Federal Tax News
The Pension Protection Act of 2006
Congress has passed the most comprehensive pension reform package in more than 30 years. The Act not only contains provisions that impact traditional pension plans, but also contains a number of provisions impacting charities and charitable donations. Among the provisions applicable to higher education and donors:
- Public disclosure required of Form 990T: In addition to public disclosure of Form 990, organizations described in IRC Section 501(c) and exempt under IRC Section 501(a)(1) are now required to make available unrelated business income tax returns Form 990-T. Note that based on strict reading of the statute, this provision would not apply to state colleges and universities. However, there is no guidance available from the IRS at this time to clarify this point.
- New recordkeeping requirements for cash donation: Donors must keep adequate records of charitable contributions of all types of property for any amount (de minimis rule no longer applies). New requirements are effective for the donor's first tax year beginning after date of enactment, generally January 1, 2007.
- Tax-free distributions from IRAs for charitable purposes: Individuals at least 70 1/2 years old can distribute up to $100,000 of their IRA balance to charitable organizations in 2006 and in 2007 without recognizing income or claiming a charitable deduction. The distribution counts towards the required minimum distribution. Distributions to supporting organizations (Sec 509(a)(3) supporting organizations) and donor advised funds do not qualify.
- Federal tax-free treatment of qualified distributions from Section 529 plans made permanent. Pension and individual retirement arrangement provisions made permanent. Both were set to expire in 2011.
- Additional requirements for returns of supporting organizations: Supporting organizations must indicate the name of the supported organization, whether they are Type I, II, or III, and certify that they are not controlled by disqualified persons.
- Also, changes to the rules related to donations of fractional interest in tangible personal property and test room supervisors and proctors who provide services for tax-exempt organizations by assisting with the administration of college entrance or placement examinations may be treated as independent contractors despite being treated as employees in the past.
Foundation's Revenue From Providing Living Quarters Not Unrelated Business Income
A non-operating private foundation providing theological education, exempt from federal income taxation under Code Sec. 501(a), was not generating unrelated business income by providing living quarters under circumstances that furthered its exempt purposes. Revenue generated by providing living quarters for its students and faculty was not unrelated business taxable income (UBTI) to the organization. In addition, revenue generated by providing temporary living quarters to the family members of its students and faculty, potential students and their families, and to guest speakers and musical performers at their institution was not UBTI. However, any revenues generated by the renting of rooms to the general public or other persons not described above would not contribute to the foundation's exempt purposes and therefore would be considered income from unrelated trade or business subject to the tax on unrelated business income under Code Sec. 511(a). Please read the following article from CCH Incorporated for more information: LTR_200625035.pdf.
IRS Delays Effective Date Of 403(b) Regs On Tax-Sheltered Annuities One More Year
The IRS has announced that the effective date for proposed Code Sec. 403(b) tax sheltered annuity regs will generally not be effective earlier than January 1, 2008. Previously, the IRS had moved the effective date to January 1, 2007.
Since the IRS first proposed the regs, employee plans have urged the agency to give them more time to comply with the new rules. The proposed regulations relate to retirement annuity contracts under section 403(b), which are generally available to employees of public schools and organizations exempt from tax under section 501(c)(3), along with related temporary regulations clarifying the application of employment taxes to section 403(b) contracts.
When initially proposed in 2004, the regs would not go into effect until years beginning after 2005. The IRS moved that date to January 1, 2007. The latest announcement moves it to January 1, 2008.
For further information on the items above contact: Catherine Bonnes at 269.567.4557 or Forrest Lewis at 517.336.7522.
