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Better Grab This Tax Break Now

Personal Business: GIVING


For more than 40,000 wealthy Americans with family or private foundations, it's time to play tax law chicken--again. On June 30, a tax provision that lets donors deduct the full value of appreciated stocks given to private foundations will expire. Congress isn't likely to extend the break before June 30, which means that deductions on gifts made afterward will be limited to the stock's basis--essentially, its purchase price. Given the 342% stock market gain of the last decade, that's a far smaller benefit.

If you're one of the 40,000--or want to join their ranks by creating a foundation--you have a dilemma. Should you rush a gift through? Or should you wait to see whether Congress will extend the tax break later in the year and make the extension retroactive, as it did last year? "Do it now," says Cathy Brown, partner in the Boston accounting firm Brown & Brown.

She's working with one wealthy client to accelerate her annual donation--stock typically worth 20% of her income--from November to June to beat the deadline. Congress "probably will patch it up later," Brown says, "but if I had a big tax deduction on the line, I wouldn't count on the politicians coming through."

The tax break for foundation donors, called 170(e)(5) for its Internal Revenue Code section, is one of a handful of provisions known as "extenders." These items are written so that they expire every year or two, and their survival depends on frequent renewals. The reason is budgetary: If Congress made these provisions permanent, budget rules would require lawmakers to find offsetting tax hikes or spending cuts to cover the cost for five years.

Among the extenders, only two directly affect individuals' taxes: the break that lets employers give workers tax-free tuition benefits and 170(e)(5). The tuition break is hooked onto an education bill that's moving across Capitol Hill, but the foundations provision--which costs the Treasury a mere $80 million a year--hasn't found a legislative vehicle to ride. Backers predict that Congress may not extend 170(e)(5) until October. When a similar delay took place in 1997, the extension was made retroactive to June. But there's no guarantee history will be repeated.

So donors might find it safest to give before June 30. The provision applies only to gifts of publicly traded securities--for other property given to a private foundation, such as closely held stock, artwork, or real estate, the deduction is always limited to the donor's basis.

Philanthropists who want to create a new foundation face a tougher task: They would have to form a trust or corporation, turn over their stock to it by June 30, then apply to the IRS for foundation status as soon as possible, says John Edie, general counsel for the Council on Foundations.

Private foundations appeal to the wealthy because they allow donors or their families more flexibility in both timing and directing their gifts. Foundations can make grants, as well as outright gifts, to other nonprofits, shaping the direction that research or community service take. And foundations can outlive the original donor. But setting up and running a foundation usually makes sense only for donors who plan eventually to contribute $5 million or more, says Phoenix financial planner Dale Walters.ALTERNATIVES. Donors with less hefty sums can do good--and save on taxes--with other vehicles. Public foundations and mutual-fund companies, such as Fidelity Investments, offer "donor advised funds," which will take gifts of cash or property, manage the funds, and disperse them to charities of the donor's choice. Donations to those funds--like outright gifts of stock to a charity--are deductible at the shares' full market value, subject to overall limits on charitable deductions.

Alternatively, your favorite charity would be happy to help set up a charitable remainder trust or charitable gift annuity, "planned giving" instruments that produce a smaller deduction but let you keep some of the income from your donated property.

Still, for many donors, nothing beats the prestige of putting the family name on a foundation that can keep doing good works long after the founder is gone. Since 170(e)(5) first passed in 1984, the number of private foundations has almost doubled, with endowed assets in 1995 hitting $227 billion. Little wonder that big donors are still rooting for Congress to keep their tax break alive.Mike McNamee

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