POTUS Sends FY 2017 Budget Proposal to Congress
On Tuesday, President Obama released his Fiscal Year 2017 Budget Proposal. The $4.1 trillion Budget sets forth the Administration’s spending and policy priorities for the coming year, including several provisions that have implications for the philanthropic sector:
- Capping the itemized deduction at 28% for individuals who earn more than $200,000 and couples who earn more than $250,000 per year.
- Simplifying the private foundation excise tax to a flat 1.35%.
- Changing the base limit for certain charitable contributions. The base for gifts of cash to public charities would remain at 50% of adjusted gross income (AGI), while a base of 30% would apply to all other types of gifts to charitable organizations other than public charities. Additionally, it would allow contributions that exceed these base limitations to be carried forward for 15 years, up from the current 5-year carry-forward period.
- Prohibiting the charitable deduction for contributions that are made to satisfy the prerequisite for purchasing tickets for college sporting events.
In a statement this week, Council President and CEO Vikki Spruill expressed the intent of the Council to “continue to engage with policymakers and elected officials in our role as the voice of philanthropy in Washington.”
Typically when an Administration releases its budget proposal, the House and Senate Budget Committees will invite the Director of the White House Office of Management and Budget to speak before the committees and explain the blueprint of the proposed budget. This year, however, the chairmen of these committees—Senator Michael Enzi (R-WY) and Representative Tom Price (R-GA-6) issued a joint statement to retract this standing invitation, citing disagreement with the President’s approach and the preference to craft a budget plan independently of the White House. This is an indication that the President’s proposed budget is very unlikely to gain the necessary traction for progressing through Congress to become law.
Congress Requests Endowment Information from Universities
Continuing the trend of skepticism around endowed philanthropy, leadership from the House Ways & Means and Senate Finance Committee sent letters to 56 private universities whose assets exceed $1 billion. The letter requested detailed information regarding financial practices and the management of their endowments.
The letter notes the jurisdiction and corresponding authority of these committees to conduct an “inquiry into the activities of colleges and universities related to the numerous tax preferences they enjoy under the Internal Revenue Code.” The letter also cites data from a 2015 National Association of College and University Business Officers (NACUBO) Commonfund Study that reports university endowments experienced an average return on investment of 15.5%, and an average payout rate of 4.4% per year.
This inquiry is the latest development in an ongoing series of events that highlight the concerns of policymakers around endowed philanthropy. The Council will continue our ongoing work of engaging with Members of Congress to educate them on the priorities and perspectives of our sector as it relates to endowed philanthropy.
Crossroads GPS Group Granted (c)(4) Status
This week it was reported that Crossroads GPS—a politically active group organized by GOP strategist Karl Rove—was granted nonprofit, 501(c)(4) status by the IRS after more than five years of uncertainty.
Founded shortly following the Citizens United decision by the Supreme Court in 2010, Crossroads GPS has faced criticism regarding where its undisclosed contributions are coming from and how the funds are spent to support candidates and election-related activity.
As our readers will recall, the Treasury Department and IRS proposed regulations in November 2013 around nonprofit political activity, which—due to an enormous influx of concerned comments—were later retracted by Treasury with the promise to rework and propose new regulations. To date, Treasury has not yet put forth any updated proposed rules on this matter.
Borrowing from One's Agency Endowment
A community foundation recently asked the Council’s legal team about a request from a local nonprofit to borrow from an endowed agency fund that it had established with the community foundation. The nonprofit was in the early stages of a capital campaign, and needed some initial funding to get the project off the ground.
The legal team advised that if all the money in the agency fund came from that nonprofit, the community foundation’s board could consider and approve the loan, with the endowed fund held as collateral.
An “agency endowment” generally refers to funds at community foundations that were established by a charity that designated itself as the beneficiary. Such funds can help ensure the continuity of a charity’s programs and can provide resources to meet emergencies and occasional financial deficits.
The legal team emphasized the importance of identifying the source of the endowed funds. If the nonprofit transferred its own funds, that is the end of the inquiry. However, if third-party donors contributed to the fund, donor intent would be an issue. Did the donors intend for the contributions to remain as an endowment and not be spent? If it was wholly funded by the nonprofit, the community foundation could approve the loan, which could be secured by the fund. In the event of a default, the foundation could transfer money from the endowment to the foundation’s operating account.
Since the community foundation would, in effect, become a lender, the legal team suggested the foundation consider additional legal matters. These would include what interest rate it would charge, repayment terms and whether to have local counsel draw up the loan documents. Finally, the foundation was advised to be prepared to deal with a default situation and the public relations that could result if it foreclosed and they were forced to transfer the nonprofit’s endowment money.
For more information on this or any other tricky legal matters, please contact the Council’s Legal Affairs team at email@example.com.
Access to the Council’s legal team is a valuable member benefit. Council attorneys are available to discuss your legal questions and to provide legal information by telephone, email and through our various publications and newsletters. This information is intended for educational purposes and does not create an attorney-client relationship. The information is not a substitute for expert legal, tax or other professional advice tailored to your specific circumstances, and may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.
Exclusive from our colleagues at the National Council of Nonprofits.
State Budget Challenges Raising Tensions, Anxiety for Nonprofits
The longest-running state budget impasse entered its eighth month with no sign of progress or even concern, but with continued suffering by the nonprofits struggling to maintain services in communities throughout Illinois. When the Governor gave his State of the State speech at the end of January, he largely ignored the budget crisis imposed by politicians, and instead inflamed the nonprofit community. According to Forefront, formerly known as Donors Forum, the Governor “expressed concern that nonprofits are reactive and ineffective and that despite the state's investment, Illinois residents are sicker and less educated than ever.” In response to those allegations, Forefront CEO Eric Weinheimer issued a strong statement explaining how the government, and not nonprofits, has failed to live up to agreements and expectations. Nonprofits including Catholic Charities, Lutheran Social Services, and Meals on Wheels, have been forced to curtail operations while incurring huge costs delivering contracted services that the state demanded, but is not likely to pay for anytime soon.
In Illinois, the standoff is due to political demands for concessions on non-budget related issues; elsewhere concerns rise from deficits and choices politicians are making to fill them. One of many budget drivers is the falling price of petroleum. This month North Dakota’s Governor ordered most state agencies to arbitrarily cut their budgets by more than 4 percent due to a new budget forecast predicting that slumping oil and farm commodity prices will generate a $1 billion revenue shortfall in a $6 billion budget. Oklahoma state agencies are also bracing for cuts in the face of an expected $900 million decline in revenue. Oil and gas woes are also being felt in Texas where sales tax revenues continue to decline. Recognizing that 85 percent of the Alaska State budget is funded by oil revenue, Plan 4 Alaska, a project of the Rasmuson Foundation, is highlighting the need for a balanced, long-term solution to the state’s budget problems.
FASB Outreach on Proposed Changes to Nonprofit Accounting Standards
Council staff met with members of the Financial Accounting Standards Board (FASB) this week to discuss possible changes to guidance for nonprofits.
Specifically, FASB is working to determine whether there is a need to clarify when a nonprofit entity—that is a general partner—should consolidate a for-profit limited partnership. FASB is reaching out to Council members to see how changes to the guidance might affect their programmatic and investment activities.
To learn more or to comment on the proposed changes, please contact John Cochrane, Associate Director of Social Innovation.