Information Donors Should Know about the Pension Protection Act of 2006
Summary of Selected Charitable Provisions

Prepared by: Paul G. Martz
Senior Financial Analyst
GII Research and Development

The Pension Protection Act of 2006 was signed into law on August 17, 2006. The new law contains numerous changes to the tax law provisions affecting tax-exempt organizations. The attached Detailed Summary of Charitable Provisions issued by the Committee on Ways and Means of the United States Congress provides a complete listing of all the charitable giving incentives and reforms. The scope of this analysis is to address only those charitable reforms and incentives which will have an immediate impact on all Goodwills. They include the following reforms:

• Public Disclosure of Information Relating to Unrelated Business Income Tax Return (IRS Form 990-T)
• New Disclosure Requirements for Nonprofits with Subsidiaries
• Modification of Recordkeeping Requirements for Certain Charitable Contributions
• New Limitation on Charitable Contributions of Clothing and Household Items
• Recapture of Tax Benefit for Charitable Contributions of Exempt Use Property Not Used for an Exempt Use

The first two reforms focus on additional disclosure requirements for nonprofits and the last three focus on both donor and donee reporting changes. Unless otherwise noted, these reforms are effective for returns filed and donations received after August 17, 2006.

The following analysis is provided for informational purposes only and is not intended to replace expert legal or tax advice. Additional information can be found on the Exempt Organization website at www.irs.gov/eo. We expect that the Internal Revenue Service will be updating two publications, Publication 526 - Charitable Contributions, and Publication 561 - Determining the Value of Donated Property sometime in the near future. If you have any questions or comments concerning this analysis, contact Paul Martz, GII Senior Financial Analyst at paul.martz@goodwill.org.

Public Disclosure of Information Relating to Unrelated Business Income Tax Returns

The Pension Protection Act extends the public inspection and disclosure requirements to include the Unrelated Business Income Tax Return Form 990-T. Certain information (e.g., trade secrets, patents, etc) may be withheld if public availability would adversely affect the organization.

New Disclosure Requirements for Nonprofits with Subsidiaries

Before the Pension Protection Act was enacted, rent, royalty, and interest income paid to a tax-exempt organization by a controlled taxable subsidiary was generally treated as unrelated business income, which is taxable to the tax-exempt parent organization. The new law provides that payments received or accrued by certain exempt parents from taxable controlled subsidiaries will not be treated as unrelated business taxable income. This change is effective for two years through 2007. Nonprofits with subsidiary corporations that file Form 990 are required to meet the following additional reporting requirements:

• List the amount of any interest, annuities, royalties, or rents received from each controlled entity.
• List any loans made to each controlled entity.
• List any transfer of funds between the controlling organization and each controlled entity.

Modification of Recordkeeping Requirements for Certain Charitable Contributions

Regardless of the contribution amount, a donor must maintain reliable written records of a contribution in order to claim a charitable deduction. For all cash contributions, donors are now required to maintain a record, such as a receipt or letter from the organization or a cancelled check or bank statement, in order to claim the charitable monetary deduction. As a marketing/public relation tool, Goodwill might consider providing, if not already doing so, a written acknowledgement of all monetary contributions to assist contributors in fulfilling the new recordkeeping provision. To fulfill the recordkeeping requirements, a written communication from Goodwill must contain the name of the agency, the date of the contribution and the amount of the monetary contribution. It may be advantageous to mention in the annual report of the more stringent recordkeeping requirements for monetary contributions no matter how small the cash contribution.

It should be noted that the new law does not address any other recordkeeping or substantiation requirements. For example, no charitable deduction is allowed for any contribution of $250 or more unless there is a written acknowledgement of the contribution by the donee organization. For more information about substantiation of charitable contributions, see Publication 1771 – Charitable Contributions-substantiation and disclosure Requirements. While the new substantiation requirements are not discussed in Publication 1771, the publication is still helpful to understanding the many substantiation requirements already in effect.

New Limitation on Charitable Contributions of Clothing and Household Items

No deduction is allowed for a charitable contribution of clothing or household items unless the clothing or household item is in good used condition or better. The IRS is authorized to deny a deduction for any item with minimal monetary value. A deduction may be allowed for a charitable contribution of an item of clothing or a household item not in good used condition or better if the amount claimed for item is more than $500 and the taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property. Household items include furniture, furnishing, electronics, appliances, linens and other similar items. Food, paintings, antiques, and other objects or art, jewelry and gems, and collections are excluded from the limitation.

The President’s Advisory Panel on Federal Tax Reform and the staff of the Joint Committee on Taxation both have concluded that the fair market value-based deduction for contributions of clothing and household items present difficult tax administration issues, and can be both fact intensive and labor intensive. As recently reported by the IRS, the amount claimed as deductions in tax year 2003 for clothing and household items was more than $9 billion. At a minimum, it is expected that the IRS will pay much closer attention to deductions claimed for some items of low value consistent with the goals of improving tax administration and ensure that donated clothing and household items are of meaningful use to charitable organizations. We expect more guidance to be forthcoming from the IRS once it has convened and completed discussions with organizations such as Goodwill.

Recapture of Tax Benefit for Charitable Contributions of Exempt Use Property Not used for an Exempt Purpose

Contributions of “related use” tangible personal property (defined as any property, other than land or buildings that can be seen or touched). It includes furniture, books, jewelry, paintings, and cars that is contributed to a public charity for further use of the organization’s exempt purpose and may be deducted by the donor at fair market value. If the organization disposes of the property within three years and in a manner that does not benefit the organization’s exempt purpose, the donor will be required in include as ordinary income (in the year of disposition) the difference between the amount claimed as a charitable deduction (fair market value) and the basis (cost) of the property at the time of the contribution.

For example, John Doe contributes Babe Ruth and Mickey Mantle rookie baseball cards in mint condition to Goodwill with the expectation that the agency will sell the cards on ShopGoodwill (i.e., E Bay) with the proceeds to help fund mission needs. The cards are valued at $65,000 and John’s basis for the cards is $7,000. Two years after the contribution, the Goodwill decides to not sell the cards, but instead will put both cards in a frame and hang them on the wall in the administrative offices (not an exempt use purpose). In the year that the cards became an office fixture, John Doe must include in ordinary income $58,000 ($65,000 minus $7,000).

A donor can avoid recapture of his deduction only if an officer of the charity in a written statement certifies that the use of the property was a related use and describes how the property was used and how this use furthered its charitable mission. Any person that identifies tangible personal property a related use property and knows that the property is not for a related use will be assessed a $10,000 penalty. The deduction recapture rules apply to contributions of “related use” tangible personal property after September 1, 2006. The new $10,000 penalty is effective for identifications made after August 17, 2006.

The time period for filing Form 8282. Donee Information Return (Sale, Exchange, or Other Disposition of Property), has now been extended to three years from the date of contribution for all types of property. Charities are now required to attach to Form 8282 a statement certifying the related use of tangible personal property that has been sold, exchanged, or otherwise disposed. The change to Form 8282 is effective for forms filed after September 1, 2006.