Senate Finance Committee Chairman Max Baucus, D-Mont., said on September 7 that he will build on the Senate-passed higher education legislation with an education tax package to be considered by the committee this session. His 2007 education tax bill would streamline and expand college tuition tax credits, provide a tax credit for college savings and encourage the increased availability of federal bonds for school construction and repair. Baucus expects to unveil the measure in October. Likely provisions of the Baucus education tax package include:

• improvements to college tuition tax credits by increasing the amount available to students and their families, and to make it easier to claim credit for tuition expenses
• encouraging college savings with tax incentives for families
• expansion of the availability of Qualified Zone Academy Bonds for school repair and renovation, especially in low income areas

Baucus's bill also is expected to extend a number of education tax provisions currently slated for expiration, including the deduction that can be claimed by teachers who spend their own money for classroom supplies and the deduction for interest on student loans.

Senate Finance Committee Chairman Max Baucus, D-Mont., in keeping with his vow to close tax loopholes and find revenue offsets, plans to examine a number of international tax issues during a September 26 hearing entitled: "Offshore Tax Issues: Reinsurance and Hedge Funds." According to Senate Finance Committee staff, the hearing will examine how reinsurance — or the transfer of a portion of an insurance company's risk to another insurance company — affects the tax status of foreign insurance companies and their U.S. subsidiaries, in comparison to that of U.S.-based insurance companies.

Investment by tax-exempt organizations in offshore hedge funds and offshore deferral of compensation by U.S. managers of hedge funds will also come under scrutiny. Witnesses at the hearing will include Suzanne Ross McDowell, a former associate tax legislative counsel in the U.S. Treasury Office of Tax Policy, who plans to provide testimony regarding investment by tax-exempt organizations in offshore hedge funds and Jane Gravelle, a senior specialist in the Economic Policy, Government and Finance Division of the Congressional Research Service (CRS), who will testify on the investments of university endowments in offshore hedge funds.

The IRS has finally proposed a regulation defining what is a "functionally integrated" supporting organization after the Pension Protection Act of 2006. As you know, Congress was concerned because there apparently were a small number of exempt organizations which had established themselves as supporting organizations of universities and other large public charities which were practically unknown to the supported charity. The amendments in the PPA and this regulation are aimed at ending that practice.

Supporting organizations are classified by "type" depending on their relationship to the supported organization. The new regulation does not apply to a Type I (directly controlled) or Type II (common directors and officers) supporting organization. It is only aimed at a Type III supporting organization. A Type III must meet all four of the following tests in order to qualify as "functionally integrated":

(A) the "but for" test in existing Treas. Reg. §1.509(a)-4(i)(3)(ii) which essentially means the support organization carries on a function that would otherwise have to be carried on by the supported organization. A hospital auxiliary that operates a hospital gift shop would be a very common example of this relationship.

(B) an expenditure test consistent with section 4942(j)(3)(A). It is expected that the expenditure test will require a functionally integrated Type III supporting organization to use substantially all of the lesser of (a) its adjusted net income or (b) five percent of the aggregate fair market value of all its assets (other than assets that are used, or held for use, directly in supporting the charitable programs of the supported organizations) directly for the active conduct of activities that directly further the exempt purposes of the organizations it supports.

(C) an assets test consistent with section 4942(j)(3)(B)(i).The assets test will require the organization to devote at least 65 percent of the aggregate fair market value of all its assets directly for the active conduct of activities that directly further the exempt purposes of the organizations it supports.

(D) a responsiveness test in which the officers, directors or trustees of the supporting organization demonstrate the appropriate working relationship with those of its supported organization(s), and further show that this relationship results in the officers, directors or trustees of its supported organization(s) having a significant voice in the operations of the supporting organization.

If a Type III supporting organization fails any of the four tests above, it will be subject to a minimum 5% of asset payout like a private foundation. If it fails to make the 5% payout, it will be classified as a private foundation which will entail a number of additional negative consequences. View proposed regulations.