Exempt Organizations Advisory - Tax Bill Includes Provisions for Exempt Organizations

By: Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com)

On October 25, House Ways and Means Committee Chairman Charles Rangel (D-NY) introduced the Tax Reduction and Reform Act of 2007.  This $1 trillion revenue-neutral bill is expected to result in tax relief for approximately 91 million families through permanent repeal of the AMT, an increase in the refundable child tax credit, an increase in the standard deduction, and an enhanced earned income tax credit.

The extenders package includes $879 million to extend a variety of charitable contribution deductions.  These provisions include:

Extension of provision encouraging contributions of capital gain real property made for conservation purposes:  The bill would extend for one year the current-law increased contribution limits and carryforward period for amounts in excess of these limits for contributions of appreciated real property (including partial interests in real property) for conservation purposes. This proposal is estimated to cost $52 million over 10 years.

Extension of enhanced charitable deduction for contributions of food inventory:  The bill would extend for one year the current-law provision allowing businesses to claim an enhanced deduction for the contribution of food inventory. This proposal is estimated to cost $72 million over 10 years.

Enhanced charitable deduction for contributions of book inventories to public schools:  The bill would extend for one year the current-law provision allowing C corporations to claim an enhanced deduction for contributions of book inventory to public schools (kindergarten through grade 12). This proposal is estimated to cost $31 million over 10 years.

Extension of enhanced deduction for corporate contributions of computer equipment for educational purposes:  The bill would extend for one year a provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions. This proposal is estimated to cost $218 million over 10 years.

Extension of tax-free distributions from individual retirement plans for charitable purposes:  The bill would extend for one year the current-law provision that permits tax free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year. This proposal is estimated to cost $452 million over 10 years.

Extension of special rule for S corporations making charitable contributions of property:  The bill would extend for one year the current-law provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in the S corporation. The bill would also make a technical correction clarifying the application of this provision. This proposal is estimated to cost $54 million over 10 years.

In addition to the extension of the charitable giving provisions, the bill also includes two significant provisions relating to unrelated business income tax and income from controlled organizations:

Modification of unrelated business income tax rules for certain investment partnerships:  The bill would allow pension plans, universities and other tax-exempt entities to directly invest in hedge funds and other investment funds without incurring unrelated business income tax (“UBIT”). This would eliminate the current-law incentive for pension plans, universities and other tax exempt entities to invest in hedge funds and other investment funds through offshore “blocker” corporations formed in tax haven jurisdictions and would improve the investment returns for pension plans, universities and other tax exempt entities that invest in these investment funds. This proposal is estimated to cost $1.34 billion over 10 years.

Extension of special tax treatment of certain payments to controlling exempt organizations:  The bill would extend for one year the current law special rules for interest, rents, royalties and annuities received by a tax exempt entity from a controlled entity. This proposal is estimated to cost $23 million over 10 years.

For a summary of the legislation, click here.  For the text of the bill as introduced, click here.