This is what you should know about the new Charitable Reform bill…

Urban Swirski & Associates, LLC 

Washington Philanthropy Update – June 11, 2021

Senators Introduce Sweeping Charitable Reform Bill

On Wednesday, Senators Angus King (I-ME) and Chuck Grassley (R-IA) introduced the Accelerating Charitable Efforts (ACE) Act, modeled after the Initiative to Accelerate Charitable Giving proposal put forward by billionaire philanthropist John Arnold and Boston College professor Ray Madoff. The bill, which is being reported on as an attempt to drive more funding to charities, would establish two timelines for payouts from donor-advised funds (DAFs) to charities and impose additional rules on private foundations. Absent from the legislation is the expansion of the temporary universal charitable deduction, which was included as a sweetener in the initial Initiative to Accelerate Charitable Giving proposal.

Many sector organizations are concerned that the new legislation calls for reforms that aren’t supported by data and doesn’t include the voices of a broad representation of the sector that would be most impacted. National philanthropy serving organizations, including the Community Foundation Public Awareness Initiative, Council on Foundations, Independent Sector, The Philanthropy Roundtable, and United Philanthropy Forum, sent a letter to Congress addressing these concerns, which can be found here.

Politically, a bill of this controversial nature faces a steep uphill climb in Congress, especially as lawmakers continue to hash out basic infrastructure parameters. However, the inclusion of a tax penalty (more on that below) signals to us that the authors could make a play at including the bill, or parts of it, in a reconciliation package if the opportunity presents itself. As a reminder, provisions must have a substantial revenue impact to pass parliamentary rules for reconciliation.

Details of the provisions included in the legislation are below.

Private/Family Foundations

Under the proposal, private foundations would no longer be able to count disbursements to donor-advised funds or family members’ travel and salary expenses toward their 5-percent minimum payout requirement. The legislation offers additional benefits to private foundations that payout more than 7 percent in any year by waiving the annual 1.39 percent excise tax on investment income that all private foundations currently pay. Additionally, private foundations created after the implementation of the ACE Act would be completely exempt from the excise tax if they agree to grant out all assets within 25 years of founding.

Donor-Advised Funds

This bill would scrap the current structure of DAFs and create two new categories of the giving vehicles, one of which would offer better tax benefits to those who disburse assets within 15 years while the other would delay the tax benefits until the donor advises the assets out of the DAF. It also includes provisions intended to prevent donors of complex assets, such as private stock holdings and real estate, from claiming tax benefits that exceed the dollar amount for which the asset is eventually sold.

• 15-Year DAFs: DAF holders who choose this vehicle could take an immediate tax deduction for their gifts but would be required to disperse all funds or relinquish control of their DAF within 15 years, otherwise face a 50 percent excise tax penalty on the value of the assets held in the DAF.
• 50-Year DAFs: Donors who want more than 15 years to distribute funds from their DAF could elect this vehicle, referred to as an aligned-benefit rule DAF. Donors would still receive capital gains and estate tax benefits upon donation to their DAF, but they would not receive the tax deduction for their gift until the funds are distributed. All funds would be required to be distributed within 50 years of donation to the DAF.

Community Foundations

The legislation includes a definition of community foundations, for the first time in the tax code, and a carveout for certain DAFs at those community foundations. The legislation allows donors with less than $1 million in assets in a DAF managed by a community foundation to be exempt from the new payout rules, and DAF accounts larger than $1 million at community foundations would either be subject to a 5 percent payout each year or have to distribute funds within 15 years. 

State of Play in Washington: Month Two of Infrastructure Talks

In Washington, infrastructure negotiations continue to dominate the policy agenda. On Tuesday, President Biden ended negotiations with Senate Republicans, led by Senator Shelley Moore Capito (R-WV), after four weeks of trying to come to an agreement on the size of a package and how to pay for it. Now, President Biden has turned his attention to negotiating with a bipartisan group of 20 moderate senators, often referred to as the G-20, led by Senators Kyrsten Sinema (D-AZ) and Rob Portman (R-OH). It remains unclear if this round of negotiations will fare any different than the previous, with the G-20 already ruling out tax increases as a way to fund a bill, a major sticking point for President Biden that contributed to negotiations faltering with Senate Republicans.

In tandem with continued bipartisan negotiations, Democratic leaders are eager for progress on infrastructure in the coming weeks, and Senate Democrats are already working on the first steps necessary to pass a bill through the budget reconciliation process, which only requires a simple majority vote in the Senate. Sen. Bernie Sanders (I-VT) said Tuesday he would begin working on a Fiscal Year 2022 budget resolution, the first step of the reconciliation process, that incorporates aspects from President Biden’s American Jobs Plan and American Families Plan. At this point, a partisan budget reconciliation bill that moves this fall appears the most likely outcome for infrastructure unless President Biden and the G-20 can make considerable progress soon. The mystery remains how large of a bill, and what tax increases, will moderate Senate Democrats be willing to support. Stay tuned.

Leaked Tax Documents Lead to Renewed Call for Wealth Tax

On Tuesday, ProPublica released an article highlighting how little the wealthiest 25 Americans paid in income taxes from 2014 to 2018. The article was based on thousands of leaked taxpayer documents ProPublica received detailing the tax data of the wealthiest Americans covering more than 15 years. This unprecedented data breach presents a significant security concern given that taxpayer data is expected to remain confidential and is closely guarded by the Internal Revenue Service (IRS). In response to the leak, IRS Commissioner Charles Rettig said Tuesday that federal authorities are investigating the leak with potential prosecutions to follow. ProPublica has said they don’t know who sent the documents, noting that it could be a foreign actor.

On Capitol Hill, while privacy concerns remain, Democrats see the information released as another reason to increase taxes on the wealthy. Senate Finance Committee Chairman Ron Wyden (D-OR) said the leak shines a fresh spotlight on the issue, adding that he will be introducing legislation to address it. Wyden’s legislation is expected to include his mark-to-market proposal, which would tax capital gains annually rather than when the gains are realized. Sen. Elizabeth Warren (D-MA) said the leak reaffirmed how rigged the tax system is for the ultrawealthy and continued her calls for a wealth tax. You can read more about Warren’s wealth tax bill in our past update here.

Growing Scrutiny of Behested Payments in California

In California, there are growing concerns about the use of donor-advised funds to make behested payments on behalf of politicians. In short, a behested payment is a payment made at the request of an elected official for a specific legislative, governmental or charitable purpose. Critics view them as operating like campaign contributions with fewer safeguards and transparency requirements. Because the payments are technically charitable gifts, they can be made from donor-advised funds as long as the sponsoring organization allows it.

Politicians must report behested payments in excess of $5,000, but when they are made from DAFs, the sponsoring organization is normally who the politician reports, not the donor advisor. Critics suggest this undermines transparency measures meant to limit outside influence in government. In some cases, while the public does not know who is making these donations, the governor likely does and could award that entity accordingly with a government contract without anyone being able to discern the link.

As you may recall, there have been legislative efforts in California to allow the Attorney General to require DAF sponsors to report information that could reveal their donors, threatening donor privacy in a state where confidential tax information has been leaked in the past. Given the headlines this issue is making, we could see calls for legislation to tackle both of these issues in one, a move that could threaten donor privacy if done in haste. Currently, some organizations in the sector are weighing whether to get involved. Stay tuned.

White House Office of Faith-Based and Neighborhood Partnerships: New ACA Navigator Grant Program and Upcoming CTC Webinar

On Thursday’s White House Office of Faith-Based and Neighborhood Partnerships call, administration officials discussed a new $80 million grant program for organizations that can help people navigate the Affordable Care Act (ACA) enrollment period this fall. You can find more information on the grant program here and check which states fit the eligibility criteria here.

White House officials also announced they would be holding a webinar on the child tax credit (CTC) in the coming weeks before monthly payments of the credit start going out in July. Please let us know if you would like to attend that webinar, and we can pass along an invitation once we receive it.

Urban Swirski Philanthropy Team

Sandra Swirski, Sara Barba, Ali Bedford and Grant Berkshire