Transcript Perspectives on Tax Reform: Charitable Contributions and the Nonprofit Sector Professor Jon Forman University of Oklahoma Comm.

Perspectives on Tax Reform:
Charitable Contributions and
the Nonprofit Sector
Professor Jon Forman
University of Oklahoma
Comm. on Tax Policy and Simplification
ABA Section of Taxation
San Diego, California
February 18, 2012
Perspectives on Tax Reform:
Charitable Contributions and the
Nonprofit Sector
Moderator:
Professor Jonathan B. Forman, University of
Oklahoma, Norman, OK
Panelists:
Roger Colinvaux, Catholic University of
America, Washington, DC
Miranda P. Fleischer, University of
Colorado, Boulder, CO
Brian Galle, Boston College, Newton, MA
2
Size of the Nonprofit Sector
 1.5 million nonprofits, foundations,
and religious congregations
 http://www.independentsector.org/our_sector
 Returns of Tax-Exempt Organizations,
Fiscal Year 2010
 Total 776,300
 Internal Revenue Service Data Book, 2010,
Table 13, http://www.irs.gov/pub/irssoi/10databk.pdf
3
More Nonprofit Statistics
 501(c)(3)s filed 315,184 information
returns for Tax Year 2008
 Held $2.52 trillion in assets
 Reported $1.38 trillion in revenue,
more than two-thirds of which came
from program services.
http://www.irs.gov/pub/irs-soi/11eofallbulteorg.pdf
4
Nonprofit Charitable Organizations,
Selected Financial Data, 2008
(money amounts are in millions of dollars)
Item
Number of returns
2008
315,184
Total assets
2,521,216
Total liabilities
1,086,476
Net assets
1,434,740
Total revenue
1,378,269
Program service revenue
Contributions, gifts, and grants
Investment income
Sales of assets
Other
Total expenses
Total excess or deficit
1,038,014
322,016
25,574
-40,240
32,906
1,396,365
5
-18,095
Size of the Untaxed
Business Sector
 Nonprofit institutions that serve
households – most 501(c)(3)
organizations, etc. – $483 billion
(5.3% GDP) in 2002
 State and local governments – $749
billion (8.2% GDP)
Congressional Budget Office, Taxing the Untaxed Business Sector (July 2005), at 6,
http://www.cbo.gov/doc.cfm?index=6567.
6
Unrelated Business Income
(UBI)
 Unrelated Business Income Defined
 For most organizations, an activity is an
unrelated business (and subject to
unrelated business income tax) if it
meets three requirements:
 It is a trade or business,
 It is regularly carried on, and
 It is not substantially related to furthering
the exempt purpose of the organization.
http://www.irs.gov/charities/article/0,,id=96104,00.html
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UBI
 Trade or business means selling goods or
services to generate income.
 Regularly carried on means the activity
shows frequency and continuity and that it
is conducted in the same way that a nonexempt organization would run a similar
business.
 Not substantially related means that the
activity is not important to furthering the
exempt purpose of the organization (other
than generating income for it).
http://www.stayexempt.irs.gov/Resource-Library/pdfs/Mod2_Summary.pdf
8
Exceptions to UBI
 The Internal Revenue Code contains a
number of exceptions to the usual
rules of UBI. That means that some
UBI is not subjected to tax. These
exceptions include, but are not
limited to, activities:
 Conducted by a volunteer workforce,
 Conducted for the convenience of
organizational members,
9
Exceptions to UBI continued
 Involving the sale of donated
merchandise,
 Involving the distribution of low-cost
articles,
 Involving income from convention or
trade show participation,
 Involving income from qualified
sponsorship, and
 Traditional bingo.
10
Exclusions and Deductions from
UBI
 In addition to the exceptions
discussed, the Code allows certain
other exclusions and deductions in
calculating UBI tax.
11
Exclusions from UBI
 The exclusions include, but are not
limited to, income generated from:
 Interest and dividends,
 Royalties,
 Certain rents from real properties with
the exception of income from debtfinanced property, and
 Certain gains and losses.
12
Deductions
 Allowable deductions include certain expenses,
depreciation, and similar items directly connected
with carrying on an unrelated trade or business.
In addition, other modifications allow for
deductions like:
 The net operating loss deduction, where an
unrelated business loss in a previous or current tax
year is deductible;
 Charitable contributions made by the organization
regardless of whether they are directly connected
with the unrelated trade or business; and
 The specific deduction that allows for $1,000 to be
automatically deducted from the UBI tax calculation.
13
Charitable Gaming and
Applicable Taxes
 A small amount of unrelated trade or business
activity in relation to an organization’s exempt
purpose activity will have no impact on exempt
status. Exempt status is only jeopardized when
the activity generating unrelated income makes
up a substantial part of the organization’s overall
activities.
 Gaming is one of the most common and successful
types of fundraising. It can range from sponsoring a
bingo game to a once-a-year raffle or casino night.
Most often, gaming will generate UBI. Federal
wagering excise taxes apply to certain types of
gaming, but these taxes are typically not applicable
to gaming conducted by 501(c)(3) organizations.
14
Filing Procedures for Form
990-T
 Organizations with gross income of
$1,000 or more from unrelated
business must file Form 990-T
annually.
 Form 990-T is due the 15th day of the
5th month following the end of the
organization’s accounting period.
15
UBIT Statistics
 For 2008, some 42,066 taxpayers
reported gross unrelated business
income of $10.3 billion dollars;
 After deductions, some 20,371
taxpayers reported $1.2 billion in
unrelated business taxable income;
 And 20,311 taxpayers reported
unrelated business income tax
(UBIT) of $336.3 million
http://www.irs.gov/taxstats/charitablestats/article/0,,id=97210,00.html (click on Sire
of Gross UBI,for 2008); see also http://www.irs.gov/pub/irs-soi/tehistory.pdf
16
Title XII of the Pension
Protection Act of 2006
 Detailed Summary of Charitable
Provisions
 http://waysandmeans.house.gov/media/pdf
/taxdocs/072806charitable.pdf
 Charitable Giving Incentives
 Charitable Reform
 IRS, Pension Protection Act of 2006
Revises EO Tax Rules
 http://www.irs.gov/charities/article/0,,id=1
61145,00.html
17
Charitable Reform Provisions
 Appraisal Reform
 Notification Requirement for Exempt
Organizations –Annual Notice
 3 years to comply; revocation
 Encourage IRS Information-Sharing
with State Charity Officials
 Public Disclosure of Information
Relating to Unrelated Business
Income Tax Returns
18
TAX REFORM: Concerns about
Nonprofits: high salaries, high
expenses
 IRS
 http://www.nytimes.com/2011/02/15/busines
s/15charity.html
 States
 e.g., Oklahoma Attorney General,
http://www.oag.state.ok.us/oagweb.nsf/0/0a9
382d6ed29978f862572b400738e2f/$FILE/char
ityflier.PDF
19
Concerns about Nonprofits:
high salaries, high expenses
 Charity watch groups, etc.
 http://www.charitywatch.org/toprated.html
 http://liveunited.org/pages/accountability
 GuideStar. National directory of nonprofit
organizations, http://www2.guidestar.org/
 Better Business Bureau. For Charities and
Donors. Includes evaluative reports on some
national and regional charities.
http://www.bbb.org/us/charity/
20
Concerns about Nonprofits:
enriching related parties
 Hospitals and trade associations use
nonprofit status in ways that enrich
doctors, etc.
 Nonprofit, For-profit, and Government
Hospitals: Uncompensated Care and Other
Community Benefits (GAO-05-743T (2005),
http://www.gao.gov/new.items/d05743t.pdf
 State property tax exemption
 http://www.state.il.us/court/opinions/supreme
court/2010/march/107328.pdf
21
Concerns about Nonprofits:
tax evasion
 IRS, Exempt Organization Tax
Avoidance Transactions,
http://www.irs.gov/charities/article/0
,,id=128722,00.html
 OECD, Report on Abuse of Charities
for Money-Laundering and Tax
Evasion (2009),
http://www.oecd.org/dataoecd/30/20
/42232037.pdf
22
http://cboblog.cbo.gov/?p=2371
23
Congressional Budget Office, The Long-Term Budget Outlook (June 2011), at 64,
http://www.cbo.gov/doc.cfm?index=12212.
24
Top 10 Income Tax Expenditures,
2012 (Billions)
Health insurance exclusion
$184
Mortgage interest deduction
99
401(k) plans
68
Step-up of basis at death
61
Exclusion of net imputed rental income
51
Deductible nonbusiness state and local taxes other
than on houses
49
Employer plans
45
Charitable contrib. (other than health & education)
43
Capital gains (except agriculture, timber, iron, coal)
38
Exclusion of interest on tax-exempt bonds
37
2012 Federal Budget, Analytical Perspectives, Chapter 17, Tax Expenditures, Table 17-3,
http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.
25
Recent Nonprofit Reform
Proposals: Obama's Debt Panel
 Option 1 (The "Zero
Plan"): eliminate all tax expenditures
or, alternatively, preserve only a few
such tax benefits in exchange for higher
marginal rates
 Option 2: establish a 2% AGI floor
 Option 3: an across-the-board
"haircut" for all tax benefits if reform not
enacted as of 2013
http://lawprofessors.typepad.com/nonprofit/2010/11/obamas-debt-panel-and-taxbenefits-for-charities.html
26
Recent Nonprofit Reform
Proposals, CBO
 Congressional Budget Office, Options
for Changing the Tax Treatment of
Charitable Giving (2011),
http://www.cbo.gov/ftpdocs/121xx/d
oc12167/CharitableContributions.pdf
 The next few slides are based on
slides from a June 15, 2011
presentation by
[email protected]
27
Current Law Tax Treatment
 Deductibility limited to only itemizers.
 Deduction subject to annual limits:
 Total deductions: 50% of AGI
 Appreciated properties: 30% of AGI
 Contributions exceeding the limits may be
carried forward for up to 5 years.
 Starting in 2013: Pease provision
 Itemized deduction reduced by 3% of AGI
above a specific threshold. Total reduction is
limited to 80% of the deduction.
28
Concerns About the Current
Tax Treatment
 (1) Could the tax subsidies be
extended to more taxpayers without
being too costly? Share of Tax Returns
• Under current
law, tax benefits
only available
for itemizers.
by Tax Filers'
Itemizing Status,
2008
34%
Itemizers
Nonitemizers
66%
29
Concerns About the Current
Tax Treatment
 (2) Could the tax subsidies per dollar
of giving be made more equal?
 After-tax price of giving decreases
with marginal tax rate.
 If facing T = 25%,
 after-tax price of giving = $0.75.
 If facing T = 10%,
 after-tax price of giving = $0.90.
30
Concerns: Concentration of Tax
Subsidies Among High-Income
Taxpayers
Figure 4: Different Income Groups' Shares of Total
Donations and the Total Tax Subsidy, 2006
(Percent)
80%
70%
60%
50%
40%
30%
20%
10%
0%
Under $50,000
$50,000 - $100,000
$100,000 - $200,000 $200,000 - $500,000
Above $500,000
Adjusted Gross Income
Source: Congressional Budget Office.
Returns
Charitable Contribution
Tax Subsidy
31
Various Policy Options
 Reflecting 3 important characteristics:
 1) whether the tax benefit includes a
floor
 2) whether it is restricted to itemizers
 3) whether it takes the form a deduction
or a credit.
32
Various Policy Options
 Grouped into 4 categories:
 Retaining current deduction for itemizers but
adding a floor
 Allowing all taxpayers to claim the deduction,
with or without a floor
 Replacing the deduction with a 25% credit for all
taxpayers, with or without a floor
 Replacing the deduction with a 15% credit for all
taxpayers, with or without a floor
 Two floors examined:
 $500 for single; $1000 for joint filers.
 2% of AGI.
33
Basis for the Estimates
 Micro-simulation model
 2006 Public-use sample of tax returns,
 2007 CPS.
 Impute nonitemizers’ charitable
giving: SCF and CEX
 Assume Price Elasticity of Giving= 0.5
 All estimates are for tax year 2006.
34
Effects on Donations and Tax
Subsidies
Floor for Eligible
Donations
Total
Contributions
Change from
Current-Law Level
Dollars
Percent
Tax Subsidy
Change from
Current-Law Level
Dollars
Percent
Keep Deduction Available Only to Itemizers but Add Floor
Option 1
$500/$1,000
Option 2 2 percent of AGI
202.5
200.0
-0.5
-3.0
-0.2
-1.5
35.4
25.2
-5.5
-15.7
-13.5
-38.5
 The floor would allow the deduction
to continue providing incentives but a
much lower cost.
35
Effects on Donations and Tax
Subsidies
Floor for Eligible
Donations
Total
Contributions
Change from
Current-Law Level
Dollars
Percent
Tax Subsidy
Change from
Current-Law Level
Dollars
Percent
Extend Deduction to All Filers
Option 3
No floor
Option 4
$500/$1,000
Option 5 2 percent of AGI
205.0
203.8
201.1
2.0
0.8
-1.9
1.0
0.4
-0.9
46.1
38.4
27.8
5.2
-2.5
-13.1
12.8
-6.1
-32.1
 Extending the deduction to all tax filers
would be costly without a floor.
 However, combining this deduction
with a floor could both raise donations
and lower the tax cost
36
Effects on Donations and Tax
Subsidies
Floor for Eligible
Donations
Total
Contributions
Change from
Current-Law Level
Dollars
Percent
Tax Subsidy
Change from
Current-Law Level
Dollars
Percent
Convert Deduction to 25 Percent Credit for All Filers
Option 6
No floor
Option 7
$500/$1,000
Option 8 2 percent of AGI
205.7
204.5
202.0
2.7
1.5
-1.0
1.3
0.7
-0.5
48.0
38.5
29.0
7.1
-2.4
-11.9
17.4
-5.8
-29.2
 Similar pattern of results would occur
if the itemizer deduction was replaced
with a 25% credit.
37
Effects on Donations and Tax
Subsidies
Floor for Eligible
Donations
Total
Contributions
Change from
Current-Law Level
Dollars
Percent
Tax Subsidy
Change from
Current-Law Level
Dollars
Percent
Convert Deduction to 15 Percent Credit for All Filers
Option 9
No floor
Option 10 $500/$1,000
Option 11 2 percent of AGI
195.2
194.4
193.0
-7.8
-8.6
-10.0
-3.9
-4.2
-4.9
27.6
21.9
16.3
-13.3
-19.0
-24.6
-32.6
-46.5
-60.1
 A small credit (e.g. 15% credit) would
lower both donations and tax subsidy.
38
Effects on Various Income
Groups
 Comparing
Tax Subsidy
Rate
(= Tax
Subsidy/AGI)
under current
law and under
a given policy
change.
Tax Subsidy Rates Under Current Law,
by Income Group, 2006 (Percentage of AGI)
1.00
0.80
0.60
0.40
0.20
0.00
Under $50,000
$50,000 $100,000
$100,000 $200,000
$200,000 $500,000
Above
$500,000
39
Effects on Various Income
Groups
 Extending
tax benefits
to all filers
would mostly
benefit
lower- and
middleincome
taxpayers.
40
Effects on Various Income
Groups
 Adding a floor
would lower tax
subsidies across
the board.
 High-income
taxpayers are
significantly
worse off under
the 2% of AGI
floor.
41
More Tax Reform Resources
 Roger Colinvaux, Charity in the 21st Century: Trending
Toward Decay, 11 FLORIDA TAX REVIEW 1 (2011),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=18
09171
 Miranda P. Fleisher, Equality of Opportunity and the
Charitable Tax Subsidies, 91 BOSTON UNIVERSITY LAW
REVIEW 601 (2011),
http://www.bu.edu/law/central/jd/organizations/journals
/bulr/documents/FLEISCHER.pdf
 Brian Galle, Keeping Charity Charitable, 88 TEXAS LAW
REVIEW 1213 (2010),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=15
31778
42
More Tax Reform Resources
 Daniel Halperin, Is Income Tax Exemption for Charities a
Subsidy?, 64 TAX LAW REVIEW 283 (2011),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=19
20430
 Calvin H. Johnson, Payout by Charities Over 50 Years,
TAX NOTES, September 12, 2011, at 1161,
http://www.utexas.edu/law/faculty/calvinjohnson/payou
t_by_charities_over_50_years.pdf
 David Joulfaian, Is Charitable Giving by the Rich Really
Responsive to the Income Tax? (October 10, 2011),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=19
52889
43
More Tax Reform Resources
 Joint Committee on Taxation, Present Law and
Background Relating to the Federal Tax Treatment of
Charitable Contributions, JCX-55-11 (2011),
http://www.jct.gov/publications.html?func=startdown&id
=4371
 Joint Committee on Taxation, Historical Development
And Present Law Of The Federal Tax Exemption For
Charities And Other Tax-Exempt Organizations (2005),
http://www.jct.gov/publications.html?func=startdown&id
=1586
 Australian Treasury, Not-For Profit Reform Newsletter,
Issue 3, December 2011,
http://www.treasury.gov.au/documents/2285/PDF/NFP_
Newletters_Issue_3.pdf
44
More Tax Reform Resources
 Senate Finance Committee Hearing on Charity Oversight
and Reform (Congressional Research Service Report No.
R40919, June 22, 2004),
http://finance.senate.gov/hearings/hearing/?id=48ca4cc
e-afe1-db95-0fcb-8ff9255e780a
 Molly F. Sherlock & Jane G. Gravelle, An Overview of the
Nonprofit and Charitable Sector (2009),
http://www.fas.org/sgp/crs/misc/R40919.pdf
 Internal Revenue Service, Tax Information for Charities
& Other Non-Profits web page,
http://www.irs.gov/charities/index.html?navmenu=men
u1
45
About the Author
 Jonathan Barry Forman (“Jon”) is the Alfred P.
Murrah Professor of Law at the University of Oklahoma
College of Law and the author of Making America Work
(Washington, DC: Urban Institute Press, 2006).
 Jon was the Professor in Residence at the Internal
Revenue Service Office of Chief Counsel, Washington,
DC, for the 2009-2010 academic year.
 Jon can be reached at [email protected], 405-325-4779,
www.law.ou.edu/faculty/forman.shtml.
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