- The Washington Times - Saturday, October 18, 2003

As her executioners led Madame Roland, one of the many thousands of innocent victims of the French Revolution’s Reign of Terror, to the guillotine, she declaimed words that have gone down in history: ” Oh, liberty, what crimes are committed in thy name.”

Today, we can update that immortal statement by substituting the word “charity” for “liberty.” For I have just read through exposes in Forbes Magazine and in the Boston Globe about how the founders and managers of charitable foundations are exploiting the funds, intended for distribution to the needy, for their personal use. These revelations make sickening reading especially when you realize these foundations are supposedly supervised by the Internal Revenue Service and state attorneys general.

Here’s how Robert Lenzner, the Forbes editor, opens his expose with these right-between-the-eyes words:

“Do you need a fat tax break and have millions on hand? Here’s a tip: Establish your own charitable foundation. If you need the money later, raid the foundation in the guise of drawing a salary as a trustee. It’s perfectly legal, except for the most egregious, abusive cases.”

He quotes William Josephson, an assistant attorney general in New York, as saying:

“The donors in these private foundations can’t distinguish between their own money and the foundation’s money.”

Mr. Lenzner offers a case history of how a private charitable foundation set up by the Gary and Carlotta Biefeldt family of Peoria, Ill., paid itself 81 cents for every dollar it gave to charity. And these fees were certainly not for good performance, says the Forbes writer. Between the end of 1986 and the end of last year, the $30 million endowment had shriveled to $13 million. Regulators say that the Bielfeldt matter isn’t unique among foundations. And it’s no crime, either.

The Council on Foundations, which represents some 2,000 charities with a combined $300 billion in assets, says defensively that their recent survey found that 75 percent of foundations do not pay their trustees. But, Mr. Lenzner points out, the survey did not ask about other types of trustee fees. Trustees, says Mr. Josephson, the New York prosecutor, “are using substantial amounts of money to enrich themselves.” There are more than 60,000 private charitable foundations in the U.S.

There is a distinction between public and private or family foundations. A public foundation does public fund-raising. The private foundation begins life with a huge amount of money as an endowment and thereby reduces what might be a large estate-tax bill to zero, a perfectly legal example of tax avoidance. Sad to say, such blessings are not available for the ordinary taxpayers.

Earlier I referred to the supposed supervision of these private foundations. Laughable. To prevent what Forbes calls double-dipping, the Internal Revenue Service’s tax code bars the donors and family members from being on the foundation payroll. However, there’s the good old Big Loophole in the IRS code. Payment to a trustee is perfectly OK, provided — here it comes — it is “not excessive,” for services considered “reasonable and necessary.” So what’s “excessive” and what is “reasonable” is any lawyer’s opinion. By and large, says Mr. Lenzner, the IRS lets the foundations and trustees do as they please. We should all be so lucky.

The Boston Globe expose has come up with a charitable foundation whose trustee, Paul C. Cabot Jr., son of the benefactor, paid himself $5,185,216 from 1998 to 2002. During these same five years, Mr. Cabot donated an annual average of $400,000 to charity. And then as a topper, Mr. Cabot took $200,000 to pay for his daughter’s wedding at the family compound in Boca Grande, Fla. Not bad and not illegal.

The Boston Globe survey gave example after example where a foundation makes the same charitable gifts year after year as dictated by the terms of the trust. Nothing much to do except sign the checks. Payments to the two trustees of Philadelphia’s George Jr. and Harriet E. Woodward Trust averaged more than $100,000 a year between 1998 and 2002.

Is anything being done about what are flagrant breaches of trust? Reports the Globe:

“Despite such publicized examples of alleged abuses by foundation officials, calls for greater regulation of the industry have had little effect. Congress last month backed away from imposing substantial new restrictions on private foundations after heavy lobbying by foundation officials.”

So double-dip away, chaps, you’re home free.

Arnold Beichman, a Hoover Institution research fellow, is a columnist for The Washington Times.

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