Legislative Affairs

December 2011

NATIONAL LEGISLATIVE ISSUES

1. Capitol Hill Battle Looms on Social Programs

House Republicans have drafted a budget bill that would eliminate aid for AmeriCorps, President Obama’s Race to the Top schools program, and federal family-planning programs.

The measure to finance the Labor, Education and Health and Human Services departments would also cut off federal subsidies for NPR and stipulates that no money be granted “for any purpose” to Planned Parenthood clinics unless they pledge not to provide abortions. The House measures would provide $153-billion for the three departments for the fiscal year that started October 1, down 2.5 percent from last year and 15 percent less than President Obama is seeking.

2. Senate Rejects Proposal to Deny Grant to Charities That Use Offshore Tax
Havens

The Senate rejected a proposal to bar the Justice Department from awarding grants to charities that put money in offshore accounts to avoid paying income taxes.

But Sen. Charles E. Grassley, who promoted the idea as an amendment to a spending bill, said he would continue pushing for the measure. The Iowa senator, the senior Republican on the Senate Judiciary Committee, said it was designed to cover groups like Boys & Girls Clubs of America - an organization he has criticized since a 2010 Senate investigation found it held more than $50-million in off-shore equities and partnerships. That allowed it to avoid paying unrelated business income tax, or UBIT, that charities owe on income they earn from business not directly tied to their charitable missions.

Senator Grassley proposed the offshore-tax measure as part of an “11-point accountability plan” for the Justice Department. He also proposed:

Auditing 10 percent of grantees.
Excluding groups with negative audit findings from grants if the problems are not correct within six months.

3. Super-Committee Breakdown Could Hurt Non Profits

Non Profits could soon face significant cuts in government aid in the wake of the announcement of an impasse among members of the Congressional committee to close the mounting federal deficit.

Congress voted this summer to require the federal government to slash spending ($600 billion in Defense and $600 billion in Domestic programs) beginning on January 1, 2013, if lawmakers don’t pass a deficit reduction bill by December 23^rd. Now that the super-committee in charge of drafting such a measure failed, this deadline will be hard to meet.

Although the spending cuts would not affect Social Security, Medicaid, or unemployment insurance, they would affect many federal programs that give money/grants to nonprofits that provide health care or advocate for the disabled.

In addition, many nonprofit leaders remain worried that Congress will continue to seek ways to limit/reduce the tax deductibility of charitable gifts to reduce the deficit.

STATE LEGISLATIVE ISSUES

4. Sale Finalized for New Jersey’s Oldest Hospital

After years of financial turmoil and a drawn-out sales process, the planned transfer of New Jersey’s oldest hospital became official with a for profit operator set to take over the Hoboken University Medical Center.

HUMC Holdco, which also operates the Bayonne Medical Center, won a competitive bidding process to take over the Hoboken hospital after the facility’s nonprofit former owner declared bankruptcy. The City of Hoboken, which had taken over the money-losing medical center in 2007, warned that the facility, formerly known as St. Mary Hospital, would shut down, eliminating more than 1,000 jobs, if the sales did not go through.

5. California Charities Sue State Over Spending Cuts

California charities that serve people with developmental disabilities sued the state, challenging the legality of a series of budget cuts for their services.

The ARC of California and the United Cerebral Palsy Association of San Diego contend cuts in reimbursement for job training, daily living assistance, and other programs violate a state law guaranteeing the disabled sufficient support to live independently. The Lawsuit also claims the state must get federal approval for the cuts because Medicaid covers some of the services.

California froze reimbursement rates for providers in 2003 and cut them by 3 percent in 2009 and 4.25 percent in 2010.

6. Illinois Questioning Hospital Tax Exempt States

Illinois officials, health care advocacy groups, and nonprofit hospitals are girding for a battle over what charity benefit hospitals must provide to maintain their tax-exempt status.

In declaring a moratorium on state moves to revoke hospitals tax breaks, Gov. Pat Quinn set a March 1st deadline for all sides to negotiate a resolution. That move followed an August ruling by state regulators revoking three hospitals’ nonprofit status because les than 2 percent of their revenue went to charity care.

Regulators and some advocates want the state to implement a firm threshold of free and reduced-cost care for medical centers. But, hospitals argue that they should get credit for other community benefits, such as education, research and emergency care, and say losing their tax exemption would force many facilities to close.

7. Pennsylvania Officials Confirm Probe of Ex-Football Coach’s Charity

The Pennsylvania attorney general’s office is investigating what officers at youth charity the Second Mile might have known about alleged molestation of boys by the organization’s founder former Penn State assistant football coach Jerry Sandusky.

Authorities are also looking into whether any abuse took place at Second Miles sites or whether the charity funds were used to buy gifts for the alleged victims. Mr. Sandusky has denied charges that he sexually abused eight boys involved in the charity he established in 1977 for underprivileged youths.

The State has also put on hold a previously approved $3-million grant to the Second Mile for a planned learning center in Centre County, PA,.

IRS ISSUES AND RULINGS

8. IRS Reviews How Tax-exempt Hospitals Provide Community Benefits.

The Internal Revenue Service is reviewing how well tax-exempt hospitals are meeting their requirements to provide community benefits. The reviews are based on Form 990, publicly available records, returns that are not publicly available and other information. The IRS will not notify organizations that are being reviewed. The lead tax counsel for Charles Grassley(R-IA) also shared that there will be future discussions about extending the community assessments concept beyond hospitals to other tax-exempt organizations as part of the broader discussion of the tax treatment for charities.

USPS RATES AND ISSUES

9. Postage Rates to Increase in January 2012

The cash-strapped U.S. Postal Service will increase postage rates on Jan. 22, including a 1-cent increase in the cost of first class mail, to 45 cents. The current 44-cent rate has been in effect since May 2009.

The post office lost $8 billion in fiscal 2010, and the bottom line is likely to be even worse when final figures for fiscal 2011 are released soon. This rate increase will make only a small dent in those losses, caused by the recession, movement of mail to the Internet and a requirement that the agency fund future retiree medical benefits years in advanced.

The Postal Regulatory Commission recently verified that the new prices comply with the law limiting the increase to an average of 2.1 percent across all types of mail (the current rate of inflation) so they can take effect.

While the price for the first ounce of a first-class letter will rise to 45 cents, the cost for each additional ounce will remain at the current 20 cents.

Other increases include:

Postcards will go up 3 cents to 32 cents.
Letters to Canada and Mexico will increase a nickel to 85 cents.
Letters to other foreign countries will go up 7 cents to $1.05.
Prices for standard, advertising mail, periodicals and parcels also will rise about 2.1 percent.

The average increase for all types of Non Profit mail will be a little over 1%, but the cost of bulk mailing letters (as opposed to flats and non-machinable pieces) at the non profit rate will actually decrease very slightly from $174/M to $172/M (non automation) and from $152/M to $150/M (automated).

10. Senate Panel Offers Plan to Keep Postal Services Afloat and Maintain the NP Rate Discount

Senators announced a bipartisan plan yesterday to help keep the financially ailing Postal Service solvent and continued six-day mail delivery for at lest two more years.

The proposal would lift the agency from brink of bankruptcy. According to the Senate bill:

The Postal Service would receive a refund of nearly $7 billion it has overpaid into the Federal Employee Retirement System.
The agency would be required to use part of the refund to set up a buyout program aimed at reducing staff by 100,000.
Mail delivery would continue at six days a week for at least two years. After that, if the Postal Service wanted to reduce deliveries to five days, the independent Postal Regulatory Commission would have to verify that other cuts have been made and the savings still were not enough to ensure financial viability.

Fund raisers and nonprofit leaders are relieved because this bill would in effect preserve lower postage rates for charities. Charities now are charged 35 percent less, on average, than businesses when they send mass mailings to donors.

Because of its broad reach, lobbyists say this measure has better chances than another bill that Sen. John McCain, the Arizona Republican proposed to phase out nonprofit postage rates. Similar legislation was introduced in the House by Rep. Darrell Issa, a California Republican. Their legislation proposal calls for reducing the current discount rate for nonprofit postage by 5% each year for 6 years which effectively reduces the nonprofit discount rate from 40% to about 10% by 2018.

September 2011

NATIONAL LEGISLATIVE ISSUES

1. House Proposal Would Simplify Foundation Excise-Tax Rate

House lawmakers have introduced a bill that would change the way private foundations pay taxes on their investment income by creating a flat tax rate. The bill-has the same language as proposed legislation that Sen. Charles Schumer, Democrat of New York, introduced, earlier in the Senate.

Both the House and Senate bills call for eliminating the existing two-tiered tax rate and setting a flat tax of 1.39 percent. That figure is slightly higher than the rate included in a plan by President Obama, which would create a flat excise tax of 1.35 percent.

Though they are exempt from federal income tax, private foundations are currently required to pay 2 percent of their net investment earnings to the government, unless they increase their giving beyond the average sum they gave in the previous five years, in which case the rate would be reduced to 1 percent.

The system was designed to get foundations to give more, but some believe it has had the opposite effect. Foundations that sharply increase giving in one year raise their average donation amount and therefore must continue to give at high rates in subsequent years to avoid the 2-percent tax rate. Some Foundations may be reluctant to raise their giving in any one year as a result.

Proponents of the change, including the council on Foundations, say the move would encourage grant makers to give more during the current hard times for charities.

2. CBO Examines Various Income Tax Proposals to Nonprofit Contributions

Under current law, taxpayers who itemize deductions may deduct the amount they donate to charities from their adjusted gross income (AGI) when determining how much they owe in federal income taxes. That deduction gives people who itemize an incentive to contribute to charities. Like other forms of preferential tax treatment, the deduction also cost the federal government revenues that it might otherwise collect. At current levels of charitable giving, the cost of that deduction-measured as the additional revenues that could be collected if the deduction was eliminated-will total about $230 billion between 2010 and 2014 according to the Joint Committee on Taxation (JCT).

Numerous proposals have been made in recent years to alter the income tax treatment of charitable giving by individual donors.

Recently the Congressional Budget Office (CBO) examined how much taxpayers in various income groups donate to charities and what types of organizations receive those donations. CBO also investigated how changing the structure of tax incentives for giving would affect the tax subsidy, the overall level of charitable giving, and the extent to which different income groups benefit from the tax preference. Specifically, CBO looked at 4 categories options.

Retaining the 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 nonrefundable credit for all taxpayers, equal to 25 percent of a taxpayer’s charitable donation, with or with out the floor.
Replacing the deduction with a nonrefundable credit for all taxpayers, equal to 15 percent of a taxpayer’s charitable donations, with or with out the floor.

According to CBO’s modeling, adding a contribution floor to any of the approaches listed above would reduce both the total federal tax subsidy and the total amount donated to charity, relative to the same option without a floor.

Allowing all taxpayers to claim a deduction for charitable giving would have increased donations in 2006 by an estimated $2.0 billion (or 1 percent) from the total tax subsidy by $5.2 billion (or 13 percent) from the 2006 amounts.

Replacing the current deductions with a 25 percent tax credit would increase donations and also increase the government’s forgone revenues.

Setting the credit at 15 percent would reduce donations but would reduce the tax subsidy by a larger amount.

3. Charitable Deduction Not Touched in Debt-Ceiling Deal

The deficit deal between President Obama and House Speaker John Boehner does not make any changes in the tax deduction that donors receive for making charitable gifts.

The deal trims the federal deficit by almost $2.5-trillion over the next 10 years, identifies $900-billion in spending reductions now and would require Congress to pass $1.5-trillion more in cuts by December. It is in that process that reducing or eliminating the value of the deduction could come under consideration.

No matter what happens with the charitable deduction, however, the spending cuts outlined in the debt accord will probably be far more significant for non profit groups that rely on federal money.

4. Senate Proposal Takes Aim at Charities That Avoid Taxes Offshore

Sen. Charles E. Grassley, senior Republican on the Senate Judiciary Committee, has introduced legislation that would deny some federal money to charities that put money in offshore accounts to avoid paying income taxes.

The Iowa Senator has proposed barring such charities from getting grants from federal programs that helps prisoners re-enter society. The proposal follows an inquiry that he and several other lawmakers conducted last year into Boys & Girl Clubs of America.

Mr. Grassley’s move -- an amendment to a bill pending in the Judiciary Committee to extend the so-called Second Chance Act -- takes aim at unrelated business income tax, or UBIT. Those are taxes that charities owe on income they earn from businesses that are not directly tied to their charitable missions.

While moving money offshore to avoid those taxes isn’t illegal, Mr. Grassley said “it’s loophole that I saw exploited in the many investigations and hearings I conducted as the chairman of the Finance Committee.” For now, he said, Congress should consider denying grant money to nonprofits that practice such tax avoidance.

The senator, who regularly investigates nonprofits, said he and his colleagues discovered that Boys & Girls Clubs held more than $50-million in off-shore equities and partnerships in the Cayman Island, British Virgin Islands, and Bermuda in an effort to avoid paying income taxes. The questions about UBIT arose after senators started investigating the charity’s spending on executive compensation, travel, perks and other items at a time when some local boys and girls clubs were closing due to budget shortfalls.

5. U.S. Clamps Down on Donated Easements

The U.S. government is trying to stamp out abuse of an obscure tax break that allows the owners of historic buildings to take big tax deductions for “donating” to preservation groups a promise to not to alter a property exterior.

As part of the effort, the Justice Department is taking legal steps to prevent a Washington preservationist from advising local property they can claim the deduction on the so-called façade easement donation.

Preservation laws in Washington and many other cities already bar unapproved changes to historic homes’ facades-meaning property owners those locations are claiming a tax break for something they are legally prevented from doing anyway. The government estimates that inflated easement deductions have cost the Treasury $1.2-billion since 2002.

The Justice Department is seeking the names of hundreds of Washington taxpayers who took the deduction and filed a civil complaint asking a judge to order the Trust for Architectural Easements to stop telling homeowners they could write off up to 15 percent of the value of historic properties.

6. Budget Deal Puts Pressure on Nonprofits

For nonprofits that rely on federal grants and contracts, that deal to head off a costly credit default by the government marks the beginning of a fretful new era of lobby and uncertainty.

The new budget law calls for cuts of more than $2-trillion over 10 years but does not spell out exactly where those savings should come from. So, nonprofits will have to watch for months, if not years, to figure out if they or people they serve will be victims of the budget scalpel.

Bitterly divided lawmakers must now decide how much of the savings will derive from social programs; how much from tax increases and how much from Medicaid and other entitlement programs.

The agreement crafted by President Obama and Congressional leaders places annual limits on spending that will provide $917-billion in savings through the 2021 fiscal year. Nonprofit groups must now monitor how Congress achieves those savings in negotiations over the 2012 budget.

And they must also keep an eye on an entirely new player: 12-member bipartisan “super Committee” that must suggest at lest $1.2-trillion in additional budget savings over the next decade.

7. U.S. Court Sides with Madoff Trustee on Clawback Suits

In a ruling that could affect nonprofit groups that invested with Bernard Madoff, a federal court strengthened bankruptcy trustee Irving Picard’s hand in pursuing clawback lawsuits against those who profited from Mr. Madoff’s fraud.

The U.S. Court of Appeals panel agreed with trustee Irving Picard’s contention that investors are entitled to reimbursement only of actual cash they lost in the disgraced and jailed financier’s $65-billion Ponzi scheme, not the fictional bottom lines in their balance statements.

Lawyers said the ruling backs Mr. Picard’s pursuits against investors who withdrew more than they put in to their Madoff accounts and could set a precedent for pursuing assets in future Ponzi-scheme cases. The trustee has sued more than dozen foundations and charities to recoup what he alleges were profits from Madoff investments.

STATE LEGISLATIVE ISSUES

8. New Budget Year Sees States Cutting Medicaid Payments

More than a dozen states have reduced Medicaid payments this year to doctors, hospitals, and other providers that treat poor patients via the federal program. These rate reductions, most of which took effect July 1 as many states began their new fiscal year, represent an effort by states to cut one of their largest budget expenditures.

Some health-care experts and industry advocates said the cuts, which are subject to federal approval, would deepen the shortage of physicians accepting Medicaid patients and prompt those that do so to increase what they charge patients with private insurance.

Arizona, Colorado, Connecticut, Florida, Nebraska, New Hampshire, New York, North Carolina, Oregon, Pennsylvania, South Dakota, Texas, Virginia and Washington have cut payments to doctors, hospitals, or both this year. A 10-percent rate cut in California is on hold due to lawsuit.

9. Lawmakers in 2 States Strike Down High-Profile Bill to Regulate Nonprofits

Efforts in Massachusetts and Oregon to place new financial restrictions on nonprofits have failed to become law.

In Massachusetts, lawmakers last week rejected a proposal that would have prohibited nonprofits from paying their board of directors.

Oregon lawmakers, meanwhile, have failed to approve a measure that would have required charities to spend at least 30 percent of their expenses on programs or else be unable to allow donors to get a charitable deduction.

Both measures had won significant support and national attention before they withered. Their failures may indicate the challenges of introducing legislation that could affect as many legitimate charities as those the attorneys consider abusive.

10. N.J. Drops Proposal to Require Charities to tell Donors They Can Earmark
Money

New Jersey regulators have decided not to purse a proposal to require charities to tell donors they can earmark their contributions for specific programs, an idea that had drawn strong criticism from nonprofit leaders.

The draft proposal, issued in June by the Division of Consumer Affairs, would have required charities with at lest $250,000 in annual contributions to provide forms allowing donors to specify how their gifts should be spent—and to tell them that any undesignated money could pay for administrative and fund-raising cost.

The Center for Non-Profit Corporations, an association of New Jersey charities, had criticized the plan, saying it would be an administrative burden and would not allow charities to decide how best to spend their money

11. New Hampshire Medicaid Cuts Prompt Lawsuit by Hospitals.

Ten New Hampshire hospitals are suing the state over cuts in Medicaid reimbursements that the medical centers say threaten low-income residents’ access to care. The hospitals told a federal court that the state made deep cuts in repayments solely for budgetary reasons, without regard to what the hospitals needed to treat Medicaid patients.

The New Hampshire budget that took effect July 1^st, lowers Medical payments and does not include a past provision to reimburse hospitals for a state tax on patient revenues, using federal funds. Hospitals say the measure will cost them $250-million over two years, prompting facilities to lay off hundreds of employees and reduce or eliminate some services.

State lawmakers passed the cuts over the objections of the governor.

12. M.N. Budget Squeezes Nonprofit Health Plans

Minnesota’s new two-year budget cuts or delays $435-million in payments to nonprofit health plans that manage subsidized care for half a million low-income residents.

The trims represent nearly 15 percent of the $3-billion in state’s contract held by HMO’s and include funds to be withheld unless the plans meet targets for reducing emergency-room visits, hospitalizations, and readmissions.

While their battle over taxes and social spending culminated in the state’s recently ended government shutdown, Democratic Gov. Mark Dayton and Republican lawmakers were in harmony on efforts to cut health-care and scrutinize contracts with providers.

13. Saints Medical Center to Become For-Profit.

Saints Medical Center in Lowell will join Steward Health Care, continuing the outflow of hospitals from the nonprofit sector amid financial distress.

Saints Medical Center announced that its board of trustees voted to enter into and execute an asset purchase agreement to become a part of Steward Health Care LLC, the largest fully integrated community care organization in New England.

Steward has offered to provide about $98 million to Saints Medical Center, including $35 million for capital improvements, $15 million to cover unfunded pension liability, and $48 million for other debt.

Before the transaction is concluded, state regulators and the Supreme Judicial Court will have to approve it.

In recent months, Steward has moved to acquire Quincy Medical Center and Morton Hospital, although those purchases have not yet to receive final approval. Last year, Steward bought six hospitals associated with Caritas Christi Health Care.

14 N.Y. State to Examine Nonprofit Executive Pay

The State of New York has formed a committee to investigate compensation for top officials at nonprofit organizations that receive government money.

Announcing the committee, Gov. Andrew Cuomo said nonprofits had “a special obligation to the tax payers that support them to use their government money to help New York, not to line their own pockets” The Governor cited startlingly excessive pay for non profit officials, including two brothers who headed a Medicaid financed NPO that runs group homes for the developmentally disabled, whom each made as much as $1 million a year.

The panel, which includes New York’s inspector general and secretary of state, will audit nonprofit pay and recommend rules to curb “excessive salaries and compensations.” It has already sent hundreds of letters to non profit organizations which receive state funds, asking them to provide compensation data for their executives and board members. The committee plans to hold public hearings and later devise proposals for changes in the rules governing these salaries.

15. IL Denies Tax Breaks to 3 Hospitals Over Charity Care

The state of Illinois denied property-tax exemptions to three nonprofit hospitals, saying they did not provide sufficient charity care to warrant tax breaks.

The institutions-Decatur Memorial Hospital, Edward Hospital in Naperville, and Chicago’s Prentice Women’s Hospital-reported spending 0.96 percent to 1.85 percent of their revenue on free care in applications for tax exemptions. The state Department of Revenue reviews non-profit hospitals’ tax status when the facilities expand or change ownership.

In a statement, the revenue agency said it was following the guidelines of the Illinois Supreme Court, which last year upheld the rejection of another medical center’s tax break over charity care.

“The fundamental question is weather hospitals operate as business or charities” the department said.

IRS ISSUES AND RULINGS

16. NPO’s Lose Charity Status With IRS

The Internal Revenue Service said that 275,000 nonprofits have lost their tax-exempt status because they did not file legally required documents for three consecutive years. That move trims the number of tax-exempt groups by about 14 percent.

Many of the groups that lost their exemptions are charities, and donors to those organizations cannot claim a charitable deduction for gifts to the groups after the IRS makes the list official.

The IRS action came after Congress passed a law in 2006 to keep better track of groups that have tax- exempt status. The law gave organizations with annual revenue of $25,000 or less years of tax-filing deadlines to comply. Organizations must file annual informational returns, through small groups must simply provide a few pieces of information.

Organizations that are affected by this action can ask the IRS to reinstate their tax-exempt status retroactively. Appling can cost as much as $850, but the fee will be reduced for small groups that can prove they had good reason not to comply with the paperwork rules.

Moving forward, the tax agency plans every month to release the names of groups that fail to file their paperwork. Organizations that do not file for three years will be placed on the list, which will be separate from the IRS Announcements about nonprofits that have lost their tax-exempt status for other reasons.

17. IRS Drops Investigations of Big Donors to Advocacy Groups

The International Revenue Service announced that it has dropped any consideration of enforcing gift taxes on donations made to nonprofit advocacy groups.

Several big donors to advocacy groups had reported this spring that they had received questions from the IRS about whether they should have paid gift taxes, a move some Republican lawmakers speculated could have been the result of Obama administration pressure. Many advocacy groups classified under Section501© (4) of the tax code, spent heavily on political ads in the 2010 election cycle.

A deputy commissioner of the IRS said in a statement that so many questions had been raised about the application of the gift tax; the agency would no longer spend time or money pursing its enforcement.

An IRS statement on the announcement added that its possible Congress would consider legislation to clarify the taxes that apply to donors to advocacy groups.

Donors can’t give charitable contributions to such groups because they engage in efforts to influence voters, but the IRS had said a rarely enforced law meant that donors probably should pay gift taxes for their support of such groups. (Gift taxes apply to money exchanges of $13,000 or more).

18. IRS Considers Changes in Disclosure Rules for Many Groups

Many nonprofits and their affiliates could face expanded requirements to disclose information to the Internal Revenue Service if some tax-agency officials and advisers get their way. What’s more, the IRS might require each affiliate to prove it deserves tax exemption, rather that granting one exemption to cover every affiliate.

Organizations like the American Cancer Society, Habitat for Humanity, and the NAACP all would be affected by a change.

Under current IRS rules, nonprofits with affiliates can apply for tax-exempt status as a group. They can choose to file one informational return each year with the tax agency that covers all the affiliates.

Concerned about the lack of information available about affiliates, the IRS’s tax-exempt unit said the 70-year-old practice of approving one group application for tax-exempt status may no longer make sense.

Ending the group tax exemption would increase accountability “to a limited degree” but it could also raise legal objections from groups that would lose their status.

USPS RATES AND ISSUES

19. Postal Service Revamp Could Slash Charity Rate Break

A congressional proposal to restructure the money-losing Postal Services would phase out the 40-percent discount nonprofit organizations get for their mailings.

The bill would reduce the discount by 5-percent a year for six years and would save $1.7-billion a year for the Postal Service, which faces a second straight year of $8-billion or more in losses.

The Association of Fundraising Professionals said the plan would “cripple” many charities that depend on direct mail for the bulk of their solicitations. The Alliance of Nonprofit Mailers is also protesting the proposal, stating it “is unfair to punish nonprofits for the Postal Service’s inability to control its own costs.”

June 2011

NATIONAL LEGISLATIVE ISSUES

1. President’s Deficit Plan Seeks to Limit Charity Write-Offs For the Wealthy

President Obama is making a renewed call to limit the value of charitable tax breaks taken by wealthy people, saying that such changes are needed to help close the nation’s mounting federal deficit.

Obama’s plan borrows from recommendations from his bipartisan commission as well as his 2012 budget proposal. The 2012 budget proposal would eventually reduce the value of itemized deductions for those in the top tax bracket by 30 percent. The plan calls for limiting itemized tax deductions, including those for charitable donations, to 28 percent for taxpayers in the highest brackets. Currently that rate is set at a maximum of 35 percent.

The Obama Administration says such a move, which would be coupled with changes to other itemized deductions such as those offered for mortgage interest, would reduce the deficit by $320-billion over 10 years and would eliminate inequities in the tax code that the president says unfairly benefit the rich.

2. Republicans Propose Big Changes in Aid for the Poor

House Republicans unveiled a budget plan that would cut government spending on social safety-net programs over the next decade and require people who receive some federal aid to work or get job training.

The plan -- presented by Rep. Paul Ryan of Wisconsin, chairman of the House Budget Committee -- singles out Medicaid, food stamps, and rental assistance, saying the cost were growing “at an unsustainable rate” and were failing the people they were supposed to help.

The plan lays out their spending priorities over the next 10 years, proposing to cut $6.2-trillion from the budget proposed by President Obama for that period. If adopted, the plan could have a big impact on charities that help low-income people, including those that offer job training or count on Medicaid to help cover their health services.

The Republican plan would change the way that the federal government pays for Medicaid and food stamps by offering block grants to states according to a formula based on population and other factors instead of paying a fixed percentage of the state’s costs. The Republicans also want to apply to some safety-net programs the approach that was used to overhaul federal welfare programs in the 1990s: that is, they would require recipients to have jobs, seek work, or enroll in a job-training program.

The plan also proposes to consolidate dozens of federal job-training programs, many of which are operated by nonprofit groups, and make them more accountable. The government would track the types of training provided, the cost per student, employment after training, and whether people are working in the field for which they were trained.

3. Health and Education Programs Cut in Budget Deal

Federal health, education, and labor programs will be cut by $13-billion under the compromise lawmakers and the White House backed to avert a government shutdown. In addition, reductions will be made in housing and foreign aid, and all domestic agencies will face a total of $1-billion in cuts. What’s more, the plan will eliminate more than $2-billion that was supposed to create private nonprofit health cooperatives under the new health-care law.

4. Senators Offer Bill to Help Charities Seek IRA Gifts

Sen. Charles Schumer, a New York Democrat, and nine other senators have introduced a new bill to permanently extend a provision that allows people ages 70 ½ or older to transfer up to $100,000 tax-free from their individual retirement accounts to charity.

The measure now expires at year’s end, but S557 would make it permanent. It also includes other measures charity leaders advocated: it lowers the minimum age of such donors to 59 ½, removes the $100,000 cap on annual donations, and allows IRA gifts to be made to donor-advised funds and supporting organizations, which is currently not allowed.

5. Senator Prods Medical Nonprofits to Disclose More About Industry Contributions

Sen. Charles E. Grassley has renewed his effort to get nonprofit medical groups to provide more information to the public about the money they get from pharmaceutical, medical-devices, and insurance companies.

Grassley, Republican of Iowa, sent letters about the matter to all of the 34 organizations that he had contacted in late 2009 and early 2010, including disease advocacy groups like the American Cancer Society and the America Heart Association and medical-professional groups like the American Academy of Family Physicians and North American Spine Society.

Sen..Grassley, who has been conducting a wide-ranging investigation into the financial ties between industry and the medical fields, said that the nonprofits should disclose who is giving them the money because “these organizations have a lot of influence over the way taxpayer dollars are spent,” adding that they take stands on legislation and provide guidance to federal health agencies.

6. Congressman Accused of Directing Federal Aid to His Nonprofits

Hal Rogers, Chairman of the House Appropriations Committee, has funneled more than $236-million in federal funds to nonprofit groups that he created. The findings come from a new report by Citizens for Responsibility and Ethics in Washington, a watchdog group.

The report also found that private companies with links to Mr. Rogers and the nonprofits he created received $227-million in federal money and that aides, campaign donors and family members benefited from the deals. Mr. Rogers, a Republican from Kentucky, has been criticized by conservatives and anti-spending groups for his deals, such as earmarking money to a conservation program where his daughter worked.

7. ‘Three Cups of Tea’ Lawsuit Could Open Path for Donors to Sue.

A new federal lawsuit demanding that Greg Mortensen, the Author of Three Cups of Tea, and his charity return millions of dollars of the donations and book proceeds could shake up the nonprofit world.

Legal experts say that if the case, which is seeking class-action status, is allowed to proceed, it would give unprecedented recourse to people who feel they were duped into supporting a charity and leave charities vulnerable to damaging lawsuits by unhappy donors and customers.

The Lawsuit is the latest fallout from the controversy involving Mr. Mortenson and the charity he started, The Central Asia Institute, in Bozeman, MT.

The complaint, filed in the U.S. District Court in Montana, alleges that Mr. Mortenson and the institute fraudulently solicited donations and earned book profits based on his claims about his experiences in Afghanistan and Pakistan. The Montana lawsuit alleges that Mr. Mortenson fabricated details in his books and in his speeches for the purpose of inducing “unsuspecting individuals” to make donations

The Lawsuit may have made a smart end run around an issue that has in the past tripped up prospective lawsuits – the legal right of donors to sue a charity. Courts have consistently limited the ability of donors to sue to correct alleged abuses at a nonprofit group, typically reserving that right for state attornies general. The Montana lawsuit, however, does not reach in to the business of the Central Asia Institute. Instead, it sticks to claims of fraud involving solicitations for gifts.

STATE LEGISLATIVE ISSUES

Oregon Bill Ties Exemption To Program Expense Ratios

Charities that don’t spend at lest an average of 30 percent of their expenses on programming for three years would risk losing certain state tax deductibility, due to a bill passed by the Oregon State Senate. Under Senate Bill 40, charities registered in Oregon with more than $20,000 in annual revenue would have to spend at lest 30 percent of their budgets averaged over three years, on functional program expenses to keep their state tax-deductible status for contributions.

Sanctioned nonprofits would still be allowed to solicit donations but would be required to disclose that donations to the organizations are not deductible for Oregon state purposes. This would impact not just nonprofits incorporated in Oregon but all so organizations simply mailing into the state for donations from Oregon residents.

A spokesman for the attorney general’s office expects the measure to gain legislative approval. The measure was introduced in January and it passed by a 28-2 vote in the Senate.

The Direct Marketing Association Nonprofit Federation (DMANF) drafted a letter opposing the legislation on grounds that it’s unconstitutional, citing U.S. Supreme Court precedents, adding, “It’s the wrong way to regulate charity,” “Numbers prove nothing in and of themselves and shouldn’t be used to impose sanctions absent a demonstration that there’s a failure of stewardship”.

Budget-Strapped Cities Charge Nonprofits New Fees

Several cities are including nonprofit organizations in new fees for road and storm-water-management improvements. Faced with budget shortfalls and strict new mandates for storm-water-run-off, Houston, TX; Richmond, VA; Lafayette, IN.; and Verona, WI., have imposed drainage fees that will be charged to churches, private schools, and other traditionally tax-exempt groups as well as to taxpayers.

Plus: After a two-year review, Boston officials recently released details of a program to increase the size and the fairness of the payments charities voluntarily make to the city for basic services.

The plan, thought to be the first in the nation coordinated effort of this type, ties payments for police and fire protection to the value of tax-exempt groups’ property, with the first $15-million exempt, and sets a formula quantifying the benefits they provide the community. It replaces the current system of ad hoc agreements with the charities, which results in widely varying payments.

Boston officials hope to raise an additional $5-million from medical and educational institutional in the first year of the program. The formula is designed to increase payments gradually over 5 years from $15 million to $48 million.

States Consider New Corporate Structures to Support Social Goals

States are moving to approve new corporate structures for businesses that blend profits with social and environmental goals.

Two bills that would establish such structures in California are gaining momentum, but the California Association of Nonprofits is asking the state legislature to slow down and consider how any changes to corporate forms might affect charities.

Some proponents of the bills says passage would enable California to become a leader in experimenting with new for-profit structures and could bring billions of dollars of new capital to bear on social and environmental problems.

One bill, would allow the creation of “flexible purpose corporations” that seek both profits and at least one broader social/environmental goal. The structure would shield board members from claims that they have violated their fiduciary duties by pursuing the social or environmental goal and is expected to appeal to companies with large numbers of shareholders, including publicly traded companies.

The second bill would allow the creation of benefit or B corporations. This structure would go even further than the flexible-purpose legislation and require corporate directors to pursue a broad set of social and environmental objectives in addition to profits. The B Corporation appeals to social entrepreneurs and privately held companies that would like to be held to a higher standard, at a time when it has become trendy for corporations to boast about their socially conscious activates.

Already, four other states—Maryland, New Jersey, Vermont and Virginia—have passed laws creating B corporations.

Neither California bill would provide any tax advantages to corporations that also pursue social or environmental goals, but some charity leaders are concerned that such tax advantages may be sought eventually. The fear is that some wealthy Americans would take money they would otherwise have given to charity and invest it in for-profit corporations pursuing social goals.

New York Attorney General Calls for Changes in Nonprofit Laws.

New York’s attorney general announced that he plans to propose an overhaul of laws that govern the state’s charities.

Attorney general, Eric Schneiderman, said nonprofit groups face too much red tape and that the cost of complying with government regulations are too high at a time when states and cities are cutting their support to the organizations.

He said that if a nonprofit received money from six city or state agencies, it could be subject to six audits. Plus New York asks too many small groups to conduct annual audits—currently any organization with an annual revenue of more than $250.000. In California, he noted, groups do not have to do that unless they have at least $2-million in revenue.

MA Officials Fast-Track Bill to Restrict Nonprofit Board Pay

A bill that prohibits nonprofits from compensating board members, which was attached to the state’s budget legislation, was approved by the MA Senate. It now goes to a legislative conference committee.

The bill would bar tax-exempt groups from paying their directors unless they get a waiver from the attorney general’s office. The State’s attorney general has publicly tangled with the state’s nonprofit insurers over their five figure annual stipend payments to board members.

NC Bill Would Require Nonprofits to Provide Financial Data Upon Request

The NC legislature has approved a bill that would require nonprofits that receive government funding to provide financial statements to anyone who makes a written request. The bill follows a controversy over a nonprofit that received county money for a project, but was slow to say how it was spent when asked. It would require these nonprofits to give details about how much government money they received and specifically how it was used.

IRS ISSUES AND RULINGS

IRS Warns of Tax Abuses Involving Nonprofits.

The IRS reports that attempts to abuse charitable organizations and deductions are among the most common efforts to skirt the tax code. Taxpayers are using charities to shield income from taxation, often by inflating the value of donated assets or income from donated property.

In addition, the IRS said it has also been investigating schemes involving the donation of products and other noncash items by multiple groups that each claims the full value for giving and receiving the same contribution. These donations are often highly overvalued -- therefore allowing a bigger tax deduction -- or the recipient allows the donor to repurchase the item at a later date.

IRS Warns Mega-Donors about Gifts to Advocacy Groups

Mega-donors may owe taxes on their millions-of-dollars in contributions to nonprofit advocacy groups that are playing an increasing role in politics. The IRS has notified at least six major donors that they should have reported their contributions as taxable gifts.

These advocacy groups, mostly ultra-conservative organizations, have funneled vast sums of money in support of campaigns and causes without having to disclose their donors. During the midterm election cycle, they were heavily involved in politicking, spurring complaints that they were flouting election laws. These organizations are set up as nonprofit corporations under section 501(c)(4) of the tax law and so their primary purpose cannot be political.

Unlike contributions to charities, donations to these advocacy groups have always been subject to a gift tax, but the IRS has not enforced this rule. The timing of the agency’s moves at this time is prompting some to question if the IRS is sending a signal to these groups and their mega-donors in an effort to curtail the practice.

Note: Six Republican Senators on the Finance Committee have requested the IRS to explain why it decided to take this action – concerned that the retroactive enforcement of this gift tax may be politically motivated – which the IRS has denied.

USPS RATES AND ISSUES

There is nothing new to report at this time

March 2011

The New Congress Brings New Agenda for Nonprofits

Here is some of what the nonprofit world can expect from the new Congress.

Federal aid: Republicans, who now control the House and gained seats in the Senate, will take a hard line on spending, especially given pressure from the small-government Tea Part. This will be bad news for safety-net programs and programs that President Obama hoped to expand, like AmeriCorps; the Social Innovation Fund, which provides grants for promising nonprofit projects; and Promise Neighborhoods, which provides money for antipoverty projects modeled after Harlem Children Zone.

Scrutiny of nonprofits: Senator Charles E. Grassley, the Iowa Republican who has led a steady stream of investigations into alleged nonprofit abuses as chairman and then senior Republican on the Senate Finance Committee, is expected to move to the top Republican post on the Senate Judiciary Committee. Some observers expect his successor, Senator Hatch (R –UT) to be less interested in nonprofit investigations. He is also more sympathetic than many other Republicans to national-service programs.

Charity oversight: With control of House oversight committees, Republican will be able to call hearings over controversies involving nonprofit groups or social programs that draw their suspicion.