Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

July 14, 2008

Charity regulation needs fixing

The regulation of private foundations and charitable giving has skewed the charitable marketplace and needs to be changed.

The law lets donors who create private foundations take their tax breaks up front but does not require that the foundations pay out more than five percent of their assets each year, letting them hoard their wealth.

So donors and their foundations reap big windfalls.

Donors save on taxes, and their families enjoy continuing power and influence through their foundations.

The tax breaks for wealthy donors and the low spending requirement for foundations starve social programs of funds and transfer the cost to less affluent taxpayers and to nonprofits struggling to meet rising demand for services.

A bill in Congress five years ago to require private foundations to pay out more their assets each year in grants triggered howls of protest from big foundations.

Exercising the clout that flows from the wealth they control, foundations spent millions of dollars to fight the bill, outgunning advocates for a more even-handed charitable marketplace.

What is wrong here? Consider the multi-billion-dollar bequest the late Leona Helmsley created for the care and welfare of dogs.

Helmsley, like any donor, was free to support the cause of her choice.

But as law professor Ray Madoff of Boston College pointed out in a recent opinion column in The New York Times, because it will be paid through her family’s charitable trust, Helmsley’s huge bequest exposes a continuing scam perpetrated against U.S. taxpayers by the laws that give tax deductions for charitable gifts and let donors create perpetual foundations.

Not only can donors save big bucks on the front end and let their foundations hoard even bigger bucks far into the future, but foundations also can count overhead costs, including salaries for trustees, as part of the tiny annual payout the law requires them to make.

It was the 2003 proposal in Congress to exclude overhead costs from the required payout that unleashed a flood of crocodile tears from foundations, which whined that the change could deprive them of their dream of immortality.

The laws regulating foundations and charitable gifts cost taxpayers big-time and tilt the charitable marketplace in favor of wealthy donors and their foundations.
Getting the short end of the stick are nonprofits and less affluent taxpayers.

Madoff calculates that, with her fortune warranting an estate-tax rate of 45 percent, Helmsley’s $8 billion donation for dogs really amounts to a gift of $4.4 billion from her and $3.6 billion from taxpayers.

In return for paying out a tiny share of their assets each year, private foundations yield big tax benefits for their donors, and give the donors’ families, as foundation trustees and directors, continuing power and prestige.

Many foundations now demand that nonprofits looking for grants prove their commitment to equity.

But many of those same foundations are first in line to fight efforts to make charitable regulation more equitable.

In theory, the charitable marketplace in the U.S. represents a good bargain and frees government for other tasks: Nonprofits enjoy tax-exempt status because they address the symptoms and causes of urgent social needs, and donors and foundations enjoy tax benefits because they invest in nonprofits.

But the deal has soured because the rules have allowed donors and their foundations to bulk up, like athletes on steroids.

To ensure the fairness the charitable marketplace needs to foster innovation in giving and in nonprofit enterprise, Congress needs to bring the rules back into balance.

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