IRS Releases Supporting Organization
Classification Guidance

The IRS has provided guidance for supporting organizations and donor advised funds about changes made by the Pension Protection Act. See Notice 2006-109.

The Notice provides a definition of "donor advised fund" and defines the supporting organization classifications used in, and made formal by, the Act. The Notice also clarified when the excise taxes on taxable distributions from a donor advised fund and excess benefit transactions involving supporting organizations would apply; and created a safe harbor procedure for private foundations to make qualified distributions to supporting organizations while the IRS develops classification procedures for these organizations.

The IRS indicates that it has received 73 requests by supporting organizations to change their classification so that they may continue to receive distributions from private foundations. The IRS has approved 70 of these requests.

Charity Excise Tax Provisions Remain
Source of Confusion

The IRS plans to release guidance clarifying the charitable excise tax provisions added to the Internal Revenue Code by the Tax Increase Prevention and Reconciliation Act of 2005. This bill added new section 4965 to the Code imposing excise taxes on exempt organizations that are parties to prohibited tax shelters. This excise tax may be as high as 35 times the greater of net income from the transaction or 75% of the net proceeds, or the greater of 100% of net income or 75% of the gross proceeds derived from the transaction.

Practitioners are concerned that the sweeping nature of this provision could subject tax-exempt investors, such as endowments or charities investing in endowments, to this excise tax. As a result, guidance is needed clarifying when a tax-exempt organization is a "party" to a prohibited tax shelter and clarifying what transactions constitute such tax shelters.

GAO Questions Exemption for Credit Unions;
IRS to Release UBIT Guidance

In a report entitled Credit Unions: Greater Transparency Needed on Who Credit Unions Serve and on Senior Executive Compensation Arrangements released on December 1, 2006, the General Accounting Office questioned the rationale for continuing to exempt credit unions from federal income taxes. In this report, the GAO concluded that such organizations have not proven that they serve low- and middle-income individuals and that no firm evidence existed linking the exemption of the credit unions to lower interest rates for their customers. The GAO recommended that credit unions "systematically track the progress of credit unions serving those of modest means."

Meanwhile, the IRS is planning to issue technical advice in early 2007 describing when credit unions are required to pay unrelated business income tax.

IRS Continues Focus on Fringe Benefits
of Exempt Organizations, Governments

The IRS continues to focus on improving compliance with the complex rules involving fringe benefits for exempt organizations. The most recent example of this focus arises from an audit of Lexington County, South Carolina. In that audit, the IRS required the county to withhold taxes on $25 gift cards given to county employees. The Internal Revenue Code requires employers to withhold taxes on gifts of cash or "cash equivalents." Cash equivalents include gift cards that can be used to purchase a variety of items.

IRS Releases Guidelines on Substantiating
Charitable Payroll Contributions

The IRS released guidance explaining how taxpayers could substantiate charitable contributions made through payroll deductions. See Notice 2006-110.

The Pension Protection Act of 2006 requires taxpayers to maintain records of charitable contributions showing the name of the donee, the date and amount of the contribution for contributions made after April 17, 2006. For payroll deductions, these substantiation requirements may include a pay-stub or Form W-2 showing the amount withheld for charitable donations or a pledge card prepared by the donee showing its name. Donations of more than $250 must also include a statement that the organization does not provide goods or services in whole or partial consideration for contributions made.

Ohio Attorney General Receives Money
to Enforce Charitable Gaming

The Ohio Attorney General has received $1.5 million from the state Controlling Board to help it enforce the state's charitable gaming rules. The AG indicated it plans to use the funds to develop a database of public records, provide accurate and current information to requesting parties, and enable the AG to track, monitor, and investigate applications, registrations and payments.

Charity Care Update

House Ways and Means Committee Chairman Thomas (R-Ca) has introduced charity care legislation requiring that hospitals provide statutorily mandated amounts of charity care. The bill, H.R. 6420 (Tax Exempt Hospitals Responsibility Act of 2006), requires "specified medical care providers" to provide "specified medically necessary care" to "low-income uninsured individuals" and charge no more than the "maximum allowed charges" of either $25 or the average amount received under contracts with private insurers, depending on the patient's income. The failure to provide this charity care will result in the imposition of excise taxes. In addition, the bill requires hospitals to publicize this charity care policy, as well as the average amount received for specified medically necessary care from private insurers.

The Congressional Budget Office released its report on the community benefit standard for nonprofit hospitals, prepared at the request of the House Ways and Means Committee. In this report, the CBO noted that, on average, nonprofit hospitals provided more charity care than their for-profit counterparts, but that amounts varied widely among individual hospitals.

Meanwhile, the Healthcare Financial Management Association offered its own proposals on how charity care and bad debt should be accounted for in financial documents and valuation reports. The HFMA standards join other groups, including the CHA and AHA in proposing new standards.

IRS Planning Guidance on Verification
of Supporting Organization Status

The Pension Protection Act does not permit foundations to make "qualified distributions" to Type-3 supporting organizations that are "not functionally integrated." There is no mechanism, however, for foundations to determine the classification of a supporting organization or whether the organization will be considered functionally integrated. The Department of Treasury anticipates releasing guidance to clarify these provisions shortly.

Group Urges Withdrawal of Terrorist Financing Rules

The Council of Foundation is urging the Department of Treasury to withdraw the most recent version of its rules for international grant making. As discussed in last month's Nonprofit Advocate, these rules are intended as "best practices" to ensure that charities do not unwittingly fund terrorist activities through their overseas programs.