Charitable Giving Post Ppa (Pension Protection Act)

CHARITABLE GIVING POST PPA (PENSION PROTECTION ACT)

SHANNON G. GUTHRIE Hughes & Luce, LLP Attorneys and Counselors 1717 Main Street, Suite 2800 Dallas, Texas 75201 Fort Worth: By Appointment (214) 939-5500 (214) 939-5849 (facsimile) www.hughesluce.com (website) [email protected] (email)

State Bar of Texas 25TH ANNUAL ADVANCED TAX LAW COURSE August 30 - 31, 2007 Houston

CHAPTER 16

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©Hughes & Luce LLP

BIOGRAPHICAL INFORMATION AUTHOR

SHANNON G. GUTHRIE EDUCATION B.S., University of Evansville, magna cum laude J.D., Indiana University

Attorney, Hughes & Luce, LLP Fellow, American College of Trust and Estate Counsel Board Certified, Estate Planning and Probate Law, Texas Board of Legal Specialization Member, University of Texas at Austin, Gift Planning Advisory Council Member, Texas Board of Legal Specialization, Exam Committee Member, Real Estate Probate and Trust Law Committee, State Bar of Texas Supplement Co-Author 2005 to present, Kathryn J. Henkel, Estate Planning and Wealth Preservation – Strategies and Solutions, (Warren, Gorham & Lamont 2003) Adjunct Co-Instructor, Fall 2001 – Baylor University, School of Law Adjunct Instructor 1998-2001 – University of Texas at Arlington, Continuing Legal Education

Guest Lecturer and Author in Estate Planning: Panelist, Charitable Planning for Clients Who Aren’t Wealthy: Ideas and Forms You Can Take Back to Your Office and Use on Monday, Advanced Estate Planning and Probate Course (2007); Course Director, Advanced Drafting: Estate Planning and Probate Course (2006), Foundations – Do’s and Don’ts, Advanced Estate Planning, Center for American and International Law (2006); Charitable Planning, Texas Bankers Association, Trust and Wealth Management Seminar (2006); Moderator, Estate Tax Law Changes and Other Hot Topics That May Affect Estate Planners, State Bar of Texas, Advanced Drafting and Probate Course (2005); Private Foundations, Tarrant County Bar Association, Tax Section (2005); Panelist, A New Paradigm for Trusts: Rethinking Trust Structure in Light of Changing Purposes, a Changing Legislative Landscape and a Litigious Society, State Bar of Texas, Advanced Estate Planning Strategies (2005); Panelist, Top 10 Things to Take Away From This Course, State Bar of Texas - Advanced Drafting: Estate Planning and Probate Course (2004); Panelist, Drafting for the Twin UPIAs – A Practical Guide, State Bar of Texas, Advanced Drafting: Estate Planning and Probate Course (2004); Co-Director, Wills, Trusts and Estate Planning Institute, Center for American and International Law (2004); Creation of Family Foundations, Creation and Structure, Wills, Trusts and Estate Planning Institute, Center for American and International Law (2004); Panelist and Author, Working With and Giving Through Community Foundations, State Bar of Texas – Charitable Giving Course (2004); Exempt Organizations – Governance Issues, Tarrant County Bar Association, Tax and Estate Planning Section, (2004); Panelist, A Muggle’s Look at the Wizardry of Trusts: The UPIA Twins and Other Curses, State Bar of Texas – Advanced Estate Planning Strategies (2004); Public Charities and Private Foundations – Planning Options, Brazos Valley Estate and Financial Planning Council (2004); A Tale of Two Tools: Split Interest Trust Drafting in a Low Interest Environment (CLTS and GRTS) – Charitable Lead Annuity Trusts and Charitable Lead Unitrusts With Forms, State Bar of Texas – Advanced Drafting Course (2003); Uniform Principal and Income Act and Uniform Prudent Investor Act, Texas Bank Trust Officers (2003); Uniform Principal and Income Act and Uniform Prudent Investor Act, Texas Society of Certified Public Accountants, Fort Worth Chapter (2003); Charitable Update, State Bar of Texas – Advanced Estate Planning and Probate Course (2002); Creating Private Foundations, State Bar of Texas – 12th Annual Advanced Drafting: Estate Planning and Probate (2001); Private Foundations, Operating Foundations, Supporting Foundations and Community Foundations: Seeing Through the Mud, East Texas Estate Planning Council (2001); Charitable Lead Trust Drafting, State Bar of Texas, Advanced Drafting: Estate Planning & Probate (2000); and,

Foundations, To Be or Not to Be…Private, Operating, Community and Supporting Organizations: The Delicate Balance of Considerations of Benefits, Costs and Control, State Bar of Texas – Advanced Estate Planning and Probate Course (2000).

Charitable Giving Post PPA (Pension Protection Act) Chapter 16

TABLE OF CONTENTS

I. INTRODUCTION ...... 1

II. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR CHARITABLE PURPOSES...... 1

III. INFORMATION RETURNS FOR SPLIT INTEREST TRUSTS...... 1

IV. CONTRIBUTIONS OF FOOD INVENTORY...... 1

V. S-CORPORATION STOCK BASIS ADJUSTMENT ...... 1

VI. CONTRIBUTIONS OF BOOK INVENTORY...... 1

VII. UBIT TREATMENT OF PAYMENTS FROM SUBSIDIARIES...... 2

VIII. CONSERVATION REAL PROPERTY...... 2

IX. EXCISE TAX EXEMPTION FOR BLOOD COLLECTOR ORGANIZATIONS...... 2

X. INTERESTS IN LIFE INSURANCE...... 2

XI. PRIVATE FOUNDATION EXCISE TAXES...... 2 A. Self-Dealing ...... 2 B. Failure to Make Minimum Distributions ...... 2 C. Excess Business Holdings...... 3 D. Jeopardizing Investments...... 3 E. Taxable Expenditures...... 3

XII. EASEMENTS IN HISTORIC DISTRICTS...... 3

XIII. TAXIDERMY PROPERTY...... 3

XIV. RECAPTURE OF TAX BENEFIT FOR CHARITABLE CONTRIBUTIONS OF EXEMPT USE PROPERTY NOT USED FOR AN EXEMPT PURPOSE...... 3

XV. CLOTHING AND HOUSEHOLD ITEMS...... 4

XVI. RECORDKEEPING...... 4

XVII. FRACTIONAL INTERESTS IN TANGIBLE PERSONAL PROPERTY...... 4

XVIII. VALUATION MISSTATEMENTS ...... 4

XIX. TAX ON NET INVESTMENT INCOME...... 4

XX. REQUIREMENTS FOR ENTITIES NOT CURRENTLY REQUIRED TO FILE...... 4

XXI. DISCLOSURE TO STATE OFFICIALS...... 4

XXII. UBIT RETURNS...... 5

XXIII. TREASURY STUDY ON DONOR-ADVISED FUNDS AND SUPPORTING ORGANIZATIONS...... 5

i Charitable Giving Post PPA (Pension Protection Act) Chapter 16

XXIV. IMPROVED ACCOUNTABILITY OF DONOR ADVISED FUNDS...... 5 A. Definition of Donor Advised Fund...... 5 B. Exceptions...... 5 C. Taxes on Taxable Distributions...... 5 D. Taxes on Prohibited Benefits...... 5 E. Excess Business Holdings...... 6 F. Contributions to Donor Advised Funds...... 6 G. Reporting...... 6

XXV. IMPROVED ACCOUNTABILITY OF SUPPORTING ORGANIZATIONS...... 6 A. Prohibited Transactions...... 6 B. Excess Business Holdings...... 7 C. Grants From Private Foundations to Supporting Organizations...... 7 D. Reporting...... 7

ii Charitable Giving Post PPA (Pension Protection Act) Chapter 16

CHARITABLE GIVING POST PPA there is support in the charitable community to make (PENSION PROTECTION ACT) these provisions permanent.

III. INFORMATION RETURNS FOR SPLIT I. INTRODUCTION INTEREST TRUSTS. On August 17, 2006, President Bush signed the RC § 6034 is amended to provide that split Pension Protection Act of 2006 (P.L. 109-280) interest trusts are required to file certain returns, (hereinafter referred to as the “Act” or “PPA”) into including information returns, as prescribed by the law. Most of the provisions of the Act are pension Secretary, including trusts that distribute current related; however, a number of provisions were income to beneficiaries. Penalties for failure to file or included that affect charitable organizations and provide the information required are increased from donors. This paper is intended to highlight those $10 to $20 per day, up to a maximum of $10,000 per changes. return. For trusts with gross income in excess of $250,000, the penalty is $100 per day, with a II. TAX-FREE DISTRIBUTIONS FROM maximum of $50,000. IRC § 6652(c)(2)(C). Also, if INDIVIDUAL RETIREMENT PLANS the person required to file the return knowingly fails to FOR CHARITABLE PURPOSES. file, the penalties also may be applied to such One of the most publicized provisions in the individual. IRC § 6652(c). PPA is the provision addressing charitable Information regarding the non-charitable contributions from retirement plans. These are often beneficiaries of any such trust is no longer required to referred to as “charitable rollovers.” Prior to the PPA, be made available to the public. IRC § 6104. if a donor wanted to make a charitable contribution Changes are effective beginning January 1, from an IRA, such donor had to make a withdrawal 2007. IRC § 6034(c). from his or her IRA (resulting in taxable income to the donor) and turn around and make a donation to charity. IV. CONTRIBUTIONS OF FOOD The income tax charitable deduction available to the INVENTORY. donor was subject to being reduced by the overall The provisions of the Katrina Emergency Tax itemized deduction limitation, deduction limits and Relief Act that provided for a deduction for charitable other unfavorable tax deduction limitations. contributions of food inventory by any taxpayer were Under the PPA, amounts up to $100,000 per extended through December 31, 2007. Donors are year that are distributed to directly to a public charity entitled to a deduction equal to the lesser of either the from an individual retirement plan (“IRA”) (other than taxpayer’s basis plus ½ of the difference between the a SEP IRA or a SIMPLE IRA, but including an fair market value of such property and its basis or 2 inherited IRA, Notice 2007, A-37) on or after the date times the taxpayer’s basis in such property. IRC § the participant attains the age of 70½ are excluded 170(e)(3)(C)(iv). from the donor’s gross income. IRC § 408. For married individuals who file joint returns, each spouse V. S-CORPORATION STOCK BASIS making a $100,000 charitable contribution from his or ADJUSTMENT her IRA is entitled to receive a $100,000 exclusion. Beginning January 1, 2006, the basis of an Notice 2007-7, A-34. owner of stock in a S-Corporation that makes a The distribution qualifies for purposes of the charitable contribution is equal to the shareholder’s minimum distribution requirements. Treas. Regs. §§ prorata share of the adjusted basis of such contributed 1.401(a)(9)(5), 1.401A-9(a). The distribution is property. IRC § 1367(a). deemed to be made from first the owner’s pre-tax money in all aggregated IRAs, until fully used for basis VI. CONTRIBUTIONS OF BOOK purposes. IRC § 408(d)(8)(D). INVENTORY. The exclusion does not apply to distributions The provisions of the Katrina Emergency Tax made to Section 509(a)(3) supporting organizations Relief Act that provided for a deduction for charitable and donor advised funds. The main drawback to this contributions of qualified book inventory by C- provision is that it is only effective for the tax years Corporations were extended through December 31, 2006 and 2007. IRC § 408(d)(8)(B). Direct transfers 2007. Also, public schools were added to the list of made prior to August 17, 2006 to charity are qualified donees. Donors are entitled to a deduction equal to the charitable distributions providing that other lesser of either the taxpayer’s basis plus ½ of the requirements of the Act are met. appreciation of such item or 2 times the taxpayer’s It is yet to be seen as to whether or not the IRA inventory basis in such property. IRC § 170(e)(3)(D). charitable distribution deduction will be extended, but,

1 Charitable Giving Post PPA (Pension Protection Act) Chapter 16

VII. UBIT TREATMENT OF PAYMENTS than an applicable exempt organization is as a named FROM SUBSIDIARIES. beneficiary, or (iii) the sole interest in the contract of For tax years 2006 and 2007, a charity that each person other than an applicable tax exempt controls a subsidiary is not required to pay unrelated organization is (a) as a beneficiary of a trust holding an business income tax on its “qualifying specified interest in the contract, but only if the person’s payments” that it receives from the subsidiary. A designation as such beneficiary was made without “qualifying specified payment” is a specified payment consideration and solely on a purely gratuitous basis, made under a contract that is in effect on the date of or (b) as a trustee holding an interest in the contract in enactment (August 17, 2006) or a contract that is a a fiduciary capacity solely for the benefit of applicable renewal, under substantially similar terms. IRC § tax exempt organizations or persons otherwise 512(b)(13). described in (a) or (i) or (ii) above. The organization must still report “qualified The provision does not apply to transactions specified payments” and any loans or transfers from a occurring after August 17, 2008. IRC § 6050V(e). controlled subsidiary on its Form 990 due after August Failure to file may result in a penalty of $50 17, 2006. IRC § 6033(h). per return. If there is an intentional disregard of the requirement to file, a penalty of 10% of the value of VIII. CONSERVATION REAL PROPERTY. any contract with respect to which information is For tax years 2006 and 2007, the charitable required to be reported may be assessed. IRC § deduction limitation for a contribution of qualified 6050V(b). conservation real property is increased from 30% of The Secretary is directed to undertake a study AGI to 50% of AGI for taxpayers who are not farmers within 30 months from August 17, 2006, on whether and ranchers. For contributions made after August 17, such life insurance transactions are consistent with the 2006, the charitable deduction limitation is increased tax exempt purposes of such tax exempt organizations. from 50% of AGI to 100% of AGI for qualified IRC § 6050V(d). farmers and ranchers as long as the contribution does not prevent the land from being used for farming or XI. PRIVATE FOUNDATION EXCISE ranching. IRC §§ 170(b)(1)(E)(i), 170(b)(1)(E)(iv)(I). TAXES. A qualified farmer or rancher is one whose gross A. Self-Dealing income from farming or ranching is more than 50% of Section 4941 of the Code is revised to increase the taxpayer’s gross income. The excess may be the excise tax imposed on disqualified persons who carried over for up to 15 years. participate in acts of self-dealing with a private foundation from 5% to 10%. Excise taxes on IX. EXCISE TAX EXEMPTION FOR BLOOD foundation managers who knowingly participate in an COLLECTOR ORGANIZATIONS. act of self-dealing between a disqualified person and a Qualified blood collector organizations defined private foundation are now increased from 2.5% of the in IRC § 7701(a)(49) are exempt from certain taxes, amount involved (not to exceed $10,000) to 5% (not to such as special fuel taxes, manufacturers excise taxes, exceed $20,000). If the transaction is not corrected by communications excise taxes, and taxes on heavy the Correction Date, (1) the disqualified person must vehicles. See IRC §§ 4041(g), 4221(a), 4253, 4251, pay a tax of 200 percent of the amount involved, and 4253, and 4483. (2) a foundation manager who does not correct the transaction may have to pay a tax of 50 percent of the X. INTERESTS IN LIFE INSURANCE. amount involved (up to a limit of $20,000 for any one IRC § 501(c) tax exempt organizations must act of self dealing). report acquisitions of a direct or indirect interest in The Correction Date is the earlier of the time applicable life insurance contracts. An applicable an IRS deficiency notice for the initial tax is mailed, or insurance contract is any life insurance, annuity or the time the tax is assessed. endowment contract in which both a tax exempt organization and anyone who is not a tax exempt B. Failure to Make Minimum Distributions organization, directly or indirectly, hold interests. IRC Section 4942 of the Code is revised to increase § 6050V. the excise tax imposed on a private foundation for It does not apply if (i) all persons directly or failing to make minimum distributions each year from indirectly holding interests in the contract (other than 15% to 30% on the difference between the amount that applicable tax exempt organizations) have an insurable should have been distributed and the amount that was interest in the insured under the contract independent actually distributed. If the amount on which that tax is of any interest of a tax exempt organization in the assessed is not distributed by the Correction Date, an contract; (ii) the sole interest in the contract of an additional tax of 100 percent of the undistributed applicable exempt organization or each person other amount is imposed on the Foundation. 2 Charitable Giving Post PPA (Pension Protection Act) Chapter 16

C. Excess Business Holdings The charity and the taxpayer must have a Section 4943 of the Code is revised to increase written agreement reflecting that the charity is a the excise tax imposed on a private foundation’s excess qualified public charity whose purposes is business holdings from 5% to 10%. If the Foundation environmental or historic preservation or protection, does not divest itself of the excess holdings by the and that the charity has the resources for manage and Correction Date, an additional tax of 200 percent of the enforce the easement restrictions and is committed to value of the excess holdings may be imposed. doing so. Id. The taxpayer must submit a qualified appraisal D. Jeopardizing Investments of the donation, photographs of the exterior of the Section 4944 of the Code is revised to increase building and descriptions of restrictions on the the excise tax imposed on a private foundation for building’s development. having investments that jeopardize the foundation’s For Buildings located in Registered Historic charitable purpose from 5% to 10%. Additionally, the Districts, the provisions apply to donations made after excise tax imposed on a foundation manager who July 25, 2006. As of February 13, 2007, donors have knowingly participates in an organization having to pay a filing fee of $500 when claiming a deduction jeopardizing investments is increased from 5% of the in excess of $10,000. Id. amount involved (not to exceed $5,000) to 10% of the amount involved (not to exceed $10,000). If the XIII. TAXIDERMY PROPERTY. jeopardy investment is not disposed of by the For contributions after July 25, 2006, IRC Correction Date, the Foundation must pay an § 170(e)(1) is revised to limit the basis for donated additional tax of 25 percent of the amount of the taxidermy property to the direct cost of preparing, investment. If this additional tax is imposed and the stuffing and mounting the taxidermy property. IRC § Foundation managers refuse to agree to the removal of 170(f)(15)(A). The amount that may be allowed as a the jeopardy investment, such Foundation managers charitable deduction is the lesser of the donor’s basis or may be required to pay an additional 5 percent of the the fair market value of the property. IRC § amount of the investment (up to a limit of $20,000). 170(e)(1)(B)(iv).

E. Taxable Expenditures XIV. RECAPTURE OF TAX BENEFIT FOR Section 4945 of the Code is revised to increase CHARITABLE CONTRIBUTIONS OF the excise tax imposed on a private foundation’s EXEMPT USE PROPERTY NOT USED expenses that constitute taxable expenditures from FOR AN EXEMPT PURPOSE. 10% to 20%. Additionally, the excise tax imposed on Beginning September 2, 2006, a charitable foundation managers who knowingly participate in or deduction for contribution of exempt use property approve the foundation’s taxable expenditure are now valued in excess of $5,000 that is disposed of by the increased from 2.5% of the amount involved (not to recipient organization before the close of the taxable exceed $5,000) to 5% (not to exceed $10,000). If the year in which the contribution is made is limited to the taxable expenditure is not corrected by the Correction donor’s basis (instead of its fair market value), unless Date, the Foundation must pay an additional tax of 100 the donor obtains a certification from the recipient percent of the amount of the expenditure. If this organization stating either (i) that the property was additional tax is imposed and the Foundation managers related to the recipient’s exempt purposes, describes refuse to agree to the correction of the taxable how the property was used and how such use furthers expenditure, such Foundation managers may be the organization’s exempt purposes, or (ii) the intended required to pay an additional 50 percent of the amount use of the property by the recipient and that the of the taxable expenditure (up to a limit of $20,000). intended use has become impossible or infeasible to implement. IRC § 170(e)(1)(B). Additionally, if such XII. EASEMENTS IN HISTORIC DISTRICTS. exempt use property is disposed of by the recipient IRC § 170(h) is revised to increase the organization within 3 years of the date of the requirements for taking charitable deductions for the contribution and after the close of the taxable year in contribution of exterior easements for buildings in which the contribution is made, the donor is required to registered historic districts. Deductions will be include in income in the year of disposition the amount allowed only for donations that preserve the entire by which the charitable contribution deduction allowed exterior of the building and that ensure that no portion exceeds the donor’s basis in the property. Id. A new of the exterior may be changed or altered in a manner section is added, effective August 17, 2006, to impose inconsistent with the historical character of the a penalty of $10,000 to any person who knowingly building. Additionally, no deductions for personal misrepresents that the contributed property was exempt residences are allowed, unless the residence is listed in use property. IRC § 6720B. the National Register of Historic Places. 3 Charitable Giving Post PPA (Pension Protection Act) Chapter 16

XV. CLOTHING AND HOUSEHOLD ITEMS. less of the amount determined to be correct to 65% or Beginning August 18, 2006, IRC § 170(f) less of the amount determined to be correct. requires that donations of clothing and household items Additionally, appraisers whose appraisals be in “good used condition or better” in order to claim result in substantial or gross valuation misstatements a charitable deduction for such property. The are subject to penalties equal to the lesser of (i) the restriction does not apply if the deduction claimed is greater of $1,000 or 10% of the understatement of tax, more than $500, the donor obtains a qualified appraisal or (ii) 125% of the gross income derived by the and includes it with the tax return. appraisal. IRC § 6695A. Such penalties may be Household items includes furniture, imposed if (i) the appraiser knows or reasonably furnishings, electronics, appliances, linens and other should have known, that the appraisal would be used in similar items. IRC § 170(f)(16)(D) It excludes food, connection with a return or a claim for refund, and (ii) paintings, antiques and other objects of art, jewelry and such claimed value results in a substantial valuation gems and collections. Id. misstatement or a gross valuation misstatement. A “qualified appraiser” is now defined as someone who XVI. RECORDKEEPING. has met certain educational or certification Beginning January 1, 2007, in order to claim a requirements and regularly performs appraisals for deduction for a contribution of cash, check or other which he or she receives compensation. IRC § monetary gift, donors must maintain a bank record or a 170(f)(11). written communication from the donee showing the name of the donee organization, the date of the XIX. TAX ON NET INVESTMENT INCOME. contribution and the amount of the contribution. IRC § Section 4940 of the Code pertaining to the 170(f)(17). excise tax on the net investment income of a private foundation revises the definition of “gross investment XVII. FRACTIONAL INTERESTS IN income” to include income from sources similar to TANGIBLE PERSONAL PROPERTY. interest, dividends, rents, payments with respect to A charitable deduction for a contribution of an securities loans, and royalties. The definition of capital additional undivided interest in property to a donee gain net income is amended to include capital from the organization is limited to the lesser of (i) the fair sale of property used for the production of gross market value of such interest at the time of the initial investment income. Additionally, a new Section fractional interest contribution and (ii) the fair market 4940(c)(4) is added that provides that except as value of the interest at the time of the additional provided by regulation, under rules similar to Section contribution. IRC § 170(o). The deduction is not 1031, no gain or loss is taken into account for any allowed unless all the interests in the property are held property used for a period of less than one year for an immediately before the contribution by either the exempt purpose if the property is exchanged taxpayer or the taxpayer and the donee organization. immediately following such period solely for property Id. Recapture is applied in the amount of the deduction of like kind that is to be used primarily for an exempt plus interest unless: (i) the donor contributes all of the function. These changes are applicable to tax years remaining interest in the property to the donee beginning after August 17, 2006. organization before the earlier of 10 years from the initial contribution or the donor’s death, and (ii) during XX. REQUIREMENTS FOR ENTITIES NOT that time period the donee organization has had CURRENTLY REQUIRED TO FILE. substantial physical possession of the property and the For annual periods beginning after 2006, use of the property is related to the donee exempt organizations that do not have annual receipts organization’s exempt purpose. IRC § 170(o)(3). exceeding $25,000 are required to electronically file an annual notice that includes the legal name of the XVIII. VALUATION MISSTATEMENTS organization, any name under which it does business, Valuation misstatements are generally subject its mailing address, website address, taxpayer to penalties under the Code. Substantial valuation identification number, name and address of the understatements are subject to a 20% penalty. Gross principal officer and the evidence of the continuing valuation misstatements are subject to a 40% penalty. basis to not file Form 990. IRC § 6033(i). Failing to For returns filed after August 17, 2006, Section 6662 file the notice for 3 consecutive years will result in of the Code is revised to lower the substantial valuation revocation of exempt status. IRC § 6033(j). misstatement percentage for income tax purposes from 200% to 150%. For estate and gift tax valuations, XXI. DISCLOSURE TO STATE OFFICIALS. Section 6662 of the Code is revised to increase the Effective August 17, 2006, IRC § 6104(c)(2) undervaluation misstatement percentage from 50% or gives the IRS authority to disclose to State officials charged with overseeing tax exempt organizations, 4 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 information concerning investigations related to refusal B. Exceptions. to recognize an organization as tax exempt, as to A Donor Advised Fund does not include a revocation of tax exempt status, as to deficiencies, and fund or account: names addresses and taxpayer identification numbers (1) that makes distributions only to a single of organizations which have applied for tax exempt identified organization or governmental entity, status. The information provided may be used in civil or administrative and civil judicial proceedings related to (2) with respect to which a donor or designee the enforcement of state laws. advises as to which individuals receive grants for travel, study or other similar purposes if: XXII. UBIT RETURNS. (a) the donor’s advisory privileges are Beginning with returns filed after August 17, performed exclusively by such donor 2006, organizations that must file UBIT returns must in his capacity as a member of a make those available on the same basis as Form 990 is committee appointed by the available. IRC § 6104(d)(1)(A). sponsoring organization, (b) no combination of a donor and persons XXIII. TREASURY STUDY ON DONOR- related to or appointed by such donor ADVISED FUNDS AND SUPPORTING control such committee, and ORGANIZATIONS. (c) all grants from such fund or account The Secretary of the Treasury is directed to are awarded on an objective and undertake a study on the organization and operation of nondiscriminatory basis pursuant to a donor advised funds and of supporting organizations. procedure approved in advanced by The study must consider whether the income, gift, and the board of directors of the estate tax deductions for charitable contributions to sponsoring organization and such donor advised funds or to supporting organizations are procedure is designed to satisfy the appropriate, considering the use of contributed assets requirements applicable to private (including the type of assets, extent, and timing of such foundations under Section 4945(g) use) and uses benefiting donors (or persons related to with respect to grants made for travel, donors). Additionally, the study must also consider (i) study or similar purposes. Id. whether donor advised funds should be required to distribute a specified amount (whether based on the C. Taxes on Taxable Distributions. income or assets of the fund), (ii) whether retention of A new Section 4966 is added that imposes rights by donors over assets transferred to donor excise taxes on certain “taxable distributions” from advised funds or to supporting organizations (including donor advised funds. IRC § 4966(c). A tax of 20% on advisory rights or privileges with respect to making the sponsoring organization and 5% (not to exceed grants or investment of assets) are consistent with the $10,000) on fund managers agreeing to the distribution treatment of such transfers as completed gifts, and (iii) are imposed on distributions to any natural person or whether any of these issues are also issues with respect any other person if (i) not for charitable purposes to other forms of charities or charitable donations. described in Section 170(c)(2)(B) of the Code, or (ii) the sponsoring organization does not exercise XXIV. IMPROVED ACCOUNTABILITY OF expenditure responsibility with respect to the DONOR ADVISED FUNDS. distribution in accordance with Section 4945(h). The A. Definition of Donor Advised Fund. term “taxable distribution” does not include A Donor Advised Fund is now defined as a distributions (i) to public charities described in Section fund or account that is: 170(b)(1)(A) (other than a disqualified supporting organization), (ii) to the sponsoring organization of the (1) separately identified by reference to donor advised fund, or (iii) to any other donor advised contributions of a donor or donors; fund. Id. (2) owned and controlled by a sponsoring charity; and D. Taxes on Prohibited Benefits. (3) with respect to which a donor, or the donor’s Charitable contribution deductions for designee has, or reasonably expects to have, contributions to a donor advised fund maintained by a advisory privileges regarding the distribution veteran’s organization, a lodge, a cemetery corporation or investment of any amounts held in the fund. or a Type III supporting organization (other than a IRC § 4966(d)(2). “functionally integrated” Type III supporting organization) are disallowed. A charitable deduction for a contribution to a donor advised fund is allowed only if the donor has a written acknowledgement from 5 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 the sponsoring charity confirming that the sponsoring such funds. These provisions apply to returns filed for charity has exclusive legal control over the fund. IRC the tax year after the enactment of the Act. IRC § § 4967. 6033(k). New organizations seeking tax exempt status Section 4967 is added to impose an excise tax after August 17, 2006 are required to disclose whether on a donor, donor advisor, or related person where or not they will have donor advised funds and how such person receives, directly or indirectly, any benefit they will be operated. that is more than incidental as a result of a distribution from a donor advised fund. Additionally, a fund XXV. IMPROVED ACCOUNTABILITY OF manager agreeing to any such distributed is subject to SUPPORTING ORGANIZATIONS. an excise tax of 10% (not to exceed $10,000) of the IRC § 509(a)(3)(B) is amended to define three benefit. types of supporting organization defined in the Section 4958 of the Code is amended to treat Regulations, Type I (operated, supervised or controlled donors, persons with advisory rights, their family by the supported organization), Type II (supervised or members, and 35% controlled entities as disqualified controlled in connection with the supported persons of a donor advised fund for purposes of the organization, and Type III (operated in connection with excess benefit transaction rules. Any grant, loan, the supported organization. Type III organizations compensation or other similar payment from a donor must provide annual information to the supported advised fund to such persons is automatically treated as organization(s), cannot support foreign charities and an excess benefit transaction. must maintain a close and continuous working These provisions are effective for tax years relationship with the officers of the supported beginning after August 17, 2006. organization(s). A “functionally integrated” Type III E. Excess Business Holdings. supporting organization is defined to mean one that is Donor advised funds are now treated as private not required to make payments to supported foundations for purposes of Section 4943 of the Code organization(s) due to the activities of the organization pertaining to excess business holdings. For this related to performing the functions of, or carrying out purpose, a disqualified person is (i) a donor, or any the purposes of, such supported organization(s). IRC § person appointed or designated by the donor, who has 4943(f)(5)(B). advisory privileges with respect to distribution or The Secretary is mandated to promulgate new investment amounts held in a fund by reason of the regulations requiring Type III supported organizations donor’s status as a donor; (ii) a member of the family that are not functionally integrated to make of the individual described above or (iii) a 35 percent distributions of either a percentage of income or assets controlled entity. Transition rules apply to present to supported organizations in order to assure that a holdings. IRC § 4966(e)(3). Donor advised funds will significant amount is paid to the supported now be required to dispose of excess business holdings organizations. in order to avoid penalties. Furthermore, if a Type I or Type III organization supports an organization controlled by a F. Contributions to Donor Advised Funds. donor, then the supporting organization is treated as a Effective after February 13, 2007, private foundation for purposes of the relationship test. contributions to Donor Advised Funds are deductible A trust will not be a Type III supporting organization for income, gift and estate tax purposes unless the solely based on the facts that it is a charitable trust sponsoring organization is a 2555(a)(3)-(5) under state law, the supported organization is a organization (i.e., war veterans organization, lodge or beneficiary of the trust and the supported organization cemetery corporation), or a Type III supporting has the power to enforce the trust and compel an organization that is not functionally integrated. IRC § accounting. IRC § 509(f)(2)(A). 170(f), 2522(c)(5) and 2055(e)(5). The Donor must These provisions are effective generally obtain a contemporaneous written acknowledgement August 17, 2006. The effective date for charitable from the sponsoring organization that the sponsoring trusts that are Type III organizations is August 17, organization has exclusive legal control over the assets 2007. contributed. Id. A. Prohibited Transactions. G. Reporting. Excess benefit transaction rules are applied to Sponsoring organizations must provide a supporting organization making any grant, loan, information as to the number of its donor advised funds compensation or similar payment to a substantial it owns at the end of the tax year, indicate the contributor, a family member of a substantial aggregate value of assets held in those funds and show contributor or a 35% controlled entity. A substantial the aggregate contributions to and grants made from contributor is any person contributing an aggregate of 6 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 more than $5,000 if such amount is more than 2% of effective for distributions and expenditures occurring the total contributions before the close of the tax year after August 17, 2006. in which the contribution is received. It also includes the creator of a trust. The term does not apply to IRC § D. Reporting. 509(a)(1), (2) or (4) organizations. Additionally, all Supporting organizations are now required to loans to disqualified persons (except for certain public report on annual returns (i) a list of its supported charities) of the supporting organization are prohibited. organizations, (ii) its type, and (iii) certify that it is not Disqualified persons are defined to include any person controlled directly or indirectly by disqualified persons who was in a position to exercise substantial influence (other than organization managers and public over the affairs of the organization at any time during charities). IRC § 6033(l). the 5 year period preceding the transaction in question, who was family member of such person or that was a 35% controlled entity. IRC § 4958(f)(1)(D).

B. Excess Business Holdings. Section 4943 of the Code pertaining to excess business holdings is revised to apply to Type III supporting organizations (other than functionally integrated Type III organizations) and to other supporting organizations which accept gifts or contributions from a person (other than a non- supporting organization public charity) who controls the governing body of the supporting organization or related persons. For purposes of this section, a disqualified person includes any person who was in a position to exercise substantial influence over the affairs of the organization at any time during the 5 year period preceding the transaction in question, was family member of such person, was a 35% controlled entity, any person described in IRC § 4958(c)(3)(B), and any organization controlled by the same person or persons who control the organization in question or substantially all of the contributions of the organization were made (directly or indirectly) by the same person or persons described in subparagraph (B) or a family member of such person. For purposes of subparagraph (B), a person described is a substantial contributor, an officer, director or trustee of the organization or persons with similar powers, or an owner of more than 20% combined voting power, profits interest of the partnership or beneficial interest of a trust, which is a substantial contributor.

C. Grants From Private Foundations to Supporting Organizations. Section 4942 of the Code is revised to provide that a non-operating private foundation may not treat a distribution to (i) a Type III supporting organization that is not a functionally integrated Type III, or (ii) a Type I, Type II, or functionally integrated Type III supporting organization, (if a disqualified person of the private foundation directly or indirectly controls the supporting organization or one of its supported organizations) as a qualifying distribution and thus any such distributed will be treated as a taxable expenditure under Section 4945 of the Code. These provisions are 7

CHARITABLE GIVING POST PPA (PENSION PROTECTION ACT)

Presented by:

Written by and reprinted with permission of:

HARRY W. WOLFF, JR. Cox Smith Matthews Incorporated 112 East Pecan Street, Suite 1800 San Antonio, Texas 78205-1521 (210) 554-5500

State Bar of Texas 25TH ANNUAL ADVANCED TAX LAW COURSE August 30 - 31, 2007 Houston

CHAPTER 16

CHARITABLE PROVISIONS OF THE PENSION PROTECTION ACT OF 2006

HARRY W. WOLFF, JR. Cox Smith Matthews Incorporated 112 East Pecan Street, Suite 1800 San Antonio, Texas 78205-1521 (210) 554-5500

State Bar of Texas 31ST ANNUAL ADVANCED ESTATE PLANNING AND PROBATE COURSE June 6 - 8, 2007 San Antonio

CHAPTER 16

HARRY W. WOLFF, JR. Cox Smith Matthews Incorporated San Antonio, Texas

EDUCATION • St. Mary’s University, J.D., 1980 • The University of Texas, B.B.A., 1976

ADMISSIONS / CERTIFICATION • Licensed to practice before all Texas state courts; the United States District Court, Western District of Texas; the United States Supreme Court; the United States Court of Appeals for the Fifth Circuit; and the United States Tax Court • Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization

PROFESSIONAL ACTIVITIES • American Bar Association • State Bar of Texas (Council Member, Real Estate Probate and Trust Law Section 1999-2003 and 2004- 2005) (Chairperson, Probate Law Committee 2000-2005) (Sub-Committee Chairperson, Texas Uniform Trust Code Committee 2000-2003) • Fellow, The American College of Trust and Estate Counsel • San Antonio Estate Planners Council • San Antonio Bar Association

SPEAKING ENGAGEMENTS / PUBLICATIONS • San Antonio Young Lawyer's Association, Docket Call in Probate Court, "Distribution of Estates," 1990, 1994, 1996 • National Business Institute, "Key Issues in Estate Planning and Probate in Texas," 1994 • Houston Bar Association Wills and Probate Institute, "Special Use Valuation I.R.C. 2032A- Problems with Securing the Election," 1994 • Texas Bankers Association Texas Trust and Probate Codes Refresher Workshop, "Texas Trust Code," 1995 • University of Houston Law Foundation Wills and Probate Institute, "The Decision to Die," 1992-1995 • Texas Society of Certified Public Accountants, "Life Insurance in Estate Planning," 1996 • University of Houston Law Foundation, Wills and Probate Institute, "Marital Property Agreements," 1996, 1999 • Law Education Institute, Inc., and BNA Books, 2000 National CLE Conference ®, "Life Insurance in Estate Planning" • Law Education Institute, Inc., and BNA Books, 2001 National CLE Conference ®, "Life Insurance Trusts" • Law Education Institute, Inc., and BNA Books, 2003 National CLE Conference ®, "Recent Developments Regarding Family Owned Business Entities And Valuation" • State Bar of Texas, 2003 Advanced Estate Planning Strategies Course, "Adapting to Change – How do you maintain flexibility ‘after’ the plan" • State Bar of Texas, 2003 Legislative Update - "Estate Planning, Probate & Guardianship Update" • Law Education Institute, Inc., and BNA Books, 2004 National CLE Conference ®, "Recent Developments In Wealth Transfer Planning" • American Bar Association Section of Family Law, 2005 Spring Committee Meeting & CLE Conference, “Estate Planning Basics For The Family Lawyer”

SELECTED AWARDS / ACHIEVEMENTS • Woodward/White, "The Best Lawyers In America," 2001 - Present • Texas Monthly, "Texas Lawyer Super Lawyer," 2003 - Present • Scene In SA, "San Antonio’s Best Attorneys," 2004 - Present

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16

TABLE OF CONTENTS

I. Introduction...... 1 II. Qualified Charitable Distributions...... 1 A. Duration and Amount ...... 1 B. Only From IRAs ...... 1 C. Directly to a Public Charity ...... 1 D. IRA Participant Must Be 70 ½...... 1 E. Income Tax Treatment...... 2 F. Likelihood of Extending ...... 2 III. Split Interest Trust Reporting...... 2 IV. Contributions of Food Inventory...... 2 V. Adjusted Basis of S-corporation Stock ...... 2 VI. Contributions of Book Inventory ...... 2 VII. UBIT Rules for Payments from Subsidiaries...... 2 VIII. Qualified Conservation Real Property ...... 3 IX. Charity Owned Life Insurance...... 3 X. Increased Penalty Excise Taxes ...... 3 XI. Façade Easements ...... 3 XII. Contributions of Taxidermy Property ...... 4 XIII. Recapture for Non-Exempt Use...... 4 XIV. Clothing and Household Items...... 4 XV. Record Keeping Requirements ...... 4 XVI. Charitable Gifts of Fractional Interests...... 4 A. Initial Fractional Gift “Caps” Value ...... 4 B. Recapture ...... 5 XVII. Valuation Misstatements...... 5 XVIII. Private Foundation Investment Income ...... 5 XIX. Expanded Filing Requirements...... 5 XX. Disclosure to State Officials ...... 5 XXI. Public Disclosure of UBIT Returns ...... 6 XXII. Study by Treasury Secretary ...... 6 XXIII. Donor Advised Funds ...... 6 A. Statutory Definition ...... 6 B. Taxes on Taxable Distributions ...... 6 C. Taxes on Prohibited Benefits ...... 6 D. Prohibited Transactions ...... 7 E. Excess Business Holding ...... 7 F. Contributions to Donor Advised Funds ...... 7 G. Reporting Requirements ...... 7 XXIV. Supporting Organizations ...... 8 A. New Requirements...... 8 B. Excess Benefit Transactions ...... 8 C. Excess Business Holdings...... 8 D. Payments from Private Foundations ...... 9

i Charitable Provisions of the Pension Protection Act of 2006 Chapter 16

XXV. Returns ...... 9 XXVI. IRS Interim Guidance ...... 9 XXVII. Conclusion ...... 9

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16

CHARITABLE PROVISIONS OF THE that it meets the other requirements (discussed below). PENSION PROTECTION ACT OF Notice 2007-7, A-38. The income exclusion for a qualified charitable distribution is limited to $100,000 2006 per year. Sec. 408(d)(8)(F). For married individuals filing a joint return, if each spouse makes a $100,000 By: Harry W. Wolff, Jr. qualified charitable distribution from his or her IRA, Cox Smith Matthews Incorporated they are each entitled to receive a $100,000 exclusion. San Antonio, Texas Notice 2007-7, A-34.

B. Only From IRAs I. Introduction A qualified charitable distribution can only be On August 17, 2006, in the wake of numerous made from an individual retirement plan other than a well publicized corporate accounting scandals, Simplified Employee Pension Plan or a Simple President Bush signed the Pension Protection Act of Retirement Plan. IRC Sec. 408(d)(8)(A). The 2006 (P.L. 109-280 8/17/2006) (“PPA”). Although the prohibition against a qualified charitable distribution underlying purpose of the PPA was to strengthen the from a Simplified Employee Pension Plan or a Simple pension system, the more than 900 page law contains Retirement Plan only applies to a plan to which an numerous provisions impacting charities and charitable employer contribution is made for the plan year ending donations. These provisions include some of the in the same taxable year as the year of the tax incentives in the Charitable Giving Act of 2003 and the charitable contribution. Notice 2007-7, A-36. Though CARE Act, which were passed in both the House and the PPA seems to permit a qualified charitable Senate but were never taken to conference. This article distribution from a Roth IRA, a distribution is treated will address the changes impacting charities and as a qualified charitable distribution only to the extent charitable donations most important to estate planning the IRA distribution would otherwise be include in attorneys. gross income. IRC Sec. 408(d)(8)(B).

II. Qualified Charitable Distributions C. Directly to a Public Charity Perhaps the most publicized provision in the The qualified charitable distribution must be PPA is Section 1201 which allows “Charitable IRA made directly from the IRA to a “50% organization” Rollovers.” Though this section does make it easier described in IRC Section 170(b)(1)(A). Accordingly, a for individuals over the age of 70 ½ to donate IRA qualified charitable distribution cannot be made to a funds to charities, the watered down version of the donor advised fund, a supporting organization or long awaited charitable IRA provision will only be in certain types of family foundations. In addition, to effect for two years. The new provision allows an IRA qualify as a qualified charitable distribution, the direct owner to make a “qualified charitable distribution” distribution must be 100% deductible if paid from the directly from the IRA to a charity. The qualified taxpayers non-IRA assets, thereby prohibiting a charitable distribution is excluded from the IRA qualified charitable distribution to a charitable owner’s gross income, thereby avoiding the remainder trust, charitable gift annuity, pooled income unfavorable income tax consequences encountered fund or other type of spilt interest gift. A check from under pre-PPA law, which required the IRS owner to an IRA made payable to a charitable organization and first make a withdrawal from the IRA (included in the delivered by the IRA owner to the charitable recipient’s gross income) and then in turn donate the organization will be considered a direct payment by the withdrawn asset to a charity (taking a charitable IRA trustee to the charitable organization. Notice deduction which was subject to itemized deduction 2007-7, A-41. phase-out limits, deduction limits, AMT consequences, no decrease in AGI, potential taxation of Social D. IRA Participant Must Be 70 ½ Security taxes and potential state income taxes). The IRA owner must be 70 ½ or older. IRC Sec. 408(d)(8)(B)(ii). Unlike the minimum required A. Duration and Amount distribution rules which are based on the year an IRA As set forth above, this provision of the PPA participant reaches age 70 ½, eligibility to make a only applies to a qualified charitable distribution made qualified charitable distribution is based on the day the in tax years beginning after December 31, 2005, and IRA participant reaches age 70 ½. The qualified sunsets for distributions made in tax years beginning charitable distribution will count as a distribution for after December 31, 2007 (IRC Sec. 408(d)(8)(B). A purposes of the minimum distribution requirements. pre-August 17, 2006 direct transfer from an IRA to a See Treas. Regs. Sec. 1.401(a)(9)-5, 1.401A-9(a). charity is a qualified charitable distribution, provided 1

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16

Though the PPA was not clear on the point, an IRA split-interest trusts that distribute all current income to beneficiary who has attained the age of 70 ½ can make the beneficiaries was repealed. IRC Sec. 6104(b) and a qualified charitable distribution from his or her 6034. The provisions apply to returns filed for tax inherited IRA. Notice 2007, A-37. years beginning after December 31, 2006.

E. Income Tax Treatment IV. Contributions of Food Inventory The qualified charitable distribution is PPA Section 1202 extends for two years the excluded from the IRA owner’s gross income for all provisions of the Katrina Emergency Tax Relief Act purposes and thus is not counted as part of gross (Pub. Law 109-73), which provide an enhanced income for application of the percentage-of-income deduction for charitable donations of food inventory by limitations under IRC Sec. 170(b). For basis purposes, any taxpayer whether or not a C-corporation engaged a qualified charitable distribution is deemed to come in a trade or business. Accordingly, donations of food first from the IRA owner’s pre-tax money in all inventory made on or after August 28, 2005, and aggregated IRAs, until fully used. IRC Sec. before December 31, 2007, are entitled to a deduction 408(d)(8)(D). equal to the lesser of (i) the taxpayer’s basis plus one- half of the difference between fair market value and F. Likelihood of Extending basis; and (ii) twice the taxpayer’s basis in the As of March 5, 2007, a survey conducted by contributed inventory. IRC Sec. 170(e)(3)(C)(iv). the National Committee on Planned Giving, reported 2,921 qualified charitable distributions, with a total V. Adjusted Basis of S-corporation Stock value of more than $56,000,000, and the Fiscal Year PPA Section 1203 provides that the amount of 2008 budget proposed by the Bush administration a shareholder’s basis reduction in the stock of an S- proposes to permanently extend “tax-free withdrawals corporation as a result of a charitable contribution from IRAs for charitable distributions.” The General made by the corporation will be equal to the Explanation issued by the Department of the Treasury shareholder’s pro rata share of the adjusted basis of the estimates the cost of making qualified charitable contributed property. This provision achieves the same distributions permanent to be $120,000,000 in 2008, result for S-corporations as afforded a partnership $255,000,000 in 2009, and a total cost of under Rev. Rul. 96-11, 1996-1 C.B. 140. $1,867,000,000 for the period 2008 – 2017. Charitable groups are also banding together to VI. Contributions of Book Inventory support making qualified charitable distributions PPA Section 1204 extends for two years the permanent. See, Charities Love IRA Rollovers, The provisions of the Katrina Emergency Tax Relief Act Wall Street Journal Online, January 27, 2007. On (Pub. Law 109-73), which provide an enhanced March 8, 2007, Senators Byron Dorgan (D-NY) and deduction for donations of qualified book inventory by Olympia Snow (R-ME) introduced SB-819, the Public C-corporations and add public schools to the list of Good IRA Rollover Act of 2007. A House companion eligible donees. Accordingly, donations of qualified bill, H.R. 1419, was also introduced by Rep. Earl book inventory made by a C-corporation on or after Pomeroy (D-NY). SB-819 would remove the August 28, 2005, and before December 31, 2007, are $100,000 annual limit on donations, would allow entitled to a deduction equal to the lesser of (i) the donations beginning at age 59½ and would be donated inventory item’s basis plus one-half of the permanent. item’s appreciation, or (ii) twice the donated items inventory basis. IRC Sec. 170(e)(3)(D). III. Split Interest Trust Reporting Section 1201 of the PPA also changes the VII. UBIT Rules for Payments from Subsidiaries reporting requirements for split-interest trusts Under PPA Section 1205, a charitable (charitable remainder trusts, charitable lead trusts, organization that controls a subsidiary organization pooled income funds and private annuities). The will no longer be required to pay unrelated business penalties for failure to file or failure to provide income tax (UBIT) on “qualifying specified payments” information required on Form 1040A are increased received from the subsidiary. A “qualifying specified from $10 to $20 per day, up to $10,000 per return; and payment” is a specified payment made under a binding for trusts with gross income in excess of $250,000, the written contract in effect on August 17, 2006, or a penalty is $100 per day, up to a maximum of $50,000. substantially similar renewal of such a contract. The IRC Sec. 6652(c)(2)(C). Information regarding non charity must still report qualified specified payments as charitable beneficiaries no longer must be made well as any loans or transfers from a controlled available to the public, and the filing exception for subsidiary on their annual Form 990. The new

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 provision applies to payments received or accrued in basis, or (b) as a trustee who holds an interest in the 2006 and 2007, and all information returns due after contract in a fiduciary capacity solely for the benefit of August 17, 2006. applicable exempt organizations or of persons otherwise meeting one of the first two exceptions. VIII. Qualified Conservation Real Property The reporting requirement is temporary and PPA Section 1206 increases the charitable will not apply to reportable acquisitions which occur deduction limit for contributions of qualified after two years from August 17, 2006. Failure to conservation real property from 30 percent of adjusted comply results in a penalty of $50 per return, and in the gross income to 50 percent of adjusted gross income case of intentional disregard of the return filing for non-farmers and ranchers. The charitable requirements, a penalty equal to 10 percent of the value deduction limit is raised to from 50 percent to 100 of any contract with respect to which information is percent of adjusted gross income for qualified farmers required. and ranchers, provided the contribution does not The Treasury Secretary is required to issue a prevent the donated land from being used for farming report within 30 months of the date of enactment or ranching purposes. IRC Sect. 170(b)(1)(E)(i), examining whether such transactions are consistent 170(b)(1)(E)(iv)(I). A qualified farmer or rancher is an with the tax-exempt purposes of those 501(c) individual whose gross income from the trade or organizations that acquire such applicable insurance business of farming or ranching is greater than 50 contracts. percent of the taxpayer’s gross income for the tax year. Excess values of qualified conservation contributions X. Increased Penalty Excise Taxes may be carried over for up to 15 years, subject to the PPA Section 1212 doubles private foundation 100 percent limitations. The provision for fines and penalties under IRC Sections 4941, 4942, contributions by individuals is effective for 4943, 4944 and 4945 (self-dealing, minimum contributions made in tax years beginning after distribution, excess business holding, jeopardizing December 31, 2005, and before January 1, 2008. IRC investments and taxable expenditures rules). It is Sec. 170(b)(1)(E)(vi). The provision for contributions important to remember that the tax under IRC Section by qualified farmers and ranchers is effective only for 4941 also applies to charitable remainder trusts and contributions made after August 17, 2006. IRC Sec. charitable lead trusts. IRC Sec. 4947(a)(2). The 170(b)(1)(E)(iv)(II). doubled rates apply to tax years beginning after August 17, 2007. IX. Charity Owned Life Insurance PPA Section 1211 requires organizations that XI. Façade Easements are exempt from Federal income tax by reason of being PPA Section 1213 tightens the requirements described in IRC Section 501(c) to report acquisitions for claiming a charitable deduction for the contribution of a direct or indirect interest in “an applicable of a façade easement for a building in a registered insurance contract” to the Treasury Department. An historic district. Deductions will only be allowed for applicable insurance contract is any life insurance, donations of building facades that preserve the entire annuity or endowment contract in which both an exterior of the building and that ensure no portion of exempt organization and any person that is not an the building exterior may be changed or altered in a exempt organization have directly or indirectly held an manner that is not consistent with it historical interest in the contract. character. Deductions for personal residences are The term, applicable insurance contract, does completely disallowed, unless the residence is listed not apply if (i) each person (other than an applicable individually in the National Register of Historic Places. exempt organization) with a direct or indirect interest The taxpayer and the charity receiving the in the contract has an insurable interest in the insurance donation must enter into a written agreement that the independent of any interest of an applicable exempt charity is (i) a qualified public charity whose purpose organization in the contract; (ii) the sole interest in the is environmental or historic preservation or protection; contract of an applicable exempt organization or each and (ii) that the charity has the resources to manage person other than an applicable exempt organization is and enforce the easement restrictions and a a named beneficiary; or (iii) the sole interest in the commitment to do so. IRC Sec. 170(h)(4)(B)(ii). The contract of each person other than the applicable taxpayer must also submit a qualified appraisal of the exempt organization is either (a) as a beneficiary of a donated facade (the $5,000 threshold requirement is trust holding an interest in the contract, but only if the eliminated for façade easements), photographs of the person’s designation as such a beneficiary was made building’s exterior and descriptions of restrictions on without consideration and solely on a purely gratuitous the development of the building, such as zoning

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 ordinances. IRC Sec. 170(h)(4)(B)(iii). The August 17, 2006, will be allowed only if the item is in provisions apply to contributions made after July 25, “good used condition or better.” IRC Sec. 2007, and for contributions made after February 13, 170(f)(16)(A). This restriction does not apply if (i) the 2007, donors claiming a deduction in excess of deduction claimed is more than $500; and (ii) the $10,000 must pay a filing fee of $500. donor includes a qualified appraisal. Household items includes furniture, XII. Contributions of Taxidermy Property furnishings, electronics, appliances, linens, and other PPA Section 1214 limits the basis for donated similar items, but does not include food, paintings, taxidermy property to the direct cost of preparing, antiques, other objects of art, jewelry, gems, or stuffing and mounting the taxidermy property. IRC collections. IRC Sections 170(f)(16)(D)(i) and Sec. 170(f)(15)(A). The amount that will be allowed 170(f)(16)(D)(ii). The Treasury Department is as a deduction for a charitable donation of taxidermy developing regulations to assist taxpayers in property is the lesser of the donor’s basis in the determining what constitutes “good used condition” property or the fair market value. IRC Sec. and whether deductions will be permitted for specific 170(e)(1)(B)(iv). items that have a minimum value. Accordingly, for contributions made after July 25, 2006, indirect costs such as transportation, XV. Record Keeping Requirements equipment or other costs related to hunting or killing a PPA Section 1217 requires that donors of cash, donated animal may not be included in the donor’s checks or other monetary gifts must retain either a (i) basis and therefore are not deductible. bank record; or (ii) a receipt, letter or other written communication from the donee indicating the name of XIII. Recapture for Non-Exempt Use the donee organization, the date the contribution was PPA Section 1215 imposes recapture made, and the amount of the contribution. If these provisions if a charitable organization which receives records are not kept for each donation made, then no tangible personal property identified by the charity as deduction is allowed for the charitable contribution. related to the purpose or function constituting the IRC Sec. 170(f)(17). The provision applies to donor’s basis for tax exemption and for which a contributions made after August 17, 2006. deduction in excess of the donor’s basis is claimed, disposes of the property within three years of receiving XVI. Charitable Gifts of Fractional Interests the property. Charities are required to file Form 8282 PPA Section 1218 adds several new sections to for property that is disposed of within three years of the IRC which change the rules regarding charitable receipt. gifts of fractional interests in tangible personal In order for the taxpayer to receive a property. Most planners are of the opinion that these deduction equal to the fair market value of the donated changes will result in donors no longer making gifts of property, the charity is required to use the property for undivided interests in art. three years before selling it and to provide both the taxpayer and the IRS with a statement certifying that A. Initial Fractional Gift “Caps” Value its use was related to the its tax exempt purpose, or Under the provisions added by the PPA, no indicating that the continued use was impossible or increased charitable deduction will be allowed that is infeasible to implement. If the donee sells the property attributable to increases in value in the fair market within three years and there is no such certification, the value in the property after an initial factional interest taxpayers deduction is reduced from fair market value gift. Specifically, the amount of the income, gift or to cost basis. IRC Sec. 170(e)(1)(B)(i) and 170(e)(7). estate tax deduction for a subsequent contribution of These new rules do not apply to any tangible personal property in which the donor has contribution of exempt use property with a claimed made a prior contribution of an undivided interest is value of $5,000 or less. These changes are effective the lesser of: (i) the fair market value of the property for contributions made and tax returns filed after that was used to determine the charitable contribution September 1, 2006. Also, effective August 17, 2006, of the initial fractional gift; or (ii) the fair market value Congress added a $10,000 penalty for knowingly of the property as the time of the subsequent misidentifying property as having an exempt use. contribution. IRC Sec. 170(o)(2), 2055(g)(1) and 2522(e)(2). XIV. Clothing and Household Items Accordingly, if an individual makes a gift of PPA Section 1216 imposes new requirements an undivided interest in a painting to charity and leaves for contributions of clothing and household items. A the remaining interest to the charity upon his or her deduction for contributions of such items made after death, the value included in his or her estate could be

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 greater than the amount of the estate tax charitable tax under IRC Section 6662(e) or a gross valuation deduction. The Joint Committee on Taxation misstatement under IRC Sec. 6662(h). Appraisers may explanation of the PPA provides that a contribution of also be subjected to suspension or barred from a fractional interest in tangible personal property presenting appraisal to the IRS. Finally, the provision before August 17, 2006, is not treated as an initial changes the definition of a “qualified appraiser” to contribution for purposes of the new provisions. included minimum experience and education Instead, the first additional contribution of fractional requirements. See IRS Notice 2006-96. These interest gift after August 17, 2006, is treated as the provisions are applicable to returns filed and appraisals initial contribution for purposes of the new rules. made after August 17, 2006.

B. Recapture XVIII. Private Foundation Investment Income Any income or gift tax deduction allowed for a PPA Section 1221 expands the definition of contribution of an undivided interest in tangible private foundation investment income under IRC personal property will be recaptured if within the Section 4940, to include income from a broader range earlier of the tenth anniversary of the initial fractional of investments. Specially, the definition is expanded to gift or the donor’s death (i) the donor does not include income from sources “similar” to interest, contribute all of the remaining interest in the property dividends, rents, payments with respect to securities, to the charitable donee; or (ii) the charity fails to take loans and royalties. The change overrides several physical possession of the tangible personal property or cases which the IRS lost in litigation, and most likely fails to use the property in a manner related to the includes hedging transactions, income from annuities charitable donee’s exempt purpose. IRC Sec. and notional principal contracts. Also, the PPA 170(o)(3)(B) and 2522(e)(3)(B). Further, if an income changes the definition of capital gain net income to tax or gift tax charitable deduction is recaptured, an apply to gain or loss from a sale or disposition of additional tax in the amount 10% of the amount property, if the property is used for the production of recaptured is imposed under IRC Sections gross investment income. IRC Section 4940(c)(4)(A). 170(o)(3)(B) and 2522(e)(3)(B). Both of these changes apply to taxable years beginning after August 17, 2006. XVII. Valuation Misstatements PPA Section 1219 lowers the thresholds for XIX. Expanded Filing Requirements imposing the accuracy-related penalty for substantial Section 1223 imposes a new annual reporting and gross valuation misstatements. The 20 percent requirement for exempt organizations with gross underpayment penalty on a substantial estate or gift tax annual receipts that do not exceed $25,000. The PPA valuation understatement is now imposed if the value requires such organizations to file electronically, an of any property claimed on any Form 706 or 709 is 65 annual notice that includes the legal name of the percent or less (as opposed to 50 percent) or less of the organization, any name under which it does business, correct valuation amount. IRC Sec. 6662(g)(1). The its mailing address, its website address, its taxpayer 40 percent penalty for gross valuation misstatements is identification number, the name and address of the imposed where the property value claimed on the Form principal officer, and evidence of the continuing basis 706 or 709 is 40 percent or less (as opposed to 25 for the organization from filing From 990. There are percent) or less of the correct value. IRC Sec. no monetary penalties for failing to file the notice, but 6662(h)(2)(C). Also, the reasonable cause exception the failure to file the notice for three consecutive years for underpayments due to gross valuation will result in the revocation of tax-exempt status. This misstatements on charitable deduction property has provision is effective for notices and returns with been eliminated. IRC Sec. 6664(c)(2). The provisions respect to annual periods beginning after 2006. apply to returns filed after August 17, 2006. This PPA also provides for civil penalties on XX. Disclosure to State Officials appraisers equaling the lesser of either (i) the greater of PPA Section 1224 permits the IRS to disclose $1,000 or 10 percent of the understatement of tax, or to State officials charged with overseeing tax exempt (ii) 125 percent of the gross income derived by the organizations (i.e. the Attorney General) certain appraisal. IRC Sec. 6695A. This penalty is imposed on information concerning investigations related to refusal the appraiser if (i) the appraiser knows or should have to recognize an organization as tax exempt or known, that the appraisal would be used in connection revocation of tax exempt status. The information may with a federal tax return or refund claim; and (ii) the be used in connection with the administration of state claimed value of the appraised property results in a laws regulating tax-exempt organizations or to substantial valuation misstatement related to income facilitate the resolution of federal, or state issues

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 relating to the tax-exempt status of an organization. after its donor and that donor has advisory privileges); IRC Sec. 6104(c)(2)(A). The provisions take effect on or (ii) where a donor’s or donor advisor’s advisory August 17, 2006, but do not apply to a request made privileges are with respect to which individuals receive prior to that date. grants for travel, study, or other similar purposes. The Internal Revenue Service may exempt a fund or XXI. Public Disclosure of UBIT Returns account from treatment as a donor advised fund if the PPA Section 1225 requires charitable fund (i) is advised by a committee and not directly or organizations that file an unrelated business tax return indirectly controlled by the donor or advisor (or any (generally Form 990-T) to make those returns available related party); or (ii) will benefit a single identified to the public on the same basis as Form 990. charitable purpose (e.g. a fund established exclusively for disaster relief). IRC Sec. 4966(d)(2)(C). XXII. Study by Treasury Secretary Section 1226 of the PPA directs the Secretary B. Taxes on Taxable Distributions of the Treasury to conduct a study and submit a report Section 1231 of the PPA imposes taxes on the no later than August 17, 2007, on the organization and “sponsoring organization” and the “fund manager” for operation of donor advised funds and supporting “taxable distributions” from a donor advised fund. A organizations described in IRC Section 509(a)(3). The taxable distribution is any distribution from a donor purpose of the study is (i) to determine the advised fund (i) to any natural person; (ii) to any other appropriateness of deductions for income, gift and person if the distribution is for any purpose other than estate tax for contributions to supporting organizations one specified in IRC Section 170(b)(1)(A); or, the of donor advised funds; (ii) to consider requiring donor supporting organization does not exercise IRC Section advised funds to distribute specified amounts; (iii) to 4945(h) expenditure responsibility. Taxable consider whether certain rights and privileges retained distributions do not include distributions from a donor by donors of donor advised funds is consistent with advised fund to (i) any IRC Section 170(b)(1)(A) completed gift treatment; and (iv) to determine whether organization (i.e. churches, educational organizations, other types of charities or donations should also be medical or health-care organizations, etc.), other than a studied. disqualified supporting organization; (ii) the supporting organization of the donor advised fund; or (iii) any XXIII. Donor Advised Funds other donor advised fund. IRC Sec. 4966(c). In recent years, donor advised funds have A sponsoring organization is an organization become a popular alternative to a private foundation, that (i) is described in IRC Section 170(c)(2)(A); (ii) is despite the fact that neither the Internal Revenue Code not a private foundation as defined in IRC Section nor the Treasury Regulations heretofore have provided 5099(a); and (iii) maintains one or more donor advised any specific rules that govern donor advised funds. funds. A fund manager means, with respect to any Sections 1231-1235 of the PPA contain provisions that sponsoring organization of a donor advised fund (i) an for the first time specifically address donor advised officer, director, or trustee of the sponsoring funds. organization; and (ii) with respect to any act (or failure to act), the employees of the sponsoring organization A. Statutory Definition having authority or responsibility with respect to such The PPA includes a statutory definition of a act (or failure to act). IRC Sec. 4966(d)(3). donor advised fund as a fund or account (i) that is A 20 percent tax is imposed on any sponsoring separately identified by reference to contributions of a organization for taxable distributions. A five percent donor or donors; (ii) that is owned and controlled by a tax is imposed on the agreement of any fund manager sponsoring organization; and (iii) with respect to which to the making of a distribution if the manager knows it a donor (or any person appointed or designated by the is a taxable distribution. IRC Sec. 4966(a). This donor (“a donor advisor”)) has, or reasonably expects provision applies to tax years beginning after August to have advisory privileges with respect to the 17, 2006. distribution or investment of amounts held in the fund or account by reason of the donor’s status as a donor. C. Taxes on Prohibited Benefits IRC Sec. 4966(d)(2). The term donor advised fund PPA Section 1231 imposes excise taxes on does not include a fund or account (i) which makes donors, donor advisors and related persons who receive distributions only to a single identified organization or a benefit greater than an “incidental benefit” from a governmental entity (e.g. an endowment fund owned donor advised fund. IRC Sec. 4967(a). The and controlled by a college that is held exclusively for determination of what constitutes more than an the benefit of the college even if the fund is named incidental benefit is determined under the rules that are

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 used to determine when the receipt of the benefit 4943(c)(4)-(6) will be applied to present holdings. IRC would reduce or eliminate a charitable deduction. Sec. 4966(e)(3). Though not entirely clear, it appears The tax is imposed on any person who that a donor advised fund will generally have 10 to 20 recommended the distribution and on the recipient of years to dispose of interests held as of August 17, the benefit (investment advisors are excluded). The 2006, and 5 years to dispose of gifts and bequests amount of the tax is (i) 125 percent of the amount of acquired thereafter. This provision applies to tax years the benefit on the person who advised the distribution beginning after August 17, 2006. or received the benefit as a result of the distribution; and (ii) 10 percent of the benefit on the agreement of F. Contributions to Donor Advised Funds any fund manager to the making of a distribution, PPA Section 1234 addresses contributions to knowing that the distribution would confer an improper donor advised funds, and provides that such benefit, unless the agreement is not willful and is due contributions will not be eligible for a charitable to reasonable cause. IRC Sec. 4967(a)(1) and deduction for (i) income tax purposes if the fund 4967(a)(2). Payments pursuant to a bona fide sale or sponsoring organization under IRC Section 4966(d)(1) lease of property are exempt from this provision, but is an organization described in IRC Sections are subject the arm’s length provisions of IRC Section 2555(a)(3)-(5) (i.e., a war veterans organization, lodge 4958. or cemetery corporation), or a IRC Section 4943(f)(5) This provision effectively prohibits any grant, Type III supporting organization that is not a loan, compensation or expense reimbursement from a functionally integrated Type III Supporting donor advised fund to a donor, donor advisor or related Organization; (ii) gift tax purposes if the fund’s party. This provision applies to tax years beginning sponsoring organization under IRC Section 4966(d)(1) after August 17, 2006. is an organization described in IRC Section 2555(a)(3) or (4) (i.e., a war veterans organization, or lodge) or a D. Prohibited Transactions IRC Section 4943(f)(5) Type III supporting PPA Section 1232 automatically treats donors, organization that is not a functionally integrated Type donor advisors, and investment advisors to donor III Supporting Organization; or (iii) estate tax purposes advised funds (and persons related to them) as if the funds sponsoring organization under IRC Section disqualified persons with respect to the sponsoring 4966(d)(1) is an organization described in IRC Section organization under the excess benefits rules of IRC 2555(a)(3) or (4) (i.e., a war veterans organization, or Section 4958. IRC Sec. 4958(f)(1). Distributions lodge) or a IRC Section 4943(f)(5) Type III supporting (grants, loans, compensation arrangements, expense organization that is not a functionally integrated Type reimbursements or other payments) from a donor III Supporting Organization. IRC Sec. 170(f)(8)(19), advised fund to a person that, with respect to the fund, 2055(e)(5) and 2522(c)(5). is a donor, a donor advisor, or a person related to a An otherwise allowable contribution will be donor or donor advisor (though not an investment allowed only if the donor obtains a contemporaneous advisor) automatically will be treated as an excess written acknowledgement from the sponsoring benefit transaction, with the entire amount paid to the organization that the sponsoring organization has disqualified person being deemed the amount of the exclusive legal control over the asset contributed. IRC excess benefit. IRC Sec. 4958(c)(2). This provision Sec. 170(f)(18)(B), 2055(e)(5)(B) and 2522(c)(5)(B). applies to tax years beginning after August 17, 2006. These provisions are effective for contributions made after February 13, 2007. E. Excess Business Holding PPA Section 1233 subject’s donor advised G. Reporting Requirements funds to the private foundation excess business PPA Section 1234 requires holders of donor holdings rules. IRC Sec. 4943(e). A disqualified advised funds to provide additional information in its person with respect to a donor advised fund and the Form 990. A sponsoring organization (such as a excess business holdings rules, is any person who is (i) community foundation) which holds donor advised described in IRC Section 4966(d)(A)(iii) (a donor, or funds must disclose (i) the number of donor advised any person appointed or designated by the donor, who funds owned; (ii) the aggregate value of assets held in has advisory privileges with respect to distribution or donor advised funds at the end of the tax year; (iii) the investment amounts held in a fund by reason of the aggregate contributions to donor advised funds during donor’s status as a donor); (ii) a member of the family the tax year; and (iv) the aggregate grants made from of the individual described in (i) above; or (iii) a 35 donor advised funds. In addition, new organizations percent controlled entity. IRC Sec. 4966(e)(2). filing Form 1023 seeking tax exempt status will be Transition rules similar to those found in IRC Sections required to disclose whether the organization intends to

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 maintain donor advised funds and information considered Type III supporting organizations for which concerning the manner in which the organization will the effective date is August 17, 2007 operate the donor advised funds program. The new Form 990 reporting is effective for taxable years B. Excess Benefit Transactions ending after August 17, 2006, and the new Form 1023 PPA Section 1242 expands the rules governing requirements are effective for organizations applying excess benefit transactions to include all supporting for recognition of exempt status after August 17, 2006. organizations. Accordingly, effective July 25, 2007, any “excess benefit” or “excess benefit transaction” XXIV. Supporting Organizations made by a supporting organization to “disqualified Many of the provisions of the PPA are aimed person” will be considered an “excess benefit amount.” at curbing perceived abuses of supporting A “disqualified person” is defined as any organizations (specifically non-functionally integrated person who with respect to a IRC Section 509(a)(3) Type III supporting organizations). supporting organization (i) was in a position to exercise substantial influence over the affairs of the A. New Requirements organization at any time during the five-year period PPA Section 1241 amends IRC Section preceding the transaction in question; (ii) was a 509(a)(3)(B) to specify the three types of supported member of the family of such an individual; or (iii) organization relationships defined in the Treasury was a 35-percent controlled entity. IRC Sec. Regulations (i) “operated, supervised or controlled by” 4958(f)(1)(D). The definitions of “excess benefit” and the supported organization (Type I); (ii) “supervised or “excess benefit transaction” now provide that any loan, controlled in connection with” the supported grant, compensation or other similar payment made by organization (Type II); and (iii) “operated in a supporting organization to (i) a substantial connection with” the supported organization (Type III). contributor; (ii) a family member of a substantial To qualify as a Type III supporting organization, the contributor; or (iii) a 35-percent controlled entity organization must (i) annually provide to each constitutes an excess benefit transaction. IRC Sec. supported organization, information as required by the 4958(c)(3)(A). A “substantial contributor” is defined Treasury Secretary; (ii) not support non-U.S. as a person who contributed or bequeathed more than organizations; and (iii) maintain a “close and $5,000 to the supporting organization if such continuous working relationship” with the officers of contributions constitute in excess of 2-percent of the the supported organization(s). total contributions and bequests received by the The PPA also adds a definition of supporting organization in the tax year in which the “functionally integrated Type III supporting funds are received. IRC Sec. 4958(c)(3)(c). A “35- organization.” See supra Part XXIV, C. This percent” controlled entity is defined as one of the definition is critical because PPA Section 1241 also following: (i) a corporation in which a substantial requires the Treasury Secretary to promulgate new contributor to a supporting organization or a family regulations requiring Type III supporting organizations member of such an individual owns more than 35- which are not functionally integrated, to pay out percent of the total voting power; (ii) a partnership in annually, a percentage of assets or income to or for the which such persons own more than 35-percent of the use of supported organizations to ensure that a profits interest; or (iii) a trust or estate in which such significant amount is paid to such organizations. persons own more than 35-percent of the beneficial In addition, Section 1241 provides that if a interest. IRC Sec. 4958(c)(3)(B). Type I or Type III supporting organization supports an The provision which modifies the definition of organization that is controlled by a donor, then the disqualified persons is effective for transactions which supporting organization is treated as a private occur after August 17, 2006. The provision modifying foundation (as opposed to a public charity) for the definitions of excess benefit and excess benefit purposes of the relationship test, and specifically transaction is effective for transactions occurring after provides that a trust will not be considered a Type III July 25, 2006. supporting organization solely based on the facts that (i) it is a charitable trust under state law; (ii) the C. Excess Business Holdings supported organization is a beneficiary of the trust; and PPA Section 1243 extends the excess business (iii) the supported organization has the power to holdings rules to a private foundation that qualifies as a enforce the trust and compel an accounting. IRC Sec. supporting organization if it is (i) a Type III supporting 509(f)(2)(A). organization that is not functionally integrated with its These provisions are generally effective supported organization; or (ii) an organization that August 17, 2006, except for charitable trusts that are meets the requirements of IRC Sections 509(a)(3)(A)

Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 and 509(a)(3)(C) and is supervised or controlled in non-functionally integrated Type III supporting connection with one or more organizations described in organization may be counted as qualifying IRC Section 509(a), but only if such organization distributions. In addition, no payments made to Type I accepts any gift or contribution from a person or Type II supporting organizations, or to organizations described in IRC Section 509(f)(2)(B). IRC Section that are supervised or controlled in connection with 4943(f)(3). such organizations, or to a functionally integrated Type A functionally integrated Type III supporting III supporting organization will be considered organization is defined as Type III supporting qualifying distributions if (i) a disqualified person of organizations that are excepted by regulation from the the private foundation controls, directly or indirectly, requirements to make payments to supported either that organization or a supported organization; or organizations because the organization’s activities are (ii) such a distribution is declared inappropriate by related to the functions of, or carrying out the purposes regulation issued by the IRS. IRC Sec. of those supported organizations. IRC Sec. 4942(g)(4)(A)(ii). The provision is effective for 4943(f)(5)(B). A disqualified person for these distributions and expenditures occurring after August purposes is defined as any person who is (i) at any time 17, 2006. during the five year period preceding the transaction in question, was in a position to exercise substantial XXV. Returns influence over the affairs of the organization; (ii) was a PPA Section 1245 requires supporting member of the family of such an individual described organizations to include in their Form 990 (i) its type; in (i); (iii) a 35-percent controlled entity; (iv) any (ii) a list of all of the organizations it supports; and (iii) person described in IRC Section 4958(c)(B)(3); or (v) a certification that it is not controlled directly or an organization that is effectively controlled by the indirectly by one or more disqualified persons (other same person(s) controlling the organization, and to than entity managers and public charities). which substantially all of its contributions were made by substantial contributors or other persons in position XXVI. IRS Interim Guidance to exercise substantial influence over the affairs of the The IRS has provided interim guidance on the origination, or members of that persons family. PPA provisions that affect supporting organizations, A person “in position to exercise substantial private foundations and donor advised funds. Notice influence over the affairs of the organization” includes 2006-109 “substantial contributors,” (defined as a person who contributed or bequeathed in excess of $5,000 to the XXVII. Conclusion supporting organization if such aggregate contributions The PPA represents the most sweeping constitute in excess of 2 percent of the total legislation regarding charitable giving and charitable contributions and bequests received) and any officer, organizations since 1969. Though the long and director or trustee of the organization, or the owners of complicated law contains incentives to promote more than 20 percent of the total combined voting charitable giving, a number of the provisions are power of a corporation, the profits interest of clearly intended to address what Congress (specifically partnership, or the beneficial interest of trust or the Senate Finance Committee) felt were abuses in the unincorporated enterprise that qualified as a substantial charitable area. The PPA also requires the Treasury contributor. IRC Sec. 4958(c)(3)(B) and Department to conduct a study and issue new 4943(f)(4)(B). regulations. This will hopefully provide guidance in These provisions prohibit the holding either areas left unclear under the new law, but could also alone or in conjunction with qualified persons more lead to more changes in the future. than a 20 percent voting interest in a for profit entity, and have the effect of ending the use of Type III supporting organizations for donors who wish to contribute interests in closely held businesses. They are effective for tax years beginning after August 17, 2006, (though transition rules apply to the present holdings of Type III supporting organizations.)

D. Payments from Private Foundations PPA Section 1244 modifies the definition of a “qualifying distribution” to prevent payments by non- operating private foundations to a supporting organization. Specifically, no payments made to a 9