05656
Dec. 5, 2005

Hurricane tax-relief package
includes windfall for wealthy donors

Some may be able to deduct
100 percent of gross incomes

by Stephanie Strom
The New York Times
Reprinted by permission

NEW YORK, Oct. 27 — A little-noted provision in the tax-relief package intended to help victims of Hurricane Katrina is shaping up as a windfall for charity and a drain on government coffers.

        It allows donors who make cash gifts to almost any charity by the end of 2005 to deduct an amount equal to virtually 100 percent of their adjusted gross incomes — double the normal limit of 50 percent. The tantalizing prospect has set off a financial scramble among some wealthy donors and charities vying for their dollars.

        “I just keep thinking there’s got to be a catch, they can’t really be doing this,” said C. Kemmons Wilson Jr., a Memphis businessman whose father founded Holiday Inns Inc.

        Mr. Wilson said he and his siblings give away several million dollars a year, and that amount could double this year because of the new tax provision. “How many sales does the government have?” he said. “This is a big sale, and you bet I’m going to go.”

        Fund-raisers say many wealthy Americans are pressing financial planners to increase their giving this year and reduce their tax bills. Some institutions, primarily universities, are encouraging big donors to take advantage of the favorable tax treatment and make sizable gifts or fulfill previous pledges. Some donors may shift into 2005 gifts that would have been made in future years.

        Because of the strong interest, experts say, the government may forgo more tax revenue than Congress anticipated when it passed the legislation. Based on information from 2002 tax returns, Robert F. Sharpe Jr., a fund-raising consultant whose clients include the American Heart Association and the University of California, Los Angeles, estimates that the provision will spur $4 billion to $10 billion in additional giving this year. Giving for 2005 was already expected to exceed last year’s total of $248 billion.

        Mr. Sharpe said that much additional giving would result in $1 billion to $3.5 billion in lost revenue for the Treasury — more than the $819 million Congress anticipated.

        Moreover, some donors may be able to use the provision to take deductions this year for gifts made in past years. When taxpayers have more charitable deductions that they can use in a given year, they may carry them forward to future tax years. This may further lower tax revenue.

        “Congress intended this, but I’m not sure they understood how big the tab is going to be,”said Mr. Sharpe, who has become a national “town crier” on the issue. “There are just so many ways a donor can use this bill to maximize their charitable giving.”

        Congress was willing to give up some revenue because of fears that Americans had given so generously to charities for tsunami and hurricane disaster victims that they would cut back on contributions to other organizations, including cultural institutions and schools.

        Sen. Charles E. Grassley (R-IA), the chairman of the Senate Finance Committee, did not express concern about the potential cost of the provision in an email response to questions. If it is spurring a surge of giving, he said, it is working as intended.

        “After 9/11, there was an outpouring of giving to charities involved in responding to that tragedy, but unfortunately, many other charities saw a significant downturn in donations,” Mr. Grassley said. “My hope in passing this provision is that Americans’ generosity for those harmed by Hurricane Katrina won’t mean a tradeoff for other important charitable work in this country.”

        However, fund-raising experts have long said that the decline in charitable giving after the Sept. 11 terrorist attacks was smaller than non-profit groups had led the public to believe.

        “After 9/11, 65 percent of our members were raising the same or more, and the following year, the numbers went up again,” said Paulette V. Maehara, president of the Association of Fundraising Professionals. “There wasn’t the sky-is-falling impact that a lot of people thought there would be, and there won't be now, either, unless the economy does a nosedive.”

        Universities, long known as the non-profit world’s savviest fund-raisers, have been the biggest promoters of the provision. “We’re trying to get the word out to as many as we can,” said Jack Murphy, senior trust officer at Cornell University.

        Not all charities are rushing to take advantage of the provision. “You don’t want to appear to be greedy or inappropriate,” said Arthur J. Ochoa, senior vice president for community relations at Cedars-Sinai Medical Center in Los Angeles. “The legislative intent was drawn more broadly, but if you asked members of Congress what they were voting for, they would say relief for the Katrina victims. We don’t want to appear to be trading on that.”

        Cedars-Sinai has done no explicit marketing of the provision, Mr. Ochoa said, but is in discussions with one donor who may accelerate a gift because of it.

        Many other charities, particularly smaller ones, have been slow to understand the provision, fund-raisers say. “The thing that has surprised me is that I have not heard yet from any of the non-profits I have supported over the years, and time is running out,” said Frank P. Wendt, who built Nuveen Investments into a Wall Street powerhouse and is now retired. “A lot of them don’t seem to know about it.”

        Mr. Wendt was alerted to the potential tax benefit by his tax adviser at U. S. Trust. He said he did not yet know how he would use it. ”I’m certainly going to take advantage of it to the maximum amount I’m able to,” he said.

        He said he was uncertain how much additional money he could give, however, because he had not fully deducted for gifts in years past.

        Charities are focusing largely on wealthy older individuals like Mr. Wendt, whose incomes may be small relative to their assets. This week, for example, the AARP Foundation will send a brochure explaining the provision to 25,000 of its biggest donors — a tiny slice of the AARP’s membership of 35 million.

        “The reality is that this is targeted to the high-net-worth audience, for all intents and purposes,” said Monica Estabrooke, the foundation’s gift-planning officer.

       Financial advisers who work with wealthy people are trying to help their clients understand how to take advantage of the provision.

        “I talked to two people just yesterday about that topic,” said Vaughn Henry, an estate planner in Springfield, Ill. “It’s not for everybody, but there are some people who are sure kicking it around.”

        Because fund-raisers never know where the next gift might come from, AARP also will inform its entire membership of the provision in the December issue of its magazine.

        “I heard from an elderly gentleman who is going to get $500,000, and doesn't want to pay taxes on it,” Ms. Estabrooke said. “His income isn’t so high, so normally he would have to carry the deduction forward for a number of years, but this changes things for him.”

        Ms. Estabrooke and other experts say there are several caveats for donors. Gifts to private foundations and other concerns controlled by donors do not qualify for the additional deduction. And wealthy individuals could incur a 1 percent to 2 percent tax liability for charitable gifts financed by withdrawals from individual retirement accounts.

        “We have some concerns about mass-marketing this to the rank-and-file,” said Ed John, vice president of planned giving at the United Way of America. “For some middle- to lower-income donors, taking money out of an IRA to donate more could increase their taxable income and tax rate.”

        Christopher R. Hoyt, a professor of tax law at the University of Missouri-Kansas City, said donors also need to consider their state tax liability, because some states do not allow charitable deductions allowed at the federal level.