Share this article

print logo

In some cases, charity begins at home office Foundations skirt rules by calling expenses gifts

Over the past decade, the people running the Swede Anderson Foundation of West Seneca gave away some $580,000 in grants, a boon to the museums, colleges and other recipients to which they gave.

But Swede Anderson's total donations fell short of the charitable spending level the federal government required, given the generous tax breaks foundations receive.

So the Travers family, which runs Swede Anderson, did what more foundation leaders have started doing in recent years: They counted their expenses as charity.

Unlike most other foundations, however, the Travers family paid those expenses to themselves.

The Travers & Co. accounting firm received $143,400 in fees from 2000 to 2007.

Mark J. Travers, Jeffrey P. Travers and Elise E. Travers, all of Orchard Park, collected $69,297 in trustee compensation.

Jeffrey Travers received at least $876 more in legal fees.

The foundation also paid $36,000 for office space and other expenses at Travers & Co.'s office in West Seneca.

Federal regulations allow foundations to categorize "reasonable expenses" as charity but prohibit self-dealing -- the practice of paying professional fees to a foundation's contributors, managers and members of the family running the foundation. The self-dealing regulations, however, offer a string of exemptions that Swede Anderson and other foundations typically claim.

Peter R. Travers Jr., who runs the foundation with his wife, Judith, and three children, defends the way his family runs the foundation.
"When you cite all of the expenses given to the family, they're less than if you were to give the portfolio to a major brokerage house to manage," Travers said.

"My son's an attorney. I'm a certified public accountant. We have the ability to do all these things," Travers said. "Why would you want to pay a third party more?"

>'Double-dipping'

But the practice concerns some critics, who fear that the tax breaks given to foundations are sometimes abused by those who seek to benefit personally from money that's intended to be given to charity.

"That's classic double-dipping," said Pablo Eisenberg, a senior fellow with the Georgetown Public Policy Institute's Center for Public and Nonprofit Leadership in Washington, D.C. "They got a good tax deduction up front, then they pay themselves out of that. The taxpayer is getting [cheated]."

"There is a sort of sleaze quotient about self-dealing," he added. "People become more interested in lining their own pockets. Self-dealing taints the integrity of foundations as well as nonprofits."

A Buffalo News series in December, "Charitable Foundations: The Art of Giving," found that foundations are coming up with innovative ways to address poverty, but overall, human services receive less foundation funding than cultural institutions do. The series also revealed that a dozen foundations, mostly smaller ones, spent almost as much -- more in a few cases -- to operate as they gave away in a given year.

As a follow-up to that series, The News analyzed five years of spending reports for 220 local charitable foundations to determine if they are meeting the federally requirement.

Foundations generally are required to spend 5 percent of their net assets on charitable giving every year. A foundation with $1 million, for instance, must spend at least $50,000 a year.

Among The News findings:

Foundations with assets under $5 million doubled the amount of administrative expenses they counted as charity in 2007 compared with 2003. Among foundations of all sizes, expenses counted as charity increased 58 percent.

One-third of the foundations gave away twice as much or more than required over the five years. And six of every 10 foundations gave away enough to record at least some excess grants in their most-recent filings.

Even after counting expenses, one in three foundations in 2007 did not disburse 5 percent of their net assets as required by the federal government. Most avoided paying extra taxes as a penalty by carrying over excess grants from previous years or by making up the difference the following year.

Fourteen foundations fell far enough behind in required giving that they faced penalties from the Internal Revenue Service. Three foundations fell more than $50,000 short of the amount they were supposed to give away in a single year.

Sixteen foundations relied on expenses to help meet the 5 percent threshold. Among them was Swede Anderson. The foundation counted three-quarters of its expenses -- $160,000 -- as charity to help meet the 5 percent minimum over a five-year period.

>A judgment call

Peter and Judith Travers, of Orchard Park, have contributed $260,000 to the foundation since 2000. During the same time, the foundation has paid the Travers firm and children nearly $250,000.

"Frankly, the reason I pay is we keep everybody's attention," Peter Travers said of the trustee compensation to his children. "They show up for meetings, make suggestions on what kind of investments to make. We get the whole [gamut] of arguments on where the funds should go."

Besides, government collects taxes on the money the foundation pays his accounting firm and children, Travers said.

The most important measure, Travers said, is the grants the foundation has awarded.

"We sent out more than a half a million dollars" since 2000, Travers said.

However, the foundation's expenses, as a percent of its grants, rank high among the area's foundations, The News found. Between 2002 and 2007, the foundation spent 64 cents on expenses for every dollar it gave away.

Swede Anderson counted three-quarters of its expenses as charity. That includes $48,781 of the $69,297 paid in trustee compensation to Travers' adult children.

The IRS allows counting expenses as charity, Travers said. As to how much should count, "it's a bit of a judgment call. You allocate based on how the trustees feel those expenses get spent."

Among the 220 foundations reviewed by The News, Swede Anderson is one of 26 foundations that count 75 percent or more of expenses as charity.

Because of that, Swede Anderson, in most years, meets the 5 percent minimum.

A few foundations that have not met the minimum have been penalized multiple times.

Among them was the Wildermuth Foundation, founded by the late Erwin Wildermuth, who made his money through real estate. The foundation regularly writes checks to Kenmore Mercy Hospital and the Variety Club.

>Preserving principal

With about $1.6 million in assets, the foundation in seven of the past 10 years fell short of its required giving, according to the most current publicly available forms filed with the IRS. It was generally paying out about $30,000 a year through 2005 -- less than half of its required minimum, according to IRS filings.

In most years, the foundation did not include as charity the $12,000 plus $2,800 in benefits it paid Nancy Gesicki Volker to serve as president, treasurer and clerk of the foundation, which holds no more than two meetings a year, according to IRS filing.

Recently, Wildermuth eliminated its officer positions and stipends, Volker said, and now has only three trustees, including herself and her brother. In an apparent effort to make up for its earlier shortfalls, the foundation also has quadrupled its annual giving, according to forms filed with the IRS.

"We have an attorney and an accountant," she said. "It's not like we're not under any supervision or anything."

The overall 5 percent minimum enables foundations to give money away while preserving the principal of their investments, they say.

Taking the average rate of return on investments over 30 years -- 8 percent -- and subtracting the average rate of inflation over that time -- 3 percent -- yields 5 percent, according to Andrew Schulz, deputy general counsel for the National Council on Foundations.

But giving away money can be expensive, and Schulz argues that administrative expenses need to be part of the 5 percent to ensure foundations remain viable.

"It takes money to give away money," he said. "You have to employ people, you have to have phones and paper, you have to have electricity. It isn't possible to do the work for free."

If foundations were not allowed to include expenses in their total annual payout amount, he said, "what you'd be saying is, over time, the cost of giving away that money would erode the foundations, and they'd eventually go out of business."

Critics disagree. Eisenberg advocates a minimum payout of no less than 6 percent.

And in tough financial times like these, foundations should step up to the plate and voluntarily give even more, he said.

"To say in a time of crisis a foundation can't pay 10 percent or 12 percent is nonsense," he said. "That's acting as if it's their money, and it's not. It's the public's money."

What's more, he thinks the 5 percent should be for charity only, not expenses.

When Congress took up the issue in 2003, the industry successfully beat back efforts to either raise the minimum or cap expenses that could be included. As a result, costs deemed "reasonable and necessary expenses" -- which could include anything from trustee fees to office supplies to utility bills -- are permitted in the charitable giving formula.

The issue remains alive among those who want to maintain the fiscal integrity of foundations.

Foundations are established with private money. But because they and their donors receive generous tax breaks, foundations' finances are of interest to everyone, some say.

When someone donates money to a foundation, the donor avoids income taxes of about 35 percent. Posthumous donations escape the estate tax of 55 percent. And, once the foundation has the money and invests it, the growth on investments is taxed at a lower rate than privately held investments.

"It's not private money," said Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy. "Foundation dollars are partially public dollars, subsidized by taxpayers."

e-mail: plakamp@buffnews.com and mpasciak@buffnews.com

There are no comments - be the first to comment