Compromise on reform: non-itemizer deduction not part of charitable law.

The Pension ReformAct of 2006, bringing some charitable reforms to the sector and incentives for donors to give more, has been signed into law. In a battle between anti-regulation advocates and those who sought greater change, nobody got all of what they wanted. But more reforms am likely to be on the back burner for awhile, at least until after the fall mid-term elections if not longer.

Among the charitable incentives in the bill, in effect for tax years 2006 and 2007, are:

* Tax-free distributions from IRAs for charitable purposes, which would provide an exclusion from gross income for certain distributions up to $100,000 that would normally be included in income;

* Charitable deduction for contributions of food inventory and book inventory;

* Basis adjustment to stock of S corporation contributing property;

* Tax treatment of certain payments to controlling exempt organizations;

* Qualified conservation contributions, and

* Excise tax exemption for blood collector organizations.

* Doubling the amount of excise taxes, applicable to certain activities by charities, social welfare organizations, foundations and exempt organization managers;

* Information-sharing between Internal Revenue Service and state charity officials, by allowing the secretary to disclose information regarding organizations for which the IRS has denied or revoked tax-exempt status and certain other actions;

* Notification requirement for exempt organizations with gross receipts less than $25,000;

* Public disclosure on Form 990 of information relating to Unrelated Business Income Tax returns;

* Treasury study of donor-advised funds and supporting organizations, and

* Improved accountability for donor-advised funds and supporting organizations through an excess benefits transaction tax on any grant, loan, compensation or other similar benefits from a donor-advised fund to a person.

"The charitable package is, in many respects, a watered-down version of provisions that were advanced by Senate Finance Committee Chairman Chuck Grassley and the Panel on the Nonprofit Sector," said Perry Wasserman, managing director of 501c Strategies, a division of the Vivero Group lobbying firm, which represents some nonprofits on The Hill.

The legislation includes some provisions from S. 1321 (Telephone Excise Tax Act), which Senate Finance Chairman Charles Grassley (R-Iowa) pushed through the committee last month. Many pointed to the IRA Rollover Provision as the biggest victory in the legislation.

Although the charitable package did not include the non-itemizer deduction that United Way of America (UWA) has supported, overall, the organization backed the bill.

UWA Director of Public Policy Patrick Lester said there are other issues to be addressed in the second phase of charitable reform, but he does not expect anything to occur in 2006. The only possibility he saw was perhaps something in the pension correction bill later this year, where technical corrections are made to the bill. That likely will focus primarily on the pension reform aspect, but there still will be the ability to make small charitable revisions, he said.

With the IRA Rollover in effect for two years, Lester said, the timing of its reauthorization could come into play with other proposals.

"We invested a lot of political capital (in the non-itemizer deduction), and that was a disappointment," Lester said. The United Way and a number of other charities are "looking for other opportunities to push that forward," he said.

"If there's an opportunity to push forward on that issue again, we will. If there's some resistance, we probably will not push as aggressively as we did in the current Congress," Lester said.

For now, it's a matter of waiting and watching. With Rep. Bill Thomas (R-Calif.) retiring at the end of this session, there will be a new chairman of the House Ways and Means Committee. He was the "biggest point of resistance" on the nonitemizer, Lester said. The November mid-term elections also could play into who becomes the next chairman, should Democrats regain control of the House.

"The bill should strengthen our sector, helping our organizations receive the resources they need and making it harder for unscrupulous individuals to use charitable organizations for personal gain," said Diana Aviv, president and CEO of Independent Sector, which represents a coalition of more than 500 nonprofits.

"Reforms incorporate many of the changes that Independent Sector sought as we worked closely with congressional staff, particularly in the Senate, to improve reforms initially passed last November," she said. "They now more closely reflect the recommendations of the Panel on the Nonprofit Sector. We are currently analyzing all of the bill's details and will work to address any areas of concern."

Grassley thanked Aviv and the Panel on the Nonprofit Sector, Sen. Rick Santorum (R-Pa.), and IRS Commissioner Mark Everson for their help in creating the charitable measures that were passed. "I look forward to working with the same individuals to put together more legislative proposals to increase governance, transparency, and accountability in the non-profit sector."

But Steve Gunderson, president and CEO of the Council on Foundations (COF), called the legislation another congressional attack on community foundations because the IRA charitable rollover--and last year's charitable incentives in Katrina legislation--did not apply to donor-advised funds.

"Congress does not understand the important role of foundations, and particularly the significance of donor-advised funds and supporting organizations, in strengthening American communities. Community foundations provide almost $3 billion annually to help strengthen their communities. Donor-advised funds continue to be the fastest growing vehicle that allows many Americans to participate in philanthropy," Gunderson, a former congressman, said via a statement.

The process was also flawed "in that it was secretive and closed," Gunderson added. "There was no opportunity for us to amend, change or correct those sections that negatively impacted the philanthropic sector.

The decision to deny the bill's major giving incentive, IRA charitable rollovers, to community and private foundations was added at the last moment."

Given some of the proposals that have been considered previously, said Geoffrey Peters, general counsel for American Charities for Reasonable Fundraising Regulation, "I'm encouraged that it didn't go further. Saying that it didn't go as far as some people originally had proposed, my reaction to that is, it's a good thing."

While not onerous, the requirement for organizations with annual gross receipts of more than $25,000 to file with the IRS is "just silly."

"The IRS can't keep up with its current workload," Peters said.

The bigger problem is the IRS sharing information with state charity officials, he said. Where an organization's tax-exempt status is revoked, it's not a problem, Peter said, as much as if the IRS takes action that's not final, and that's reported to state officials. "I'm not convinced that's a good idea."

Sometimes a low-level IRS official takes action that is later reversed, Peters said, which is why it's preliminary and other senior officials review it. "A perfectly good charity might end up having to defend itself with multiple regulators, he said, and national charities might have to defend themselves in 40-odd states.

House leaders passed H.R. 4 late on July 28 by a vote of 279-131 while it sailed through the Senate, 93-5. The only nay votes were cast by Barbara Boxer (D-Calif.), Richard Burr (R-N.C.), Tom Coburn (R-Okla.), John Cornyn (R-Texas) and Russ Feingold (D-Wise.). Max Baucus (D-Mont.), the ranking Democrat on the Senate Finance Committee, and Joseph Lieberman (D-Conn.) did not vote.

The Senate also failed to pass "trifecta" legislation--bills that included a collection of tax credits, a 75 percent repeal of the estate tax, and an increase in the minimum wage--that the House approved a week earlier by a 230-180 vote. A motion to end debate on the Senate bill failed (56-42), which was followed by the vote on the pension measure. Sixty votes were needed to end debate.