Changes for Charities and Donors in the Pension Protection Act

August 30, 2006
On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (the “Act”). The Act contains a number of provisions impacting charities and their donors. Some provisions have broad application and some are narrowly tailored. This advisory summarizes several of the Act’s provisions that are likely to be of general interest to charities and their donors. Areas covered by the Act include charitable contributions, new reporting requirements, increased penalties, donor advised funds, and support organizations. The Act leaves unanswered a number of questions that will require IRS guidance. Except as noted below, the Act takes effect for tax years beginning after the date of enactment – August 17, 2006. 


Charitable Contributions

Reporting

Increased Penalties

The Act increases the severity of a number of penalties that already apply to charities and private foundations.  It is useful to remember that all Section 501(c)(3) organizations are either public charities or private foundations. Public charities typically receive broad public support. Private foundations receive funding from only a few sources (such as a family or a company).  Donors to public charities receive better tax treatment and private foundations face more regulation than public charities. 

Donor Advised Funds

Much of the Act involves new restrictions placed on donor advised funds. Traditionally, donor advised funds were offered by community foundations and allowed a donor to provide non-binding advice concerning the distribution of his or her contributions by the community foundation. The popularity of donor advised funds has dramatically increased over the past several years. Donor advised funds are now sponsored by many types of charities, including those affiliated with investment managers.  

Support Organizations

Support organizations are Section 501(c)(3) charities that are treated as public charities – even though they do not receive broad public support.  Support organizations receive public charity status because they support one or more public charities. (A public charity supported by a support organization is called a supported charity.) Support organizations may not support private foundations.

There are three types of  support organizations.  The first type (called a Type I support organization) is a subsidiary of the supported charity.  The second type of support organization (a Type II) has a brother-sister relationship with the supported charity – there is generally common supervision or control over both organizations by the same persons.  The third type of support organization (a Type III) has the loosest relationship with the supported charity.  The test for Type III status is extremely complex, but generally requires that the Type III support organization be responsive to, and significantly involved in the operations of, the supported charity.  Support organizations – especially Type III – are subject to a series of new rules that reflect those imposed on donor advised funds. 

Due to the complexity of the Act, the need for IRS guidance, and because the Act introduces many new concepts to the tax law, this information is subject to change. This information is general in nature and is not a substitute for professional legal advice. You should contact your professional advisor to determine the impact of the Act on your particular situation.

Additional Documents:

Practices

Top