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Finance Committee Democratic Staff Summary of Joint Committee on Taxation Report on Options to Improve Tax Compliance and Reform Expenditures January 27, 2005 (Costs are over 10-year window)
VIII. EXEMPT ORGANIZATIONS
A. Require Five-Year Review of Exempt Status of Public Charities and Private Foundations and Annual Notice by Organizations Not Required to File Information Returns (sec. 508). The proposal require that every five (5) years §501(c)(3) organizations (except Houses of Worship), must file with the Secretary information on whether it continues to be organized and operated exclusively for exempt purposes. This filing must be done electronically and made publicly available. Failure to file would result in loss of tax-exempt status. Raises: Less than $50 million
B. Impose Termination Tax on Conversions of Assets of Charities (sec. 501, 507, 4941, and 4958). The proposal applies to public charities and to private foundations, and thus eliminates the present- law aggregate tax benefit limit contained in §507. In the case of private foundations, the proposed termination tax applies to voluntary or involuntary terminations, as well as to conversion liquidation transactions. The proposed termination tax also applies to a public charity if there have been either willful repeated acts or failures to act that give rise to liability for Chapter 42 taxes, which includes §§ 4955 and 4958. In order to assure that fair consideration is paid in conversion transactions, the proposal extends the §4958 excess benefit transaction tax rules (in case of public charity) or §4941 self-dealing rules (in case of a private foundation) to an acquirer of the charity’s assets in a conversion or liquidation transaction, if persons who are disqualified persons of the charitable organization are in a position to exercise substantial influence over the affairs of the acquirer at the time of or after the transaction. No Revenue Effect
C. Tax Involvement by Exempt Organizations in Tax-Shelter Transactions (secs. 6011 and 6707A). The proposal requires disclosure by tax exempt entities (often accommodating parties) to the IRS of participation in a “prohibited tax shelter transaction” and disclosure of other known parties if it is a reportable transaction. Prohibited transactions include only certain reportable transactions. New penalties at both the entity level and the entity manager level are included in the proposal, and the deductibility of contributions to the entity may be suspended for one year. Existing disclosure penalties also apply. Raises: $500 million
D. Reform Intermediate Sanctions and Extend Certain Reforms to Private Foundations (secs. 4941 and 4958). Proposal eliminates rebuttable presumption and establishes due diligence procedures that apply to public charities and private foundations. If an initial tax is imposed on a disqualified person under the intermediate sanctions rules or on a self-dealer under the self-dealing rules, the organization is subject to an excise tax equal to 10% of the excess benefit in the case of a public charity or a social welfare organization, or 2.5% of the amount involved in the case of a private foundation. Raises: $200 million
E. Increase the Amount of Excise Taxes Imposed on Public Charities, Social Welfare Organizations, and Private Foundations (secs. 4941, 4942, 4943, 4944, 4945, and 4958). For acts of self-dealing other than the payment of compensation by a private foundation to a disqualified person, the initial tax on the self dealer goes from 5% to 10% of the amount involved. For acts of self-dealing regarding the payment of compensation by a private foundation to a disqualified person, the initial tax on the self-dealer goes from 5% to 25% of amount involved with 15% of which is subject to abatement. It increases the initial tax on foundation managers from 2.5% to 5% of the amount involved and increases the dollar limitation on the amount of the initial and additional taxes on foundation managers per act of self-dealing from $10,000 per act to $20,000 per act, and doubles the dollar limitation on organization managers of public charities and social welfare organizations for participation in excess benefit transactions from $10,000per transaction to $20,000 per transaction. Raises: Less than $50 million
F. Modify Charitable Deduction for Contributions of Conservation and Façade Easements (sec. 170). The proposal eliminates the charitable contribution deduction with respect to façade and conservation easements relating to personal residence properties, substantially reduces the deduction for all other qualified conservation contributions, and imposes new standards on appraisals and appraisers regarding the valuation of such contributions. Raises: $1 billion
G. Limit Charitable Deduction for Contributions of Clothing and Household Items (sec. 170). The proposal limits the amount that taxpayers may deduct for contributions of clothing and household items to $500. Raises: $1.9 billion
H. Reform Rules for Charitable Contributions of Property (sec. 170). Option One: This proposal contains various options and concepts to limit deductions on donations of property, generally to the lesser of basis or fair market value. They do not apply to publicly traded securities and certain other property already addressed in previous legislation, i.e., intellectual property and vehicles. Suggestions for enhanced appraiser accountability, limiting the deduction to the disposition amount, and eliminating deductions for property altogether are also included. Raises: $2.5 billion
I. Require Public Disclosure of Form 990-T and Related Certification Requirements (secs. 6104 and 6685). The proposal extends the present- law public inspection and disclosure requirements and penalties applicable to the Form 990 to an organization’s Form 990-T. Organizations that normally have annual total gross revenues or gross assets of at least $10 million must include with its Forms 990 and 990T filings a certification by an independent auditor or by an independent counsel. Raises: Less than $50 million
J. Expand the Base of the Tax on Private Foundation Net Investment Income. Proposal amends the definition of gross investment income to include income from notional principal contracts, annuities, and other substantially similar income from ordinary and routine investments. Carrybacks of losses from sales or other dispositions of property are not included. Raises: $200 million
K. Limit Tax-Exempt Status of Fraternal Beneficiary Societies that Provide Commercial-Type Insurance (sec. 501 (c)(8)). A fraternal beneficiary society, order, or association is exempt from tax as an organization described in section 501(c)(8) only if no substantial part of its activities consists of providing commercial-type insurance. In the case of an organization that is exempt from tax under the proposal, it is taxed under the rules relating to insurance companies rather than under the unrelated business income tax rules generally applicable to exempt organizations. Raises: $500 million
L. Established Additional Exemption Standards for Credit Counseling Organizations (sec. 501). Under the proposal, a nonprofit credit counseling agency or other nonprofit organization that provides credit counseling, debt management, and similar services, is eligible for exemption from income tax only as a charitable or educational organization under section 501(c)(4). It also provides additional requirements that must be satisfied by a credit counseling organization in order to be an organization described in section 501(c)(3) or (c)(4), and the requirements supplement, rather than replace the present law requirements. Raises: $100 million
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