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Archives
January 2002
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IRS Issues 2002 Inflation-Adjusted Rates The IRS has released a number of inflation-adjusted figures for the 2002 tax year, which will be of interest to both individuals and nonprofit organizations. Low Cost Article The unrelated business taxable income of certain exempt organizations does not include proceeds from the distribution of "low cost articles" in connection with charitable solicitations. For tax year beginning in 2002, a "low cost article" is any article which costs $7.90 or less.
The IRS established guidelines in Rev. Proc. 90-13 to provide charitable organizations with help in advising their patrons of the deductible amount of contributions when the contributors are receiving something in return for their contributions. The value of benefits received by a donor in return for a fully-deductible charitable contribution may be disregarded if either: 1) for a contributions of $25 or more, the contributor did not receive something in return that costs more than $5 (the rate for a "low cost article" listed above); or 2) the fair market value of all of the benefits received in connection with the payment is not more than 2 percent of the payment or $50, whichever is less. The $5/$25/$50 schedule is annually adjusted for inflation and this year has been increased to $7.90, $39.50, and $79, respectively.
The standard mileage deduction rate for business use of an automobile has increased to 36.5 cents/mile. The figure for volunteer or charity work remains at the 14 cents/mile rate in effect last year.
Rev. Proc. 98?19 set at $75 or less-annually adjusted for inflation-the amount of annual dues that social welfare organizations may receive without becoming subject to I.R.C. § 6033(e), which requires a tax?exempt organization that incurs nondeductible lobbying expenditures to notify its members, at the time the dues are assessed or paid, of its reasonable estimate of the portion of the dues that is allocable to those expenditures. In 2002, the annual dues limitation to qualify for the reporting exception regarding certain exempt organizations with nondeductible lobbying expenses is $83 or less.
In 2001, dues paid by an individual to 501(c)(5) agricultural and horticultural organizations and 501(c)(6) organizations will not be subject to UBIT provided they do not exceed $120.
The first $11,000 of gifts to any person (other than gifts of future interests in property) is not included in the total amount of taxable gifts made during that year. This increase, the first in many years, is the result of the 1997 Taxpayer Relief Act, which allowed this figure to be annually indexed for inflation (rounding down to the next lowest multiple of $1,000).
The income threshold for the overall limitation on itemized deductions, which rises slightly each year, has risen to $137,300, or $68,650 for married individuals filing separately. The allowable amount of deductions is reduced for taxpayers with adjusted gross income above that amount.
  501(c)(3)s May Administer Payroll Deduction Plan for PAC Contributions Section 501(c)(3) organizations are prohibited from participating in political campaigns, including administering or making contributions to PACs. But in a recent private letter ruling, the IRS okayed a tax-exempt health plan's voluntary payroll deduction program that would enable the plan's employees to contribute a portion of their salaries to their unions' PACs. Several labor unions that represent the tax-exempt health plan's employees requested during collective bargaining negotiations that the health plan establish the payroll deduction plan. Under the National Labor Relations Act (NRLA), the health plan was legally required to bargain in good faith regarding this request. The negotiations resulted in a plan whereby the health plan would deduct both union dues and voluntary PAC contributions from its employees' salaries and transfer them to the unions, which in turn would transfer the contributions to their respective PACs. The PACs would be responsible for reimbursing the health plan for expenses incurred in administering the program. The IRS ruled that the carefully structured plan would not violate the prohibition on political campaign intervention, nor would the health plan risk losing its exempt status. It concluded that the program was not an attempt by the health plan to circumvent the ban on political activity, noting that the employees-not the (c)(3)-were making individual, voluntary PAC contributions. A key factor was that the initiative for creating the PAC came not from the organization but from the unions, during genuine arms-length negotiations. The IRS found that the health plan would not have any direct connection to the PACs or the candidates and political parties they support. This ruling demonstrates that (c)(3)s that find themselves in a similar position to the health plan during collective bargaining may agree to establish a similar payroll program, but they must structure the program carefully to avoid jeopardizing their tax status. The ruling creates a limited exception, accounting for the NLRA-imposed obligation to bargain on this subject. It is not a loophole for (c)(3)s to exploit. By Mark Sawchuk Congress Issues Advice to the IRS on Corporate Disaster Relief In an effort to ease restrictions on disaster relief assistance, Congress has instructed the Internal Revenue Service to clarify its rules regarding disaster relief payments by corporate foundations. The instruction, which is contained in the Joint Committee's Technical Explanation of the "Victims of Terrorism Tax Relief Act of 2001," calls for the IRS to reverse its previous position which denied 501(c)(3) status to employer-controlled foundations that provided disaster relief to employees. The report directs the IRS to issue guidance allowing corporate foundations to provide direct financial aid to employees of the company or their families who are disaster victims. In a 1999 ruling, the IRS held that such payments constituted private inurement, and thus violated the corporate foundation's charitable purpose. The IRS assumed that employers providing charitable assistance to their employees through controlled foundations would have an advantage in attracting and retaining employees, resulting in a substantial benefit to the employer. The Technical Explanation states that these payments are not inconsistent with an employer-controlled foundation's §501(c)(3) status as long as the payments relieve distress caused by September 11th or a future qualified disaster (as defined in new IRC §139 created by the new law). Disaster relief payments must also be awarded based on an objective determination of need by an independent committee of the foundation or other adequate procedures. The Technical Explanation also confirms that such payments would be excluded from the recipients' income as gifts. By Anne Cornelison Shop Till You Drop: Certain "Charity Mall" Donations are Tax-Deductible In a recent private letter ruling, the IRS found that donations made through a "charity mall" web site are tax-deductible by the shopper as long as the donation is made voluntarily. Charity mall transactions are often enigmatic and complicated due to number of middlemen involved [see NN 6/00]. A typical charity mall allows on-line shoppers to shop at affiliated vendors through links or web sites. For each purchase, the vendor agrees to donate an agreed-upon percentage of the purchase price (usually called a rebate) to the designated charity through the charity mall operator. Most of these transactions are structured so that it is the for-profit "charity mall" operator, not the shopper, who makes the contributions to charity, with the result that the shopper is not entitled to a tax deduction. A 1986 Supreme Court Case, U.S. v. American Bar Endowment, established this precedent when it ruled that members of an organization that required its membership to assign refunds from their insurance premiums to the organization were not entitled to claim a charitable deduction. The court ruled that charitable contributions must be made "voluntarily and with donative intent." The charity mall in the recent private letter ruling, however, structured the transaction differently. For each purchase through a participating vendor, the shopper received a rebate which she could either receive in cash or donate to a number of specified charities through the for-profit mall operator. The IRS ruled that since the shopper had a choice of what to do with the rebate, she was entitled to a charitable tax deduction for her contribution of the rebate. A question then arises regarding in what tax year the donor can take her tax deduction. In this case, the IRS ruled that the donor would be entitled to claim a deduction during the taxable year in which the for-profit mall operator transferred the donation to charity, not the year in which the purchase was made. The IRS reasoned that the donor still maintained some control over the contribution until it was received by the charity. Although it applies only to the parties involved, this ruling is a good indication of the IRS's position on this issue, especially because its logic is based on a Supreme Court decision. It appears that the element of choice in charity mall transactions is what determines whether a donation is tax-deductible to the donor. By Mark Sawchuk Fundraising Consultants Win Case Against Florida County Several professional consulting firms have won a district court victory against Pinellas County, Florida, in a case regarding that county's charitable solicitation registration requirements. The case was on remand from the 11th Circuit Court of Appeals [see NN 9/00]. The consulting firms brought the case against Pinellas County, Florida, protesting that they should be exempt from the county's charitable solicitation registration requirements. They argued that they consulted with, advised, planned and prepared solicitation materials for their nonprofit clients but did not actually perform solicitation activities themselves. They also indicated that they had not tailored the charities' materials to solicit funds specifically from the citizens of Pinellas County. The Court agreed with the plaintiffs, noting that the consultants do not advise their clients where to send solicitation mail; are not aware of where the solicitations are mailed; do not have the ability to control where the solicitations are sent; and are not sufficiently involved in the printing process to constitute "minimum contacts" with Pinellas County that would require their registration. Although this decision focuses on the consultants' contacts with Pinellas County, several charities are also litigating the requirement that they register at the county level. Their case, known as "Pinellas II," is currently in discovery and is likely to be resolved sometime this summer. By Mark Sawchuk Hanging Up: Federal and State Initiatives Attempt to Regulate Charitable Solicitation by Telemarketers Recent moves by Congress and New York's Attorney General indicate a new interest in regulating telemarketers and telemarketing companies who perform charitable solicitation on behalf of charities. The recently passed U.S. Patriot Act includes a short section known as the "Crimes Against Charitable Americans Act," which requires that telemarketers who solicit for charities must promptly and clearly disclose that the purpose of their call is to solicit charitable contributions, as well as the name and address of the charitable organization for whom the solicitation is being made. The Federal Trade Commission (FTC) is currently considering amendments to its regulations that will implement the new law, and may also require additional disclosures. Meanwhile, the New York Attorney General's office has launched several related initiatives, including investigations into fraudulent fundraising by specific charity-hired telemarketers. This move is apparently inspired by findings that less than a third of the total amount raised in 1999 and 2000 by New York telemarketing fundraising campaigns actually reached charities. Separately, the office is preparing regulations that would require charities to "shop around" before hiring telemarketers. It is also pushing for a state law requiring telemarketers to disclose to potential donors that they are entitled to know the percentage of funds the charity received in the telemarketing company's prior campaigns. Charities that occasionally employ telemarketing firms to engage in charitable solicitation on their behalf will want to pay attention to what comes out of the FTC and New York. It seems clear that the Patriot Act and potentially the proposed New York legislation will alter telemarketing scripts, which charities should be in the habit of reviewing. It remains to be seen whether these initiatives will usher in a new era of stricter telemarketing fundraising regulation. By Mark Sawchuk This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required. Newsletter Home | HarmonCurran Home |