Environmental Benefits of the Tax Reform Act

The Tax Reform Act of 1976, P.L. 94-455, signed by President Ford on October 4, 1976, includes among its hodge-podge of some 1500 pages several provisions of interest to those involved with environmental protection. The Act establishes new lobbying rules for tax-exempt charitable organizations, adds tax incentives to encourage the preservation of historic structures, and changes the tax treatment of pollution control facilities.

Section 2502 of the Act¹ provides a new elective set of tests for determining whether an organization (except a church, church affiliate or private foundation) that is tax-exempt under Internal Revenue Code § 501(c)(3) has engaged in lobbying activities sufficient to cause it to lose its tax exemption and qualification for receiving deductible contributions.

The highly-inexact "substantial part of activities" test, derived from Internal Revnue Code § 501(c)(3), caused many environmental organizations to set up separate arms which were exclusively devoted to lobbying and which would not "taint" the main organization so as to cause it to lose its tax-exempt status. The new rule, applicable for tax years beginning after December 31, 1976, creates a sliding-scale limitation on lobbying activities based on the amount of money spent to influence legislation. The limitation uses an inverse ratio so that larger organizations can spend proportionately less money. The base-level allowance of expenditures is 20 percent of the first $500,000 of the organization's exempt purpose expenditures for the year, declining to 15 percent for the second $500,000, 10 percent of the third $500,000 and 5 percent of any additional amount. The upper limit on an organization's lobbying expenditures is $1 million per year. In addition, no more than one fourth of the amount spent may be used to influence the general public on legislative matters ("grass roots lobbying"). In order to avoid the spin-off of multiple branch organizations which could be used to dodge the expenditure tests or spending limitations, the Act adds affiliation rules which aggregate the expenditures of related organizations. Furthermore, an individual may not deduct out-of-pocket expenditures incurred on behalf of a charitable organization if they are paid to influence legislation and the organization is eligible to elect the new expenditure tests.

The Internal Revenue Service will tax 25 percent of the excess lobbying expenditures paid by an organization which exceed the expenditure limitations in a taxable year. If the expenditure limitations are exceeded by more than 50 percent over a four-year period, the organization will lose its § 501(c)(3) tax-exempt status. An electing organization must also disclose on its information report the amount of total lobbying expenditures, including "grass roots," together with the amount it could have spent for these purposes without imposition of the new tax. Affiliated organizations must provide this information in a consolidated report and in a report for each affiliate.

The new Act also includes provisions encouraging the preservation of historic structures by a combination of tax disincentives for demolition and incentives for rehabilitation.² Section 1325(a) of the new Act permits amortization of the capital expenditures incurred in the rehabilitation of an historic structure over a 60-month period instead of deductions for depreciation. Amortization in excess of the otherwise-allowable depreciation is recaptured as ordinary income when the property is sold. Demolitions are discouraged by disallowing deductions for the cost of demolition and any loss sustained on account of the demolition. These items are to be treated as chargeable to the capital account for the land on which the demolished structure was located and, therefore, not includable in the depreciable basis of a replacement structure. Real property constructed on a site formerly occupied by an historic structure that had been demolished or substantially altered can be depreciated only on a straight-line rather than accelerated basis. On the other hand, substantial rehabilitation is encouraged by allowing the taxpayers to depreciate the property as if they were the original users and use the 150 percent declining-balance method of depreciation for the entire basis of the rehabilitated property. All of the foregoing new provisions are allowable only for five years, ending in or before 1981.

Section 1325(e) of the new Act also amends Internal Revenue Code § 170(f)(3) to permit charitable deductions of less than the taxpayer's entire interest of real property for "conservation purposes." The property interest transferred, whether lease, option to purchase, or easement, must extend for at least 30 years.³ This change will be particualrly beneficial to private preservation groups because prior law had limited this deduction's scope to personal residences and farms.

Section 169 of the Internal Revenue Code, which permits a taxpayer to deduct amortization, over a 60-month period, of a certified pollution control facility installed in a plant in operation before January 1, 1969, expired on December 31, 1975. Section 1312 of the new Tax Reform Act, however, makes this amortization deduction permanently available. A second significant change by the new Act is that a 50 percent investment tax credit for the amortizable basis of such facilities placed in service after December 31, 1976 is available whereas previously no tax credit had been allowed.⁴

1. Section 2502 amends Internal Revenue Code § 501 by adding a new subsection (h) and also adds a new § 504. See also House Committee on Ways and Means, Summary of the Conference Agreement on the Tax Reform Act of 1976 (H.R. 10612), 94th Cong., 2d Sess. (1976).

2. The new Act affects the following sections of the Internal Revenue Code: § 167 (depreciation of improvements), new § 167(o) (substantially rehabilitated property), new § 191 (amortization), and new § 280B (demolition).

3. This change amends Internal Revenue Code § 170(f)(3) (transfers of part interests in property), § 2055(e)(2) (estate tax), and § 2522(c)(2) (gift tax).

4. The new Act amends Internal Revenue Code §§ 46(c), 48(a)(8), 169(d)(1), and 169(d)(4).