How to Spend Money to Save Money

THE FOUNDATIONS

THE Ford Foundation's allocation of $500 million in charitable grants to education and medicine climaxed a year in which U.S. charitable foundations handed out or committed almost $1 billion, a record total nearly doubling the 1954 figure. The prime reason for all this lavish giving was that high taxes make generosity an inexpensive proposition. The effect of taxes on charity was succinctly explained by New York Welfare Commissioner Henry L. McCarthy: "You have to spend money to save money." One of the best ways to do both, as an increasing number of businessmen and corporations are finding out, is to set up a charitable foundation or trust.

In the first decade of the 20th century, only 16 foundations were set up. Since then, as income and inheritance taxes have climbed, the number of foundations has soared to 7,300, estimates the American Foundations Information Service. Not only is the number increasing at the rate of 200 foundations a year, but the makeup has greatly changed. Of the 260 foundations born between 1900-29, 50% had assets of more than $1,000,000 or were able to give grants of more than $50,000 a year. Of those formed in the 1950s, 80% have had assets of less than $1,000,000. Hundreds of small businessmen and small companies have entered a field once dominated by tycoons and corporate giants.

The legal requirements for setting up a foundation are simple. To get a tax exemption from the Internal Revenue Service, a foundation must be incorporated under state laws or federal charter, must be administered by trustees and must have charitable purposes. The purposes can be broad or narrow. The Carnegie Corporation has the broad purpose of promoting "the advancement and diffusion of knowledge." The Esso Education Foundation, set up last year, follows a new business trend of giving aid to schools. But some foundations have such narrow purposes that the trustees have trouble spending the money. A Boston hospital was given a fund to provide wooden legs for Civil War veterans; another philanthropist left $2,000,000 to care for the daughters of men killed while working on the Pennsylvania Railroad.

While handing money out to daughters of the Pennsy and others in need, foundations pay back their founders in many ways. A foundation not only gives its donor an outlet for generosity but saves him much of the annoyance of being solicited by a multitude of charities. It also helps him slide into a lower tax bracket. An individual may deduct up to 20% of his taxable income for payments into a foundation; a corporation may deduct 5%. In some cases, the saving in taxes almost equals the cost of philanthropy. A foundation can also be used, as was the Ford Foundation, to help a family retain control of a company, or to promote a pet idea, e.g., the Odlum-Cochran Foundation spends some of its money on psychic research, a hobby of Financier Floyd Odium's wife. From a businessman's point of view, probably the most important byproduct of a foundation is the good will created for a company.

It is not even necessary to set up a foundation to reap benefits from the foundation idea. Some businessmen set up charitable trusts, which are small brothers to foundations, and easier to establish. A trust need not be incorporated, yet enjoys the same tax-free status as foundations.

In the tax-spurred rush to squeeze savings out of foundations and trusts, some companies and individuals have worked out some ingenious gimmicks. In the 1940s, Textron's President Royal Little had his charitable trust borrow money to buy a textile mill, which it then sold to Textron; in this way, the company used the trust's mountain of capital to better its credit position. Numbers of companies sold their plants to foundations, then rented them back. Since the foundation's income was taxexempt, it charged extremely low rentals. Other foundations paid a big share of assets in officers' salaries. One ended a year with $501 in assets and a record of $39,370 in expenditures, $11,000 of which went to the trustees. In 1950, Congress put a stop to most of these borderline schemes.

In 1954, when Congressman B. Carroll Reece headed a probe into foundation activities, he found comparatively little illegality. All told, the Reece Committee estimated the total assets of foundations at $7.5 billion--and still growing fast. As foundations become bigger business, there will probably be more Reece Committees and more federal regulation. Many of the big foundations, anxious to keep their business respected, favor tighter controls. The Rockefeller Foundation, said President Dean Rusk to the Reece Committee, wants "full publicity for foundation activities and an increase in the manpower of the Internal Revenue Service to enable it to watch these activities more closely."

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