Summary

The Pension Protection Act of 2006 (“HR 4”) was signed into law on August 17, 2006. Following is a brief summary of several key charitable giving incentives included in HR 4, as well as new charity reform rules, including key DAF reforms. (Following each entry are references to the applicable pages of the Bill or the Explanation.)

Key Charitable Giving Incentives

1. IRA Rollover Provision

For calendar years 2006 and 2007, HR 4 allows taxpayers to exclude up to $100,000 from gross income for a taxable year for qualified charitable distributions from the taxpayer’s individual retirement account. The contribution must be made directly from the IRA account to the charity, and must be made on or after the date that the individual attains age 70 ½. Exclusions: no gifts to trusts or gift annuities, no quid pro quo gifts, and no gifts to donor advised funds or supporting organizations. State and local taxes may be imposed. (See the Bill, Section 1201(a), pages 780-82, and the Explanation, pages 263-68.)

2. Food Inventory Contributions

HR 4 extends the rule from the Katrina Emergency Tax Relief Act to provide that taxpayers may claim an enhanced deduction for donations of food inventory. (See the Bill, Section 1202, page 787 and the Explanation, page 269.)

3. Book Inventory Contributions

HR 4 extends the rule from the Katrina Emergency Tax Relief Act to provide that C corporations may claim an enhanced deduction for donations of book inventory to K-12 public schools. (See the Bill, Section 1204, page 788 and Explanation, page 272-73.)

4. Conservation Easements

This provision is designed to encourage conservation easements by (among other things) increasing the limitation on gifts of long-term capital gain property from 30% to 50%, and allowing a carryover for up to 15 years. Additional incentives are also made available to farmers and ranchers. (See the Bill, Section 1206, page 791-97 and the Explanation, page 274-77.)

Key Charity Reforms

1. “First Dollar Rule” - Prohibited transactions with donors, investment advisors, and others in a Donor Advised Fund (DAF)

Any grant, loan, compensation, or other similar payment is prohibited from a DAF to: a donor; an advisor who has received advisory powers from the donor; an investment advisor of the donor; a family member; and a 35% related entity. The “first dollar” of such payment is automatically deemed an excess benefit transaction, and requires the recipient of the payment to refund the entire payment and pay a penalty of 25% of the entire payment. 

There are some important exceptions to the First Dollar Rule:
 
Disqualified Person Exception: In general, the provision provides that donors and donor advisors with respect to a donor advised fund (as well as persons related to a donor or a donor advisor) are treated as disqualified persons with respect to transactions with such donor advised funds (though not necessarily with respect to transactions with the sponsoring organization more generally).

Compensation and Reimbursement Exception: Payment by a sponsoring organization of, for example, compensation to a person who is both a donor with respect to a donor advised fund of the sponsoring organization and a service provider with respect to the sponsoring organization generally, will not be subject to the automatic excess benefit transaction rule of the provision unless the payment…properly is viewed as a payment from the donor advised fund and not from the sponsoring organization.

(See the Bill, Section 1232, page 874-78 and the Explanation, page 347-48.)

2. Distributions to Donors from Donor Advised Funds

In short, this provision imposes a tax on DAF distributions to donors. The “donor” is a person who has advisory privileges, and includes the donor’s family and 35% related business entities. These provisions apply to taxable years beginning after the date of enactment. (See the Bill, Section 1231, page 872-74 and the Explanation, page 349-50.)

3. Recordkeeping for cash gifts

Taxpayers must maintain records of their gifts. Under these new provisions, the taxpayer is entitled to a deduction only if he or she has a canceled check or a receipt in writing from the donee charity showing the donee’s name, the date of the contribution, and the amount. (See the Bill, Section 1217 at page 825 and the Explanation at page 305-06.)

4. Appraisal rules for gifts of property

If taxpayers “substantially” overstate the correct value of property by 150% or more, they are subject to an “accuracy-related penalty” of 20% of the underpaid tax. If taxpayers “grossly” overstate the value of property by 200% or more, they are subject to a penalty of 40% of the underpaid tax. The same accuracy-related penalty is imposed on an understatement of value on an estate or gift tax return if the value of property claimed on the return is 65% or less of the correct amount in the case of a substantial understatement; or 40% or less of the correct amount in the case of a gross understatement. No penalty is imposed on a “substantial” overstatement or understatement if taxpayers’ treatment of the item on the return is supported by substantial authority or adequately disclosed. These provisions are effective with respect to returns filed after the date of enactment. The Bill codifies a number of the regulatory provisions regarding the definition of a qualified appraiser; authorizes the imposition of a penalty on appraisers for substantial or gross valuation misstatements. (See the Bill, Section 1219 at page 833-41 and the Explanation at page 308-12.)

See HR 4 text: Congress 109, Bill H.R. 4