CHARITABLE GIVING POST PPA (PENSION PROTECTION ACT)

Transcription

1 CHARITABLE GIVING POST PPA (PENSION PROTECTION ACT) SHANNON G. GUTHRIE Hughes & Luce, LLP Attorneys and Counselors 1717 Main Street, Suite 2800 Dallas, Texas Fort Worth: By Appointment (214) (214) (facsimile) (website) ( ) State Bar of Texas 25 TH ANNUAL ADVANCED TAX LAW COURSE August 30-31, 2007 Houston CHAPTER 16 All written material contained within this outline is protected by copyright law and may not be reproduced without the express written consent of Hughes & Luce, LLP. Hughes & Luce LLP

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3 SHANNON G. GUTHRIE EDUCATION B.S., University of Evansville, magna cum laude J.D., Indiana University BIOGRAPHICAL INFORMATION AUTHOR 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 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 12 th 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,

4 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).

5 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. IX. CONSERVATION REAL PROPERTY...2 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. XX. TAX ON NET INVESTMENT INCOME...4 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

6 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

7 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 CHARITABLE GIVING POST PPA (PENSION PROTECTION ACT) I. INTRODUCTION On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (P.L ) (hereinafter referred to as the Act or PPA ) into law. Most of the provisions of the Act are pension related; however, a number of provisions were included that affect charitable organizations and donors. This paper is intended to highlight those changes. II. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR CHARITABLE PURPOSES. One of the most publicized provisions in the PPA is the provision addressing charitable contributions from retirement plans. These are often referred to as charitable rollovers. Prior to the PPA, if a donor wanted to make a charitable contribution from an IRA, such donor had to make a withdrawal from his or her IRA (resulting in taxable income to the donor) and turn around and make a donation to charity. The income tax charitable deduction available to the donor was subject to being reduced by the overall itemized deduction limitation, deduction limits and other unfavorable tax deduction limitations. Under the PPA, amounts up to $100,000 per year that are distributed to directly to a public charity from an individual retirement plan ( IRA ) (other than a SEP IRA or a SIMPLE IRA, but including an inherited IRA, Notice 2007, A-37) on or after the date the participant attains the age of 70½ are excluded from the donor s gross income. IRC 408. For married individuals who file joint returns, each spouse making a $100,000 charitable contribution from his or her IRA is entitled to receive a $100,000 exclusion. Notice , A-34. The distribution qualifies for purposes of the minimum distribution requirements. Treas. Regs (a)(9)(5), 1.401A-9(a). The distribution is deemed to be made from first the owner s pre-tax money in all aggregated IRAs, until fully used for basis purposes. IRC 408(d)(8)(D). The exclusion does not apply to distributions made to Section 509(a)(3) supporting organizations and donor advised funds. The main drawback to this provision is that it is only effective for the tax years 2006 and IRC 408(d)(8)(B). Direct transfers made prior to August 17, 2006 to charity are qualified charitable distributions providing that other requirements of the Act are met. It is yet to be seen as to whether or not the IRA charitable distribution deduction will be extended, but, there is support in the charitable community to make these provisions permanent. III. INFORMATION RETURNS FOR SPLIT INTEREST TRUSTS. RC 6034 is amended to provide that split interest trusts are required to file certain returns, including information returns, as prescribed by the Secretary, including trusts that distribute current income to beneficiaries. Penalties for failure to file or provide the information required are increased from $10 to $20 per day, up to a maximum of $10,000 per return. For trusts with gross income in excess of $250,000, the penalty is $100 per day, with a maximum of $50,000. IRC 6652(c)(2)(C). Also, if the person required to file the return knowingly fails to file, the penalties also may be applied to such individual. IRC 6652(c). Information regarding the non-charitable beneficiaries of any such trust is no longer required to be made available to the public. IRC Changes are effective beginning January 1, IRC 6034(c). IV. CONTRIBUTIONS OF FOOD INVENTORY. The provisions of the Katrina Emergency Tax Relief Act that provided for a deduction for charitable contributions of food inventory by any taxpayer were extended through December 31, Donors are entitled to a deduction equal to the lesser of either the taxpayer s basis plus ½ of the difference between the fair market value of such property and its basis or 2 times the taxpayer s basis in such property. IRC 170(e)(3)(C)(iv). V. S-CORPORATION STOCK BASIS ADJUSTMENT Beginning January 1, 2006, the basis of an owner of stock in a S-Corporation that makes a charitable contribution is equal to the shareholder s prorata share of the adjusted basis of such contributed property. IRC 1367(a). VI. CONTRIBUTIONS OF BOOK INVENTORY. The provisions of the Katrina Emergency Tax Relief Act that provided for a deduction for charitable contributions of qualified book inventory by C- Corporations were extended through December 31, Also, public schools were added to the list of donees. Donors are entitled to a deduction equal to the lesser of either the taxpayer s basis plus ½ of the appreciation of such item or 2 times the taxpayer s inventory basis in such property. IRC 170(e)(3)(D). 1

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

9 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 C. Excess Business Holdings Section 4943 of the Code is revised to increase the excise tax imposed on a private foundation s excess business holdings from 5% to 10%. If the Foundation does not divest itself of the excess holdings by the Correction Date, an additional tax of 200 percent of the value of the excess holdings may be imposed. D. Jeopardizing Investments Section 4944 of the Code is revised to increase the excise tax imposed on a private foundation for having investments that jeopardize the foundation s charitable purpose from 5% to 10%. Additionally, the excise tax imposed on a foundation manager who knowingly participates in an organization having jeopardizing investments is increased from 5% of the amount involved (not to exceed $5,000) to 10% of the amount involved (not to exceed $10,000). If the jeopardy investment is not disposed of by the Correction Date, the Foundation must pay an additional tax of 25 percent of the amount of the investment. If this additional tax is imposed and the Foundation managers refuse to agree to the removal of the jeopardy investment, such Foundation managers may be required to pay an additional 5 percent of the amount of the investment (up to a limit of $20,000). E. Taxable Expenditures Section 4945 of the Code is revised to increase the excise tax imposed on a private foundation s expenses that constitute taxable expenditures from 10% to 20%. Additionally, the excise tax imposed on foundation managers who knowingly participate in or approve the foundation s taxable expenditure are now increased from 2.5% of the amount involved (not to exceed $5,000) to 5% (not to exceed $10,000). If the taxable expenditure is not corrected by the Correction Date, the Foundation must pay an additional tax of 100 percent of the amount of the expenditure. If this additional tax is imposed and the Foundation managers refuse to agree to the correction of the taxable expenditure, such Foundation managers may be required to pay an additional 50 percent of the amount of the taxable expenditure (up to a limit of $20,000). XII. EASEMENTS IN HISTORIC DISTRICTS. IRC 170(h) is revised to increase the requirements for taking charitable deductions for the contribution of exterior easements for buildings in registered historic districts. Deductions will be allowed only for donations that preserve the entire exterior of the building and that ensure that no portion of the exterior may be changed or altered in a manner inconsistent with the historical character of the building. Additionally, no deductions for personal residences are allowed, unless the residence is listed in the National Register of Historic Places. 3 The charity and the taxpayer must have a written agreement reflecting that the charity is a qualified public charity whose purposes is environmental or historic preservation or protection, and that the charity has the resources for manage and enforce the easement restrictions and is committed to doing so. Id. The taxpayer must submit a qualified appraisal of the donation, photographs of the exterior of the building and descriptions of restrictions on the building s development. For Buildings located in Registered Historic Districts, the provisions apply to donations made after July 25, As of February 13, 2007, donors have to pay a filing fee of $500 when claiming a deduction in excess of $10,000. Id. XIII. TAXIDERMY PROPERTY. For contributions after July 25, 2006, IRC 170(e)(1) is revised to limit the basis for donated taxidermy property to the direct cost of preparing, stuffing and mounting the taxidermy property. IRC 170(f)(15)(A). The amount that may be allowed as a charitable deduction is the lesser of the donor s basis or the fair market value of the property. IRC 170(e)(1)(B)(iv). XIV. RECAPTURE OF TAX BENEFIT FOR CHARITABLE CONTRIBUTIONS OF EXEMPT USE PROPERTY NOT USED FOR AN EXEMPT PURPOSE. Beginning September 2, 2006, a charitable deduction for contribution of exempt use property valued in excess of $5,000 that is disposed of by the recipient organization before the close of the taxable year in which the contribution is made is limited to the donor s basis (instead of its fair market value), unless the donor obtains a certification from the recipient organization stating either (i) that the property was related to the recipient s exempt purposes, describes how the property was used and how such use furthers the organization s exempt purposes, or (ii) the intended use of the property by the recipient and that the intended use has become impossible or infeasible to implement. IRC 170(e)(1)(B). Additionally, if such exempt use property is disposed of by the recipient organization within 3 years of the date of the contribution and after the close of the taxable year in which the contribution is made, the donor is required to include in income in the year of disposition the amount by which the charitable contribution deduction allowed exceeds the donor s basis in the property. Id. A new section is added, effective August 17, 2006, to impose a penalty of $10,000 to any person who knowingly misrepresents that the contributed property was exempt use property. IRC 6720B.

10 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 XV. CLOTHING AND HOUSEHOLD ITEMS. Beginning August 18, 2006, IRC 170(f) requires that donations of clothing and household items be in good used condition or better in order to claim a charitable deduction for such property. The restriction does not apply if the deduction claimed is more than $500, the donor obtains a qualified appraisal and includes it with the tax return. Household items includes furniture, furnishings, electronics, appliances, linens and other similar items. IRC 170(f)(16)(D) It excludes food, paintings, antiques and other objects of art, jewelry and gems and collections. Id. XVI. RECORDKEEPING. Beginning January 1, 2007, in order to claim a deduction for a contribution of cash, check or other monetary gift, donors must maintain a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution and the amount of the contribution. IRC 170(f)(17). XVII. FRACTIONAL INTERESTS IN TANGIBLE PERSONAL PROPERTY. A charitable deduction for a contribution of an additional undivided interest in property to a donee organization is limited to the lesser of (i) the fair market value of such interest at the time of the initial fractional interest contribution and (ii) the fair market value of the interest at the time of the additional contribution. IRC 170(o). The deduction is not allowed unless all the interests in the property are held immediately before the contribution by either the taxpayer or the taxpayer and the donee organization. Id. Recapture is applied in the amount of the deduction plus interest unless: (i) the donor contributes all of the remaining interest in the property to the donee organization before the earlier of 10 years from the initial contribution or the donor s death, and (ii) during that time period the donee organization has had substantial physical possession of the property and the use of the property is related to the donee organization s exempt purpose. IRC 170(o)(3). XVIII. VALUATION MISSTATEMENTS Valuation misstatements are generally subject to penalties under the Code. Substantial valuation understatements are subject to a 20% penalty. Gross valuation misstatements are subject to a 40% penalty. For returns filed after August 17, 2006, Section 6662 of the Code is revised to lower the substantial valuation misstatement percentage for income tax purposes from 200% to 150%. For estate and gift tax valuations, Section 6662 of the Code is revised to increase the undervaluation misstatement percentage from 50% or 4 less of the amount determined to be correct to 65% or less of the amount determined to be correct. Additionally, appraisers whose appraisals result in substantial or gross valuation misstatements are subject to penalties equal to the lesser of (i) the greater of $1,000 or 10% of the understatement of tax, or (ii) 125% of the gross income derived by the appraisal. IRC 6695A. Such penalties may be imposed if (i) the appraiser knows or reasonably should have known, that the appraisal would be used in connection with a return or a claim for refund, and (ii) such claimed value results in a substantial valuation misstatement or a gross valuation misstatement. A qualified appraiser is now defined as someone who has met certain educational or certification requirements and regularly performs appraisals for which he or she receives compensation. IRC 170(f)(11). XIX. TAX ON NET INVESTMENT INCOME. Section 4940 of the Code pertaining to the excise tax on the net investment income of a private foundation revises the definition of gross investment income to include income from sources similar to interest, dividends, rents, payments with respect to securities loans, and royalties. The definition of capital gain net income is amended to include capital from the sale of property used for the production of gross investment income. Additionally, a new Section 4940(c)(4) is added that provides that except as provided by regulation, under rules similar to Section 1031, no gain or loss is taken into account for any property used for a period of less than one year for an exempt purpose if the property is exchanged immediately following such period solely for property of like kind that is to be used primarily for an exempt function. These changes are applicable to tax years beginning after August 17, XX. REQUIREMENTS FOR ENTITIES NOT CURRENTLY REQUIRED TO FILE. For annual periods beginning after 2006, exempt organizations that do not have annual receipts exceeding $25,000 are required to electronically file an annual notice that includes the legal name of the organization, any name under which it does business, its mailing address, website address, taxpayer identification number, name and address of the principal officer and the evidence of the continuing basis to not file Form 990. IRC 6033(i). Failing to file the notice for 3 consecutive years will result in revocation of exempt status. IRC 6033(j). XXI. DISCLOSURE TO STATE OFFICIALS. Effective August 17, 2006, IRC 6104(c)(2) gives the IRS authority to disclose to State officials charged with overseeing tax exempt organizations,

11 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 information concerning investigations related to refusal to recognize an organization as tax exempt, as to revocation of tax exempt status, as to deficiencies, and names addresses and taxpayer identification numbers of organizations which have applied for tax exempt status. The information provided may be used in civil administrative and civil judicial proceedings related to the enforcement of state laws. XXII. UBIT RETURNS. Beginning with returns filed after August 17, 2006, organizations that must file UBIT returns must make those available on the same basis as Form 990 is available. IRC 6104(d)(1)(A). XXIII. TREASURY STUDY ON DONOR- ADVISED FUNDS AND SUPPORTING ORGANIZATIONS. The Secretary of the Treasury is directed to undertake a study on the organization and operation of donor advised funds and of supporting organizations. The study must consider whether the income, gift, and estate tax deductions for charitable contributions to donor advised funds or to supporting organizations are appropriate, considering the use of contributed assets (including the type of assets, extent, and timing of such use) and uses benefiting donors (or persons related to donors). Additionally, the study must also consider (i) whether donor advised funds should be required to distribute a specified amount (whether based on the income or assets of the fund), (ii) whether retention of rights by donors over assets transferred to donor advised funds or to supporting organizations (including advisory rights or privileges with respect to making grants or investment of assets) are consistent with the treatment of such transfers as completed gifts, and (iii) whether any of these issues are also issues with respect to other forms of charities or charitable donations. XXIV. IMPROVED ACCOUNTABILITY OF DONOR ADVISED FUNDS. A. Definition of Donor Advised Fund. A Donor Advised Fund is now defined as a fund or account that is: (1) separately identified by reference to contributions of a donor or donors; (2) owned and controlled by a sponsoring charity; and (3) with respect to which a donor, or the donor s designee has, or reasonably expects to have, advisory privileges regarding the distribution or investment of any amounts held in the fund. IRC 4966(d)(2). 5 B. Exceptions. A Donor Advised Fund does not include a fund or account: (1) that makes distributions only to a single identified organization or governmental entity, or (2) with respect to which a donor or designee advises as to which individuals receive grants for travel, study or other similar purposes if: (a) the donor s advisory privileges are performed exclusively by such donor in his capacity as a member of a committee appointed by the sponsoring organization, (b) no combination of a donor and persons related to or appointed by such donor control such committee, and (c) all grants from such fund or account are awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advanced by the board of directors of the sponsoring organization and such procedure is designed to satisfy the requirements applicable to private foundations under Section 4945(g) with respect to grants made for travel, study or similar purposes. Id. C. Taxes on Taxable Distributions. A new Section 4966 is added that imposes excise taxes on certain taxable distributions from donor advised funds. IRC 4966(c). A tax of 20% on the sponsoring organization and 5% (not to exceed $10,000) on fund managers agreeing to the distribution are imposed on distributions to any natural person or any other person if (i) not for charitable purposes described in Section 170(c)(2)(B) of the Code, or (ii) the sponsoring organization does not exercise expenditure responsibility with respect to the distribution in accordance with Section 4945(h). The term taxable distribution does not include distributions (i) to public charities described in Section 170(b)(1)(A) (other than a disqualified supporting organization), (ii) to the sponsoring organization of the donor advised fund, or (iii) to any other donor advised fund. Id. D. Taxes on Prohibited Benefits. Charitable contribution deductions for contributions to a donor advised fund maintained by a veteran s organization, a lodge, a cemetery corporation or a Type III supporting organization (other than a 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

12 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 the sponsoring charity confirming that the sponsoring charity has exclusive legal control over the fund. IRC Section 4967 is added to impose an excise tax on a donor, donor advisor, or related person where such person receives, directly or indirectly, any benefit that is more than incidental as a result of a distribution from a donor advised fund. Additionally, a fund manager agreeing to any such distributed is subject to an excise tax of 10% (not to exceed $10,000) of the benefit. Section 4958 of the Code is amended to treat donors, persons with advisory rights, their family members, and 35% controlled entities as disqualified persons of a donor advised fund for purposes of the excess benefit transaction rules. Any grant, loan, compensation or other similar payment from a donor advised fund to such persons is automatically treated as an excess benefit transaction. These provisions are effective for tax years beginning after August 17, E. Excess Business Holdings. Donor advised funds are now treated as private foundations for purposes of Section 4943 of the Code pertaining to excess business holdings. For this purpose, a disqualified person is (i) a donor, or any person appointed or designated by the donor, who has advisory privileges with respect to distribution or investment amounts held in a fund by reason of the donor s status as a donor; (ii) a member of the family of the individual described above or (iii) a 35 percent controlled entity. Transition rules apply to present holdings. IRC 4966(e)(3). Donor advised funds will now be required to dispose of excess business holdings in order to avoid penalties. F. Contributions to Donor Advised Funds. Effective after February 13, 2007, contributions to Donor Advised Funds are deductible for income, gift and estate tax purposes unless the sponsoring organization is a 2555(a)(3)-(5) organization (i.e., war veterans organization, lodge or cemetery corporation), or a Type III supporting organization that is not functionally integrated. IRC 170(f), 2522(c)(5) and 2055(e)(5). The Donor must obtain a contemporaneous written acknowledgement from the sponsoring organization that the sponsoring organization has exclusive legal control over the assets contributed. Id. G. Reporting. Sponsoring organizations must provide information as to the number of its donor advised funds it owns at the end of the tax year, indicate the aggregate value of assets held in those funds and show the aggregate contributions to and grants made from 6 such funds. These provisions apply to returns filed for the tax year after the enactment of the Act. IRC 6033(k). New organizations seeking tax exempt status after August 17, 2006 are required to disclose whether or not they will have donor advised funds and how they will be operated. XXV. IMPROVED ACCOUNTABILITY OF SUPPORTING ORGANIZATIONS. IRC 509(a)(3)(B) is amended to define three types of supporting organization defined in the Regulations, Type I (operated, supervised or controlled by the supported organization), Type II (supervised or controlled in connection with the supported organization, and Type III (operated in connection with the supported organization. Type III organizations must provide annual information to the supported organization(s), cannot support foreign charities and must maintain a close and continuous working relationship with the officers of the supported organization(s). A functionally integrated Type III supporting organization is defined to mean one that is not required to make payments to supported organization(s) due to the activities of the organization related to performing the functions of, or carrying out the purposes of, such supported organization(s). IRC 4943(f)(5)(B). The Secretary is mandated to promulgate new regulations requiring Type III supported organizations that are not functionally integrated to make distributions of either a percentage of income or assets to supported organizations in order to assure that a significant amount is paid to the supported organizations. Furthermore, if a Type I or Type III organization supports an organization controlled by a donor, then the supporting organization is treated as a private foundation for purposes of the relationship test. A trust will not be a Type III supporting organization solely based on the facts that it is a charitable trust under state law, the supported organization is a beneficiary of the trust and the supported organization has the power to enforce the trust and compel an accounting. IRC 509(f)(2)(A). These provisions are effective generally August 17, The effective date for charitable trusts that are Type III organizations is August 17, A. Prohibited Transactions. Excess benefit transaction rules are applied to a supporting organization making any grant, loan, compensation or similar payment to a substantial contributor, a family member of a substantial contributor or a 35% controlled entity. A substantial contributor is any person contributing an aggregate of

13 Charitable Giving Post PPA (Pension Protection Act) Chapter 16 more than $5,000 if such amount is more than 2% of the total contributions before the close of the tax year in which the contribution is received. It also includes the creator of a trust. The term does not apply to IRC 509(a)(1), (2) or (4) organizations. Additionally, all loans to disqualified persons (except for certain public charities) of the supporting organization are prohibited. Disqualified persons are defined to include 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, who was family member of such person or that was a 35% controlled entity. IRC 4958(f)(1)(D). effective for distributions and expenditures occurring after August 17, D. Reporting. Supporting organizations are now required to report on annual returns (i) a list of its supported organizations, (ii) its type, and (iii) certify that it is not controlled directly or indirectly by disqualified persons (other than organization managers and public charities). IRC 6033(l). 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 nonsupporting 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

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15 CHARITABLE GIVING POST PPA (PENSION PROTECTION ACT) Presented by: SHANNON G. GUTHRIE Hughes & Luce, LLP Attorneys and Counselors 1717 Main Street, Suite 2800 Dallas, Texas Fort Worth: By Appointment (214) (214) (facsimile) (website) ( ) Written by and reprinted with permission of: HARRY W. WOLFF, JR. Cox Smith Matthews Incorporated 112 East Pecan Street, Suite 1800 San Antonio, Texas (210) State Bar of Texas 25 TH ANNUAL ADVANCED TAX LAW COURSE August 30-31, 2007 Houston CHAPTER 16

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17 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 (210) State Bar of Texas 31 ST ANNUAL ADVANCED ESTATE PLANNING AND PROBATE COURSE June 6-8, 2007 San Antonio CHAPTER 16

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19 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 and ) (Chairperson, Probate Law Committee ) (Sub-Committee Chairperson, Texas Uniform Trust Code Committee ) 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," 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," Present Texas Monthly, "Texas Lawyer Super Lawyer," Present Scene In SA, "San Antonio s Best Attorneys," Present

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21 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

22 Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 XXV. Returns... 9 XXVI. IRS Interim Guidance... 9 XXVII. Conclusion... 9 ii

23 Charitable Provisions of the Pension Protection Act of 2006 Chapter 16 CHARITABLE PROVISIONS OF THE PENSION PROTECTION ACT OF 2006 By: Harry W. Wolff, Jr. Cox Smith Matthews Incorporated San Antonio, Texas I. Introduction On August 17, 2006, in the wake of numerous well publicized corporate accounting scandals, President Bush signed the Pension Protection Act of 2006 (P.L /17/2006) ( PPA ). Although the underlying purpose of the PPA was to strengthen the pension system, the more than 900 page law contains numerous provisions impacting charities and charitable donations. These provisions include some of the incentives in the Charitable Giving Act of 2003 and the CARE Act, which were passed in both the House and Senate but were never taken to conference. This article will address the changes impacting charities and charitable donations most important to estate planning attorneys. II. Qualified Charitable Distributions Perhaps the most publicized provision in the PPA is Section 1201 which allows Charitable IRA Rollovers. Though this section does make it easier for individuals over the age of 70 ½ to donate IRA funds to charities, the watered down version of the long awaited charitable IRA provision will only be in effect for two years. The new provision allows an IRA owner to make a qualified charitable distribution directly from the IRA to a charity. The qualified charitable distribution is excluded from the IRA owner s gross income, thereby avoiding the unfavorable income tax consequences encountered under pre-ppa law, which required the IRS owner to first make a withdrawal from the IRA (included in the recipient s gross income) and then in turn donate the withdrawn asset to a charity (taking a charitable deduction which was subject to itemized deduction phase-out limits, deduction limits, AMT consequences, no decrease in AGI, potential taxation of Social Security taxes and potential state income taxes). A. Duration and Amount As set forth above, this provision of the PPA only applies to a qualified charitable distribution made in tax years beginning after December 31, 2005, and sunsets for distributions made in tax years beginning after December 31, 2007 (IRC Sec. 408(d)(8)(B). A pre-august 17, 2006 direct transfer from an IRA to a charity is a qualified charitable distribution, provided 1 that it meets the other requirements (discussed below). Notice , A-38. The income exclusion for a qualified charitable distribution is limited to $100,000 per year. Sec. 408(d)(8)(F). For married individuals filing a joint return, if each spouse makes a $100,000 qualified charitable distribution from his or her IRA, they are each entitled to receive a $100,000 exclusion. Notice , A-34. B. Only From IRAs A qualified charitable distribution can only be made from an individual retirement plan other than a Simplified Employee Pension Plan or a Simple Retirement Plan. IRC Sec. 408(d)(8)(A). The prohibition against a qualified charitable distribution from a Simplified Employee Pension Plan or a Simple Retirement Plan only applies to a plan to which an employer contribution is made for the plan year ending in the same taxable year as the year of the tax charitable contribution. Notice , A-36. Though the PPA seems to permit a qualified charitable distribution from a Roth IRA, a distribution is treated as a qualified charitable distribution only to the extent the IRA distribution would otherwise be include in gross income. IRC Sec. 408(d)(8)(B). C. Directly to a Public Charity The qualified charitable distribution must be made directly from the IRA to a 50% organization described in IRC Section 170(b)(1)(A). Accordingly, a qualified charitable distribution cannot be made to a donor advised fund, a supporting organization or certain types of family foundations. In addition, to qualify as a qualified charitable distribution, the direct distribution must be 100% deductible if paid from the taxpayers non-ira assets, thereby prohibiting a qualified charitable distribution to a charitable remainder trust, charitable gift annuity, pooled income fund or other type of spilt interest gift. A check from an IRA made payable to a charitable organization and delivered by the IRA owner to the charitable organization will be considered a direct payment by the IRA trustee to the charitable organization. Notice , A-41. D. IRA Participant Must Be 70 ½ The IRA owner must be 70 ½ or older. IRC Sec. 408(d)(8)(B)(ii). Unlike the minimum required distribution rules which are based on the year an IRA participant reaches age 70 ½, eligibility to make a qualified charitable distribution is based on the day the IRA participant reaches age 70 ½. The qualified charitable distribution will count as a distribution for purposes of the minimum distribution requirements. See Treas. Regs. Sec (a)(9)-5, 1.401A-9(a).