Tuesday, January 15, 2013
An interesting article in Forbes online caught my eye today. The article, entitled "Charity Eyes Quarter-Billion-Dollar Write-Down In Value of Goods Handled" discusses one large charity's recent disclosure that it overvalued gifts in kind by $250 million. "The epic restatement downward would rank among the biggest ever by a single charity and is the latest chapter in a festering controversy over the way some nonprofits value and account for noncash d0onations known as gift-in-kind, or GIF." We all know the incentives individual taxpayers might have to overstate the value of donated goods -- a bigger charitable contribution deduction, for one -- but what are some of the reasons a charity would overstate the value of non-cash contribution? Forbes implies that the charity may have been motivated by the "ranking game," something we Law Schools would never do of course. The valuation, reported on the charity's 990 made it the 51st largest charity in the United States, as measured by private donations received in 2011. See here for a list of the largest U.S. Charities for 2012. A charity's over-valuation could both help or hurt its status. Too much from one person might push the charity into the private foundation quagmire. Too little might have the same effect. In any event, Forbes makes it seem like overvaluation is a real problem in the charitable world:
The situation also underscores one of the dirty but legal secrets of the GIK word: Multiple charities often claim credit for the same noncash gift as it moves from one nonprofit to another to another in a “daisy chain” that makes each seem bigger and more financially efficient. However, at the same time charity experts say it often takes the efforts of several nonprofits to collect, move and distribute the same batch of goods to locations domestic and foreign.
Valuation is a problem in pretty much all areas of taxation. Those seeking to reduce tax liability will either understate the value of something (when it comes to reporting income) or overstate the value of something (when it comes to claiming a deduction). And there are plenty of rules relating to valuation, just look at the regulations under IRC 170. But it never occurred to me that mis-valuation might be a problem for nonprofits. I wonder what other potential benefits -- other than a higher ranking -- might be had from overvaluation of charitable gifts.