A number of legislative actions and IRS pronouncements over the last six months may be of interest to charitable organizations and other organizations that are exempt from tax under the provisions of Internal Revenue Code section 501.

Charitable Giving Bills Stall. The House has passed the Charitable Giving Act of 2003 (H.R. 7), and the Senate has passed the CARE Act of 2003 (S. 476. Both bills contain a number of incentives for charitable giving, the most significant of which are a non-itemizer charitable contribution deduction of up to $250 ($500 for joint filers) for cash contributions above $250 ($500 for joint filers) and an IRA rollover provision that would permit IRA beneficiaries over a certain age to contribute their IRA proceeds to charities or split-interest trusts without having to take the IRA proceeds into income. The non-itemizer provision would sunset after two years; the IRA rollover provi-sion would be permanent. The House bill also contains significant changes to the private foundation rules, including denying section 4942 qualifying distribution treatment for certain administrative expenses and reducing the section 4940 investment income tax to a flat 1 percent. Further progress on these bills is unlikely this year, as Senate Democrats are refusing to send the Senate bill to conference as a way of protesting the fact that Democrats have been shut out of conference negotiations on other bills.

IRS Scores a Victory in Joint Venture Case. The U.S. Court of Appeals for the Fifth Circuit reversed the grant of summary judgment in St. David's Health Care System v. United States. The District Court had ruled St. David's Health Care System was tax-exempt under section 501(c)(3) even though it had transferred its health care activities to a partnership formed with a for-profit company and had ceded con-trol over those activities to a for-profit entity. The Court of Appeals concluded that the control analysis articulated by the IRS in Revenue Ruling 98-15 was the correct analysis to apply, and then found that genuine issues of material fact existed regarding whether St. David'sm had ceded control over the partnership to its for-profit partner. The Court of Appeals therefore remanded the case back to the District Court for trial.

IRS to Increase Focus on Political Activities. The IRS has announced that during the upcoming federal election year it will be focused on ensuring that exempt organizations are aware of their responsibilities with regard to political activities. The IRS is particularly concerned about the possible shift of money away from political parties and toward section 501(c)(4) and section 501(c)(3) organizations because of the restrictions imposed by the Bipartisan Campaign Reform Act, which may put pressure on these organizations to "push the envelope" with respect to their election- related activities. The IRS is also planning to review compliance with the tax form filing requirements for section 527 political organizations.

Treasury and the IRS Announce Guidance Plans for FY2004

Treasury and the IRS have announced that they plan to issue guidance by June 30, 2004 on: (1) joint ventures between exempt organizations and for-profit companies; (2) activities of section 501(c)(4) organizations; (3) the Internet and the unrelated business income tax; (4) low-income housing partnerships and section 501(c)(3) organizations; (5) down payment assistance organizations; (6) split-interest trusts; (7) qualified tuition pro-grams under section 529; and (8) reporting requirement applicable to Coverdell education savings accounts. Treasury and the IRS are also working on new guidance for international activities under section 501(m), but have not set a timetable for issuing that guidance.

IRS Continues Market Segment Audits.

The IRS plans to undertake in the near future "market segment studies," audits of a statistically valid sample of organizations of a particular type, for section 501(c)(3) organizations that raise funds for other organizations, private schools, and non-exempt charitable trusts. The IRS is continuing such studies for eleven other types of organizations, including private foundations, community foundations, colleges and universities, and hospitals. The IRS expects to publish reports of its studies for section 501(c)(5) labor unions, section 501(c)(6) trade associations, and section 507(c)(7) social clubs in early 2004.

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This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.