Donors, Volunteers and the Administration s FY 2016 Revenue Proposals. By Grace Allison

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1 Donors, Volunteers and the Administration s FY 2016 Revenue Proposals By Grace Allison Given the current stand-off between the Executive Office and the Congress, it is not likely that the Administration s latest budget proposal will influence tax legislation in the near future. Nonetheless, for those interested in charitable planning, the charitable provisions in the Obama FY 2016 Revenue Proposals are important. They give us an opportunity to examine Treasury s current thinking on several important issues, including the structure of the income tax charitable deduction and the appropriate incentives for conservation easements. In this regard, it is worthwhile to examine both what is new and what is being re-proposed. Looking to the broader framework, Obama s proposal includes two new capital gains provisions that would, if enacted, encourage transfers of appreciated property to charity during life and at death. The first would increase the highest long-term capital gain rate to 24.2 percent. A second, very complex set of provisions would tax wealthier decedents on built-in appreciation at death, with an exemption for appreciated property bequeathed to charity. General Explanations of the Administration s Fiscal Year 2016 Revenue Proposals, published in February, 2015 ( General Explanations ), Also included in the proposal, for the second year running, is a Buffet rule tax on the very highest income taxpayers, called the Fair Share Tax. In a bow to the charitable sector, this tax would be offset by a credit equal to 28 percent of the taxpayer s net itemized charitable deductions. General Explanations, Importantly, the Obama 2016 Budget, unlike last year s Camp proposal, includes only two provisions directly affecting charitable organizations. The first is a well-worn proposal to simplify the private foundation excise tax on net investment income. The second, buried in a discussion of the deduction for qualified conservation contributions, would require new regulation of qualified conservation organizations. For the most part, however, the 2016 proposals are notable for a wide variety of proposed modifications to the individual income tax charitable deduction, some restrictive, some enhancing. The summary which follows is based on Treasury s General Explanations. Proposals affecting the structure of the income tax charitable deduction percent cap. Of the revenue proposals directly impacting the income tax charitable deduction, the centerpiece is Obama s recurring recommendation to 1

2 cap that deduction at 28 percent. Like prior Obama revenue proposals, the 2016 iteration would reduce the value of itemized deductions, including the charitable deduction, to 28 percent for those in the 33 percent, 35 percent or 39.6 percent bracket. (In 2015, the 33 percent bracket begins at $230,450 for marrieds filing jointly.) The cap is part of a broader plan to reduce tax expenditures at the upper brackets, a plan that Treasury projects would raise $603 billion over ten years. General Explanations, Table 2, 296. Although several tax reform panels have concluded that tax expenditures cannot continue to grow unchecked, there has been considerable and continuing pushback by the charitable sector against applying a 28 percent cap to the income tax charitable deduction. 2. Changes to percentage limitations. Under current law, gifts of cash to private foundations are capped at 30 percent; gifts of long-term appreciated property to private foundations are capped at 20 percent. A proposal new this year would set the limitation for transfers of either cash or property to non-public charities at a uniform 30 percent. Given current law, this change would be an unexpected benefit to private foundations and their donors. The General Explanations is silent on the rationale for this largesse, other than to note that it would simplify [the] complicated set of rules limiting deductions for charitable contributions. General Explanations, 280. Perhaps this proposed change is best viewed in the context of the 28 percent cap, i.e. as a sweetener with appeal to some of the cap s most strident critics year carryover period. Also new this year is a proposal to amend current Section 170(d) to extend the excess charitable contribution carryover period from the current five years to 15 years for all charitable contributions. Again, this very generous proposal is introduced without much explanation. It would generally benefit donors making very large gifts, typically those with adjusted gross income in the upper one percent. The combined revenue cost of the carryover extension and the percentage limitation simplification is projected to be almost $6 billion over ten years. General Explanations, Table 2, 299. Proposals relating to conservation easements 4. Extension of enhanced provisions for qualified conservation contributions. The only extenders provision in the FY 2016 revenue proposals (as in the FY 2015 revenue proposals) is permanent extension of the enhanced percentage limitations and 15-year carryforward period for contributions of qualified 2

3 conservation easements. These provisions, which can be found in Section 170(b)(1)(E), expired at the end of (Permanent extension would also be provided by the pending America Gives More Act of 2015, H.R. 644.) 5. Anti-abuse provisions relating to the charitable deduction for qualified conservation contributions. Like last year s revenue proposals, this year s would: prohibit any income tax charitable deduction for contributions of easements on golf courses; prohibit any income tax charitable deduction for value associated with foregone upward development above an historic building; and extend special charitable deduction rules applicable to buildings in registered historic districts (Section 170(h)(4)(B)) to buildings listed in the National Register. The Administration also proposes four new anti-abuse provisions under Section 170(h). First, new Treasury regulations would require qualified conservation organizations to meet minimum requirements... which would be based on the experiences and best practices developed in several States and by voluntary accreditation programs. Second, a modified definition of eligible conservation purposes would require that all contributed easements further a clearly delineated Federal conservation policy (or an authorized State or tribal government policy) and yield significant public benefit. Third, donors would be required to describe [presumably on their tax returns] the public benefits and conservation purposes of their contributions; the donee organizations would be required to attest that the conservation purpose, public benefits and fair market value of the easement reported to the IRS are accurate. General Explanations, 191. Significantly, Penalties would apply on [sic] organizations and organization managers that attest to values that they know (or should know) are substantially overstated or that receive contributions that do not serve an eligible conservation purpose. General Explanations, 191. Fourth, required disclosure about contributed conservation easements and their fair market values would be expanded by amending section General Explanations, $100 million pilot project authorizing non-refundable qualified conservation credits. The last few years have seen a torrent of conservation easement cases under Section 170(h) in the U.S. Tax Court and the courts of appeal. In explicit response, the Administration would authorize a $100 million tax credit pilot 3

4 project for conservation easement contributions as an alternative to a co-existing income tax charitable deduction for such contributions. Credits would be allocated to qualified conservation organizations and governmental entities by a Federal interagency board ; the credits would then be distributed by those organizations and entities to easement donors. General Explanations, One purported goal of the pilot project is removing oversight of conservation value from the IRS. General Explanations, 190. It is far from clear, however, that overall federal involvement would substantially diminish. For example, in addition to the interagency board, the proposal requires the Secretaries of Agriculture, the Treasury, and the Interior to produce a report on the relative merits of the conservation credit and the deduction for conservation contributions, including an assessment of the conservation benefits and costs of both tax benefits. General Explanations, 192. Other proposals affecting the income tax charitable deduction 7. Mileage rate for volunteers. Currently, Section 170(i) sets the standard mileage rate for use of passenger autos by volunteers at $.14 per mile. The proposal would index the rate and make it equal to that set by the IRS for purposes of medical and moving expense deductions under Sections 213(d) and 217(b). In 2015, that would amount to a $.09/mile increase, from $.14 to $.23. Explanations, College sports tickets. Under current Section 170(l), college sports fans are allowed a charitable deduction equal to 80 percent of any charitable contribution that it a prerequisite to purchasing tickets for a college sporting event. The proposal would disallow any deduction for such ticket-related contributions. Private foundation excise tax on net investment income 9. Section Reform of the private foundation excise tax on net investment income has long been supported by the Council on Foundations and others. The Obama proposal would consolidate the two-tier rate structure of current Section 4940 by substituting a single 1.35 percent excise tax rate. This provision was also in last year s revenue proposals. (Section 5 of the pending America Gives More Act of 2015, H.R. 644, would create a single one percent excise tax rate.) Grace Allison, Allison@law.unm.edu Adjunct Clinical Professor 4

5 University of New Mexico School of Law 2015, UNM School of Law. 5