deduction for Qualified Conservation Contributions

Code section 170 provides special rules for qualified conservation contributions.  The administration proposes several modifications to the rules governing the deduction, and also proposes “to pilot a non-refundable credit for conservation easement contributions as an alternative to the conservation contribution deduction ….”  Treasury Explanations, 191. 

Additional details excerpted from Treasury Explanations:

This proposal would make permanent the temporary enhanced incentives for conservation easement contributions that expired on December 31, 2014. In addition, to address concerns regarding abusive uses of this deduction and to promote effective, high-value conservation efforts, the proposal includes a number of reforms:

 

First, the proposal would strengthen standards for organizations to qualify to receive deductible contributions of conservation easements by requiring such organizations to meet minimum requirements, specified in regulations, which would be based on the experiences and best practices developed in several States and by voluntary accreditation programs. For example, the regulations could, among other things, specify that a “qualified organization” must not be related to the donor or to any person that is or has been related to the donor for at least ten years; must have sufficient assets and expertise to be reasonably able to enforce the terms of all easements it holds; and must have an approved policy for selecting, reviewing, and approving conservations [sic] easements that fulfill a conservation purpose. An organization that accepts contributions that it knows (or should know) are substantially overvalued or do not further an appropriate conservation purpose would jeopardize their status as a “qualified organization.”

 

Second, the proposal would modify the definition of eligible “conservation purposes” for which deductible contributions may be made, requiring that all contributed easements further a clearly delineated Federal conservation policy (or an authorized State or tribal government policy) and yield significant public benefit.

 

Third, in order to take a deduction, a donor must provide a detailed description of the conservation purpose or purposes furthered by the contribution, including a description of the significant public benefits it will yield, and the donee organization must attest that the conservation purpose, public benefits, and fair market value of the easement reported to the IRS are accurate. Penalties would apply on [sic] organizations and organization managers that attest to values that they know (or should know) are substantially overstated or that receive contributions that do not serve an eligible conservation purpose.

 

Finally, the proposal would require additional reporting of information about contributed conservation easements and their fair market values. Section 6033 would be amended to require electronic reporting and public disclosure by donee organizations regarding deductible contributions of easements that is sufficient for transparency and accountability including: detailed descriptions of the subject property and the restrictions imposed on the property, the conservation purposes served by the easement, and any rights retained by the donor or related persons; the fair market value of both the easement and the full fee interest in the property at the time of the contribution; and a description of any easement modifications or actions taken to enforce the easement that were taken during the taxable year. As is the case under current law, personally identifying information regarding the donor would not be subject to public disclosure.

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The proposal would amend the charitable contribution deduction provision to prohibit a deduction for any contribution of a partial interest in property that is, or is intended to be, used as a golf course.

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The proposal would disallow a deduction for any value of an historic preservation easement associated with forgone upward development above an historic building. It would also require contributions of conservation easements for all historic buildings, including those listed in the National Register, to comply with a 2006 amendment that requires contributions of historic preservation easements on buildings in registered historic districts to comply with special rules relating to the preservation of the entire exterior of the building and the documentation of the easement contribution.  Treasury Explanations, 190-192.

Reform Private Foundation Excise Tax on Net Investment Income

As discussed in Treasury Explanations, under Code section 4940, tax-exempt private foundations generally are subject to a two percent excise tax on their net investment income. However, the applicable rate is generally one percent in any year in which the foundation’s qualifying distributions exceed the average level of its qualifying distributions over the five preceding taxable years. Treasury Explanations, 267.  The administration proposes to “replace the two rates of tax on private foundations that are exempt from Federal income tax with a single tax rate of 1.35 percent.” Id.  No special reduction in excise tax would apply to tax-exempt private foundations that maintain their historic levels of charitable distributions.  See id.  Further, “[t]he tax on private foundations not exempt from Federal income tax would be equal to the excess (if any) of the sum of the 1.35-percent excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation.”  Id.   

JRB