Foundation Expenses, Charitable Giving to be Debated in the House
Should foundation administrative expenses count toward their required annual 5 percent “payout,” or should only grants count? A controversial provision of the Charitable Giving Act (H.R. 7) eliminates all administrative expenses from the payout requirement, and will be debated at a mark-up scheduled for Tuesday, September 10 in the House Ways and Means Committee.
Most of the bill addresses tax incentives for charitable giving that have already passed the Senate. Rep. Roy Blunt (R-MO) added the provision on administrative expenses, saying it would increase grants to charities by $4.3 billion a year. The Council on Foundations is opposed to the provision, arguing it could threaten the long-term viability of grant makers. The National Committee for Responsive Philanthropy supports this provision, arguing it would mean more money for grantees.
Ways and Means Committee Chair Bill Thomas (R-CA) released his amended version of the bill today. It includes a compromise on the foundation administrative expenses issue that allows the first $100,000 in compensation paid to “disqualified persons” to be included in the payout calculation. IRS regulations define “disqualified persons” as those with substantial powers or financial interests in the foundation, including substantial contributors and their family members, officers, directors or trustees and corporations where disqualified persons own more than 35 percent of the voting power.
The Thomas version of H.R. 7 also adopts language from a bill introduced in July by Sen. Kay Bailey Hutchison (R-TX), the “Philanthropy Expansion and Responsibility Act of 2003 (S. 1514). It allows reasonable and necessary expenses related to grant making to be included in the 5 percent payout calculation. These are defined as expenses “directly attributable to direct charitable activities, grant selection, grant monitoring and administration activities, compliance with applicable Federal, State or local law, or furthering public accountability of the private foundation.” Thomas also excludes the cost of private jets or first class air fare from allowable administrative expenses.
The Hutchison bill is narrower than the compromise proposed by Thomas. It disallows administrative costs for all “disqualified persons” fees, travel outside the United States and first class travel. Both bills reduce the excise tax on investment income from as much as 2 percent to a flat 1 percent.
A new study released last week sheds light on the issue of fees for foundation trustees and board members. Foundation Trustee Fees: Use and Abuse, published by the Georgetown Public Policy Institute, notes that these fees count toward the minimum 5 percent payout. Using IRS data and phone interviews, the researchers found that of the 238 foundations surveyed, trustees were paid $44,891,982 in fees in 1998. Roughly two-thirds (64 percent) of large foundations and 79 percent of small foundations pay some kind of fee to their boards. If Congress makes theses expenses ineligible to count toward payout, the funds could be used for grants.
H.R. 7 also includes elimination of the requirement to track grassroots and direct lobbying separately and a host of charitable giving incentives. On Sept. 3 the Joint Committee on Taxation released an analysis of the revenue loss the incentives would trigger. The total cost of the bill is $11.7 billion over ten years. The three most expensive items are the nonitemizer deduction ($2.8 billion between 2004-2006, $2.7 billion for the deduction for contributions made from rollover of Individual Retirement Accounts, between 2003-2013, and $643 million for reduction of the foundation excise tax, also between 2003-2013).
Majority Leader Tom DeLay (R-TX) said the bill would go to the House floor some time in September, and Blunt said he expects it to be considered next week.
See our summary and comparison of H.R. 7 and the Senate’s CARE Act for further details.