Four years ago, an employe of United Way of America received a surprising telephone inquiry from a company wanting to get rid of millions of dollars of merchandise.
"What would you do if you had $12 million in office equipment?" said the voice at the other end of the phone. A startled Stephen J. Paulachak responded that he would do his best to give it away.
Today, as executive vice president of Gifts In Kind Inc. of Alexandria, Paulachak and his associates annually give away donated goods valued at tens of millions of dollars. GIK is just one of a growing number of nonprofit organizations that act as intermediaries between charities and manufacturers looking for tax deductions for surplus products.
Last year, one-fifth of corporate America's charitable contributions took the form of noncash donations, such as real property, volunteer services by personnel and products from inventory, according to the Conference Board, a trade organization that conducts an annual survey of charitable contributions by major corporations. In 1982, noncash gifts were only 11 percent of the total.
Cash contributions made by the 400 or more major corporations surveyed annually by the business organization increased from $1.1 billion in 1982 to $1.3 billion in 1985, the last year for which data are available. In the same period, the value of product donations rose from $96.1 million to $190.3 million.
The reasons for growth of product donations are both economic and societal. A 1986 monograph by Alex J. Plinio, vice president of the Prudential Insurance Co. of America, credits the recession of the early 1980s for stimulating inventory gifts when cash was hard to find.
Recent reductions in federal aid to nonprofit organizations have encouraged charities to become more aggressive in seeking corporate donations, and business executives have become more aware of the goodwill value of integrating their products and volunteer personnel with the cash contributions, he added.
Undoubtedly, changes in the tax code offer the most important incentive. In 1976 Congress decided to give corporate donors an increased deduction for donations of property to charity. In 1981, computer and data processing equipment manufacturers got a break for giving their products to colleges and universities for research purposes.
Finally, the Tax Reform Act of 1986 aided the trend, according to S. Theodore Reiner, director of client tax communications in the Washington office of the accounting firm Ernst & Whinney. "New tax law changes designed to limit deduction of certain expenses by incorporating them into inventory cost may have unintentionally created incentives for business to donate inventory to charity," he told clients.
Tax experts estimate that inventory costs will rise by 10 to 15 percent because items like taxes, employe benefits, insurance, scrap and spoilage costs will henceforth be paired with inventory expenses rather than being deductible immediately. That means that if a business does not succeed in selling its widgets before the end of the tax year, it cannot take the deduction for these expenses against that year's income.
There is, therefore, an inducement to move the widgets out of inventory quickly. Abandonment is one alternative, but giving them to charity can be more advantageous if the charity benefits the ill, the needy or children (up to 21 years of age). Under the 1976 rule, the corporate donor can get a tax deduction of up to twice the actual cost of his products or the cost plus one half of the price at which the product is sold, whichever is smaller. For example, if each widget costs the manufacturer $10 and sells for $40, the manufacturer may deduct a maximum of $20. If the $10 widget sells for $20, the manufacturer may deduct a maximum of $15.
The new law increasing the inventory costs also increases the value of "twice the cost," according to Reiner. Hence, an item with a cost basis of $3,000 would permit an actual deduction of not $6,000, but $6,725, he said. Say the market value or selling price of the property is $10,000. Under the old rules, the inventory cost is $3,000; under the new rules, it is 15 percent more, or $3,450. Under the old rules, the appreciation, or markup, is $7,000. Therefore the deduction is limited to twice the cost or $6,000. Under the new rules, the cost is now $3,450 and the markup is $6,550. Since twice the cost would be $6,900, the company must take the lesser deduction equal to the cost plus half the appreciation: $3,450 plus $3,275 or $6,725. But this still is more than the $6,000 deduction permitted under the old rules.
Surplus medical supplies have long been donated to charity, as have unsold books. In recent years, hundreds of millions of dollars worth of food and computers have been given away to charities.
But now the list of giveaway items reads like a shopping list: This year, Gifts In Kind has found users for, among other items: a million ball point pens, a million Beatles records, 36 cash registers, 500 stuffed bears, 9,000 cases of Oil of Olay, 44,080 drinking glasses, 117 boxes of Clearasil, plus assorted hosiery, bow ties and ice scrapers.
Steve Paulachak was the chief financial officer for United Way of America when he got the call in 1983 from Minnesota Mining & Manufacturing Co. asking how it could donate $12 million in office equipment. Soon thereafter Electrolux Corp. called with an offer of vacuum cleaners.
"It didn't take long for the light bulb to go on," said Paulachak.
He helped found Gifts In Kind, a nonprofit brokerage that is separate from United Way but whose seven full- and part-time employes are paid by United Way. As chief operating officer, Paulachak earns $51,000 a year.
(He is also paid a like amount as a vice president of United Way. He manages a discount buying program for its agencies, manages its benefits plan and acts as a consultant on finances to local United Way agencies.)
Since the fall of 1983, GIK has arranged for the distribution of more than $88 million in products to more than 40,000 charitable organizations. With half of that business done last year, GIK is expanding rapidly.
Current donors include American Express Co., Apple Computer Corp., Avon Products Inc., Digital Equipment Corp., Gillette Co., J.C. Penney Co. and Levi Strauss & Co. In addition, it has a long list of well-known companies that have expressed interest in in-kind giving. These include an art dealer, a soft drink bottler, a telecommunications firm, a high-fashion store and several other retailers.
For example, Best Products Co., the discount retailer with headquarters in Richmond, used GIK to dispose of excess clothing several years ago. The donation coincided with a major flood in West Virginia. When the company found itself in financial difficulties, it cut back corporate cash donations to charity and relied more on merchandise, said Susan Butler, who oversees corporate gifts.
Melwood Horticultural Training Center in Upper Marlboro has benefited from 20 vacuum cleaners sent through GIK by Electrolux Corp. Melwood's group homes use them to train mentally retarded adults to do custodial work.
At the time, the manufacturer was carrying two upright models that meant separate marketing, inventory, selling and service. A financial analysis showed that it would be economical to consolidate the operations. So the discontinued models were given to charity. Over the past four years, Electrolux has given away 72,000 new and reconditioned vacuum cleaners worth $24 million, making it GIK's largest donor.
Black & Decker Manufacturing Co. in Baltimore is another firm that is now looking at ways to dispose of its old inventory. Other companies choose to make charitable donations of products rather than reduce the price excessively and damage their markets.
Most of GIK's recipients belong to one of three categories: ill, needy or infants. The company hopes to expand its activities soon to other nonprofit groups in education and the arts.
Office equipment and furniture are the items most in demand, yet GIK will accept anything so long as it is useful and can be placed with a recipient. It does not deal in foods, drugs, liquor or frivolous items. Paulachak said female inmates love to get new clothing, but he draws the line at intimate apparel. He also refused an airplane.
Besides a $200,000 start-up grant from the Lilly Endowment and some United Way funds, GIK supports its activities through corporate cash donations and by charging administrative fees. Recipient agencies may pay $5 for a vacuum cleaner or up to $20 for a computer. Besides expenses, fees cover training and technical assistance. Donors pay shipping costs.
Brother's Brother Foundation in Pittsburgh does not charge corporations or recipients fees, depending instead on cash donations and government grants. It specializes in corporate gifts of medical supplies, books and some agricultural equipment for shipment to English-speaking Africa and Jamaica. Last year it coordinated shipments worth $34.5 million, versus $19.5 million in 1985, said President Luke Hingson.
Second Harvest, a national food bank network in Chicago, was funded as a government project until 1984. Since then it has been supported by the food industry. Last year it and its community affiliate food banks throughout the country distributed 352 million pounds of food worth nearly $500 million to 38,000 charitable feeding programs. The 1985 volume was 231 million pounds. Besides helping the hungry, Second Harvest provides a reliable method of disposing of excess inventory and market overruns of food from 250 national companies that would otherwise go to waste.
As the business of giving expands, so do the players -- and the abuses. A nonprofit broker who asked not to be identified said the number of brokers paid commissions is increasing. They are hired either by charities to solicit gifts or by corporations to locate charities to take surplus products off their hands. This has led to some instances of dumping, when the broker could not find a recipient charity and consequently destroyed or resold the merchandise without the knowledge of the corporation that took the charitable deduction.
Hingson said he had received a dozen phone calls recently from persons who wanted to become corporate gifts brokers.
The calls followed publication by the Wall Street Journal of an expose of corporate go-betweens that concluded that not only were they doing good, they were also doing well. It cited the case of the National Association for the Exchange of Industrial Resources of Galesburg, Ill. Its chief, Norbert C. Smith, received a salary of $165,000 last year, and he and members of his family were paid a total of $348,000 in salaries and bonuses, according to the newspaper. Smith could not be reached for comment, but he told the Journal that the reason he was paid so much was because he handled hard-to-place products.