Grassley Seeks Data on Proposal to Change Private Foundation Excise Tax

Grassley Seeks Data on Proposal to Change Private Foundation Excise Tax

News story posted in Congressional Correspondence on 15 June 2010| comments
audience: National Publication | last updated: 18 May 2011
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Sen. Chuck Grassley, ranking member of the Finance Committee, is asking for data to gauge how a proposed change to private foundation excise taxes would affect foundation pay-out rates. Grassley said Congress should have such information at hand before voting on the tax change.
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June 10, 2010

WASHINGTON -- Sen. Chuck Grassley, ranking member of the Finance Committee, is asking for data to gauge how a proposed change to private foundation excise taxes would affect foundation pay-out rates. Grassley said Congress should have such information at hand before voting on the tax change.

Private foundations generally have to pay out 5 percent of their assets each year as required by law. Foundations currently pay a 2 percent tax on their investment income annually but get a reduced rate of 1 percent in any year in which a foundation exceeds the average historical level of its charitable distributions. A proposal endorsed by the Council on Foundations and being promoted by several senators would flatten the excise tax rate. The foundations claim the current structure hurts them by forcing them to increase their pay-out to be eligible for the 1 percent rate.

"This isn't something to vote on without having studied who might benefit, who might be hurt, and what effects this would have on foundation payout rates," Grassley said. "Flattening the rate without mandating that the tax savings be paid out seems like it's rewarding those who just do the minimum while hurting those who go above and beyond what's required."

Grassley said Congress should consider how to fund IRS oversight and enforcement efforts of laws governing private foundations. The excise tax proceeds, which were meant to fund IRS oversight of foundations, currently go to the general U.S. Treasury instead; the proposed legislation doesn't change this. The IRS has said it does very little oversight of private foundations. In 2004, an in-depth series in the Boston Globe described some abuses resulting from the lack of checks and balances on private foundations. The Globe wrote, "The abuses included excessive salaries paid to foundation board members, many of whom work a few hours a week to approve a handful of grants to public charities; expensive perks for foundation directors, including private jets and luxury cars; and board members who direct legal and investment management contracts to their own companies." In one case, a Massachusetts foundation executive boosted his salary at a family foundation to $1.3 million to cover the expense of a daughter's $200,000 wedding. In another instance, a Florida foundation spent $36 million to buy a 12-seat jet.

Grassley sought data and an explanation of the need for the requested excise tax change from the Council on Foundations. The text of his letter is available here.


* * * * *

June 9, 2010

The Honorable Steve Gunderson
President and CEO
Council on Foundations
2121 Crystal Drive, Suite 700
Arlington, VA 22202

Dear Mr. Gunderson:

I am writing in response to your request for me to support Schumer-Stabenow-Isaakson-Chambliss amendment #4310 to the Extenders bill currently being debated in the Senate. As you are aware from our conversations, I do support simplification of the private foundation investment income excise tax. The former Administration included similar proposals in its annual budget for eight years in a row. However, such changes would be better addressed in the context of larger reform and it is questionable whether enacting such changes on the Extenders bill, without hearings or any formal study of the issue, is the best approach.

As you know, the private foundation excise tax was enacted in 1969 to fund what was then the new office of Exempt Organizations at the Internal Revenue Service. There is agreement that the tax is not serving its purpose since the funds are not -- and never have been -- dedicated to that office. Congress acknowledged this by reducing the rate from original rate. I understand that the current 2%/1% hybrid rate was enacted at the recommendation of the private foundation community but I am not aware how this impacted private foundation giving.

Similarly, while some claim that simplifying and flattening the rate will increase pay out, it is not clear to me that will be the actual result. For those foundations eligible for the 1% rate because they increase or maintain the same payout level every year, their payout to charities may decrease because they may be paying more in taxes. Also, there is no mandate that organizations actually increase their pay out to charities or even pay out the tax savings resulting from this legislation. Thus, it seems that flattening the rate may benefit those foundations which have historically chosen to only pay out the minimum required by law, while hurting those that have chosen to do the right thing by paying out more.

As a result, I would appreciate your providing the following information so that I, and my colleagues, can make an informed decision regarding the amendment in question.

    1. How many private foundations actually pay the investment income excise tax?

    2. For those subject to the tax, how many were subject to the 2% rate and 1% rate for the past five years? Please indicate the number of large and small foundations paying each rate as well as the gross amounts paid under the 2% and 1% rates.

    3. If the rate is reduced to a single, flat rate, what incentive remains for private foundations to pay out more than the statutorily mandated 5%?

Thank you in advance for your attention to these questions.
                Sincerely,

                Charles Grassley
                Ranking Member
                United States Senate
                Washington, DC
cc:
The Honorable Max Baucus
The Honorable Chuck Schumer
The Honorable Debbie Stabenow
The Honorable Johnny Isakson
The Honorable Saxby Chambliss

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