Tax Break Prompts Millionaires
To Create Private Foundations
Sample CRFNET Communication

January 27, 1997

Pick a millionaire, almost any millionaire.

Take Michael Eisner at Disney. Or Ted Turner at Time Warner. Or Bernie Marcus at Home Depot, or Leslie Quick of Quick & Reilly Group. They and hundreds of other corporate executives and entrepreneurs holding loads of appreciated stock are sprinting to take advantage of one of the sweetest deals around: private charitable foundations.

The headlong rush is a reaction to a little-known provision buried in last summer's small-business legislation. In that bill, Congress, with much fanfare, raised the minimum wage. Attached to the package, though, and all but lost amid the din, was a gift to the nation's wealthy: the return of private charitable foundations as a tax break.

'This Is the Way to Go

Here's what this means: Instead of giving $20 million to, say, the United Way or to an alma mater, wealthy folks can now plow huge chunks of their fortunes into charities of their own creation -- over which they exercise almost total control -- and still get big deductions on their taxes.

"I'm telling others this is the way to go," says Mr. Quick, chairman and chief executive officer of Quick & Reilly Group Inc., the financial-services company.

Going they are. "As soon as passage [of the bill] came across the fax, we started calling clients," says Diane Neimann, executive vice president of Family Financial Strategies Inc., a full-service management firm for wealthy families in Minneapolis. "We've had people on the runway for a year and a half waiting for this." Her firm recently hosted a breakfast meeting at the elegant Minneapolis Club for several families to hear Ford Bell of the General Mills clan and David Rockefeller Jr. elaborate on their positive experiences with their family foundations.

"We couldn't get the audience to leave," Mrs. Neimann says. "Four families wanted to set up foundations immediately." Her firm already has established eight foundations since Congress acted.

A New Age?

Proponents of the measure see its passage as the dawning of a new philanthropic age in the U.S., the emergence of the "next generation of Carnegies and Rockefellers," says Dorothy Ridings, president of the Council on Foundations, a Washington, D.C., trade group.

Many of this nation's biggest and most well-known philanthropic institutions began as private foundations endowed by wealthy individuals or families, such as the huge Ford Foundation, established in 1936 by automobile giant Henry Ford and now holding $8 billion in assets, and the W.K. Kellogg Foundation, started in 1930 by the cereal-industry pioneer and now holding $6 billion in assets.

Ideally, supporters argue, the same business skills that helped modern-day Vanderbilts amass their wealth in the first place will be brought to bear on their foundations, helping "those less fortunate in a productive, bottom-line-oriented fashion," explains Joseph Jacobs, chairman of Jacobs Engineering Group Inc. in Pasadena, Calif., and head of the Jacobs Family Foundation. After all, Mr. Jacobs observes, "Most charities are run inefficiently by 'feel-good' social workers."

Intellectual Indulgence

Many of these same "feel-good" workers, though, have their own opinion about private foundations. And it isn't pretty. In the best of all worlds, they say, private foundations, like their public counterparts, would help address problems like hunger or illiteracy; in truth, they charge, such charities tend to address the whims and agendas of their benefactors, whose motivations don't always fit the notion of "charity."

Is, for example, a foundation devoted to the opera and classical music performing a "charitable" work? Douglas Thomas of Salisbury, Conn., believes it is. Mrs. Thomas, once a regional chairman for the Metropolitan Opera National Council, is taking advantage of the tax break to set up a foundation that will give cash awards to rising stars. Her charity, she says, will help others in need, even if it does "benefit my own intellectual indulgence."

That, critics say, is precisely the point: Too many private charities are little more than indulgences, which hardly merit a governmental imprimatur in the form of a tax break. "The majority of these so-called charitable foundations [are] motivated more for avoiding taxes and supporting pet projects than helping society," complains Herbert Chao Gunther, president of Public Media Center, a nonprofit communications agency based in San Francisco that frequently solicits funds from foundations. "For rich people who've made a killing in the stock market lately, the ultimate status symbol is creating a foundation with your name on it."

For the moment, any debate over the value of private foundations is being drowned out by the stampede to get one. That is because Congress did include a large wrinkle in all this: The perk expires May 31. "We have to rush around to take advantage of this window of opportunity," explains Mr. Marcus, chairman and chief executive of Atlanta-based Home Depot Inc., the home-improvement chain, and head of the Marcus Foundation. The thinking is the same at BankAmerica Corp.'s Bank of America unit, which is sending a slick brochure to its private-banking clients. The pamphlet features a drawing of a woman in front of a well-draped window that lights up with gold stars in a deep-blue sky, touting, "Window of opportunity. Right before your eyes."

What is this highly attractive window? Until May 31, individuals can deduct the full, fair market value of publicly traded securities contributed to private foundations. Additionally, the capital-gains tax is waived on the appreciated stock when transferred. Thus, if an individual in the highest tax bracket contributes $1 million of appreciated stock to his foundation, he receives a $396,000 reduction in income tax and avoids as much as $280,000 in capital-gains tax for a total tax benefit of up to $676,000.

Keeping Control

These same tax benefits, of course, have always been available to individuals donating stock to public charities, whether it be a nonprofit hospital or the American Cancer Society or homeless shelters. But once the gift is made, the donor typically loses control over how the proceeds are spent.

By contrast, "The beauty of a private foundation is the same immediate tax advantage -- but the donor retains control of the money for a much longer period of time," explains Anne O'Brien, a Washington estate-planning lawyer. "A gift to a public charity is a one-time splash, and then it's gone." It also doesn't hurt that a foundation's creator gets to name the group -- usually after oneself or one's family. "Foundations have a unique appeal of legacy," notes Arthur Murray, a senior vice president at Bank of America.

Unlike a public charity, a private foundation is a nonprofit organization that typically has only one source of funding, from an individual, family or corporation, and therefore doesn't solicit funds from the general public. Also, private foundations generally don't engage in direct charitable activities; rather, they make grants to qualified tax-exempt entities. (To give financial assistance to college students or musicians, for example, a foundation typically gives the money through the school or the orchestra, rather than dole it out directly to individuals.) Grants are made out of income generated from the foundation endowment. By law, private foundations are required to distribute at least 5% of their assets each year, which critics charge is too low. "Sure, it's possible to store money there, but it will appreciate," Mr. Quick says. "And at some point along the road, only charity will benefit."

Little wonder then that many CEOs and others, sitting on huge gains in their stock portfolios, are launching, or adding to, their personal foundations. Sam Fox, chairman and founder of Harbour Group, the St. Louis industrial conglomerate, recently added more than $14 million to his foundation, the Fox Family Foundation, by transferring 300,000 shares of DT Industries Inc. and 70,000 shares of Greenfield Industries Inc. Sanford Robertson, who heads an investment-banking firm in San Francisco, transferred stock in Apria Healthcare Group, a leading home-healthcare company in which his firm invested and took public, to his foundation, the Jeanne and Sanford Robertson Fund.

That stock, whose "cost to me was zero," Mr. Robertson says, is now trading around $18 a share. "I was very aware of the window," he adds, "so I'm giving in both years" to maximize the tax benefit by taking advantage of the two tax years that the provision straddles.

Quiet Lobbying

The tax break has been in effect once before, from 1984 to 1994. At the time, Congress was trying to determine whether the benefit would translate into fewer gifts to public charities. When lawmakers didn't extend the provision after 1994, CEOs and entrepreneurs became antsy, particularly as the value of their stock holdings continued to soar. Accordingly, a quiet but persistent lobbying campaign to restore the tax break, orchestrated by the Council on Foundations, was launched.

The effort didn't lack for star power. Wayne Huizenga -- founder of Republic Industries Inc., the Fort Lauderdale, Fla., holding company, and majority owner of the Miami Dolphins football team -- had a company official present his position for the tax benefit to Florida lawmakers. Home Depot's Mr. Marcus spoke with House Speaker Newt Gingrich and then Sen. Sam Nunn, a Georgia Democrat, to argue for the break.

Coca-Cola Co.'s chairman and chief executive, Roberto Goizueta, who regularly gives Coke stock to his own foundation, was kept informed by his staff of the provision's prospects of passage on Capitol Hill. "We had some impressive supporters," acknowledges Ms. Ridings at the Council on Foundations.

Still, the campaign got nowhere for more than a year. Congress, according to the council, appeared reluctant to consider any legislation deemed a revenue-loser to the federal government. Last summer, however, the provision hurriedly got tacked onto the Senate version of what became the Small Business Protection Act.

The Council on Foundations scrambled to prove to lawmakers that private foundations were a businessperson's best friend. A position paper noted that private charities made $140 million in grants for economic development and business services in 1994 alone. The council also detailed how the Coleman Foundation, for instance, (funded by the Fannie Mae candies family) endowed five university chairs in entrepreneurship, and how the Claude Worthington Benedum Foundation made grants to teach poor rural women in West Virginia to knit and market their products from home.

The pitch worked. Last August, Congress passed the legislation -- with the tax break intact.

Waterway Saver

Few private foundations make apologies for the often highly personal direction their philanthropy takes. After all, their creators note, that is part of the fun. Jacob Hershey, a retired Houston investor and rancher, recently boosted his foundation's funding by 30%, to $3 million, so that the charity can help preserve the Buffalo Bayou, a waterway that runs near his home. Winston Wallin, former chairman of Medtronic Inc., the medical-device manufacturer, pays out $250,000 from his foundation each year to help college students with their tuition -- students who graduated from Mr. Wallin's old high school.

"I know the names of all the kids," he says. "We have 110 kids in college now."

Benefactors are also quick to acknowledge that the private charities are often a vehicle for keeping their own families together. Gloria Sewell, a retired development director in Minneapolis, and her husband are setting up a foundation to be called the Sewell Family Foundation. As an added attraction to her two children, Mrs. Sewell says the foundation will focus on the arts "based on our family's interests." Her daughter is a professional cellist, and her son runs his own professional ballet company.

Indeed, many foundation meetings often are called during the holidays, either because that is when the family is together -- or as a way to entice the kids to return home. The board of Ted Turner's foundation, the Turner Foundation, consists of himself, his wife Jane Fonda and his five children. Mr. Turner, vice chairman of Time Warner Inc., holds foundation board meetings around the July 4 and Christmas holidays. The Harbour Group's Mr. Fox named his wife and children to the board of his foundation. Their most recent board meeting was held last month in Aspen, Colo., where the family was vacationing.

Mr. Eisner at Walt Disney Co. similarly envisions his foundation as "a long-range family project ... to build up to become a permanent fund that his three sons can carry on," according to his attorney, Irwin Russell. The Eisner Foundation will endow "imaginative programs" with a major focus on education, Mr. Russell says.

With family members typically comprising the bulk of a foundation's board, it also isn't surprising that charities affiliated with these directors benefit from the largess. Charles Brandes, chairman of a San Diego money-management firm, recently had his foundation donate money to the Ettie Lee Homes for Youth, a Baldwin Park, Calif., program whose chairman is his wife's brother. (His foundation board consists of himself, his wife and his sister.) His interest in helping the homes for abused youth, he explains, is "genuine; I just became aware of it through my brother-in-law."

Coming Debate

Such arrangements, not surprisingly, are what drive public charities to distraction. "A private foundation is typically one person controlling his money with his family on the board," says James Luck, president of the Columbus Foundation, a public charity in Columbus, Ohio. "Public charities, not private foundations, should have the preferred tax treatment because they are more broadly representative of the community."

That argument is likely to get a broader hearing this spring. Already, the Council on Foundations is pushing to make the tax break permanent -- or, at least, to extend it for a year. The outcome of the congressional debate is expected to determine whether the current surge in new foundations continues.

"The family foundation is the fastest-growing segment of philanthropy," the council's Ms. Ridings says. "A lot depends on this tax provision, because it is the surest way to spark this charitable impulse." Mrs. Neimann, the Minneapolis adviser, agrees. "If this provision isn't extended, charitable dollars will dry up at a time when the government is expecting the private sector to pick up the slack from its cutbacks." she says. "A lot of people are prepared to be very generous -- as long as they have a tax incentive."

But the well-to-do aren't waiting for Congress to make up its mind. "My fear is that with all the Newt Gingrich controversy over their political use, foundations are taking on a political coloration," says Tom Theobald, the former head of Continental Bank of Illinois who created the Theobald Foundation. "People are getting an evil view of foundations."

Copyright 1997 Dow Jones & Company, Inc. All Rights Reserved.

CFRNET posting by :
Andrew J. Grant, Ph.D.
Director of Foundation and Corporate Relations
The Jewish Theological Seminary of America
3080 Broadway, New York, New York 10027
Voice: (212) 678-8934; FAX: (212) 678-8941
E-mail: (Andrew J. Grant)
Date: 1/27/97
Time: 10:27:33 AM

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