New Law Challenges Fund Raisers

Charities discover limits in measure to stimulate giving

Just days after Congress passed a sweeping new tax law last month, Jeff Comfort, a fund raiser at

Georgetown University, got in touch with 10 of his institution’s most-generous donors.

Mr. Comfort, now in the planning stages of a campaign that is expected to seek at least $1-billion, had been keeping in close touch with the donors, all of whom had expressed keen interest in making six- and seven-figure gifts from their individual retirement accounts.

All of them were waiting to see whether Congress would approve a measure that fund raisers have been seeking for more than a decade: a tax-free way to channel money from retirement savings to charity.

But only one of the 10 Georgetown donors now wants to make such a gift, Mr. Comfort says. Congress put so many limits on who can benefit from the retirement-savings provision, he says, that the other donors are no longer interested.

$1-Billion in New Gifts

Across the country, fund raisers are aggressively getting the word out about the new tax law’s potential benefits to donors. The retirement provision alone could produce $1-billion for charities by the end of 2007, some fund raisers predict.

But the new law, considered by many tax experts to be the most comprehensive legislation affecting charities and donors in three decades, has produced mixed reactions that vary sharply, based on the mission of a nonprofit group and the types of donors and contributions it solicits.

For example, conservation groups expect substantial gains from a provision that greatly expands tax deductions for people who take steps to protect historically or environmentally important properties. But museums anticipate a big drop-off in the number of high-value artworks they receive because Congress curtailed a break that allowed donors to take generous tax deductions over many years before contributing masterpieces from their private collections.

And in many cases, the law has left charities hoping that it will bolster their finances, but bracing for added expenses and hassles.

Charities that collect used clothing, furniture, and other goods were jubilant that Congress finally told donors they can’t get a tax write-off when they donate worn-out sweaters, battered sofas, and other items that no one can use. Getting rid of such junk costs charities millions of dollars a year.

But some nonprofit groups are worried that the provision could contain a hidden expense: If charities have to certify whether each donor’s items are useable, they could end up with a new administrative cost — one that could obliterate the savings they hope to achieve under the new law. What’s more, charities risk alienating donors by telling them they don’t deserve a tax break.

Concerns Mounting

As charities have examined the new law, their concerns about provisions intended to help them raise more money have mounted. Meanwhile, tax lawyers and charity experts have raised concerns about measures designed to curb abuses by donors and charities, saying that the legislation could hurt legitimate activities.

Among the key issues that have been raised so far:

• Restrictions on the causes and donors that can benefit from new incentives. Charities have long sought a measure that would enable donors to steer money from their individual retirement accounts to charity — and avoid any taxes or penalties.

  Over the years, they successfully persuaded several key House and Senate committees to approve such measures, but they never made it into law. When Congress gave its final blessing to IRA legislation this year, it passed a version that was far less generous than previous approaches, largely out of concern that they would be too costly to the federal treasury.

  Now donors can give no more than $100,000 by the end of this year, and another $100,000 next year; earlier versions of the legislation set no limit on how much donors could give from their accounts.

  What’s more, donors must be at least 70½, not 59½ as in earlier versions of the IRA legislation, and they must make donations to charities that provide direct services.

  They cannot put IRA funds into donor-advised funds, or supporting organizations, nor can they channel them into charitable trusts, gift annuities, or other similar giving tools, as had been allowed in the earlier versions of the legislation.

  “They stripped all the good stuff out of the IRA rollover, and they threw us a bone,” says Emil Kallina, a lawyer in Baltimore who was involved in lobbying for a more-generous version of the law.

• Time limits. Most of the tax breaks designed to increase giving will expire at the end of 2007. Nonprofit groups say the types of gifts that Congress sought to stimulate under the new law, particularly IRA donations and land-conservation gifts, take a long time to complete. For instance, conservation gifts can take several years of negotiations between charities and property owners.

• Retroactive penalties. Some of the provisions in the new law took effect weeks before Congress passed the legislation and sent it to President Bush, who signed the measure on August 17.

  For example, the legislation says that as of July 25, one type of charity — known as a supporting organization because it gives money to one or more affiliated charities — cannot have on its payroll any family members of donors who give money to the supporting organization. Anybody who violates the law must return the compensation to the supporting organization and pay a fine to the government.

  As a result, each employee affected by the law “has a month of compensation to pay back, plus a 25-percent excess-benefit tax, plus he’s out of a job,” says Marc Owens, a Washington lawyer who formerly ran the Internal Revenue Service division that oversaw tax-exempt groups.

• Lack of clarity about how the law is supposed to work. The provision of the law that prevents donors from taking a tax break for unusable items does not say whether charities or donors are responsible for certifying that clothing, furniture, or other items are in good condition.

  And under provisions governing retirement-fund donations, the law requires financial institutions to transfer money directly to a charity designated by the donor, but it does not say what transaction records those institutions should keep, what fees they can charge, and how they should report the transactions to the Internal Revenue Service.

  Fund raisers say the lack of information may slow the process for many donors this year, making it difficult for them to complete transactions in time to take advantage of the new giving incentive before the tax year ends on December 31. What’s more, delays by financial institutions uncertain about the new rule could cause some donors to give up on using their IRA’s to support charity.

• Reductions in longstanding tax breaks. Congress passed limits on so-called fractional-interest gifts out of concern that people were getting overly generous write-offs when they promised to donate a piece of art.

  Under the old tax law, donors could pledge a portion of the artwork over many years, write off a percentage of its value for each year, but keep the artwork in their possession — as long as they allowed it to be displayed at a museum periodically. The new law limits the number of years over which donors can make such gifts and tightens the requirements on museums that accept the works.

Glenn D. Lowry, director of the Museum of Modern Art, in New York, fears that now many donors won’t want to give up their masterpieces.

“Even for the extremely wealthy, these works represent a huge portion of their assets,” Mr. Lowry says. By reducing the tax breaks available to art donors, the new law endangers cultural institutions’ ability to acquire pieces “that come up very rarely, that are worth a great deal, and that museums simply cannot afford to buy,” he says.

Fighting Abuses

Despite such concerns, many charities believe the new law, especially its restrictions on charities and donors, will improve Americans’ confidence in philanthropy.

Patrick Lester, policy director at United Way of America, says the legislation’s restrictions on abuses are the key reason that his organization supported the new law.

“No legislation is perfect, but you don’t oppose something because you think it’s not perfect; you support it and you work to improve it.” Over all, he adds, “we’re pretty happy with it.”

As for the limits on charitable-giving incentives in the law, Mr. Lester and other charity officials are hopeful that Congress will decide to expand the tax breaks.

Many people in the charity world are calling on professional groups that represent fund raisers to track the results of the incentives. The goal: persuading lawmakers that the provisions should not only be extended beyond 2007, but widened to allow more charities and donors to participate and more money to flow to nonprofit organizations.

“It’s a foot in the door, but I wish we’d gotten more,” says Lynda Moerschbaecher, a Carlsbad, Calif., lawyer who has been lobbying for new giving incentives, including the retirement-account provision. “I hope that organizations will pay close attention to the number and size of gifts they receive so we can go back to Congress and demonstrate that this is beneficial to charities.”

But other experts worry that, if charities report a substantial increase in donations, Congress might be unwilling to expand the charitable-giving incentives, because doing so would deprive the Treasury of too much revenue.

Already, the Joint Committee on Taxation has estimated that the IRA and conservation breaks will cost the federal government more than $380-million that it would otherwise receive in taxes over the two years the law is in effect.

Promoting New Tax Breaks

Because those two types of gifts are expected to produce the largest sums for charities, fund raisers are focusing most of their attention on soliciting those donations.

The Nature Conservancy has held conference calls with 150 of its fund raisers, who work from offices across the country, to educate them about the new law’s benefits, especially those that affect retirement accounts and conservation easements.

The group plans to promote retirement-account gifts to potential donors in most of its regular online and print communications, including its quarterly magazine. And because the charity knows the ages of most recipients of the publication, it plans to add a special wrapper about IRA gifts on the cover of the November edition just for subscribers who are 70 and older.

Already, the organization has received its first gift from an individual retirement account, a donation of $100,000 from a Baltimore donor who plans to give another $100,000 contribution from his retirement account early next year.

Stanford University is planning to promote retirement gifts to donors, probably focusing on people 65 and older, by sending postcards to about 45,000 alumni and other donors.

Chris Yates, director of planned giving, says that postcards are less expensive than letters and are less likely to end up unread in donors’ trash. Promoting IRA gifts among donors who are younger than 70 makes sense, Mr. Yates says, “because they have spouses or friends in the right age group.”

And with Stanford set to publicly announce a multibillion-dollar capital campaign next month, Mr. Yates hopes that some wealthy donors will realize they don’t need the money in their retirement accounts and can use those funds to support the university.

Other nonprofit groups are promoting the retirement benefit to everyone, regardless of their age.

WAMU, a Washington public radio station, plans to broadcast 20- to 30-second spots, instead of relying on direct mail to reach its potential donors.

Walt Gillette, the station’s director of individual giving, says the spots are just as effective as mailings, or better, and he hopes to reach donors who can make retirement-account gifts, as well as their financial advisers, many of whom are among the station’s 600,000 listeners.

Conservation and environmental charities are now stepping up efforts to get in touch with landowners and others who have been considering donating the development rights to historically or environmentally desirable properties. The goal: letting them know about the new, more-generous tax breaks for such donations available through the end of next year.

The tax breaks came after Congress raised numerous concerns that donors were taking overly generous write-offs for properties that weren’t adequately protected from development or were inflated in value.

Concerned about a crackdown on legitimate conservation donations, more than three dozen charities banded together to persuade Congress to pass new provisions; they also worked to revise their organizations’ standards for accepting gifts and overseeing them, including new procedures on verifying how much a gift is worth.

Under the new law, donors can now take more-generous tax deductions for their gift. The law also tightened regulations that govern property appraisals and increased penalties for people who are found guilty of inflating the value of land and other properties donated to nonprofit groups.

Donors of conservation easements now get to write off up to 50 percent of their adjusted gross income per year for such gifts; in the past, they could deduct no more than 30 percent of their incomes annually.

They may also spread the deduction over 15 years, compared with just five years before the law passed. What’s more, many farmers and ranchers are allowed to deduct up to 100 percent of their income over the 15 years.

The new law will increase the number of donated easements, many conservationists say. In 2003, some $1.4-billion worth of easements were donated, according to the most-recent figures available from the Internal Revenue Service.

“Congress has given us one-and-a-half years to show how valuable this really is for the country,” says Russell Shay, director of public policy at the Land Trust Alliance, an umbrella organization for more than 1,500 land-conservation groups that lobbied for the easement provisions along with Ducks Unlimited, the National Audubon Society, and the Wildlife Society.

Demonstrating the conservation benefits will be challenging, however, given the law’s two-year limit, Mr. Shay says. “These donations are complicated matters. This law should be allowed for at least five years to give donors and donees time to work out donations that benefit the public.”

But some charities say the new law has already motivated people to donate development rights to valuable properties that they had been considering for years.

For most donors, making such a gift is not a snap decision. By deciding not to allow development, land owners guarantee that their property will not be worth as much as it would be otherwise — for generations. And while donors can still live on the property or sell it, they are limited in what kind of improvements they can make. For instance, they might not be able to build a guest house on the property or get rid of trees blocking a scenic view from their homes.

“There are three reasons a landowner wants to protect their property: because they love it, they love it, they love it,” says Matthew Logan, president of the Potomac Conservancy, a Washington charity that seeks to protect 15,000 acres along the Potomac River. “These incentives are not going to make someone who doesn’t care about conservation into a tree hugger, but it makes it possible for land-rich, cash-poor landowners to consider this as opposed to selling off their land to retire or pass something to their heirs.”

Brian Fankhauser, a land-stewardship specialist at the Iowa Natural Heritage Foundation, in Des Moines, says he is now working with a family that plans to donate the development rights to a 300-acre farm in western Iowa that is home to several endangered plant and wildlife species.

Instead of donating just a portion of the farm, the family is now ready to put all of it under an easement, he says.

“They postponed before,” says Mr. Fankhauser of the family. “But with these incentives, they have decided that they will definitely do the easement this year.”