Lawyer Article

This article was published in the September 12th edition of Southeast Tech Wire.

Approximately one-third of The Pension Protection Act of 2006 (the "Act") addresses charitable giving incentives and the reformation of exempt organizations. Listed below are the topics addressed in the Act, along with a brief summary of three of the provisions most likely to affect all charitable organizations. The Act was signed into law on August 17, 2006, and many of its provisions are now in effect. Please share the information in this Client Alert with those in your organization who are most concerned with IRS reporting requirements and charitable contribution deduction requirements. Please review this list and let us know if you would like to receive more information on specific provisions. We have a more detailed memorandum available upon request.

Charitable Giving Incentives:

1. Tax-free IRA Distributions to Charity: A donor aged 70-1/2 and older may distribute up to $100,000 to charity per year. (See explanation below.)

2. Split Interest Trust Filing Requirements: Late filing penalties are increased and the requirement to file is expanded.

3. Charitable Deduction for Contributions of Food Inventory: The deduction is enhanced.

4. Basis Adjustment of S-Corporation Stock: A basis reduction for a gift is described.

5. Charitable Deduction for Contributions of Book Inventory: An enhanced deduction is available.

6. Less Tax on Certain Payments to Controlling Exempt Organizations: The unrelated business income tax rules are modified.

7. Encourage Contributions of Real Property for Conservation Purposes: A qualified conservation contribution is defined and the deduction enhanced.

8. Provide Excise Tax Exemption for Blood Collector Organizations: Tax relief is provided for blood collector organizations.

Reforms of Exempt Organizations:

1. Reporting of Acquisitions of Interests in Insurance Contracts: New reporting is required.

2. Increase in Amounts of Excise Taxes: Certain penalty taxes are doubled.

3. Easements in Registered Historic Districts: New rules are applicable to conservation easements for building exteriors.

4. Charitable Contributions of Taxidermy: The deduction is limited to preparation costs for certain donors.

5. Gifts of Property Not Used for an Exempt Purpose: Charitable use of personal property must be documented for a fair market value deduction. (See explanation below.)

6. Contributions of Clothing and Household Items: Contributed items must be in good used condition or better.

7. Recordkeeping for Certain Charitable Contributions: A donor must have certain records to deduct cash gifts in any amount. (See explanation below.)

8. Contributions of Fractional Interest in Tangible Personal Property: New rules are applicable to fractional gifts.

9. Appraisers and Appraisals: The qualified appraiser definition is changed and penalties for misstatements are applied to the taxpayer and the appraiser.

10. Additional Exempt Standards for Credit Counseling Organizations: New requirements for exemption are applicable to credit counseling organizations.

11. Private Foundation Tax on Net Investment Income: Certain capital gains are included in net investment income.

12. Definition of Convention or Association of Churches: The definition is clarified.

13. All Exempt Organizations are Required to File Annually: Organizations receiving less than $25,000 are required to make an annual filing for annual periods that start after 2006.

14. IRS Disclosures to State Officials: The IRS is permitted to share more information earlier.

15. UBIT Tax Returns are Required to be Made Publicly Available: The Unrelated Business Income Tax report form, Form 990-T, must be made public.

16. Study on Donor Advised Funds and Supporting Organizations: The Act requires a report by 8/17/07 and proposed topics are listed.

17. Improve Accountability of Donor Advised Funds: A definition of a donor advised fund ("DAF") is added to the Code and many new rules are applicable to DAFs and to donors to DAFs.

18. Improved Accountability of Supporting Organizations: Many new rules are applicable to supporting organizations ("SOs") defined in Section 509(a)(3) of the Code and to donors to SOs.

Listed below is information about three topics that will be applicable to most charities.

A - 1. Tax-free IRA Distributions to Charity
The Act permits an individual who has attained age 70-1/2 to distribute up to $100,000 per year from his or her retirement account as a qualified charitable distribution. The contribution must be made to a charity that is described in Section 170(b)(1)(A) other than a supporting organization described in Section 509(a)(3) or a donor advised fund ("DAF") at a community foundation. Thus, the funds may be given to churches, schools, hospitals, publicly supported charities like United Ways and to funds of a community foundation other than DAFs. The transfer is not available for a private foundation unless it is described in Section 170(b)(1)(A)(vii) [a private operating foundation, a private foundation that distributes 100% of the contribution, and a private foundation which places contributions in a common fund]. The entire amount must qualify as an amount that would be fully deductible if given directly by the donor. The contribution may be counted toward the amount required to be distributed from the IRA for the year and is not included in the income of the IRA owner.

B - 5. Gifts of Property not Used for an Exempt Purpose
The tax benefit received by a donor of a deduction at FMV for a gift of personal property used for an exempt purpose can be reduced if the donee organization disposes of the property within three years (the current requirement is two years). The donor's contribution deduction is reduced to the donor's basis in the property if the sale occurs in the year of the gift. If the sale occurs in the second or third year after the gift, the donor must include as ordinary income the amount that is the difference between the cost basis and the FMV claimed unless the donee organization submits a statement that the property was used by the donee or that the intended use became impossible.

B - 7. Recordkeeping for Certain Charitable Contributions
All charitable contributions of money, regardless of the amount, will only be deductible if the donor has a bank record or written communication from the donee showing the name of the donee, the date of the contribution and the amount of the contribution.

Conclusion
The above list and the three brief descriptions are provided so that you will be able to identify the provisions of the Act applicable to your organization. If your organization maintains a donor advised fund or is supported by (or is) a supporting organization, the new rules will be applicable. We will be delighted to send additional information. The effective dates of the provisions vary and many terminate as of 12/31/2007. For additional information about the application of a particular provision, please contact your Womble Carlyle attorney or any of the attorneys in the Tax or Trust & Estates groups at Womble Carlyle.