Diverting American tax dollars for Isra'El.
One Hand Giveth ...
Tomas Kellner & Robert Lenzner, 10.27.03
forbes.com
Too many trustees of tax-exempt foundations seem to have trouble keeping their hands out of the cookie jar. One reason: No one is watching.
By the Numbers
American foundations are worth hundreds of billions of dollars but face very little oversight.
61,800 Number of foundations.
$476.8 billion Total assets in 2001.
$166 billion Total assets held by just 0.1% of all foundations.
$30.5 billion Total grants in 2001.
Source: The Foundation Center.
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. Now the problem is drawing attention from Congress, watchdog groups and prosecutors, especially in California and New York. As William Josephson, an assistant attorney general in New York, puts it: "The donors in these private foundations can't distinguish between their own money and the foundation's money."
Take a look at Gary and Carlotta Bielfeldt of Peoria, Ill. Gary Bielfeldt hit it big in the bond market in the mid-1980s, trading as much as $145 billion in government bonds and making $42 million to $53 million a year, according to tax court documents. His trading prowess was cited in the 1989 book Market Wizards, along with that of people like Bruce Kovner and Paul Tudor Jones.
In 1985 the Bielfeldts started the Bielfeldt Foundation to "benefit Peoria," endowing it with $30 million in cash. Through the year 2002 the Bielfeldts gave away a total of $24 million to Bradley University, a Peoria museum, zoo and other city projects.
No question some good was done, but it turns out the Bielfeldts also helped themselves to some of the goodies. An analysis of the foundation's tax records from 1985 to 2002 shows that Gary, Carlotta and their son, David, drew a total of $21 million in compensation from the foundation. All three are listed as foundation directors.
All told, the family paid itself 81 cents for every dollar it gave away. The Bielfeldts probably won't pull the same trick again. Gary lost his tax appeals all the way to the U.S. Supreme Court and is now facing a $68 million tax lien.
The Council on Foundations, which represents 2,000 charities with a combined $300 billion in assets, says a recent survey found that 75% of foundations do not pay their trustees. But the survey did not ask about other types of trustee fees, and regulators say that the Bielfeldt matter isn't unique among foundations. Trustees, says Josephson, the New York prosecutor, "are using substantial amounts of money to enrich themselves."
The purpose of a private, or family, foundation is to do good by funding charitable purposes, such as soup kitchens or art museums. (A public foundation solicits money from the public.) Foundations have to distribute 5% of assets every year to keep their tax-free status. That figure includes administrative expenses required to run the foundation. The larger foundations usually have professional managers, but all are required to have a board of directors, also called trustees. They are often corporate managers or family members who had endowed the foundation with a large sum of money and used the donation to reduce, say, a large estate-tax bill.
To prevent double-dipping, the Internal Revenue Service's tax code bars wealthy donors and family members from being paid for their work for the charity.
However, the revenue code has a big loophole. It allows payment to a trustee, provided it is "not excessive," for services that are considered "reasonable and necessary."
What is "excessive" and what is "reasonable" is any lawyer's opinion, however. "The standards are highly subjective," says Ellen Dadisman, a vice president with the Council on Foundations.
The feds can impose a 5% excise tax on a self-dealing transaction. But it's rare that they do that. In 2002 there were some 120 audits of the nation's 61,800 foundations, according to Marcus Owens, former director of the Exempt Organizations Division at the IRS. It can also impose a 5% tax on "jeopardy investments" for failing to "exercise ordinary business care and prudence."
At the moment he is in court fighting Michel Roux, who made a fortune running liquor distributor Carillon Importers and selling Grand Marnier and Absolut Vodka in the United States. Roux, 63, a Chevalier de la Légion d'Honneur, France's most distinguished honor, says he lives by his creed "doing well by doing good." Some of Carillon's profits endowed the Grand Marnier Foundation in 1984.
It turns out, though, that Roux and five other board members, including Jacques Marnier-Lapostolle, the grandson of Grand Marnier's founder, were the charity's greatest beneficiaries. In 1994 the directors pocketed $569,000 in pay for handing out $589,000 in grants.
Between 1990 and 1999, the six paid themselves $3.4 million for giving away $6.5 million in grants to such beneficiaries as Meals on Wheels and the Friends of the Israel Defense Forces.
Josephson's office began investigating in 2000 after it learned that the board owned a $200,000 apartment in Teaneck, N.J., near Roux's business office. "The directors repeatedly breached their fiduciary duties of care and loyalty to the Foundation, acting in their own interest at the expense of the Foundation's well-being," Josephson's lawyers charged in court papers. Roux's attorney declined comment. |
