Noyes, a New York real estate broker; the
Lawrence
A.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
69
*Danforth Foundation 23. 4
*Moody Foundation 34. 55
*Rogosin Foundation 24. 5
*David Schwartz Foundation 15.
*Patrick & Anna Cudahy Fund
Springs Foundation
86. 66 B 100.
Some additional significant enterprises under foundation control
were the
following: 14
Edgewater Beach Hotel
Chicago
First National Bank ,
Ligonier, Pa.
North American Accident
Insurance
Field Enterprises
preferred
Reinsurance Corporation
of N. Y.
Cannon Mills
First Boston
*The Boston Foundation 100.
*Avalon Foundation
(Mellon) 21. 5
*Field Foundation 30.
*Field Foundation 100.
*The Richardson Foundation 14.
*Cannon Foundation 11. 69
*Sarah Mellon Scaife
Foundation 43. 33
In all, no fewer than 111 foundations were found to own more than 10 per cent of one class of stock, usually the voting stock, in one or more of 263 different important
corporations as of December 31, 1960. 15 This was a considerable number of corporations in which to exercise tax-free control even though not all of them were of the commanding size of Great Atlantic & Pacific Tea, Kresge, Ford Motor or Sun Oil. The Ford Foundation does not directly control Ford Motor, but its holding of nonvoting stock enables the Ford family, which also controls the foundation, to control the company absolutely with its own block of stock of weighted voting power.
But at the end of 1960 all 534 foundations in the study held investments in the stock of more than 2,000 corporations, assuring considerable dispersion of voting influence. 16
The point about foundation control, full or partial, is that it is tax free all the way, giving the foundational enterprise a big competitive edge over nonfoundational businesses, a facet Representative Patman was especially interested in. He cited reports from various businessmen on how they were being undercut in the market by foundation-owned enterprises.
The 534 foundations "had aggregate untaxed receipts of almost $7 billion during the period of 1951 through 1960. During the one year 1960, their total receipts were $1. 34 billion as against $554 million in 1951. I find it difficult to reconcile the withdrawal of $1 billion annually from the reach of the Treasury with the federal government's pressing need for revenue.
"During the period of 1951 through 1960, the contributions, gifts, grants, scholarships, etc. , paid out by the 534 foundations totalled $3,448,867,894 (see Schedule 3A for details)--roughly 50 per cent of their aggregate receipts of $6,981,180,819. They claimed expenses, including administrative and operating costs, of $721,199,586-- almost 10 per cent of the total receipts. " 17
The foundations in the aggregate, it is readily seen, are as prudent as the corporations in what they pay out. They pay out only about half of income, plus 10 per cent for administration, while the corporations pay out only 44 per cent. The remainder, in both cases, is used for reinvestment and growth. The capital position of the foundations over the years is thus enlarged on the basis of their tax savings. What they don't pay in taxes, it must always be remembered, must be paid in other ways--mainly by the rank-and-file, flag-waving patriots.
To show the magnitude of income for only 534 foundations, Patman points out that 7,213,000 families in 1960 had incomes of less than $2,000 each before taxes, aggregating $8. 04 billion. Foundation income the same year was 13 per cent of this total.
But the foundation income of $1. 034 billion for 1960 was more than 20 per cent greater than the $864,435,000 net operating earnings after taxes of the fifty largest banks in the United States! 18
At the end of 1960, indeed, the net worth of the 534 foundations studied was 23 per cent greater than the capital, surplus and undivided profits of the nation's fifty largest commercial banks. 19
As to accumulation of income, the Patman findings, apart from showing payouts in pro forma beneficences of only 50 per cent of earnings on the average, placed into view some startling findings. Retained earnings of only some of the largest foundations, which are supposed to be doing the most public good, were as follows through 1960: 20
Ford Foundation
Carnegie Corporation
William Volker Fund, California
Retained Earnings
through 1960
$432,916,492
65,854,287
17,204,824
Carnegie Institution of Washington
Callaway Community Foundation, Georgia
William H. Miner Foundation, Chicago
The Cranbrook Foundation, Michigan
W. K. Kellogg Foundation
T. B. Walker Foundation, Minneapolis
Danforth Foundation
Charles Hayden Foundation
John and Mary R. Markle Foundation
Milbank Memorial Fund
William T. Morris Foundation
Olin Foundation
Research Corporation
Rockefeller Foundation
Alfred P. Sloan Foundation
Fred L. Emerson Foundation
Thomas J. Emery Memorial
Samuel Roberts Noble Foundation
Sarah Mellon Scaife Foundation
Houston Endowment
30,334,316
7,173,911
13,963,496
8,187,872
7,524,832
8,436,379
15,799,676
16,064,615
9,589,958
9,412,828
8,831,544
15,239,780
10,070,661
51,019,677
33,152,735
9,394,815
6,847,411
8,154,763
6,198,566
27,110,937
While such saving is excellent investment procedure, it does not represent giving away either income or principal. Yet the law (only since 1950) in allowing tax exemption to such enterprises stipulates that there shall be no unreasonable accumulations of income. Prior to 1950 foundation income could be retained without even nominal restriction.
Untaxed, Unfair Competition
Representative Patman's main concern was that the foundations steadily shrink the tax base, thereby increasing the tax burden for others. At the same time they gain a competitive advantage by escaping corporation taxes of 48 to 52 per cent which other business entities must load onto costs. This tax saving they use to build their capital position higher. They in fact literally, almost to the penny, capitalize their tax savings and grow. The wealthy churches do this, too.
The general panorama revealed by Patman was that through the foundation device this privileged part of the American capitalist structure had been able to move itself back into the earlier position of unregulated, uncontrolled, untaxed capitalism. Through the foundations, unless they are restrained by law or public criticism, the old unregulated capitalism may well be restored behind the screen of fitful and halfhearted pubpolic corporate regulation in the foreground.
The Internal Revenue Service of the Treasury Department, Patman showed, paid only the most cursory attention to the foundations, apparently taking them at their face value as beneficences. It rarely conducted field audits, kept very haphazard statistics, did not require proper reports, accepted any and all schemes of accounting, did not hold the foundations to existing regulations, did not hold them to the requirement in law forbidding "unreasonable" accumulations of income, gave tax exemptions for straightout big-profit big-business deals, allowed the tax base to be eroded and, in general, after a few feeble token gestures, allowed anything called a foundation to do whatever it wanted to do. 21
As a first step in correcting this situation Representative Patman called, futilely thus far, for a moratorium on the granting of further tax exemptions.
He showed, further, no less than twenty-eight accounting defects in the law-required reporting procedures of foundations.
Among other questioned practices he showed that big New York banks turned over to their own foundations appreciated assets, which the foundations then sold, thus evading a capital gains tax. 22
In the matter of holding controlling blocks of stock he showed them to be agents of more intensive corporate concentration. 23
He showed foundations operating wholly owned enterprises in competition with taxpaying enterprises, with the foundation-owned enterprise paying no taxes because it was ostensibly operated for charity. 24
Funds were given by certain foundations to certain universities which used them in applied, profit-making research for enterprises with which the foundations were connected rather than in basic research available to everybody. Such activities were carried on in competition with taxpaying firms of engineering consultants which should, it was suggested, more properly have been hired. But as the whole ride was tax free on gifts to university and institute research departments, there was more mileage to be had from the money. Had the services been purchased, the purchaser would have had packed into the price be paid (as the ordinary consumer has) profits and the business income taxes. 25
Certain large enterprises are established, indeed, to carry on applied research, without any shadow of charitable intent, and yet are given sweeping tax exemption. 26
Foundations, as the Patman inquiry showed, carry on, tax free, the following kinds of operations:
1. They buy up properties from large companies and lease them back, thus providing the companies with ready cash so that they need not enter the competitive capital market.
2. They lend money at cut rates to very large corporations, thus enabling the latter to bypass banks and the capital market.
3. Some of their donors are given convenient cut-rate loans.
4. The foundation stockholdings are used in struggles for corporate control. "In 1960 [the Patman report said], during the battle for control of the Endicott Johnson Corp. the Albert A. List Foundation, of Byram, Conn. , received 54,000 shares of Endicott Johnson from the J. M. Kaplan Fund, of New York City. These shares were used by Mr. Albert A. List in his unsuccessful attempt to acquire control of the corporation. According to press reports, during the struggle over the Alleghany Corp. between Allan P. Kirby and the Murchison brothers, the Fred M. Kirby Foundation purchased Alleghany shares, which had not previously paid a dividend. "
5. They return capital to donors when, as and if the latter need it.
6. They render research, market study and other services to related businesses on a preferential basis; staffs of large foundations serve as a minor governmental advisory staff for the donors. Parenthetically one should observe that foundation staffs regularly interchange high- and middle-level personnel with formal government. The Barons at times serve the Crown, and officers of the Crown at times serve the Baronage. For a good many years secretaries of state have mainly been foundation officers, corporation lawyers or both. Among the former has been Dean Rusk. Among combinations of the two have been John Foster Dulles, E. R. Stettinius, Jr. , Henry L. Stimson, Frank B. Kellogg and Charles Evans Hughes. Corporation lawyers in the post have been Elihu Root, Philander C. Knox and Robert Lansing, to go no further. Secretaries of the Treasury have long been drawn for the most part from banks or investment funds. John W. Gardner, recent Secretary of Health, Education and Welfare, was drawn from the
presidency of the Carnegie Corporation. Government reciprocally supplies, from time to time, high foundation personnel; McGeorge Bundy skipped from the position of presidential adviser on foreign affairs to the presidency of the Ford Foundation. Rusk originally went from the State Department to the presidency of the Rockefeller Foundation. The reciprocal interchange of personnel is heavier on the middle levels between government on the one hand and foundations, investment houses and corporate law firms. Only here and there on both middle and top levels does one find professional politicians, disparagingly referred to in the newspapers as "political" appointees. This means, between the lines, that the man is more or less incompetent for the job but useful in snaring votes. Foundations, law firms and investment houses form in relation to government part of what is known in football as The Platoon System; they have entire specially trained teams ready to be sent into the highest strata of government as conditions require. As all of these are Organization Men of the finest tooling, they fit as though pre-engineered into whatever slot they are assigned. And the reason for this is that the world of finpolity is itself a world of government.
7. They pay excessively for certain assets.
8. They sell certain assets to certain parties for unaccountably low prices.
9. They accept contributions (kickbacks? ) from persons or organizations that supply goods and services to companies interlocked with the foundation. 27
10. They also often grossly understate their assets, either in whole or in part. This includes the biggest among them such as the Ford Foundation, Samuel H. Kress Foundation, John A. Hartford Foundation, the Carnegie Corporation of New York and the Howard Hughes Medical Institute. Extraordinarily valuable properties are often carried on the books at $1. 28 Patman concluded all foundations understate asset values.
It cannot be said surely that any of this is done with intent to deceive; one simply does not know what the intent is and must infer from results.
Additionally, the foundations are big operators in the stock market, acquiring huge tax-free capital gains. 29 They do, in fact, whatever banks and investment trusts do except issue securities. They are like closely held private family banks and trusts, with virtually no limitation on their operations.
Despite substantial payouts over the years from time of inception to the present, the retained assets of the leading foundations, thanks to their tax exemption and average half payout rate, have piled up astronomically.
Much of the research and other contributions of the foundations pertain to areas of special high pecuniary interest to the donors.
Some of the foundations, such as the Howard Hughes Medical Institute, are used in concert with large corporations such as the Hughes Tool Company and the Hughes Aircraft Company in achieving very large tax savings on assets shuffled back and forth. The Hughes Medical Institute started out by buying $75 million of commercial business assets and assuming liabilities of $56 million, at the same time becoming additionally and directly liable for $18 million on its own note. Said Representative Patman: "This sounds more like high finance to me than charity. " 30
So increasingly scandalous did the Patman findings become in the course of the investigation that the staid New York Times took to distinguishing in its reports between "reputable" and "disreputable" foundations, without listing either or laying down criteria for the distinction.
By "reputable" it presumably referred to the largest foundations. And the Ford Foundation is presumably as reputable as any.
But Patman in his very first report teed off on the Ford Foundation as well as other big ones and showed it to be as free-wheeling as any.
First, the Ford Foundation is engaged in large-scale money-lending activity in competition with taxpaying banks. It lends money to a large variety of leading corporations, the interest to them tax-deductible, such as Chris-Craft, the New Haven Railroad, the Chesapeake & Ohio Railway, Continental Air Lines, Standard Oil of California, Shell Caribbean Petroleum Company, El Paso Natural Gas Company and many others. Stockholders in taxpaying lending enterprises such as banks are 'certainly undercut by such tax-free activity.
Moreover, whenever it wishes it can lower its interest rate to preferential levels. "Why, for example," Representative Patman asked, "was the Duke Power Co. of Charlotte, N. C. , charged only 2. 65 percent interest on a $3 million, 20-year loan, while other borrowers paid 6-1/2 percent? Duke Power, incidentally, is owned 57 percent by the Duke Endowment, another tax-exempt foundation. " 31 Here is one foundation washing the hands of another.
Even more fundamental questions were raised about Ford operations by Patman.
I have already referred to the $33 million the foundation loaned overseas during the 1961 balance-of-payments crisis. This, in effect, amounted to a Government subsidy being used, without Government control, in operations in conflict with government policy. Treasury Secretary Dillon on May 17, 1962, warned that the mounting flood of European bond issues sold in the U. S. capital market is undermining our Government's efforts to defend the dollar. Precisely such an outflow of dollars--to industrial nations like France, Belgium, and Canada--was involved in the Ford Foundation's loans, as shown on Schedule 4, pp. 83-84.
The Ford Foundation loans to foreign corporations and governments create a somewhat bewildering paradox. Our Government brought home soldiers' families so as to save dollars overseas. Yet the Ford Foundation exported $33 million in the year 1961. Also, in 1960 the Ford Motor Co. arranged to export $358 million to purchase minority stockholdings in British Ford which they already controlled.
The result was that a substantial part of the dollars we saved by separating our soldiers from their families was sent back overseas by the Ford Foundation and the Ford Motor Co. And the irony is that the Ford Foundation operates on a subsidy from the taxpayers--in the form of tax exemption.
Moreover, we do not know the purpose of the Ford Foundation loans to the foreign corporations and governments. For example, if the loans are used by foreign businesses--which are not bound by our antitrust statutes-to help them gain entry to our market, those foreign firms have a great competitive advantage. Trade practices in the United States and the Common Market are quite different. In Europe, an industry cartel can cut up the U. S. Market, assigning to certain members exclusive territorial rights in certain sections of the country. Our firms cannot do this without facing a violation of our antitrust laws. Hence, the Ford Foundation's loans could conceivably be helping our competitors who are not bound by the Sherman Act, the Robinson-Patman Act, etc. 32
But Mr. Patman appeared to be overzealous when he took the Ford Foundation and others to task for contributions to nonprofit educational television stations, which appear to be entirely defensible activities. Only if Mr. Patman's unstated premise is valid, that all activities must be profit-making, can his argument here hold. 33 If this is so, then contributions to nonprofit hospitals and schools are questionable.
The Patman inquiry, one must conclude, fits well the thesis of sporadic friction between the Crown and the Baronage, between pubpols and finpols. Patman's, it is
evident, is not the prevalent view of the foundations among pubpols. But the pubpols in their various calls for regulation, supervision, revision or reform of one or another aspect of the realm of finpolity--sometimes corporations, sometimes foundations--do appear to be playing some part of the role of the medieval Crown vis-a`-vis the restless Baronage. This will no doubt continue until the day arrives, if it ever does, when they effect a transition either into the corporate state or into the collective corporation: One corporation under God, indivisible, with liberty and justice for all directors and major stockholders. . . .
Seven Wildcat Foundations
Thus far Patman dealt with the foundations in their generality. In the second and third parts of his report, which ran to 872 large pages, he concentrated on seven foundations with a view to showing just how freely foundations could operate under existing laws and regulations.
In the second part he dealt with the David, Josephine and Winfield Baird Foundation ($10. 2 million), the Winfield Baird Foundation ($17. 4 million) and the Lansing Foundation ($779,546), all established by David G. Baird of Baird and Company, member of the New York Stock Exchange; the Jessie Smith Noyes Foundation, established by Charles F.
Noyes, a New York real estate broker; the Lawrence A. Wien Foundation and the Harry B. Helmsley Foundation.
The third part was devoted entirely to The Nemours Foundation and the originating Alfred I. du Pont Estate of Jacksonville, Florida.
As commentaries around the country showed, Mr. Patman at this stage had made a deep if fleeting impression.
The report revealed that the Baird foundations engaged in just about everything conceivable in the way of loose practice. They had trustees and directors who were employees of Baird and Company or relatives and friends of Mr. Baird, "mere figureheads. " All were "subservient" to him. "The abuse of public privileges" by the Baird foundations recalled findings in 1948 about three trusts established by Textron, Inc. , under Royal Little, which were held by the Senate Commerce Committee to exist "for purposes of tax avoidance and providing risk capital to Textron, thereby giving Textron an unfair advantage over the orthodox manufacturer. " One of the Baird foundations was involved, as it happened, with Textron.
Patman detailed a number of exact similarities between the Textron operation and the Baird foundations. From very small beginnings in the 1930's and 1940's both groups grew to large size.
The Textron foundations consisted of the M. I. T. Trust, the Rhode Island Charities Trust and the Rayon Trust.
Said the Patman report: 34
The M. I. T. Trust, created in 1937 with assets of $500, had earned almost $1 million net by October 1948. Its beneficiary, the Massachusetts Institute of Technology, had not received any contributions.
The Rhode Island Charities Trust, created in 1937 with assets of $500, earned $4. 5 million by September 1948. The Providence Rhode Island Community Chest, the sole beneficiary, had received only $85,000 contributions. The bank handling the investments and the trustees, however, had received over $140,000 during the same period.
The Rayon Foundation, created in 1944 with assets of $100, earned $750,000 by October 1948. The Rhode Island School for Design, the sole beneficiary, received only $75,000 in contributions.
All of this was tax exempt.
Benefits accruing to Mr. Baird and associates were set forth as follows:
1. Substantial commissions for Baird and Company were generated by large and continuous securities transactions of the Baird foundations.
2. The foundations received contributions from others which should have been treated, and taxed, as income to Mr. Baird for services he rendered to the "donors," or at least as income of the foundations rather than as tax-free increments to their capital funds.
3. Loans were made to business associates of Mr. Baird "for purposes of swinging deals. "
4. The foundation funds were freely used to "prop up" a series of Baird-dominated companies, companies controlled by the Baird foundations and companies in which Mr. Baird was a director or stockholder. 35
All of this had gone on for at least twelve years without any intervention from the Treasury Department. There is little "interference" by government with business conducted by foundations, as Patman showed conclusively.
The records of the Baird foundation "prove beyond doubt that these organizations have operated as multi-million-dollar, tax-free securities dealers-dispensing millions of dollars of credit to prominent businessmen-customers. " 36
". . . no less than 70 persons and companies used the Baird Foundations as securities dealers and/or uncontrolled lenders for securities purchases. " 37
Inter-dealings of the Baird foundations with similar foundations were frequent.
The significance of such sources of unregulated credit is that fiscal authorities have no way of preventing the credit, under existing law, from entering into wild speculative sprees that terminate in crises like the stock-market collapse of 1962. While nominally facets of capitalism, such operations in fact undermine formal capitalism at its very wellspring. These operators, despite protestations, have no more piety toward capitalism than a Lenin or Trotsky. They appear as no more than pecuniary anarchists.
The Patman report, in many pages and exhibits, details many of these deals.
"The records of the Baird Foundations have been kept in a state of total disarray, indicating a shocking disregard of the most elementary accounting principles. The Foundations' books have never been audited by independent accountants, and numerous discrepancies are evident in the accounts. . . . " 38
These foundations accumulated income at a great rate, failing to live up to charitable pretensions and, over a period of ten years, carried on "log-rolling" of assets among each other and with foundations established by business associates. According to the tax returns of the Baird foundations, they paid out $28,476,567 in contributions, gifts, grants, scholarships and the like for the decade through 1960. But about half of this sum represented solely "wash" transfers to each other and to nine other foundations owned by business associated! 39 Not a vestige of public charity was involved in such transfers.
According to the Patman findings, the foundations made unsecured loans to friends, failed to report stock ownerships as required by law, engaged in purchases and lease- back transactions that should have been taxable, made loans at "usurious" rates,
collected fees in the form of "contributions," accepted gifts from business associates of Mr. Baird, engaged in unlicensed private banking, etc.
On the basis of an avalanche of these and other alleged abuses it is difficult to characterize the operations of the Baird foundations. They appear to have been carried on without imaginative limitation as though no government or laws existed, as though they were infinitely privileged.
While the Baird foundations, like many others, are not individually of great size in the foundation world, the Patman analysis of their operations showed what any foundation can do if it likes under the existing law and regulations. The sky is literally the limit on foundation operations.
Broadly similar states of affairs were shown to exist with respect to the Jessie Smith Noyes Foundation, the Lawrence A. Wien Foundation and the Harry B. Helmsley Foundation. 40 The last two, with participations in the Empire State Building, were in many deals with the Baird foundations.
With respect to The Nemours Foundation, the Patman inquiry traced the building up of a huge foundation fund over the years on the basis of property left by Alfred I. du Pont, who died in 1935.
"Laid bare here for the first time," said the report somewhat melodramatically, "is the detailed anatomy of one of America's great fortunes--a fortune that will one day slip away forever from the payment of any income taxes. " 41
This Du Pont estate, only one among many, and The Nemours Foundation were not included in the prior reports.
[The Du Pont estate] has been used to build up an extraordinary economic empire controlling wide banking, industrial, railroad and real estate interests. These interests center in the State of Florida, but they also spread into many other states.
The fortune represented by the Du Pont Estate was worth no less than $292,720,413 at the end of 1962, according to reports received from The Nemours Foundation. By way of comparison, the Estate was valued at $39,374,845. 38 on April 29, 1935, based on an appraiser's valuations.
According to the Du Pont Estate's Federal income tax returns, it had total income of $74,392,126. 47 in the 12 years 1951 through 1962, including dividend income of $72,885,402. 93. In the year 1962 alone, the Estate received total income of $8,196,244. 50, including dividend income of $8,038,636. 14.
Most of the Du Pont Estate's income down through the years has been paid out as annuities of certain beneficiaries. These annuities are taxable income to the taxpaying beneficiaries, subject to Federal and State income tax. After the death of the annuitants, their portion of the Estate's disbursements will go to the tax exempt Nemours Foundation. Thus all income from the Du Pont Estate's vast fortune will in time escape Federal and State income taxes entirely. 42
Nor will the fortune pay any estate tax.
Taxable distributions to beneficiaries in twelve years exceeded $67 million, with $7,597,675. 25 distributed in 1962 alone. Of this last, $6,633,482. 22 went to Jessie Ball du Pont, widow of Alfred I. , $877,293. 03 (nontaxable) to The Nemours Foundation and the balance, all taxable, to eighteen members of the Du Pont clan. 43
At the time of the inquiry Mrs. Alfred I. du Pont was eighty years old, living in comfortable hothouse retirement on the social security funds provided by her husband after a life constructively spent in the harvesting of vast hereditary revenues.
Upon the death of the beneficiaries the estate will pass, tax free, to The Nemours Foundation. "Once again," according to the Patman report, "the 'cream' of one of our Nation's great fortunes will go completely tax free. Once again, the 'skim milk' incomes of the hardworking majority of the American people will be forced to bear a still heavier share of the total tax burden. " 44
The major assets of the estate were found to be as follows:
1. Direct ownership of 44 per cent to 87. 5 per cent of thirty banks in the "Florida National" group of banks, indirect ownership in the thirty-first and control in all cases. These banks held 11 per cent of all bank deposits in Florida. The trust department of the Jacksonville bank alone had assets of well over a billion dollars, thus exercising far- reaching corporate influence.
2. Direct ownership of 75. 01 per cent of the common stock of the St. Joe Paper Company of Jacksonville worth $35,515,148. This company in turn owned a million acres of woodlands, the Apalachicola Northern Railroad, the St. Joseph Telephone and Telegraph Company and 52 per cent of the common stock of the $90-million Florida East Coast Railway as well as other securities of this enterprise.
3. Direct ownership of 764,280 shares of E. I. du Pont de Nemours and Company worth $198 million on February 25, 1964.
4. Direct ownership of 444,618 shares of General Motors common with a value on the same date of more than $35 million.
5. Direct ownership of numerous parcels of real estate including the estate of
"Nemours" in New Castle County, Delaware. A standard guidebook to Delaware in the
American Guide Series, 1955, Hastings House, N. Y. , publishers, describes it as follows: 45
"On the 300-acre property there are the chateau of Nemours itself, a carillon tower, and the several hospital buildings of Nemours Foundation. . . . The residence of Nemours, built in 1908, is of formal French chateau style throughout, the exterior finished in Indiana limestone. . . . The colonnade, grand basin, fountains and statuary, pool and water courses, urns and lawns, all suggest the Garden of Versailles. . . . The front terrace is flanked by two white marble sphinxes formerly at the Chateau de Sceaux (in France). . . . Behind the sunken gardens, on an eminence, stands a classic 'temple of love. '"
The three trustees are self-perpetuating. When one dies the surviving trustees select a new one. The corporate trustee may be changed at any time by the individual trustees.
What, now, is all this wealth destined to accomplish by way of beneficence?
Quoting the will, the Patman report relates that it is first to maintain the out-of-the- way mansion at Nemours "mainly for the purpose of providing a library and exhibiting to the public interesting and valuable literature, works of art and any articles of historic and artistic interest for the advancement of education" and to maintain the mansion, grounds and gardens of Nemours "for the pleasure and benefit of the public. " Next, on the grounds at a "proper distance from the Mansion House" a charitable institution is to be maintained "for the care and treatment of crippled children, but not of incurables, or the care of old men or old women, and particularly old couples," with first consideration to residents of Delaware. Finally, any surplus income "may from time to time" be given to "other worthy charitable institutions" for the care of crippled children, old men, old women, old couples, with Delawarians preferred.
The other two big Du Pont foundations, Longwood and Winterthur, are similarly established primarily in order to enable the public to visit foundation-maintained former
Du Pont mansions and grounds, there to contemplate the splendor in which past Du Ponts lived in the heyday of the munitions trust. The Du Ponts themselves, as Fortune has observed, prefer to look upon themselves as "Armorers to the Republic," suppliers of the weapons, one concludes, with which the sturdy, God-fearing American yeomanry goes abroad and faces the myriad black-hearted rascals of the world to establish freedom, super-markets, hamburger stands, filling stations and, presumably, 100 per cent American slums.
Wells of Patronage
Two main areas of interest to observers and critics of the foundations are evident. In addition to their corporate holdings and investment operations, neglected by most inquirers, the second area of interest is the disposition of the funds they disburse in grants: their patronage. Not all funds disbursed by all foundations, as we have seen, go into what would be called beneficence by any standard. Some are simply paid over to other foundations for the profit of donors.
Let us attend now to what is claimed to be constructive outlay--at least by the formally reputable foundations. Here we find a somewhat larger literature, featured most recently by a briskly readable study of the Ford Foundation by Dwight Macdonald. 46
Although he presented a most perceptive guide to the fund-dispensing activities and public-relations tribulations of the Ford Foundation, Mr. Macdonald showed little or no interest in it as a financial control-center. But for information about how it conducts itself in the matter of payouts, his book is indispensable (although now in need of supplementation on later history).
On one of his generalizations about foundations, the weight of available evidence is strongly against the conclusion he sets forth. Commenting somewhat cavalierly on the late Dr. Eduard C. Lindeman's Wealth and Culture, Harcourt Brace and Company, N. Y. , 1936, Macdonald characterizes it as "a muck-raking survey, from a conventional- liberal point of view, that is now outdated as to many of its specific complaints (as, that philanthropists are arrogant and secretive) but which is still to the point in more general criticisms (as, that business types are over-represented on foundations boards and intellectuals represented hardly at all ). " 47
On this disputed point Lindeman was clearly right and Macdonald wrong, as Patman's findings subsequently showed in monumental detail. As to arrogance, perhaps it was as Macdonald said about the philanthropoids, a term for the fund-dispensing executives coined by one of them as distinct from my term of philanthropols for the financiers who establish and supervise the investment portfolios. Philanthropols are merely an ultra- sophisticated version of finpols. But Macdonald studied only one foundation in detail and he was obviously, as alert public relations would dictate, accorded the red-carpet treatment suitable under such circumstances to a sharp and frank critic with a commission from a widely read magazine. Any display of arrogance under the circumstances would have been self-defeating.
Concerning arrogance and secrecy on the part of foundations in general, Patman reports that he had difficulty getting information on almost every hand. Records provided by many foundations, when they were provided at all, were illegible, incomplete, lacking in required identifications of securities, personalities and other details, did not distinguish between income and principal, meandered from one accounting system to another and were generally obscure and misleading. 48 In many instances, repeated letters and subpoenas had to be issued to get required information. 49 The net effect of much foundation activity purporting to comply with requests for clarifying information was concealment.
Obtaining the information from the foundations has been a struggle [said the Patman report]. In many cases, it has taken four or five letters and a reminder of the committee's subpena power to obtain the information needed for this study. Many foundations have taken from 30 to 60 days to reply to a letter. We have been compelled to issue subpenas to 17 of them who failed to furnish information requested. These 17 foundations had been given ample opportunity to furnish the information voluntarily-in many instances, several months. In the case of the five members of the Ford family of Detroit, the Pew Memorial Trust of Philadelphia, and the Allen-Bradley Foundation of Milwaukee, the committee first asked for the information in October 1961. When followup letters did not produce the documents and data, we issued subpenas in February and March of 1962.
The attitudes of far too many of the foundations under study suggest an unmatched arrogance and contempt for the Congress and the people whom we represent. They appear to have adopted the attitude that tax exemption is their birthright--rather than a privilege granted to them by the people, through the Congress, for a public purpose.
The reluctance to cooperate takes many forms. Some only furnished information under subpena, demonstrating something less than a charitable attitude toward public knowledge and democratic processes. Others have sent us incomplete, or partially or wholly illegible, documents. Frequently, principal officers seemed to be in Europe when our letters arrived, leaving no one in the office with access to the records. 50
Perhaps what looks like it to the observer is not really arrogance but a genuine misunderstanding by adverse parties of the nature of political reality. Mr. Patman, like many others, appears to believe that the United States government is a supreme entity. But many persons of wealth, on the basis of their entire life experience, have developed the notion that it is they who are supreme; they believe this because of the many instances in their own experience when they have seen their will become either law or public policy. The Ford fortune and others like it will outlast Patman and other pubpols --reason enough to foster some feeling of greater durability in the possessors. Patmans come and go; Rockefellers, Fords, Du Ponts, Mellons and others roll on seemingly forever under the laws of inheritance and congressionally dispensed tax loopholes. Which is permanent and which transitory, which is substance and which shadow?
When challenged by a man like Patman the objects no doubt feel no more than the amused contempt of a French grand duke of the time of Louis XIV when accosted by a peasant or a minor official: "Is the man mad? " The challenge is something to be brushed aside, treated lightly, courteously ignored.
*Danforth Foundation 23. 4
*Moody Foundation 34. 55
*Rogosin Foundation 24. 5
*David Schwartz Foundation 15.
*Patrick & Anna Cudahy Fund
Springs Foundation
86. 66 B 100.
Some additional significant enterprises under foundation control
were the
following: 14
Edgewater Beach Hotel
Chicago
First National Bank ,
Ligonier, Pa.
North American Accident
Insurance
Field Enterprises
preferred
Reinsurance Corporation
of N. Y.
Cannon Mills
First Boston
*The Boston Foundation 100.
*Avalon Foundation
(Mellon) 21. 5
*Field Foundation 30.
*Field Foundation 100.
*The Richardson Foundation 14.
*Cannon Foundation 11. 69
*Sarah Mellon Scaife
Foundation 43. 33
In all, no fewer than 111 foundations were found to own more than 10 per cent of one class of stock, usually the voting stock, in one or more of 263 different important
corporations as of December 31, 1960. 15 This was a considerable number of corporations in which to exercise tax-free control even though not all of them were of the commanding size of Great Atlantic & Pacific Tea, Kresge, Ford Motor or Sun Oil. The Ford Foundation does not directly control Ford Motor, but its holding of nonvoting stock enables the Ford family, which also controls the foundation, to control the company absolutely with its own block of stock of weighted voting power.
But at the end of 1960 all 534 foundations in the study held investments in the stock of more than 2,000 corporations, assuring considerable dispersion of voting influence. 16
The point about foundation control, full or partial, is that it is tax free all the way, giving the foundational enterprise a big competitive edge over nonfoundational businesses, a facet Representative Patman was especially interested in. He cited reports from various businessmen on how they were being undercut in the market by foundation-owned enterprises.
The 534 foundations "had aggregate untaxed receipts of almost $7 billion during the period of 1951 through 1960. During the one year 1960, their total receipts were $1. 34 billion as against $554 million in 1951. I find it difficult to reconcile the withdrawal of $1 billion annually from the reach of the Treasury with the federal government's pressing need for revenue.
"During the period of 1951 through 1960, the contributions, gifts, grants, scholarships, etc. , paid out by the 534 foundations totalled $3,448,867,894 (see Schedule 3A for details)--roughly 50 per cent of their aggregate receipts of $6,981,180,819. They claimed expenses, including administrative and operating costs, of $721,199,586-- almost 10 per cent of the total receipts. " 17
The foundations in the aggregate, it is readily seen, are as prudent as the corporations in what they pay out. They pay out only about half of income, plus 10 per cent for administration, while the corporations pay out only 44 per cent. The remainder, in both cases, is used for reinvestment and growth. The capital position of the foundations over the years is thus enlarged on the basis of their tax savings. What they don't pay in taxes, it must always be remembered, must be paid in other ways--mainly by the rank-and-file, flag-waving patriots.
To show the magnitude of income for only 534 foundations, Patman points out that 7,213,000 families in 1960 had incomes of less than $2,000 each before taxes, aggregating $8. 04 billion. Foundation income the same year was 13 per cent of this total.
But the foundation income of $1. 034 billion for 1960 was more than 20 per cent greater than the $864,435,000 net operating earnings after taxes of the fifty largest banks in the United States! 18
At the end of 1960, indeed, the net worth of the 534 foundations studied was 23 per cent greater than the capital, surplus and undivided profits of the nation's fifty largest commercial banks. 19
As to accumulation of income, the Patman findings, apart from showing payouts in pro forma beneficences of only 50 per cent of earnings on the average, placed into view some startling findings. Retained earnings of only some of the largest foundations, which are supposed to be doing the most public good, were as follows through 1960: 20
Ford Foundation
Carnegie Corporation
William Volker Fund, California
Retained Earnings
through 1960
$432,916,492
65,854,287
17,204,824
Carnegie Institution of Washington
Callaway Community Foundation, Georgia
William H. Miner Foundation, Chicago
The Cranbrook Foundation, Michigan
W. K. Kellogg Foundation
T. B. Walker Foundation, Minneapolis
Danforth Foundation
Charles Hayden Foundation
John and Mary R. Markle Foundation
Milbank Memorial Fund
William T. Morris Foundation
Olin Foundation
Research Corporation
Rockefeller Foundation
Alfred P. Sloan Foundation
Fred L. Emerson Foundation
Thomas J. Emery Memorial
Samuel Roberts Noble Foundation
Sarah Mellon Scaife Foundation
Houston Endowment
30,334,316
7,173,911
13,963,496
8,187,872
7,524,832
8,436,379
15,799,676
16,064,615
9,589,958
9,412,828
8,831,544
15,239,780
10,070,661
51,019,677
33,152,735
9,394,815
6,847,411
8,154,763
6,198,566
27,110,937
While such saving is excellent investment procedure, it does not represent giving away either income or principal. Yet the law (only since 1950) in allowing tax exemption to such enterprises stipulates that there shall be no unreasonable accumulations of income. Prior to 1950 foundation income could be retained without even nominal restriction.
Untaxed, Unfair Competition
Representative Patman's main concern was that the foundations steadily shrink the tax base, thereby increasing the tax burden for others. At the same time they gain a competitive advantage by escaping corporation taxes of 48 to 52 per cent which other business entities must load onto costs. This tax saving they use to build their capital position higher. They in fact literally, almost to the penny, capitalize their tax savings and grow. The wealthy churches do this, too.
The general panorama revealed by Patman was that through the foundation device this privileged part of the American capitalist structure had been able to move itself back into the earlier position of unregulated, uncontrolled, untaxed capitalism. Through the foundations, unless they are restrained by law or public criticism, the old unregulated capitalism may well be restored behind the screen of fitful and halfhearted pubpolic corporate regulation in the foreground.
The Internal Revenue Service of the Treasury Department, Patman showed, paid only the most cursory attention to the foundations, apparently taking them at their face value as beneficences. It rarely conducted field audits, kept very haphazard statistics, did not require proper reports, accepted any and all schemes of accounting, did not hold the foundations to existing regulations, did not hold them to the requirement in law forbidding "unreasonable" accumulations of income, gave tax exemptions for straightout big-profit big-business deals, allowed the tax base to be eroded and, in general, after a few feeble token gestures, allowed anything called a foundation to do whatever it wanted to do. 21
As a first step in correcting this situation Representative Patman called, futilely thus far, for a moratorium on the granting of further tax exemptions.
He showed, further, no less than twenty-eight accounting defects in the law-required reporting procedures of foundations.
Among other questioned practices he showed that big New York banks turned over to their own foundations appreciated assets, which the foundations then sold, thus evading a capital gains tax. 22
In the matter of holding controlling blocks of stock he showed them to be agents of more intensive corporate concentration. 23
He showed foundations operating wholly owned enterprises in competition with taxpaying enterprises, with the foundation-owned enterprise paying no taxes because it was ostensibly operated for charity. 24
Funds were given by certain foundations to certain universities which used them in applied, profit-making research for enterprises with which the foundations were connected rather than in basic research available to everybody. Such activities were carried on in competition with taxpaying firms of engineering consultants which should, it was suggested, more properly have been hired. But as the whole ride was tax free on gifts to university and institute research departments, there was more mileage to be had from the money. Had the services been purchased, the purchaser would have had packed into the price be paid (as the ordinary consumer has) profits and the business income taxes. 25
Certain large enterprises are established, indeed, to carry on applied research, without any shadow of charitable intent, and yet are given sweeping tax exemption. 26
Foundations, as the Patman inquiry showed, carry on, tax free, the following kinds of operations:
1. They buy up properties from large companies and lease them back, thus providing the companies with ready cash so that they need not enter the competitive capital market.
2. They lend money at cut rates to very large corporations, thus enabling the latter to bypass banks and the capital market.
3. Some of their donors are given convenient cut-rate loans.
4. The foundation stockholdings are used in struggles for corporate control. "In 1960 [the Patman report said], during the battle for control of the Endicott Johnson Corp. the Albert A. List Foundation, of Byram, Conn. , received 54,000 shares of Endicott Johnson from the J. M. Kaplan Fund, of New York City. These shares were used by Mr. Albert A. List in his unsuccessful attempt to acquire control of the corporation. According to press reports, during the struggle over the Alleghany Corp. between Allan P. Kirby and the Murchison brothers, the Fred M. Kirby Foundation purchased Alleghany shares, which had not previously paid a dividend. "
5. They return capital to donors when, as and if the latter need it.
6. They render research, market study and other services to related businesses on a preferential basis; staffs of large foundations serve as a minor governmental advisory staff for the donors. Parenthetically one should observe that foundation staffs regularly interchange high- and middle-level personnel with formal government. The Barons at times serve the Crown, and officers of the Crown at times serve the Baronage. For a good many years secretaries of state have mainly been foundation officers, corporation lawyers or both. Among the former has been Dean Rusk. Among combinations of the two have been John Foster Dulles, E. R. Stettinius, Jr. , Henry L. Stimson, Frank B. Kellogg and Charles Evans Hughes. Corporation lawyers in the post have been Elihu Root, Philander C. Knox and Robert Lansing, to go no further. Secretaries of the Treasury have long been drawn for the most part from banks or investment funds. John W. Gardner, recent Secretary of Health, Education and Welfare, was drawn from the
presidency of the Carnegie Corporation. Government reciprocally supplies, from time to time, high foundation personnel; McGeorge Bundy skipped from the position of presidential adviser on foreign affairs to the presidency of the Ford Foundation. Rusk originally went from the State Department to the presidency of the Rockefeller Foundation. The reciprocal interchange of personnel is heavier on the middle levels between government on the one hand and foundations, investment houses and corporate law firms. Only here and there on both middle and top levels does one find professional politicians, disparagingly referred to in the newspapers as "political" appointees. This means, between the lines, that the man is more or less incompetent for the job but useful in snaring votes. Foundations, law firms and investment houses form in relation to government part of what is known in football as The Platoon System; they have entire specially trained teams ready to be sent into the highest strata of government as conditions require. As all of these are Organization Men of the finest tooling, they fit as though pre-engineered into whatever slot they are assigned. And the reason for this is that the world of finpolity is itself a world of government.
7. They pay excessively for certain assets.
8. They sell certain assets to certain parties for unaccountably low prices.
9. They accept contributions (kickbacks? ) from persons or organizations that supply goods and services to companies interlocked with the foundation. 27
10. They also often grossly understate their assets, either in whole or in part. This includes the biggest among them such as the Ford Foundation, Samuel H. Kress Foundation, John A. Hartford Foundation, the Carnegie Corporation of New York and the Howard Hughes Medical Institute. Extraordinarily valuable properties are often carried on the books at $1. 28 Patman concluded all foundations understate asset values.
It cannot be said surely that any of this is done with intent to deceive; one simply does not know what the intent is and must infer from results.
Additionally, the foundations are big operators in the stock market, acquiring huge tax-free capital gains. 29 They do, in fact, whatever banks and investment trusts do except issue securities. They are like closely held private family banks and trusts, with virtually no limitation on their operations.
Despite substantial payouts over the years from time of inception to the present, the retained assets of the leading foundations, thanks to their tax exemption and average half payout rate, have piled up astronomically.
Much of the research and other contributions of the foundations pertain to areas of special high pecuniary interest to the donors.
Some of the foundations, such as the Howard Hughes Medical Institute, are used in concert with large corporations such as the Hughes Tool Company and the Hughes Aircraft Company in achieving very large tax savings on assets shuffled back and forth. The Hughes Medical Institute started out by buying $75 million of commercial business assets and assuming liabilities of $56 million, at the same time becoming additionally and directly liable for $18 million on its own note. Said Representative Patman: "This sounds more like high finance to me than charity. " 30
So increasingly scandalous did the Patman findings become in the course of the investigation that the staid New York Times took to distinguishing in its reports between "reputable" and "disreputable" foundations, without listing either or laying down criteria for the distinction.
By "reputable" it presumably referred to the largest foundations. And the Ford Foundation is presumably as reputable as any.
But Patman in his very first report teed off on the Ford Foundation as well as other big ones and showed it to be as free-wheeling as any.
First, the Ford Foundation is engaged in large-scale money-lending activity in competition with taxpaying banks. It lends money to a large variety of leading corporations, the interest to them tax-deductible, such as Chris-Craft, the New Haven Railroad, the Chesapeake & Ohio Railway, Continental Air Lines, Standard Oil of California, Shell Caribbean Petroleum Company, El Paso Natural Gas Company and many others. Stockholders in taxpaying lending enterprises such as banks are 'certainly undercut by such tax-free activity.
Moreover, whenever it wishes it can lower its interest rate to preferential levels. "Why, for example," Representative Patman asked, "was the Duke Power Co. of Charlotte, N. C. , charged only 2. 65 percent interest on a $3 million, 20-year loan, while other borrowers paid 6-1/2 percent? Duke Power, incidentally, is owned 57 percent by the Duke Endowment, another tax-exempt foundation. " 31 Here is one foundation washing the hands of another.
Even more fundamental questions were raised about Ford operations by Patman.
I have already referred to the $33 million the foundation loaned overseas during the 1961 balance-of-payments crisis. This, in effect, amounted to a Government subsidy being used, without Government control, in operations in conflict with government policy. Treasury Secretary Dillon on May 17, 1962, warned that the mounting flood of European bond issues sold in the U. S. capital market is undermining our Government's efforts to defend the dollar. Precisely such an outflow of dollars--to industrial nations like France, Belgium, and Canada--was involved in the Ford Foundation's loans, as shown on Schedule 4, pp. 83-84.
The Ford Foundation loans to foreign corporations and governments create a somewhat bewildering paradox. Our Government brought home soldiers' families so as to save dollars overseas. Yet the Ford Foundation exported $33 million in the year 1961. Also, in 1960 the Ford Motor Co. arranged to export $358 million to purchase minority stockholdings in British Ford which they already controlled.
The result was that a substantial part of the dollars we saved by separating our soldiers from their families was sent back overseas by the Ford Foundation and the Ford Motor Co. And the irony is that the Ford Foundation operates on a subsidy from the taxpayers--in the form of tax exemption.
Moreover, we do not know the purpose of the Ford Foundation loans to the foreign corporations and governments. For example, if the loans are used by foreign businesses--which are not bound by our antitrust statutes-to help them gain entry to our market, those foreign firms have a great competitive advantage. Trade practices in the United States and the Common Market are quite different. In Europe, an industry cartel can cut up the U. S. Market, assigning to certain members exclusive territorial rights in certain sections of the country. Our firms cannot do this without facing a violation of our antitrust laws. Hence, the Ford Foundation's loans could conceivably be helping our competitors who are not bound by the Sherman Act, the Robinson-Patman Act, etc. 32
But Mr. Patman appeared to be overzealous when he took the Ford Foundation and others to task for contributions to nonprofit educational television stations, which appear to be entirely defensible activities. Only if Mr. Patman's unstated premise is valid, that all activities must be profit-making, can his argument here hold. 33 If this is so, then contributions to nonprofit hospitals and schools are questionable.
The Patman inquiry, one must conclude, fits well the thesis of sporadic friction between the Crown and the Baronage, between pubpols and finpols. Patman's, it is
evident, is not the prevalent view of the foundations among pubpols. But the pubpols in their various calls for regulation, supervision, revision or reform of one or another aspect of the realm of finpolity--sometimes corporations, sometimes foundations--do appear to be playing some part of the role of the medieval Crown vis-a`-vis the restless Baronage. This will no doubt continue until the day arrives, if it ever does, when they effect a transition either into the corporate state or into the collective corporation: One corporation under God, indivisible, with liberty and justice for all directors and major stockholders. . . .
Seven Wildcat Foundations
Thus far Patman dealt with the foundations in their generality. In the second and third parts of his report, which ran to 872 large pages, he concentrated on seven foundations with a view to showing just how freely foundations could operate under existing laws and regulations.
In the second part he dealt with the David, Josephine and Winfield Baird Foundation ($10. 2 million), the Winfield Baird Foundation ($17. 4 million) and the Lansing Foundation ($779,546), all established by David G. Baird of Baird and Company, member of the New York Stock Exchange; the Jessie Smith Noyes Foundation, established by Charles F.
Noyes, a New York real estate broker; the Lawrence A. Wien Foundation and the Harry B. Helmsley Foundation.
The third part was devoted entirely to The Nemours Foundation and the originating Alfred I. du Pont Estate of Jacksonville, Florida.
As commentaries around the country showed, Mr. Patman at this stage had made a deep if fleeting impression.
The report revealed that the Baird foundations engaged in just about everything conceivable in the way of loose practice. They had trustees and directors who were employees of Baird and Company or relatives and friends of Mr. Baird, "mere figureheads. " All were "subservient" to him. "The abuse of public privileges" by the Baird foundations recalled findings in 1948 about three trusts established by Textron, Inc. , under Royal Little, which were held by the Senate Commerce Committee to exist "for purposes of tax avoidance and providing risk capital to Textron, thereby giving Textron an unfair advantage over the orthodox manufacturer. " One of the Baird foundations was involved, as it happened, with Textron.
Patman detailed a number of exact similarities between the Textron operation and the Baird foundations. From very small beginnings in the 1930's and 1940's both groups grew to large size.
The Textron foundations consisted of the M. I. T. Trust, the Rhode Island Charities Trust and the Rayon Trust.
Said the Patman report: 34
The M. I. T. Trust, created in 1937 with assets of $500, had earned almost $1 million net by October 1948. Its beneficiary, the Massachusetts Institute of Technology, had not received any contributions.
The Rhode Island Charities Trust, created in 1937 with assets of $500, earned $4. 5 million by September 1948. The Providence Rhode Island Community Chest, the sole beneficiary, had received only $85,000 contributions. The bank handling the investments and the trustees, however, had received over $140,000 during the same period.
The Rayon Foundation, created in 1944 with assets of $100, earned $750,000 by October 1948. The Rhode Island School for Design, the sole beneficiary, received only $75,000 in contributions.
All of this was tax exempt.
Benefits accruing to Mr. Baird and associates were set forth as follows:
1. Substantial commissions for Baird and Company were generated by large and continuous securities transactions of the Baird foundations.
2. The foundations received contributions from others which should have been treated, and taxed, as income to Mr. Baird for services he rendered to the "donors," or at least as income of the foundations rather than as tax-free increments to their capital funds.
3. Loans were made to business associates of Mr. Baird "for purposes of swinging deals. "
4. The foundation funds were freely used to "prop up" a series of Baird-dominated companies, companies controlled by the Baird foundations and companies in which Mr. Baird was a director or stockholder. 35
All of this had gone on for at least twelve years without any intervention from the Treasury Department. There is little "interference" by government with business conducted by foundations, as Patman showed conclusively.
The records of the Baird foundation "prove beyond doubt that these organizations have operated as multi-million-dollar, tax-free securities dealers-dispensing millions of dollars of credit to prominent businessmen-customers. " 36
". . . no less than 70 persons and companies used the Baird Foundations as securities dealers and/or uncontrolled lenders for securities purchases. " 37
Inter-dealings of the Baird foundations with similar foundations were frequent.
The significance of such sources of unregulated credit is that fiscal authorities have no way of preventing the credit, under existing law, from entering into wild speculative sprees that terminate in crises like the stock-market collapse of 1962. While nominally facets of capitalism, such operations in fact undermine formal capitalism at its very wellspring. These operators, despite protestations, have no more piety toward capitalism than a Lenin or Trotsky. They appear as no more than pecuniary anarchists.
The Patman report, in many pages and exhibits, details many of these deals.
"The records of the Baird Foundations have been kept in a state of total disarray, indicating a shocking disregard of the most elementary accounting principles. The Foundations' books have never been audited by independent accountants, and numerous discrepancies are evident in the accounts. . . . " 38
These foundations accumulated income at a great rate, failing to live up to charitable pretensions and, over a period of ten years, carried on "log-rolling" of assets among each other and with foundations established by business associates. According to the tax returns of the Baird foundations, they paid out $28,476,567 in contributions, gifts, grants, scholarships and the like for the decade through 1960. But about half of this sum represented solely "wash" transfers to each other and to nine other foundations owned by business associated! 39 Not a vestige of public charity was involved in such transfers.
According to the Patman findings, the foundations made unsecured loans to friends, failed to report stock ownerships as required by law, engaged in purchases and lease- back transactions that should have been taxable, made loans at "usurious" rates,
collected fees in the form of "contributions," accepted gifts from business associates of Mr. Baird, engaged in unlicensed private banking, etc.
On the basis of an avalanche of these and other alleged abuses it is difficult to characterize the operations of the Baird foundations. They appear to have been carried on without imaginative limitation as though no government or laws existed, as though they were infinitely privileged.
While the Baird foundations, like many others, are not individually of great size in the foundation world, the Patman analysis of their operations showed what any foundation can do if it likes under the existing law and regulations. The sky is literally the limit on foundation operations.
Broadly similar states of affairs were shown to exist with respect to the Jessie Smith Noyes Foundation, the Lawrence A. Wien Foundation and the Harry B. Helmsley Foundation. 40 The last two, with participations in the Empire State Building, were in many deals with the Baird foundations.
With respect to The Nemours Foundation, the Patman inquiry traced the building up of a huge foundation fund over the years on the basis of property left by Alfred I. du Pont, who died in 1935.
"Laid bare here for the first time," said the report somewhat melodramatically, "is the detailed anatomy of one of America's great fortunes--a fortune that will one day slip away forever from the payment of any income taxes. " 41
This Du Pont estate, only one among many, and The Nemours Foundation were not included in the prior reports.
[The Du Pont estate] has been used to build up an extraordinary economic empire controlling wide banking, industrial, railroad and real estate interests. These interests center in the State of Florida, but they also spread into many other states.
The fortune represented by the Du Pont Estate was worth no less than $292,720,413 at the end of 1962, according to reports received from The Nemours Foundation. By way of comparison, the Estate was valued at $39,374,845. 38 on April 29, 1935, based on an appraiser's valuations.
According to the Du Pont Estate's Federal income tax returns, it had total income of $74,392,126. 47 in the 12 years 1951 through 1962, including dividend income of $72,885,402. 93. In the year 1962 alone, the Estate received total income of $8,196,244. 50, including dividend income of $8,038,636. 14.
Most of the Du Pont Estate's income down through the years has been paid out as annuities of certain beneficiaries. These annuities are taxable income to the taxpaying beneficiaries, subject to Federal and State income tax. After the death of the annuitants, their portion of the Estate's disbursements will go to the tax exempt Nemours Foundation. Thus all income from the Du Pont Estate's vast fortune will in time escape Federal and State income taxes entirely. 42
Nor will the fortune pay any estate tax.
Taxable distributions to beneficiaries in twelve years exceeded $67 million, with $7,597,675. 25 distributed in 1962 alone. Of this last, $6,633,482. 22 went to Jessie Ball du Pont, widow of Alfred I. , $877,293. 03 (nontaxable) to The Nemours Foundation and the balance, all taxable, to eighteen members of the Du Pont clan. 43
At the time of the inquiry Mrs. Alfred I. du Pont was eighty years old, living in comfortable hothouse retirement on the social security funds provided by her husband after a life constructively spent in the harvesting of vast hereditary revenues.
Upon the death of the beneficiaries the estate will pass, tax free, to The Nemours Foundation. "Once again," according to the Patman report, "the 'cream' of one of our Nation's great fortunes will go completely tax free. Once again, the 'skim milk' incomes of the hardworking majority of the American people will be forced to bear a still heavier share of the total tax burden. " 44
The major assets of the estate were found to be as follows:
1. Direct ownership of 44 per cent to 87. 5 per cent of thirty banks in the "Florida National" group of banks, indirect ownership in the thirty-first and control in all cases. These banks held 11 per cent of all bank deposits in Florida. The trust department of the Jacksonville bank alone had assets of well over a billion dollars, thus exercising far- reaching corporate influence.
2. Direct ownership of 75. 01 per cent of the common stock of the St. Joe Paper Company of Jacksonville worth $35,515,148. This company in turn owned a million acres of woodlands, the Apalachicola Northern Railroad, the St. Joseph Telephone and Telegraph Company and 52 per cent of the common stock of the $90-million Florida East Coast Railway as well as other securities of this enterprise.
3. Direct ownership of 764,280 shares of E. I. du Pont de Nemours and Company worth $198 million on February 25, 1964.
4. Direct ownership of 444,618 shares of General Motors common with a value on the same date of more than $35 million.
5. Direct ownership of numerous parcels of real estate including the estate of
"Nemours" in New Castle County, Delaware. A standard guidebook to Delaware in the
American Guide Series, 1955, Hastings House, N. Y. , publishers, describes it as follows: 45
"On the 300-acre property there are the chateau of Nemours itself, a carillon tower, and the several hospital buildings of Nemours Foundation. . . . The residence of Nemours, built in 1908, is of formal French chateau style throughout, the exterior finished in Indiana limestone. . . . The colonnade, grand basin, fountains and statuary, pool and water courses, urns and lawns, all suggest the Garden of Versailles. . . . The front terrace is flanked by two white marble sphinxes formerly at the Chateau de Sceaux (in France). . . . Behind the sunken gardens, on an eminence, stands a classic 'temple of love. '"
The three trustees are self-perpetuating. When one dies the surviving trustees select a new one. The corporate trustee may be changed at any time by the individual trustees.
What, now, is all this wealth destined to accomplish by way of beneficence?
Quoting the will, the Patman report relates that it is first to maintain the out-of-the- way mansion at Nemours "mainly for the purpose of providing a library and exhibiting to the public interesting and valuable literature, works of art and any articles of historic and artistic interest for the advancement of education" and to maintain the mansion, grounds and gardens of Nemours "for the pleasure and benefit of the public. " Next, on the grounds at a "proper distance from the Mansion House" a charitable institution is to be maintained "for the care and treatment of crippled children, but not of incurables, or the care of old men or old women, and particularly old couples," with first consideration to residents of Delaware. Finally, any surplus income "may from time to time" be given to "other worthy charitable institutions" for the care of crippled children, old men, old women, old couples, with Delawarians preferred.
The other two big Du Pont foundations, Longwood and Winterthur, are similarly established primarily in order to enable the public to visit foundation-maintained former
Du Pont mansions and grounds, there to contemplate the splendor in which past Du Ponts lived in the heyday of the munitions trust. The Du Ponts themselves, as Fortune has observed, prefer to look upon themselves as "Armorers to the Republic," suppliers of the weapons, one concludes, with which the sturdy, God-fearing American yeomanry goes abroad and faces the myriad black-hearted rascals of the world to establish freedom, super-markets, hamburger stands, filling stations and, presumably, 100 per cent American slums.
Wells of Patronage
Two main areas of interest to observers and critics of the foundations are evident. In addition to their corporate holdings and investment operations, neglected by most inquirers, the second area of interest is the disposition of the funds they disburse in grants: their patronage. Not all funds disbursed by all foundations, as we have seen, go into what would be called beneficence by any standard. Some are simply paid over to other foundations for the profit of donors.
Let us attend now to what is claimed to be constructive outlay--at least by the formally reputable foundations. Here we find a somewhat larger literature, featured most recently by a briskly readable study of the Ford Foundation by Dwight Macdonald. 46
Although he presented a most perceptive guide to the fund-dispensing activities and public-relations tribulations of the Ford Foundation, Mr. Macdonald showed little or no interest in it as a financial control-center. But for information about how it conducts itself in the matter of payouts, his book is indispensable (although now in need of supplementation on later history).
On one of his generalizations about foundations, the weight of available evidence is strongly against the conclusion he sets forth. Commenting somewhat cavalierly on the late Dr. Eduard C. Lindeman's Wealth and Culture, Harcourt Brace and Company, N. Y. , 1936, Macdonald characterizes it as "a muck-raking survey, from a conventional- liberal point of view, that is now outdated as to many of its specific complaints (as, that philanthropists are arrogant and secretive) but which is still to the point in more general criticisms (as, that business types are over-represented on foundations boards and intellectuals represented hardly at all ). " 47
On this disputed point Lindeman was clearly right and Macdonald wrong, as Patman's findings subsequently showed in monumental detail. As to arrogance, perhaps it was as Macdonald said about the philanthropoids, a term for the fund-dispensing executives coined by one of them as distinct from my term of philanthropols for the financiers who establish and supervise the investment portfolios. Philanthropols are merely an ultra- sophisticated version of finpols. But Macdonald studied only one foundation in detail and he was obviously, as alert public relations would dictate, accorded the red-carpet treatment suitable under such circumstances to a sharp and frank critic with a commission from a widely read magazine. Any display of arrogance under the circumstances would have been self-defeating.
Concerning arrogance and secrecy on the part of foundations in general, Patman reports that he had difficulty getting information on almost every hand. Records provided by many foundations, when they were provided at all, were illegible, incomplete, lacking in required identifications of securities, personalities and other details, did not distinguish between income and principal, meandered from one accounting system to another and were generally obscure and misleading. 48 In many instances, repeated letters and subpoenas had to be issued to get required information. 49 The net effect of much foundation activity purporting to comply with requests for clarifying information was concealment.
Obtaining the information from the foundations has been a struggle [said the Patman report]. In many cases, it has taken four or five letters and a reminder of the committee's subpena power to obtain the information needed for this study. Many foundations have taken from 30 to 60 days to reply to a letter. We have been compelled to issue subpenas to 17 of them who failed to furnish information requested. These 17 foundations had been given ample opportunity to furnish the information voluntarily-in many instances, several months. In the case of the five members of the Ford family of Detroit, the Pew Memorial Trust of Philadelphia, and the Allen-Bradley Foundation of Milwaukee, the committee first asked for the information in October 1961. When followup letters did not produce the documents and data, we issued subpenas in February and March of 1962.
The attitudes of far too many of the foundations under study suggest an unmatched arrogance and contempt for the Congress and the people whom we represent. They appear to have adopted the attitude that tax exemption is their birthright--rather than a privilege granted to them by the people, through the Congress, for a public purpose.
The reluctance to cooperate takes many forms. Some only furnished information under subpena, demonstrating something less than a charitable attitude toward public knowledge and democratic processes. Others have sent us incomplete, or partially or wholly illegible, documents. Frequently, principal officers seemed to be in Europe when our letters arrived, leaving no one in the office with access to the records. 50
Perhaps what looks like it to the observer is not really arrogance but a genuine misunderstanding by adverse parties of the nature of political reality. Mr. Patman, like many others, appears to believe that the United States government is a supreme entity. But many persons of wealth, on the basis of their entire life experience, have developed the notion that it is they who are supreme; they believe this because of the many instances in their own experience when they have seen their will become either law or public policy. The Ford fortune and others like it will outlast Patman and other pubpols --reason enough to foster some feeling of greater durability in the possessors. Patmans come and go; Rockefellers, Fords, Du Ponts, Mellons and others roll on seemingly forever under the laws of inheritance and congressionally dispensed tax loopholes. Which is permanent and which transitory, which is substance and which shadow?
When challenged by a man like Patman the objects no doubt feel no more than the amused contempt of a French grand duke of the time of Louis XIV when accosted by a peasant or a minor official: "Is the man mad? " The challenge is something to be brushed aside, treated lightly, courteously ignored.
