The Magazine

No Tax-Free Lunch

Charities and the tax code.

Sep 1, 2003, Vol. 8, No. 48 • By CHESTER E. FINN JR.
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THE SALMON-AND-RASPBERRIES world of private foundations is rattling its Pellegrino bottles over a tax bill that would alter a 30-year-old practice whereby most of the foundations' operating expenses--lunch included--are classified as "charitable activity."

A bipartisan cast in the House of Representatives, led by majority whip Roy Blunt of Missouri and Democrat Harold Ford Jr. of Tennessee, reportedly backed by the Bush administration, wants to bar foundations from counting "administrative expenses" toward their annual "payout" threshold. Please don't yawn. The terminology may be arcane, but the implications are sweeping and not necessarily welcome.

The mandatory payout rule for private foundations dates to 1969 when Congress--alarmed by donors who deducted large gifts to foundations that devoted little of the money to bona fide philanthropic activity--imposed a minimum annual spending rate on these nonprofits. At first, it was 6 percent of a foundation's assets, eased in 1976 to 5 percent.

Under current IRS regulations, almost everything foundations do with their money can count toward the obligatory charitable payout. This includes all overhead costs--which is what raised the eyebrows of Rep. Blunt and his cosponsors. It's no secret that some foundations live high on the hog, with big salaries for staff, generous stipends for trustees, and fancy offices--check out the Ford Foundation's soaring arboretum-atrium on East 43rd Street--not to mention comfy retreats in scenic places. Some also have sprawling public-relations staffs and innumerable consultants. In the name of philanthropy, foundations spend a lot of money on themselves and the upper-middle-class professionals they employ.

The bill's supporters hope that barring foundations from counting their overhead costs and various self-indulgences as charitable activity will ensure more of their money reaches the needy people they are supposed to help. For this reason, the new bill has been hailed by many charities that dream of gaining billions in additional grant dollars if it becomes law. (Let us not speak of the high-living and fat overheads that also characterize some of the 501[c]3 outfits on the receiving end.) Much editorial applause has followed. "Wealthy charities are most generous to themselves," scolded USA Today. "Bill promises billions to charities," shrieked a headline in the San Jose Mercury News.

The conservative opinion world has also supported the bill, drooling over the chance to stick it to Ford, MacArthur, and other major funders of the left wing. National Review and the Wall Street Journal have editorialized in favor. Most prominent right-of-center foundations welcome the measure or have declined to oppose it. They, too, would like to bring Ford and Carnegie and Packard down a notch. Of course the big liberal foundations are fighting back. The wealthiest of them banded together to hire former representative Bill Paxon, now an influential GOP lobbyist, to kill this feature of the bill.

But like most tax issues, this turns out to be more than a simple dispute between white-hat congressional crusaders and pampered moneyed interests. There is the awkward fact that America's 60,000-plus private foundations are so varied that these well-intended reforms cannot be uniformly implemented without crippling a lot of genuine charitable activity. Blunt's bill turns out to be, well, too blunt an instrument.

That's because its drafters assumed that all foundation expenditures split neatly into two categories: grants and overhead. Not so. Many of these organizations also engage in direct services that advance their charitable missions, but don't take the form of grant-making.

The Oklahoma-based Samuel Roberts Noble Foundation is such a hybrid. Besides making grants to (mostly conservative) charities, it has a sizable in-house scientific staff engaged in agricultural research. It devotes more than half its assets to such direct charitable activities. The Baltimore-based Annie E. Casey Foundation, besides making grants to (mostly liberal) causes, has an arm (Casey Family Services) that directly aids hundreds of needy kids and families, mainly in New England, with foster care, adoption, counseling, and such.