Charitable Foundations, The Power Behind The Throne

by David Reavill

They are the Charitable Foundations that we’ve all come to know so well. They are among the most powerful and influential organizations in our society. Exercising immense control over the attitudes and sometimes the behavior of millions.

Watch Public Broadcasting at any time of the day, and you’re likely to see a small reference at the show’s end to the John D. and Katherine P. MacArthur Foundations. A foundation that has chosen to finance much of the programming on our Public Broadcasting Network.

It is becoming an ever-more popular way for the supper wealthy to provide funding for their favorite worthy cause. Promoting their social objectives is also a hidden agenda for the very elite. And that’s the point, for many of the ultra-rich, the Foundation’s first objective is to promote societal change, molding the country into the one they feel is best. Only secondarily does the benefit of granting the financial gift come into play.

Often, I’ll hear the comment that such-and-such Foundations must act in our best interest because Charitable Foundations are supposed to go “good.”

As much as I wish that were the case, it’s not. There is no such provision in most of the Charity’s organizing documents. And there is no need to include them. After all, as most attorneys will say, “good” is such a nebulous term, defined differently by different people.

The only definition for a Charitable Foundation comes from the Tax Code. Anyone wanting to begin a Charity must adhere to Section 501(c) of the Code. The basic premise is that all funds the Charity/Foundation collects must be spent on the beneficiaries. For instance, if you wanted to start a Foundation to fund your local Little League Baseball Team, the funds collected should go to the Little League and not end up in your pocket. However, you may retain a reasonable income to support your fees and expenses in operating your Little League Foundation.

As you can see, this structure has no actual provision for “good.” Whether your Little League Team reflects a particular set of values, being sportsman-like, or never exhibiting anti-social behavior is not part of the equation. The “Good” is left out. Collect the donations, and distribute them to your Foundation’s Beneficiaries, and you’ll have a Foundation that all the regulators will accept.

The other distinguishing characteristic of a Charitable Foundation is that they are “tax-exempt,” They don’t pay taxes at all. This tax-exempt Status can be convenient when purchasing something for the Foundation. I remember buying 14 cases of wine for a foundation reception and being delighted at the discount when the sales tax was not added to the price.

But the cost of wine is one of many places the tax-exempt Status applies. The Gates Foundation, the Charitable Foundation of Bill and Melinda Gates, push its tax-exempt Status. Each year the Gates Foundation provides its complete financial report online (www.gatesfoundation.org). The information includes the audited financials as well as the tax return. A return, incidentally, that last year ran to 1,300 pages.

First, some background, a foundation’s income comes principally from its patrons’ donations. Often these donations are made in stocks or bonds, but depending on the Foundation’s rules, a gift can also be in any form of real property. You may donate an old automobile, boat, or even a piece of Real Estate.

They are using the funds for the Foundation’s primary mission. The Foundation then takes that donation and sells it. From an accounting point of view, the “cost basis” for the Foundation is zero, and the gain on its sale is 100%.

So, in the last reported year, the Gates Foundation took in $500 million in these types of donations. And the tax they owed on that gain? You’re right, zero.

From the donor’s perspective, this means 100% of their donation will benefit the Charity. From an economic perspective, this gives the Foundation an incredible financial advantage over any fully taxed competitor. For instance, to the degree that the Public Broadcasting System is tax-exempt, it has a tremendous economic advantage over the for-profit networks NBC, ABC, and CBS.

So the next time someone talks about Charitable Foundations, remember these two overriding characteristics. First, there is a minimal constraint on what a Foundation may or may not do. Of course, criminal activity is prohibited, as it is for all of us. But, other than an outright crime, the scope for a foundation is extensive.

And secondly, foundations, when they qualify under IRS Section 501(c)3, are tax-exempt—giving them a tremendous financial advantage over all for-profit firms.

Next, we’ll examine how some powerful Foundations are operating today.

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