Tax Code Changes Spur New Strategies to Cope : Charitable Donations Increase by Year-End as ’87 Revisions Near

As one of the nation’s leading museums, the Art Institute of Chicago usually receives a flood of year-end gifts of artworks and cash from donors seeking tax deductions. But, thanks to tax revision, this year’s flood is the biggest in years.

“I’ve been here 10 years, and this is the most giving I’ve seen,” said Larry Ter Molen, museum vice president for development and public affairs. As one example, he said the museum’s staff recently reviewed about 300 to 500 donated photographs, nearly twice the number given a year ago.

The Art Institute is not alone in enjoying this year-end largess. Although some nonprofit organizations are worried that lower individual tax rates and other changes under tax revision could hurt charitable contributions next year and beyond, the prospect of revision is helping to spur increased donations this year.

Best Period Ever

Some nonprofits say they are enjoying their best year-end period ever, with some individual donors giving as much as 10 times more than normal. Racing to capitalize on the year-end spirit, many nonprofits are mounting special year-end fund-raising drives, sponsoring tax seminars for contributors and holding special events to encourage giving.

“Every educational or charitable organization I know has sent out some kind of tax-explanation letter,” said Jane Stuber, director of deferred gifts and bequests at Smith College in Northampton, Mass. “This has interested people in tax savings who never thought about it before.”

The biggest beneficiaries appear to be museums, universities, hospitals and other organizations that receive a high proportion of contributions from the affluent in the form of large gifts of cash, securities, artworks or property. Such donations are strongly rewarded if made before Jan. 1, because donors can avoid capital gains taxes and beat a major change in the new tax law that will boost taxes next year on assets that have grown in value.

Umbrella for 200 Funds

“This is by far the most active period we’ve ever had,” said Jack Shakely, president of the California Community Foundation, an umbrella for almost 200 philanthropic funds. The foundation will receive as much as $7 million in contributions this month, contrasted with only $1 million last December, Shakely said.

Dozens of other religious, health, educational, cultural, social and other philanthropic organizations in Southern California and nationwide also report healthy increases over previous years.

Pepperdine University, one of several local universities involved in major fund-raising drives, expects to receive $23 million in contributions this year, $10 million more than last year. The Los Angeles Music Center reports that its contributions are at least 30% ahead of last year. Cedars Sinai Medical Center says many donors are giving now what they would have given in 1987 and 1988. City of Hope, a charitable health-care organization in Los Angeles, reports many donors are doubling their contributions.

The Jewish Community Foundation in Los Angeles and the National Audubon Society in New York report big influxes of gifts of securities. The Salvation Army reports increases nationwide in donations of cars, furniture, food, clothing and building materials.

The United Way of America, the nation’s largest charitable organization, expects an increase in donations of between 6% and 7% nationwide, up from $2.3 billion last year, said Jack Moskowitz, senior vice president for government relations. That is coming despite a drop in donations from Southern California, believed to be due to fallout from publicity surrounding controversial loans of donated money to some of its top Los Angeles-area executives.

Charitable Gifts Up 10%

Overall, charitable contributions nationwide this year will rise 10% over last year’s $79.84 billion, according to the American Assn. of Fund-Raising Counsel, an organization of fund-raisers that tracks nationwide giving. Contributions in 1985 had risen 8.9% over 1984.

Such a boost in private giving is most welcome to nonprofit organizations because federal funding for nonprofits continues to decrease amid budget-cutting pressures and President Reagan’s effort to encourage greater private aid to charities. Until now, private donations have replaced only about 25% of those federal cutbacks, according to the Urban Institute, a Washington think tank.

As a result, nonprofit organizations are facing intensifying competition among themselves for private, corporate and foundation monies. Meanwhile, high unemployment, the aging of the population and other economic and social problems have increased demands on some charities, many agencies say.

The incentives to give this year instead of next are clear, particularly for the wealthy. The cut in the top individual tax rate from 50% this year to 38.5% in 1987 and 33% in 1988 means that charitable contributions will cost more in the future. Also, taxpayers who do not itemize will be unable to deduct charitable contributions next year.

Change in Tax Law

Another important consideration for the wealthy is a significant change in the tax law that will reduce the tax benefits of gifts of securities, artworks or other assets that have increased in value.

Under current law, the taxpayer’s capital gain in such donated assets can escape taxation as long as the assets were held six months or longer. But under the new law, untaxed profit on assets will be a so-called “preference item” that could subject a taxpayer to the 21% alternative minimum tax, which guarantees that wealthy taxpayers with uncommonly large deductions pay at least some tax. Thus, claiming a deduction for appreciated assets could result in a higher tax liability than under regular tax rates, in effect raising the cost of the gift.

Accordingly, many affluent taxpayers are rushing before year-end to donate securities and other assets that have risen in value.

“There’s no real tax benefit in giving appreciated stock next year. I’d like to do it this year,” said a Los Angeles real estate developer who plans to give as much as $250,000 in stock by Dec. 31 to a local medical center. A Glendale orthopedic surgeon, who usually donates $15,000 at year-end to a local museum, instead is donating $100,000 worth of Japanese art that cost him much less a few years ago.

Charitable Trusts

Some wealthy donors are placing cash or other assets in their own private foundations, so-called donor-advised funds, or charitable trusts. Two popular vehicles are the pooled-income fund and the charitable remainder trust, which allow taxpayers to receive income from donated assets for a certain number of years before the assets are turned over to the charitable organization.

One Encino businessman is donating $100,000 this year--instead of the $10,000 he had planned to give--to his synagogue through a charitable remainder trust. The trust will give him a $60,000 tax deduction this year and pay him a 5% return for the next 10 years or until he dies. The cash will then be turned over to the synagogue.

“The end of the year is always busy, but this year it’s wild,” said Conrad Teitell, a Connecticut tax attorney specializing in setting up remainder trusts and other vehicles for large donors.

Many donors are simply making donations this year that they had planned to make later. William Schroeder, a retired Beverly Hills insurance executive, said he is boosting his contributions “several” times higher than normal. James Norvell, chairman of a Long Beach consulting firm that normally helps others mount fund-raising drives, said he is giving three times as much as normal.

Gifts to Museum

Several donors to the Los Angeles County Museum of Natural History are paying $10,000 this year for 10 years’ worth of $1,000 annual memberships, said Kathleen Rydar, the museum’s associate director for development. Several donors to the Los Angeles Music Center, who pledged an average of about $6,000 a year for each of the next five years, are giving the entire $30,000 now, said Esther Wachtell, the center’s executive vice president.

Individuals, who account for nearly 90% of all charitable contributions, are not alone in their increased generosity this year. Private philanthropic foundations--which account for about 5% of all contributions--also are giving more, partly because the stock they own has risen sharply in value this year thanks to the strong stock market. Private foundations are required under tax laws to give out at least 5% of their assets each year.

Assets of the New York-based Ford Foundation, the nation’s largest, rose 25% to a record $4.6 billion in the year ended Sept. 30. The W.K. Kellogg Foundation of Battle Creek, Mich., posted a whopping 60% jump for the year ended Aug. 31.

But not all contributors are being as generous this year. Some individual donors, figuring that their tax liability might be greater next year because of increased income or other reasons, are deferring contributions until then, said Rydar of the county natural history museum.

Corporate Giving

Corporations, hurt by lower earnings and cost-cutting moves, will give about 2.5% less this year, according to estimates by the Conference Board, a nonprofit business research organization.

That will end an impressive string of increases over the last decade, during which corporate giving had tripled, Linda Cardillo Platzer, senior research associate at the Conference Board, said. Corporations gave about $4.4 billion last year, accounting for about 5% of the total charitable contribution pie.

Corporate contributions in Southern California have also been hurt by the slump in the oil industry and by the acquisitions of previously generous givers, such as Getty Oil Co., which has been taken over by Texaco Inc., said Lon Burns, president of the Southern Calif Assn. for Philanthropy.

Grants awarded by the Arco Foundation, the philanthropic arm of Los Angeles-based Atlantic Richfield Co. and a major Southland corporate contributor, are down from $32.5 million last year to $20 million this year and $11 million next year due to a corporate restructuring and cost-cutting effort triggered by lower profits and oil prices, foundation president Eugene R. Wilson said.

As a result, the foundation has greatly narrowed its focus, he said, citing as an example that it is making no major grants to universities this year but instead is targeting programs helping low-income and minority pre-college students stay in school.

‘Not Seeing Big Flood’

Also, not all nonprofits are enjoying higher contributions. Those dependent on smaller gifts from less-affluent individuals are reporting mixed results.

“We’re not seeing the big flood that everybody expected,” said Daniel Rice, director of financial planning for World Vision, a hunger-relief organization based in Monrovia, Calif. Total donations this year are off between 15% and 18% from last year’s pace, he said, estimating that about 70% of World Vision’s donors do not itemize their income tax deductions. However, the organization has received more gifts of stocks, real estate and other non-cash items this month than it did during all of its last fiscal year ended Sept. 30, Rice said.

At the Salvation Army, large cash donations from the wealthy have increased, but donations of small change at street-corner Christmas kettles are only about the same as last year, said Leon Ferraez, the charity’s national communications director.

Some less-prestigious private or public colleges and universities also are not doing as well, partly because they are less dependent on income from private endowments and their alumni tend to be less affluent, some educational fund-raisers said.

Even nonprofit organizations enjoying increased donations are not entirely ecstatic. Many express uncertainty about the outlook for giving next year and beyond, and will try to spread out their windfalls from this year.

‘Something in Reserve’

“We are keeping something in reserve to see what happens,” said Mark E. Friedman, development director for the Jewish Community Foundation, which has seen a significant increase in donations this year.

Economist Estimates Decline

Independent Sector, a coalition of 625 national voluntary associations, foundations and corporate-giving programs, estimates that starting in 1988, nonprofits will receive $11 billion less than they otherwise would have gotten had the 1986 tax laws remained intact. That estimate is based on research by Lawrence Lindsay, an economist at Harvard University.

Of that $11 billion, $6 billion will be lost because of the elimination of the charitable deduction for non-itemizers, Lindsay contends. Last year, nearly 65% of all taxpayers did not itemize, and that could grow to as high as 80% next year under the new tax law, some analysts estimate.

Another $4 billion will be lost due to lower tax rates, and $1 billion will be lost from including appreciated property under the alternative minimum tax.

This latter change could severely discourage gifts of artworks and other appreciated property, prompting wealthy individuals to keep assets until death, said James A. Joseph, president of the Council on Foundations, which represents more than 1,000 independent foundations and other organizations.

“We may just have to wait longer before getting some of these objects” through bequests, said William Bentsen, director of planned giving for the Art Institute of Chicago.

Advertising Campaign

Hoping to stimulate continued increases in giving, Independent Sector is spearheading a national effort by a coalition of nonprofit organizations seeking to double charitable giving nationwide by 1991. They plan to mount a national advertising campaign, among other things.

But not all officials of nonprofits are pessimistic. Some contend that contributions will continue to grow, despite tax revision.

“The negatives and positives of the (tax) bill are grossly exaggerated,” said Michael F. Adams, vice president for university affairs at Pepperdine. He added that he expects 1987 donations for the school to exceed 1986’s record year.

Lower tax rates, some fund-raisers argue, will actually stimulate giving. “People give out of spendable income,” said William E. Nies, chief counsel for development at USC. “If in fact they have more of that, they will be able to give and will continue to give.”

Others argue that tax rates are not much of a factor either way in determining charitable giving. Since at least 1968, giving has increased constantly every year despite tax changes, said Lawrence Clancy, vice president for public information at the American Assn. of Fund-Raising Counsel.

In 1982, for example, contributions rose 8.2% despite its being the first year of a cut in the maximum individual tax rate from 70% to 50%, Clancy said. Giving also has been increasing as a percentage of the nation’s gross national product, rising from 1.85% of GNP in 1978 to 2.0% last year, he noted.

But the fact that tax rates have not mattered much “doesn’t mean a charity doesn’t have to work harder,” Clancy said, noting that nonprofits in the past, by hiring more professional fund-raisers and using more sophisticated techniques, “have overcome any changes in tax laws.”