TESTIMONY BY BILL REIGHARD
PRESIDENT, FOOD DONATION CONNECTION
BEFORE THE OVERSIGHT SUBCOMMITTEE OF THE
COMMITTEE ON WAYS & MEANS
MARCH 21, 2000

THE GOOD SAMARITAN TAX ACT – HR 1325

Good Afternoon. I would like to thank Chairman Houghton and ranking member Coyne, and other members of the Subcommittee for this opportunity to speak on the Good Samaritan Tax Act, H.R. 1325.

This bill, if enacted, will go a long way toward solving the issue of hunger in America. By allowing companies to offset the costs associated with donating surplus wholesome food to hungry Americans, The Good Samaritan Tax Act will encourage more food service companies to make the effort needed to set up food recovery and donation programs. The Good Samaritan Tax Act has the support of the National Restaurant Association, the National Council of Chain Restaurants, and America’s leading food recovery and distribution organizations -- Foodchain and America’s Second Harvest.

MY BACKGROUND:

Since 1992, I have been President of Food Donation Connection (FDC). FDC assists restaurants in providing an alternative to discarding excess wholesome unsold food by linking those restaurants to food rescue programs and agencies that help the hungry. FDC manages the donations of over 4500 restaurants to 1500+ hunger agencies.

Our Mission Statement is from John 6:12, which reads: "When they had all had enough to eat, Jesus said to his disciples, "Gather the pieces that are left over. Let nothing be wasted.""

We accomplish this by handling coordination and administration for our client restaurants. This includes determining recipient food rescue programs and handling paperwork, maintaining an 800 number for use by donor restaurants and hunger agencies, tracking and reporting all excess food donations, tax savings calculation and reporting and providing the ongoing follow-up and monitoring necessary for successful implementation and growth.

Prior to establishing Food Donation Connection, I worked for 17 years in the food service industry, holding management positions in operations, quality assurance, product development and technical services.

HUNGER EXISTS IN AMERICA

Despite our country’s economic prosperity, hunger is a pressing social issue in America. According to a recent report by Tufts University, 36 million Americans, including 14 million children, live in food insecure households. A United States Conference of Mayors report shows demand for emergency food increasing, and that over 20% of this demand goes unmet. In a New York Times article, America’s Second Harvest said they do not receive sufficient food to meet the demand from the member agencies of their network food banks. As individuals leave welfare and enter the work place, they often turn to food banks and other non-profit private sector groups for food to help make ends meet. Layoffs also remain widespread as companies reconstitute themselves to compete in the changing economy.

WHOLESOME EXCESS FOOD IS GOING TO WASTE

At the same time that many Americans go hungry, good wholesome food is going to waste. One of the major reasons this food is not getting to the hungry is because businesses cannot offset the costs of donating it.

It takes management commitment and money to properly save excess food for donation to hunger agencies. Prepared food must be properly saved, packaged, labeled and kept refrigerated or frozen until it is picked up by the agency. Operating procedures and food safety standards must be developed and implemented. Hunger agencies need to be selected and approved, and ongoing pick-up schedules established. A system for donation reporting and tracking must be in place. Tax regulations require strict receipting procedures and limit the type of non-profit organizations that can receive the donation. An example of these requirements as they appear on one of our client’s food donation can be found here.

A number of expenses are incurred when a restaurant donates its excess food. Based on our experience, provided below is an example of the typical cost associated with food donation programs. Note that costs will vary from company to company based on type and value of food donated, the type of storage containers needed, storage method and other factors. This example assumes the value of the donated food to be two times cost. Costs represent a percentage of tax savings. Since the tax incentive is a deduction (as opposed to a credit) a company must be profitable to realize any tax savings. Two tax rates are used in this example.

Program Cost Item	Cost: % of tax savings at 35% Tax Rate	Cost: % of tax savings at 15% Tax Rate
Storage & Transport Containers	4%	9%
Restaurant Manager Bonus Costs	10%	10%
Employee Labor to Save Food	10%	23%
Management Oversite	3%	7%
Program Management	15%	25%
Company Incentive After Costs	58%	26%

TO INCREASE DONATIONS, COMPANIES MUST BE ABLE TO OFFSET COSTS

Obviously, if we are to encourage food service companies to donate rather than discard usable surplus food, we need to allow them to offset the costs of doing so. In fact, Congress did include legislation in the Tax Reform Act of 1976 designed to help companies offset the costs of donating food to 501(c)(3) organizations that serve infants, ill or needy. Section 170 of the IRS Code allows a deduction equal to the donated food basis cost plus ½ of the appreciated value, not to exceed twice the basis cost. This last limitation, as well as strict receipting requirements, insures that a company cannot earn a profit by producing food specifically for donation.

Example Calculation of Incentive Provided by Tax Reform Act of 1976

The Tax Reform Act of 1976 allows regular ‘c’ corporations that donate excess food to certain specified 501©(3) non-profit organizations that serve the ill, infants or needy to take an incremental deduction for donated food. Strict receipting requirements must be met to take the incremental deduction

Example of potential tax benefit:

	Product Sold	Surplus Not Donated	Surplus Donated
Sales revenue	$1.00	$.00	$.00
Base cost (food & direct labor)	.35	.35	.35
Gross margin/(loss)	.65	.35	.35
Incremental tax deduction	-	-	-.33*
Total income/(deduction) for tax	.65	.35	(.68)
Tax (assumes 35% rate)	(.23)	(.12)	.24
Gross margin/(loss) after tax	$.42	$(.23)	$(.11)

In this example, donating reduces the after tax cost of surplus by 52%. The company still loses money on the donated food. The amount of the loss is reduced.

* Incremental deduction is one-half of the foods’ appreciated value (FMV less base cost) however base cost plus the incremental deduction cannot exceed twice base cost.

PROBLEMS WITH THE CURRENT LAW EXIST

While the food donation provisions of the 1976 act were well intended and designed to encourage companies to donate food, two problems exist today that actually discourage food service companies from doing so.

First, the IRS challenges, as an industry coordinated issue, any appreciated value placed on the donated food. The uncertainty of the value of their deduction prevents many companies from investing in and incurring the costs of food donation programs. In fact, under current IRS interpretation, it actually makes more financial sense for a company to throw away excess food rather than donate it.

Second, this deduction is only available to regular ‘c’ corporations. Many restaurant companies are set up as limited liability or sub-chapter s corporations or sole proprietors and are not eligible for the deduction.

THE GOOD SAMARITAN TAX ACT ADDRESSES THESE PROBLEMS

This Good Samaritan Tax Act restores some common sense to our tax code by addressing these two issues.

First, the Act clarifies the determination of fair market value when internal company policies relating to the treatment of food are also involved, ensuring that restaurants that donate food to non-profit hunger relief agencies will be allowed to take the full deduction available to them under current law. Free of the risk of having to defend themselves against an IRS challenge, more businesses will be encouraged to donate food.

Second, the Act will extend the deduction to all business entities, providing the incentive to thousands of restaurants that are not organized as "c" corporations.

FOOD DONATION PROGRAMS MEET LOCAL COMMUNITY NEEDS

Despite strong economic growth, hunger remains a problem in every state. Hunger exists in rural areas as well as in urban areas. A major strength of food donation programs is that restaurants operate in every part of the country. The result is a largely untapped source of excess food in each of our communities.

A strong network of non-profit agencies that serve those who are hungry has developed across the country. America’s Second Harvest network food banks, along with Foodchain and other national organizations, provide food to this network. However, increased demand at these agencies has resulted in the need for additional food. At the same time, food-manufacturing companies, a traditional source of excess food, have become more efficient in their operations. In addition, a secondary market for excess manufactured goods, i.e. Big Lots, Odd Lots, Internet surplus food sales etc., has developed. This has reduced the food available at a time when need is increasing. These agencies have a need for food now. The Good Samaritan Tax Act would increase the supply of available wholesome food by encouraging additional restaurants to donate their excess food.

Mr. Chairman, I appreciate the opportunity to testify here today. I encourage you and the committee to do everything in your power to enact the Good Samaritan Tax Act this year. Every day we wait, another child in America goes to bed hungry.

Bill Reighard, President
Food Donation Connection
P.O. Box 22787
Knoxville, TN 37933
800-831-8161
Bill@FoodToDonate.com
http://www.FoodToDonate.com

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