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2011 Year in Review: Legislative Sound and Fury Signifying…?

December 30, 2011

As it has for the last few years, the nonprofit sector operated under the shadow of legislative and regulatory action in 2011. Although the Obama White House first proposed reducing the charitable tax deduction for affluent households and individuals in 2009, a number of similar proposals were debated -– and ultimately rejected -- during the endlessly contentious negotiations over the federal budget for which the 112th Congress will be remembered.

Proposals to either limit or get rid of the charitable deduction as a way to help reduce the nation's growing debt were debated during battles over the debt ceiling in August and the American Jobs Act in September, and to a lesser degree by the Joint Select Committee on Deficit Reduction (the so-called "Super Committee”), which concluded its deliberations in November without having achieved anything. After Senate majority leader Harry Reid (D-NV) removed the provision in the jobs bill to lower the deduction to 28 percent from 35 percent, Independent Sector president Diana Aviv noted that the decision validated "[o]ur message that the charitable deduction spurs the giving that enables nonprofits to create jobs and provide critical services...."

If nonprofit leaders thought the issue had been laid to rest, however, they were mistaken. In an op-ed in the Los Angeles Times in December, former California Community Foundation president and CEO Jack Shakely argued that the deduction should be eliminated. "[A]lmost a century after the charitable deduction was enacted, nobody can say positively, absolutely how much, or even if it stimulates giving, which was its primary purpose," wrote Shakely. "Moreover, in order to receive tax-deductible gifts, nonprofit corporations must become second-class corporate citizens -- they are not allowed to contribute to political campaigns, to lobby or to otherwise politically advocate for the very constituencies they were created to serve."

It remains to be seen whether the issue will be a political football in the inevitable budget battles of 2012. And while controversial legislation often gets tabled during a presidential election year, there are enough legislative and regulatory matters kicking around to keep nonprofit leaders looking over their shoulders. Then again, Washington being Washington, they probably shouldn't worry.

Take the 2006 Pension Protection Act, which included a provision designed to spur the IRS into keeping a closer eye on the activities of donor-advised funds and so-called supporting organizations; five years later, the agency is still soliciting comments with respect to new regulations for the latter and hasn't begun to tackle the former. And IRS efforts to impose greater disclosure of the use of management companies and other related businesses that can mask compensation to nonprofit executives have been on the back burner even longer.

At the city and state levels, budget shortfalls across the country left governments eyeing nonprofits as a source of tax revenue. In New Orleans, Boston, and Providence, Rhode Island, local governments floated the idea of asking large nonprofits to contribute, on a voluntary basis, payments in lieu of taxes (PILOTs). And in California, where a yawning budget shortfall has the state scrambling for revenues, some nonprofit groups were being denied property tax exemptions on the grounds they don't provide enough benefits to state residents.

Whether the state's "primary benefit" rule is eventually challenged in court, Ofer Lion, a lawyer representing a nonprofit client with "a global outlook" in a property tax exemption dispute, told the New York Times that the rule "clearly [is] a violation of the commerce clause of the Constitution, and, it may also be a violation of the equal protection clause, given the uneven application of the standard."

Related Links:

Republican-Controlled House Poised to Revisit Nonprofit Agenda (1/06/11)

IRS Cracks Down on Supporting Organizations (2/16/11)

Report Targets Property Tax Exemption for New Orleans Nonprofits (3/18/11)

Senate Bill Would Permanently Extend IRA Charitable Rollover (3/21/11)

Nonprofits Pay Fees Despite Tax-Exempt Status, Survey Finds (4/22/11)

States Criticized for Weak Enforcement of Charity Rules (4/22/11)

Boston Requests PILOT Payments From Area's Largest Nonprofits (4/26/11)

Providence Considers Asking Some Nonprofits for PILOT Payments (5/11/11)

Debt-Ceiling Deal Spares Charitable Deduction for Now, Future Uncertain (8/04/11)

Increased Scrutiny of California Nonprofits Leads to Fewer Property Tax Exemptions (8/16/11)

Proposed Jobs Bill Limits Charitable Deductions for Wealthy Donors (9/15/11)

Illinois Postpones Challenging Property Tax Exemptions of Nonprofit Hospitals (9/30/11)

Senators Remove Charitable Deduction Cap Proposal From Jobs Bill (10/09/11)

Tax-Exempt Status of Nonprofit Hospitals Under Increasing Scrutiny (10/25/11)

White House Proposals Would Have Modest Effect on Giving, Study Finds (10/27/11)

IRS Oversight of Nonprofit Sector Questioned (11/02/11)


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