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Perspectives on Tax Reform: Charitable Contributions and the Nonprofit Sector

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.

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Perspectives on Tax Reform: Charitable Contributions and the Nonprofit Sector

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  1. 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

  2. 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

  3. 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/irs-soi/10databk.pdf

  4. 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

  5. Nonprofit Charitable Organizations, Selected Financial Data, 2008(money amounts are in millions of dollars)

  6. 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.

  7. 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

  8. 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 non-exempt 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

  9. 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,

  10. 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.

  11. Exclusions and Deductions from UBI • In addition to the exceptions discussed, the Code allows certain other exclusions and deductions in calculating UBI tax.

  12. 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 debt-financed property, and • Certain gains and losses.

  13. 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.

  14. 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.

  15. 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.

  16. 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

  17. 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=161145,00.html

  18. 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

  19. TAX REFORM: Concerns about Nonprofits: high salaries, high expenses • IRS • http://www.nytimes.com/2011/02/15/business/15charity.html • States • e.g., Oklahoma Attorney General, http://www.oag.state.ok.us/oagweb.nsf/0/0a9382d6ed29978f862572b400738e2f/$FILE/charityflier.PDF

  20. 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/

  21. 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/supremecourt/2010/march/107328.pdf

  22. 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

  23. http://cboblog.cbo.gov/?p=2371

  24. Congressional Budget Office, The Long-Term Budget Outlook (June 2011), at 64, http://www.cbo.gov/doc.cfm?index=12212.

  25. Top 10 Income Tax Expenditures, 2012 (Billions) 25 2012 Federal Budget, Analytical Perspectives, Chapter 17, Tax Expenditures, Table 17-3, http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.

  26. 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-tax-benefits-for-charities.html

  27. Recent Nonprofit Reform Proposals, CBO • Congressional Budget Office, Options for Changing the Tax Treatment of Charitable Giving (2011), http://www.cbo.gov/ftpdocs/121xx/doc12167/CharitableContributions.pdf • The next few slides are based on slides from a June 15, 2011 presentation by Athiphat.Muthitacharoen@cbo.gov

  28. 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.

  29. Concerns About the Current Tax Treatment • (1) Could the tax subsidies be extended to more taxpayers without being too costly? • Under current law, tax benefits only available for itemizers.

  30. 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.

  31. Concerns: Concentration of Tax Subsidies Among High-Income Taxpayers

  32. 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.

  33. 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.

  34. 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.

  35. Effects on Donations and Tax Subsidies • The floor would allow the deduction to continue providing incentives but a much lower cost.

  36. Effects on Donations and Tax Subsidies • 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

  37. Effects on Donations and Tax Subsidies • Similar pattern of results would occur if the itemizer deduction was replaced with a 25% credit.

  38. Effects on Donations and Tax Subsidies • A small credit (e.g. 15% credit) would lower both donations and tax subsidy.

  39. Effects on Various Income Groups • Comparing Tax Subsidy Rate (= Tax Subsidy/AGI) under current law and under a given policy change.

  40. Effects on Various Income Groups • Extending tax benefits to all filers would mostly benefit lower- and middle-income taxpayers.

  41. 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.

  42. 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=1809171 • 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=1531778

  43. 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=1920430 • Calvin H. Johnson, Payout by Charities Over 50 Years, Tax Notes, September 12, 2011, at 1161, http://www.utexas.edu/law/faculty/calvinjohnson/payout_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=1952889

  44. 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

  45. 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=48ca4cce-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=menu1

  46. 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 jforman@ou.edu, 405-325-4779, www.law.ou.edu/faculty/forman.shtml. 46

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