Over-stated Value of Donated Medicine Gets Charity in Big Trouble with the IRS

February 2, 2012

In an IRS report that Forbes qualifies as “blistering”, Food for the Hungry, an Arizona based nonprofit, is accused of valuing the donation of deworming medicine at an estimated 81,000% above market costs.

The methods for valuing donated medical supplies have been getting increased scrutiny, as noted in an article last month in Forbes, but this is the first time a charity is facing a possible federal penalty of $50,000 for an inaccurate tax return.

The temptation to value donated supplies at above market cost is certainly high. One might argue that it is difficult to nail down a market, and a donation of an asset is offset with an expense so it generates no net income, but it can make a charity look more robust than it is, thereby attracting and keeping donors. Increasing donated supplies decreases the fundraising ratio and makes the organization look more efficient. In fact, the IRS stated in its report on the investigation that the intent of the over-valuation was to “mislead the public in order to raise more funds.”

There are sources for Average Wholesale Price (AWP) of pharmaceuticals such as Red Book (TM) and First Data Bank. The problem is that these sources rely on wholesalers to report their average costs and some are delinquent, meaning there is a possibility that the AWP might not really include the most up to date information.

Over-stating donated pharmaceuticals has caused at least one organization to get cut from the Forbes 200 listing, according to the Senior Editor, William P. Barrett, at Forbes. Barrett also notes what may be an even more scathing condemnation from the IRS in regards to Food for the Hungry, which is that they concluded the charity actually bought the pills and did not receive them as donated. In other words, one would assume that in no way, shape, or form should it be counted as revenue at all, much less massively overstated revenue. However, there is a grey territory of “donative intent” whereby the purchase price of the drug paid by the charity is considerably lower than the price a consumer would pay.

Food for the Hungry rejects the accusation, claiming what other organizations also involved with the deworming medicine have, that they stated values “in accordance with then-prevalent tax law and generally accepted accounting principles. ” In the meanwhile, they have gone from valuing the pills at $16.25 per pill to $1.54 per pill.

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