Rick Cohen

HHS Secretary Leavitt’s Unusual Philanthropy Part II: His and Our Discontent

Some parts of the law and regs applying to foundations and charities are so obscure that they don't lend themselves easily to pithy blogs. The problem of Type III Supporting Organizations and HHS Secretary Mike Leavitt's use of this virtually unknown philanthropic loophole is one of those. In Part I, we explained the debate over Leavitt's family charity, the Dixie and Anne Leavitt Foundation, not really a foundation but a little known alternative alternative called a Type III. The "foundation" spent little of its nearly $9 million assets in its first few years, invested in Leavitt family businesses, and even made loans to Leavitt business interests. Leavitt's response? (a) It was all legal, and (b) since 2005, the foundation has been spending a higher proportion of its assets on charities.

As we said on All Things Considered, simply being legal doesn't make it right. There are problems with the Leavitt charitable scheme, among them these:

1. In more than two years of hearings on misuse and abuse of charity and philanthropy, the Senate Finance Committee concluded that these Type III Supporting Organizations operated primarily as loopholes for the rich to get big tax deductions while still getting to play with the money for frequently less than philanthropic purposes. As a governor and then as a cabinet secretary, Leavitt should have known.

2. Why would Leavitt set up his charity as a Type III Supporting Organization rather than as a private foundation? Because he gets a bigger charitable tax write-off under the law for Type IIIs (up to 50% of adjusted gross income for cash donations and 30% of AGI for appreciated properties, just like donations to public charities) than for private foundations (deductions limited to 30% of AGI for donations of cash and 20% of AGI for donations of appreciated property). Leavitt and his advisors had to have known the bottom line impact on the family's tax returns.

3. Also, with a Type III Supporting Organization, the required minimum payout to the designated charities is only 85% of the organization's investment income, but a private foundation has to spend for charitable purposes a minimum of 5% of its total assets--annually. Guess which one delivers more to charities as a percentage of assets. Leavitt's contention that his supporting organization spent more than 5% of assets in 2005 and beyond doesn't undo the fact that the foundation spent less than 1% of assets in previous years.

4. True, if Leavitt had set up his charity as a donor-advised fund at a community foundation, the Leavitt Foundation would have also been exempt from a private foundation-like minimum payout requirement. But nearly every community foundation in the nation maintains an average annual payout of 5% or more of assets. And the operations of the Leavitt Foundation would have been subject to the more professional, impartial due diligence oversight of community foundation staff rather than being left to the Leavitt brothers to determine what's right. The Senate Finance Committee's stance has been that both donor-advised funds and supporting organizations should have to adhere to private foundation-like minimum required payouts of 5% of assets annually.

5. It's hard to imagine any foundation--a private foundation or a community foundation--turning a blind eye to the Leavitt Foundation's 6-figure loan to Leavitt-controlled insurance and real estate interests. The Leavitt justification that this was a good investment doesn't wash (and would have been a red flag for IRS investigators had a private foundation pulled this stunt). What charitable purpose was involved? Could the Foundation really say that a loan awarded among insiders was a good business investment? Any of the Leavitts' business competitors would have had to go to something called a bank or some other commercial lending or investment institution to get a loan like this and undgo the bank's due diligence process. In this case, the Leavitt business interests are the loan applicant and the loan officer simultaneously. So the Leavitts get to make a charitable donation to their Type III Supporting Organization "foundation" and still use the money for for-profit business interests. As noted before, the IRS has identified this insider-loan behavior as one of the worst abuses typically seen among Type IIIs.

6. Although increasingly the IRS has turned a blind eye to issues of diversification of foundation investments, typically the Leavitt Foundation, were it a private foundation, might not have been permitted to dump all of its assets into two Leavitt-controlled businesses. The Leavitts' contention that holding the stock for a couple of years before selling was simply good business, waiting for the right price and earning more for the foundation, but we don't know whether there might have been other personal or business priorities in the mix as well--and the strategy might have just as easily been a bust.

So, in this case, a federal government cabinet officer basically "charity-shopped" for the charitable structure to give him and his family the biggest potential tax deduction, the lowest charitable distribution requirement, and the maximum ability to play around with the funds for non-charitable purposes (i.e., loans to Leavitt business interests). Leavitt charity-shopped for and found the philanthropic structure most heavily criticized by the Senate Finance Committee and the IRS as an outrageous tax loophole.

What should anger the public is not Leavitt's neat little use of tax law to give him the maximum possible tax advantage with the minimum required charitable benefit to legitimate nonprofits. It is that Leavitt is the head of the Department of Health and Human Services. Name a federal department that is more dependent on the functioning of charities for the delivery of government services. That HHS Secretary Leavitt would find a widely criticized possible instrument to express his philanthropic priorities and use it for dubious charitable purposes is truly the sad coda of this story. As the Salt Lake Tribune concluded, the Leavitt Foundation was only charitable for the Leavitt family.

Rick Cohen: Author Bio | Other Posts
Posted at 10:04 AM, Jul 24, 2006 in Government Accountability
Permalink | Email to Friend