World Vision, the new 100,000 shirts
Posted on February 8, 2011 at 6:02 pm
So World Vision is the new 1 million shirts. Except instead of sending 1 million donated shirts to Africa they’re sending 100,000 misprinted Super Bowl shirts to Zambia, Armenia, Nicaragua, and Romania. And unlike Jason Sadler, who was a well-intentioned but ill-informed social entrepreneur, World Vision is a multi-national, billion dollar budget, 57 year old aid organization.
In the comment section of their post about the shirt donation, World Vision claims that they’re different from 1millionshirts. While it’s good that they provided their criteria for distributing donated goods, their argument doesn’t hold much water if you followed the whole 1millionshirts controversy. Shipping unwanted goods overseas is still not smart aid. Rather than rehash the whole debate here, I’d suggest anyone interested in this topic read a few of the 60 blog posts written during the heated debate. Or read this open letter to World Vision on the blog Wanderlust.
Instead, I thought I’d focus the finances behind why these gifts-in-kind keep happening. I’ll use this particular controversy as an example of the substantial financial benefits to both non-profits and businesses to provide donated goods.
The companies benefit from tax write-offs
According to World Vision’s website, here’s how the NFL shirt donation system works.
“The NFL pre-prints about 300 shirts and hats for both Super Bowl contenders for after the game. At the same time, retailers like Sports Authority, Dick’s, and Modell’s place their merchandise orders in advance according to the market location of their stores and the potential winning teams. Basically, a retailer in Green Bay, Wisconsin, would order the pre-printed Super Bowl Champion Packers gear the same way a retailer in Pittsburgh would buy pre-printed Super Bowl Champion Steelers gear. But a retailer in Florida might not order either contender’s pre-printed merchandise, because their market doesn’t have much of an interest in buying Super Bowl Champion gear for either team.
Once the gear is pre-printed, it is shipped from the printing center to the retailers’ distribution centers, where it is counted and distributed to individual stores. Once at the stores, staff members hold the gear until the winning team is determined, at which time shelves are stocked and gear is sold. This is where World Vision comes in.
At this point, all unused gear for the team that does not win is repackaged, shipped back to the retailer distribution centers, counted again, and donated to World Vision.”
Richard Wiercinski of Huggins and Scott Auctions says, “There’d be very little value and very little interest.”
World Vision and the merchandizers estimate the value of this merchandise to be:
“On average, this equates to about 100 pallets annually — $2 million worth of product — or about 100,000 articles of clothing”
So essentially the company prints off an equal number of Super Bowl shirts for each team, knowing that they won’t be able to sell any of the shirts with the losing team’s logo. They then donate the shirts to World Vision claiming a value of $20 per shirt. This is the amount that the business then deducts from their taxes for their charitable donation. (For this particular example, I’d wondered if the NFL itself was actually making the donation in which case the tax deduction wouldn’t matter as much because – believe it or not the NFL is a registered nonprofit. But an article about this same program from 2008 contained an interview with the president of World Vision, Richard Stearns, “Stearns noted that the donation is beneficial in many ways including being tax-deductible and eco-friendly.”)
Being able to donate hard-to-sell or unwanted goods and receive a tax write-off is appealing to businesses. The NFL merchandisers are not alone, expired (or nearly expired) medicine, outdated equipment, and old machinery are regularly donated as tax write-offs. Nonprofits and aid workers come under tremendous pressure to accept these questionable donations. This is one of the reasons the Interagency Gifts-In-Kind Standards Project of AERDO (the Association of Evangelical Relief and Development Organizations) was created and subsequently included in InterAction’s PVO (Private Voluntary Organization) Standards. These are standards that non-profits who are members of InterAction – which World Vision is – agree to follow.
According to AERDO standard 3.5, the company must be able to sell the goods independently for the same amount they’re claiming as a donation.
3.5 Fair Value: GIK donations are to be valued based upon “The price that would have been received to sell an asset or paid to transfer a liability in an orderly transaction between market participants” as of the date of the donation (FASB ASC 820-10-35-2). This is known as an entity’s “exit price.” This assumes the transaction would be an “arms-length” transaction….
Personally, I question whether the NFL Super Bowl merchandizers could sell 100,000 t-shirts with the losing team’s logo for $20 each.
UPDATE: Here’s an article by a sports fan trying to buy last years shirts.
As it turns out, misprinted NFL gear doesn’t seem to command much interest from collectors as the league may believe:
Brandon Steiner, founder and CEO of Steiner Sports, tells Minyanville that there’s “not really a market” for the items the NFL makes World Vision keep under lock and key.
“Sometimes people buy them here and there,” Steiner says. “But there’s not much value.”
So apparently every year these merchandizers know in advance that they’re not going to be able to sell half of their shirts, but they print them anyway because they can pass on the bill to the American public in the form of a charitable deduction. This means that the US government could have essentially subsidized the production of approximately 30 million dollars worth of unsellable t-shirts over the 15 years of this partnership between World Vision and the NFL.
In addition to receiving a tax write-off for the donated shirts, the companies can also deduct the cost of transporting them. They also save money by not having to pay to dispose of the unwanted shirts. It’s easy to see how partnering with a nonprofit is an appealing option for businesses. If the company had to bear all of these costs themselves, they would likely print far fewer t-shirts – and create far less waste.
UPDATE #3: After quite a bit of back and forth there is now a much better, and very long, explanation as to how much the NFL saves by donating the shirts the organization is a corporation. See this comment and this comment for the full explanation. In short, it’s not enough to justify printing the shirts without the added motivation of the profit made in the immediate sales of the winning shirts. If it’s an individual or sole proprietorship business it can write off fair market value up to 50% of adjusted gross income.
Non-profits benefit by claiming higher percentages spent on programs
World Vision benefits from this partnership because they get to claim that same $2 million in donated goods annually as part of their program expenses. In their 2010 financial statement they claimed $251 million in gifts-in-kind, almost one quarter of their revenue (gifts-in-kind can also be donated services – although from the CFO’s letter it appears that this is mostly donated goods).
When these items are distributed, this $251 million of donated goods is recorded as “program costs” rather than administrative costs. This improves their ratio of program expenses to management expenses, thereby giving them higher scores on several of the nonprofit rating sites. Non-profit websites commonly boast about low administration costs, but as this example shows, it doesn’t really mean anything.
From World Vision's 2010 Annual Review
World Vision’s percentages would look very different if they were to remove all gifts-in-kind.
So this partnership is a win-win for both World Vision and the merchandizers. The merchandizers get to print 100,000 unneeded t-shirts every year without having to shoulder the full cost, and World Vision gets $2,000,000 worth of “program costs” to improve their expense ratios. And they both get free PR with photos and news stories of happy people receiving the unsellable t-shirts.
From World Vision's blog
Although World Vision claims that there is no pressure to accept Gifts-in-kind, I’ve heard otherwise from staff members. Several previous conversations with World Vision staff have centered around the pressure they are under to accept and distribute donated goods.
While there are clearly financial benefits to shipping unsellable goods overseas, it’s not Smart Aid and it’s often of minimal benefit to the people posing for the cameras. But worst of all, by engaging in this type of activity World Vision and other non-profits are sending a clear message to all the Jasons of the world that handing out stuff we do not want (SWEDOW) is the solution to the world’s problems.
Jason has changed his work based on feedback and criticisms he received from the blogosphere. Are the larger non-profits up to the same challenge?
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UPDATE: To read an explanation of the corporate taxes see this comment and this comment for the full explanation. Which is not quite what I’d written. According to him the tax breaks aren’t enough to justify printing the product with the other motivation of the immediate sales of the winning team. Thanks very much to the accountant that lent his expertise.
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NOTE: World Vision has responded to the criticisms they’ve received. Their response does not address the financial points brought up in this post and does not provide any proof for their claims. World Vision says they don’t have enough gifts-in-kind, including clothing, to meet the needs in the field. But these claims are not backed up with needs assessments or market analysis. Instead it’s based purely on staff request. For staff under the gun to keep the program/administration cost ratio low, requesting these items is one way to do that.
Their gifts-in-kind amount to one quarter of their revenues and one quarter of a billion dollars. Financial statements from similarly sized nonprofits doing similar work – such as Plan USA, Save the Children, American Red Cross, and Oxfam show very small or no gifts-in-kind. Why are gifts-in-kind so much more crucial to World Vision’s work?
Response to GIK discussion - World Vision
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UPDATE: This article states two interesting points
- “But it’s a costly process to lease shipping container space. Fields said that shipping costs to Africa range anywhere from $8,000 to $10,000 per container.”
- “In the past 5 years, World Vision has placed $1.1 billion of donated goods from major corporations, such as clothing, shoes, medical supplies, books, school supplies, personal care, sporting goods and building materials.”
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To read all the blogs written about this controversy see Tracking the World Vision / NFL Shirt Donation Controversy
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Lies, White Lies, and Accounting Practices; Why nonprofit overheads don’t mean what you think they mean.
This 20 page book breaks down the myths surrounding nonprofit overhead. You will never think of charities the same again.
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Related Posts:
An example of why the percent spent on administration is meaningless – Looks at the program/admin ratio of the NFL shirt donation.
Nonprofit Advertising: What message are we sending?
6 questions to ask before donating goods overseas
What aid workers think of the 1 million shirts campaign
A shout-out for Jason’s (1millionshirts) new direction
Don’t choose a charity based on administration costs
Evaluating charities based on administrative costs can do more harm than good
« Designed to Fail • Explaining the radio silence over World Vision »
Long time lurker, first time commenter. Great post highlighting this BS practice. No way those shirts are worth $20, and unbelievable that the NFL is considered a nonprofit. Seems pretty profitable to me…
[...] We all understand that GIK benefits your bottom line, and the bottom line of the donating companies too courtesy of tax-breaks. Saundra has done a great job of explaining that to us here. [...]
Great post.
Re the tax write-offs: this is not really an advantage for the business. As far as I understand the US tax system, they would receive the same write-off whether they would just destroy the shirts or give them to WV. The advantage for them lies in the presentation: they can now present this as a charitable donation in their accounts instead of normal running cost, consequently telling the world that they have ‘donated’ the value of the shirts and presenting a better CSR image.
Michael, thanks for your input on the taxes. I’d be interested to hear from some accountants as well. I’ve been told they could write off their manufacturing costs and shipping, but that wouldn’t amount to $20/shirt.
That is correct, but that is true whether they donate or destroy. The $20 value would not appear at all in the donor’s accounts, only in the accounts of the receiver, i.e. WV. In other words: in this case the accounts of the donor and receiver are not symmetrical.
Michael,
Here’s what the US tax code says for determining fair market value of donated goods – from IRS Publication 561
“To figure how much you may deduct for property that you contribute, you must first determine its fair market value on the date of the contribution.
Fair market value. Fair market value (FMV) is Fair Market Value the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. If you put a restriction on the use of property the FMV must reflect that restriction.
Example 1. If you give used clothing to the Salvation Army, the FMV would be the price that typical buyers actually pay for clothing of this age, condition, style, and use. Usually, such items are worth far less than what you paid for them”
This sounds like the same process outlined in AERDO standard 3.5 Fair Value. At which point wouldn’t both parties determine the value to be the same amount and claim the same amount?
First of all, IRS 561 pertains to donations by individuals, not necessarily by corporations. However, even IRS 561 shows some good sense here:
After two hours on the phone with the IRS here’s what they said. The organization donating the shirt is neither a nonprofit (so not the NFL) nor an S Corp because neither of these pay taxes and the president of World Vision specifically talked about a tax break in his 2008 interview. If the donating organization is an individual or a single proprietorship business, they can deduct the full Fair Market Value (so $20/shirt) for up to 50% of their Adjusted Gross Income. If it’s a corporation that donates the shirts to a nonprofit, and the nonprofit uses the goods to meets the direct needs of the “ill, the needy, or infants,” then they can deduct their full production/purchase costs plus 50% of whatever profit they would have made if the goods were sold at Fair Market Value. For example, if the shirts cost $5 to produce and the FMV has been stated as $20 then the tax write-off would be $5+($15/2) or $12.50 per shirt. So in this example they would be making a profit of $7.50/shirt they donate to World Vision.
I’ll write a blog post explain this more once I receive their documents they’re sending me in the mail.
I want to find out exactly where these t-shirts are being shipped and bring a significant amount of them back to the United States so I can sell them to Steelers fans in Pittsburgh for $49.99 each. Then I will donate the proceeds to Project Diaspora to help with the expenses of the next Villages in Action conference.
[...] Schimmelpfennig of Good Intentions Are Not Enough says poor people don’t want or usually need donated clothing. They have clothing. What they [...]
[...] not an aid expert and there are a ton of people who have written very smart and well thought out criticisms of why this is a pretty big fail on World Vision USA’s part so I won’t get [...]
Thank you for creating this website. I’m sure many people never really understand it because they are blinded by the good intention, but it is an important message that will hopefully reach enough ears.
[...] blogger at Good Intentions are Not Enough (http://goodintents.org/) recently shared her commentary (http://goodintents.org/uncategorized/world-vision-the-new-100000-shirts) on a partnership between the NFL and [...]
[...] VISION USA (WV USA)is in the firing line. WV USA and NFL hatched a plan to dump 100,00 unsold Tshirts specifically those from the losing teams in Africa apparently because in Africa clothing is hard to come [...]
[...] World Vision, the next 100,000 shirts – Good Intentions are Not Enough [...]
[...] wrote a kick-ass post going into great detail on why World Vision will continue doing gift in kind programs till the cows [...]
After two hours on the phone with the IRS here’s what they said. The organization donating the shirt is neither a nonprofit (so not the NFL) nor an S Corp because neither of these pay taxes and the president of World Vision specifically talked about a tax break in his 2008 interview. If the donating organization is an individual or a single proprietorship business, they can deduct the full Fair Market Value (so $20/shirt) for up to 50% of their Adjusted Gross Income. If it’s a corporation that donates the shirts to a nonprofit, and the nonprofit uses the goods to meets the direct needs of the “ill, the needy, or infants,” then they can deduct their full production/purchase costs plus 50% of whatever profit they would have made if the goods were sold at Fair Market Value. For example, if the shirts cost $5 to produce and the FMV has been stated as $20 then the tax write-off would be $5+($15/2) or $12.50 per shirt. So in this example they would be making a profit of $7.50/shirt they donate to World Vision.
I’ll write a blog post explain this more once I receive their documents they’re sending me in the mail.
They also said that if it is a corporation, in order to be able to take that 50% of profits write-off from their taxes the goods have to meet the immediate needs of the “needy”. The goods cannot be sold and the money used for other things, and their can be no fee attached to the goods. So no putting them into the second hand market, the goods must be handed out directly to people in need.
Again, once I get the documents from the IRS in the mail I’ll write a post explaining all of this.
A great post and thank you for providing a different perspective on the situation, rather than just launching into the “it’s bad aid” tirade, which really, should be very obvious. Most of all to World Vision. As others have pointed out elsewhere, apart from the pragmatic problems associated with under-cutting locals, the message this initiative sends out is completely wrong. Both for the recipients of aid and for the general public in the States. No wonder so many people have the misconception that “aid doesn’t work”, when it is portrayed as a one way exchange between a paternalistic benefactor and pitiable recipient. These sorts of programs are a real slap in the face for the empowerment model of development that is needed.
[...] strategy was criticized by many bloggers — good summaries are at More Altitude and Good Intentions are Not Enough. Saundra S. of Good Intentions also explained why she thinks there hasn’t been as much [...]
[...] World Vision, the next 100,000 shirts – Good Intentions are Not Enough [...]
[...] controversy provides a perfect example of this issue. If you need some background, read the post World Vision, the next 100,000 shirts [...]
[...] me hopes were dashed when, when we ware nearly back to port, the first mate Starbuck Schimmelpfennig spotted that all-destroying but unconquering whale, goes by the name of World Vision, for some reason [...]
[...] and delivery prices, they are simple bad aid. In terms of World Vision, a fine website called Good Intentions Are Not Enough breaks down the benefits and costs to this program.Beyond this, as others have written, using gifts [...]
Saundra is partially correct, but the IRS limits the reduction amount (the “write off”) to the lesser of either the (FMV – basis) / 2 + basis, or twice the basis. If the NFL spends $2 to manufacture each t-shirt (a reasonable guess) and the t-shirt is claimed to have an FMV of $20, they can claim a reduction of the lesser of ($20 – $2) / 2 + $2, or $11, or twice their basis, which is $4. In no circumstance under this special 170(e)(3) “donation of inventory” rule may they claim more than twice their tax basis. So if the NFL manufactures 100 t-shirts for the losing team and 100 t-shirts for the winning team in their initial production run, they’re spending $200 on manufacturing. Assuming for this initial run they produce an equal number of winning and losing team t-shirts, their tax basis is reduced by the amount of the manufacturing costs. So they don’t have to pay corporate income tax on the manufacturing costs for this initial run.
The top bracket of the federal corporate marginal tax rate is 35%, into which the NFL would certainly fall. The corporate tax on the $200 of manufacturing costs is $70. So if they didn’t donate the losing team’s shirts, they’d have a total cost of $270. If they donate them, their total cost is $200. If they had a crystal ball or waited to print just the winning team’s t-shirts, they could skip the $100 in manufacturing costs for the losing team’s t-shirts, pay the $35 in tax on the manufacturing costs and $35 in tax on the $100 of income they keep, and come out with a total cost of $170, ahead still of printing the losing team’s t-shirts. So let’s be clear: their local and state corporate taxes, when coupled with federal, won’t push them over the 50% mark, so it’s never in their tax interests to print t-shirts for a losing team. That said, they’re going to print them anyway as having the winning team’s t-shirts ready to go will surely generate more sales, so this is an effective way for them to lower their tax basis and skip out on paying corporate income tax on the manufacturing costs associated with their initial run on something that they’re already financially incentivized to do.
That’s where it ends, though. The FMV doesn’t even factor in here. The t-shirts for the losing team may not be “worth” $20, but working with a $2 manufacturing cost, unless you think that they’re worth less than $6, the twice-basis calculation will be the limiting factor.
It doesn’t make any financial sense for them to donate t-shirts after their initial run, since they’ll always incur a greater expense with the manufacturing cost than they can get in the actual value of a “write-off”. If they have unused stock (say months after the Super Bowl), they can recoup some of their manufacturing costs by donating the additional property, but this is hardly a windfall for them.
World Vision doesn’t get any direct financial benefit by receiving these t-shirts, but they certainly may be incentivized to accept them if it helps them dilute their administrative to program service expense ratio, in addition to bolstering their total income numbers.
Pogo,
Thanks for such a thorough answer. I just got the paperwork from the IRS today and the tax law they were referring to is 170(e)(3) – contributions for care of the ill, the needy, or infants. You compute it using IRC Sec. 170(e)(B) and Reg. 1.170A-4A(c).
I can see from your explanation, and from having the documents now in front of me to google them that the person I spoke with was mistaken by what he thought the “tax basis” was.
So, your example is for the printing of 100 shirts. But we know that 100,000 shirts were printed. So in your example, what is the actual amount they would save by donating them – $7,000? Do I have that right?