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Reform begins at home

Published Sep. 1, 2005

Tax laws are kind to charitable foundations, but they need not be blind. As two members of Congress attempt to make modest changes in the way tax-free charities are judged, the angry reaction of many private foundations is disappointing.

David Odahowski of the Edyth Bush Charitable Fund said of the bill: "It's born out of ignorance and apathy." Dot Ridings, president of the Council on Foundations, said Congress is "trying to fit foundations into a cookie-cutter mold." Sherry Magill, president of the Jessie Ball duPont Fund, said the bill "takes a sledgehammer to the field without understanding what is at stake here."

Good grief. All that Reps. Roy Blunt, R-Mo., and Harold Ford Jr., D-Tenn., are proposing is to make foundations follow a standard that has existed in tax law since 1969. The law says foundations get to escape taxes so long as they are giving away 5 percent of their assets each year. Some foundations already do more than that, but many do less. The ones that do less end up meeting the 5 percent threshold by counting administrative salaries and overhead. Blunt and Ford simply want to make sure the 5 percent counts only charitable contributions.

Is that really a "sledgehammer?"

The foundations' own association commissioned a study in 1999 that determined foundations could have paid out 6.5 percent a year in contributions over the past half-century and still have increased their assets by 24 percent. So why would they object to 5 percent? Is their goal to serve charity or merely to build upon their own wealth?

The stakes are significant here. Foundation assets in the United States totaled $486-billion in 2000, and a report by the National Committee for Responsive Philanthropy estimates that the proposed change could free up $4.3-billion annually to be spent on the very charitable purposes these foundations exist to support. An estimated 15,000 more organizations could be served.

These private foundations may not like Uncle Sam's peering into their books, but their tax status demands it. Because they usually don't rely on continuing contributions, they are otherwise immune to the public accountability pressures that organizations such as the United Way face. In that regard, the continued reports of their largess don't help. One example is the James Irvine Foundation, which, according to the San Jose Mercury News, paid its president $717,000 in one year, and spent $104,000 on retirement parties and $25,000 on a parting gift. To most taxpayers, such salaries and expenses sound more like big business, not big charity, but businesses are not generally exempt from taxation.

These foundations serve a vital charitable purpose in our society. But Congress is proposing a modest, and long overdue, change to encourage them to meet their charitable obligations. That so many of them are fighting it may speak to its necessity.