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PPA '06 addresses more than pensions.

Although touted as the first comprehensive pension legislation in more than 30 years, the Pension Protection Act of 2006 (PPA '06), signed by President Bush on Aug. 17, 2006, includes many other provisions addressing charitable giving and tax-exempt entities. About half of the legislation deals with traditional defined-benefit pension plans, but other parts discuss the more popular defined-contribution plans and IRAs, which affect more taxpayers than do the traditional pension rules. Also included are several provisions on charitable contributions and exempt organizations, and rules making permanent several Economic Growth and Tax Relief Reconciliation Act of 2001 changes that otherwise would have expired after 2010. This item will focus on the charitable contribution and exempt organization changes made by the PPA '06.

Donations of Cash, Clothing and Household Items

PPA '06 Section 1216(a) tightens the rules for donations of cash, clothing and household items. This provision comes after a 2004 change designed to deter vehicle contribution abuses. The new provisions indicate Congress's concern over lost tax dollars in the charitable donation area, which in 2003 amounted to $36.9 billion in noncash donations; see "Donors Gave $36.9 Billion In Non-Cash Gifts," The NonProfit Times (8/21/06), at www.

Monetary gifts: For 2007 and later, PPA '06 Section 1217(a) requires cash gifts by calendar-year taxpayers to be substantiated, regardless of dollar amount, by a bank record or a written communication from the charity acknowledging the amount and date of the contribution and the charity's name. In other words, no deduction will be allowed for any cash, check or other monetary gift (e.g., debit-card transaction) unless the donor can show a bank record or a written communication from the charity. Self-created records (such as a logbook) will not be accepted.

This change affects not only taxpayers, but charities themselves, increasing the need to generate receipts to receive charitable donations. Many taxpayers may be reluctant to give a cash gift if a receipt is not given (no matter the dollar amount). This may dramatically increase charities' administrative duties.

Material goads: Clothing and household goods will generate a deduction for a taxpayer only if the items are in at least "good" used condition, a term the legislation does not define. This change is effective for donations made after Aug. 17, 2006; see PPA '06 Section 1216(b).

Taxpayers should look to the criteria set by the various charities accepting the donations in trying to define "good" condition. The deduction is based on the fair market value of the clothing or household item. Under Sec. 170(f)(16)(D), household items include furniture, pots, pans, dinnerware, sheets, blankets, home furnishings, electronics, appliances and similar items; not included, according to Sec. 170(f)(16)(D)(ii), are food, paintings, antiques, objects of art, jewelry, gems and collectibles.

The PPA '06 does not change prior substantiation requirements, including the need to obtain a receipt from the charity showing the name of the organization, the date and location of gift and a detailed description of the property contributed. However, it does exempt a donation from the "good" condition requirement if it is valued at $500 or more and the taxpayer includes an appraisal with the return; see the discussion of PPA '06 Section 1216 in JCX-38-06 (8/3/06).

Tax-Free Distributions from IRAs to Qualifying Charities

After years of debate in Congress, charities have realized a small victory. Under PPA '06 Section 1201(a) and (c)(1), amending Sec. 408(d)(8), for 2006 and 2007, an individual age 70 1/2 or older can make direct gifts from an IRA of up to $100,000 per year to qualifying public charities under Sec. 170(b)(1)(A) (this excludes supporting organizations and donor-advised funds); the IRA distribution is not reported as taxable income and no charitable deduction is allowed. These tax-free distributions will satisfy the annual minimum distribution requirements for those meeting the age requirement. Although not for everyone, this can be an excellent planning technique for charitably inclined individuals who do not need IRA distributions, but must take them.

Notification Requirements for Tax-Exempt Entities

Tax-exempt organizations that are not required to file Form 990, Return of Organization Exempt from Income Tax, because their gross receipts are less than $25,000, must begin to furnish an electronic annual notification to the IRS, effective for annual periods beginning after 2006; see PPA '06 Section 1223. The notification must include:

1. The organization's legal name,

2. Any name under in which it operates or does business;

3. Its mailing address;

4. Its taxpayer identification number;

5. The name and address of a principal officer; and

6. Evidence of continuing basis for the organization's exemption from the filing requirements under Sec. 6033(a) (1).

In addition, the organization must notify the IRS electronically when it terminates its existence. Failure to notify the Service of this information for three consecutive years will result in loss of exempt status, effective as of the due date of the third annual notice. The primary reason for this change was to maintain the IRS's list of organizations qualified to receive tax-deductible contributions under Sec. 501(c)(3), which has been criticized as being outdated.


The items described above are only part of the PPA '06's nonpension provisions. Other charitable donation provisions include, under Sections 1202(a) and 1204(a), extending the food and book enhanced deduction initially provided in Katrina Emergency Tax Relief Act Sections 305 and 306, to Dec. 31, 2007; under Section 1205, increasing the adjusted-gross-income limit for conservation easements to 50%; and, under Section 1213(a)(1), enacting special rules for facade easements. Other exempt organization provisions include, under Section 1235(a)(1), expanded information requirements for sponsoring organizations' tax-exempt applications and annual returns, and for supporting organizations' annual returns, under Section 1245; and including unrelated business income tax returns in the materials available for public inspection, under Section 1225(a).

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Title Annotation:Pension Protection Act of 2006
Author:Leggiero, Heather J.
Publication:The Tax Adviser
Date:Nov 1, 2006
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