Proposed Legislation Would Simplify Excise Tax on Private Foundations

Modification of Tax Code Would Allow for More Giving

ARLINGTON, VA – A new bill introduced in the U.S. Senate would replace an unnecessarily complicated excise tax imposed on private foundations. This proposed legislation, introduced by Sens. Charles Schumer (D-N.Y.) and Richard Burr (D-N.C.)—co-chairs of the Senate Philanthropy Caucus—along with 10 Senate colleagues, would simplify the tax by replacing it with one flat rate, creating a structure that encourages the philanthropic sector to devote more resources to giving.

Foundations are subjected to an excise tax system that discourages increased giving, especially during times of crisis or economic turmoil. Because of that complexity, foundations have to calculate and recalculate asset balances, investment income, and expenditures as often as once every month. Foundation resources that could go to grants and programs are instead spent on accountants and lawyers working to ensure tax compliance. The modification will remove the burden on foundations without reducing federal tax revenue.

The current two-tiered rate structure is detrimental to philanthropic giving in times of significant need because it relies on a complicated formula for determining whether a foundation pays tax at 1 percent of its investment income or 2 percent. An unintended consequence of that formula is that it can impose higher taxes on foundations for responding to extraordinary community needs.

This happens when a foundation maintains its grant levels, even as its assets fall sharply or when a foundation increases spending in response to a crisis such as an earthquake, oil spill, or economic collapse. Because the tax rate is based on average giving over the previous five years, a sudden increase in giving compared to assets can result in foundations paying higher taxes in the future, often for as long as five years.

“It just makes no sense to have a tax structure that penalizes those who give more, but that’s what we have with the current excise tax,” said Steve Gunderson, president and CEO of the Council on Foundations. “Simplifying the process will free up private foundations to do more for the communities they support.”

For example, private foundations like Endowment for Health (EH) in New Hampshire experienced a significant impact on its assets during the economic downturn. But in order to uphold its grant commitments and expand its support in program year 2009, the Endowment exceeded the 5 percent distribution level as required by the Internal Revenue Service. With investments recovering in 2010, EH planned to return to the required 5 percent annual distribution.

In 2010, the foundation, which was required to pay $82,000 in additional excise taxes, decreased the payout rate from 8 to 6 percent. That money could have been used to assist organizations that protect the health of New Hampshire’s people.

The bill, (S. 593), would simplify the excise tax that foundations have to pay on investment income. A flat tax of 1.39 percent, which the Joint Committee on Taxation determined is revenue neutral, would provide greater incentive for foundations to give more when their resources are most needed.

In addition to Sens. Schumer and Burr, the original co-sponsors of the bill include:

• Mark Begich (D-Ala.)
• Saxby Chambliss (R-Ga.)
• Kirsten Gillibrand (D-N.Y.)
• Kay Hagan (D-N.C.)
• Daniel Inouye (D-Hawaii)
• Johnny Isakson (R-Ga.)
• Carl Levin (D-Mich.)
• Lisa Murkowski (R-Ala.)
• Olympia Snowe (R-Maine)
• Debbie Stabenow (D-Mich.)

Sens. Schumer and Snowe also introduced another bill, (S. 557), which would permanently extend the IRA charitable rollover and expand it to allow increased charitable giving, most notably through donor-advised funds. S. 557 currently has eight original co-sponsors. Among the supporters is Senator Burr. These IRA rollover and excise tax bills are key components of the Council’s 2011 legislative agenda, which also includes promoting and growing rural philanthropy, and streamlining the process required for foundations to participate in program-related investments.

More information about the Council on Foundations’ 2011 Legislative Agenda and policy papers is available here, as well as the Council’s issue paper on the excise tax.

The Council on Foundations (www.cof.org), formed in 1949, is a nonprofit membership association of grantmaking foundations and corporations. Members of the Council include more than 1,750 independent, operating, community, public, and company-sponsored foundations, and corporate giving programs in the United States and abroad. The Council’s mission is to provide the opportunity, leadership, and tools needed by philanthropic organizations to expand, enhance, and sustain their ability to advance the common good.