August 21, 2008 | Read Time: 3 minutes
Seed America, a charity in Alpharetta, Ga., wants to raise $100-million to build a business school that bases its curriculum on Christian values. But its approach to raising the money doesn’t focus on the big gifts, direct mail, or special events that are the backbone of most capital campaigns.
Instead, it seeks money mainly through a program called the 561 Exchange — a process that at least one charity watchdog says is ripe for abuse if it is not properly monitored.
The charity adopted the name from the Internal Revenue Service publication that explains the tax deductions for donated items.
Seed America, in much of its literature on the 561 Exchange, says that companies that donate industrial properties to charities can receive substantially more money through tax savings than they could by selling their properties on the open market.
As an example, Seed America outlines a case study on its Web site about a fictional company that wants to sell a vacant industrial building on the open market. If the company were to sell that property for $1-million, the company would pay about $400,000 in taxes, leaving it with about $600,000.
The same company stands to save a larger sum by donating the same property to charity at an assessed value of $2-million. The $2-million figure is generated by an appraisal of the property, not an actual sales price.
The company can then deduct that $2-million from its taxable income for the year — a move that would save the company about $800,000 in taxes.
“It’s a win-win solution,” Seed America says on the site. “The property owners win by disposing the property and getting a significant cash benefit without the huge carrying costs incurred while it sits empty on the market. The local community wins by helping entrepreneurs create more small business and jobs. The government wins by the creation of more profitable tax-paying businesses that use what could easily have been an empty building.”
‘Feet on the Ground’
But Dean Zerbe, a former aide to Sen. Charles Grassley, an Iowa Republican and former chairman of the Senate Finance Committee, said the scenario raises questions that are likely to draw scrutiny from the Internal Revenue Service, especially in light of the fact that Seed America has not broken ground on its planned business school.
In addition, Mr. Zerbe questions why a building that would sell for $1-million on the market would be able to receive an appraised value of $2-million for tax purposes.
“Anything that suggests a fair-market-value appraisal of two times ‘list price’ raises huge red flags,” Mr. Zerbe said in a recent online discussion with Chronicle readers. “The key in these land donations is always to have your feet on the ground regarding the valuation and avoid the temptation to pick a number and find an appraiser who will bless it.”
Joseph Johnson, founder of Seed America, said his organization requires the companies that are donating properties to get their own independent appraisals before Seed America accepts their donations.
Often, he said, the true value of the properties is higher than the prices the companies might set because the companies are attempting to sell them quickly to avoid carrying high costs and are not able to wait for the best offer.
“We simply know how to find properties that will be appraised higher than what the owner is willing to sell it for due to high carrying costs, urgency, and other issues related to the owner,” Mr. Johnson said.
