Morris Foundation
*Olin Foundation
Richardson Foundation
*Samuel Rubin Foundation
17.
*Olin Foundation
Richardson Foundation
*Samuel Rubin Foundation
17.
Lundberg - The-Rich-and-the-Super-Rich-by-Ferdinand-Lundberg
Nearly all of the American foundations have come into view since the enactment of the income tax and estate tax laws: The foundations are completely exempt not only with respect to income taxes but also capital gains taxes.
One does not know in each case that the founder sought to escape taxes, but common reason would indicate it.
Many standard tax-advisory services explicitly point to these factors as attractive features of foundations.
2
A third effect is the corporate-control effect. Corporate control, which would otherwise be undermined by the tax laws, is preserved to perpetuity by many foundations, permitting the hereditary transmission, tax free, of vast corporate power.
A fourth effect is that the foundations extend the power of their founders very prominently into the cultural areas of education (and propaganda), science, the arts and social relations. While much that is done in these areas under foundation auspices meets judicious critical approval, it is a fact that these dispensations inevitably take the form of patronage, bestowed on approved projects, withheld from disapproved projects. Recipients of the money must be ideologically acceptable to the donors.
There is a positive record showing that by these means purely corporate elements are able to influence research and many university policies, particularly in selection of personnel. While the foundations are staunch supporters of the physical sciences, the findings of which have many profit-making applications in the corporate sphere, among the social disciplines their influence is to foster a prevailing scholastic formalism. By reason of the institutional controls that have been established, the social disciplines are largely empty or self-servingly propagandistic, as careful analyses have disclosed. 3
Whether or not these various effects were sought by the foundation creators, they are present, and the realistic observer must suppose they were what the realistic founders had in mind. (We must be particularly impressed by the frank analyses of their tax advisers. ) Via the foundations they get more mileage out of their dollars--and retain more dollars.
The Foundation Panorama
There are now so many tax-exempt foundations in the country that the number cannot be precisely ascertained.
The Foundation Directory, 1964, published by the Russell Sage Foundation, lists 15,000 foundations but says the number is increasing heavily year by year. 4 In this figure it challenges the total of 45,124 given by Representative Wright Patman, chairman of the Select Committee on Small Business of the House of Representatives. Patman's figure, the Directory holds, included civic, educational, welfare and religious organizations as well as pure foundations. 5 But the Patman investigation of the foundations in the early
1960's is the most complete available and will be cited throughout this chapter. It was focused, moreover, on the 534 largest foundations (within the Russell Sage meaning of the term) with total book-value assets exceeding $10 billion at the end of 1960.
As of early 1967, a total of 6,803 foundations in the United States had total assets of $20. 3 billion by market values (as distinct from book values), an increase of almost $6 billion in three years, according to the foundation-supported Foundation Library Center of New York, as reported in the New York Times, April 4, 1967 (32:3-4). These were record high figures, a measure of lush prosperity in Foundationland.
Total foundation assets in the period 1960-63, according to the Foundation Directory, were $14,510,765,000; so it is evident that Patman's inquiry covered most of the field. 6 Of these, $8. 161 billion were concentrated in New York; Pennsylvania came next with $853 million; then Michigan with $752. 9 million; and Texas with $744 million. New York is far in the lead here as in all other aspects of finance.
Prior to 1910 there were only eighteen American foundations, with just one exceeding $10 million. (Until 1913 there were no income taxes, until 1916 no estate taxes. ) In the next decade 76 were launched, in the 1920's 173, in the 1930's 288, in the 1940's 1,638 and in the 1950's 2,839. Of 5,050 leading foundations, 32 per cent were launched in the 1940's and 56 per cent in the 1950's. 7 In their magnitude and pervasiveness, then, the foundations are something recent, a new thing. They are plainly a reflex to the tax laws which give them exemption.
The Foundation. Directory sets forth thirteen foundations with $100 million or more in assets. ' But this listing, although impressive, is misleading because some interests have established many foundations, and small foundations in their various ways are themselves significant. Patman more revealingly shows them by groups.
The thirteen leaders according to the Foundation Directory are: Source
Ford Foundation
Rockefeller Foundation
Duke Endowment
John A. Hartford Foundation
W. K. Kellogg Foundation
Carnegie Corporation
Alfred P. Sloan Foundation
Moody Foundation
Rockefeller Brothers Fund
Lilly Endowment, Inc.
Pew Memorial Trust
Danforth Foundation
Commonwealth Fund
Assets
(millions)
$3,320
632
478
Pacific Tea
Kellogg cereals
Carnegie Steel
General Motors
W. L. Moody, Texas oil,
realty, newspapers and
banks 188
Standard Oil 152
Eli Lilly pharmaceuticals 151
Sun Oil Company 135
Purina cereals 126
Harkness family;
Standard Oil 125
Ford Motor
Standard Oil
Duke Power
Great Atlantic &
The inadequacy of the above listing on the side of understatement is readily shown. Patman detailed eleven out of fourteen Rockefeller-controlled foundations with aggregate assets of $1,016,440,732. These represented about one-seventh of all foundation assets. Among six in all there were four Mellon-controlled foundations, none with assets of $100 million but with aggregate assets of $160,651,388. Nine Mellon foundations, according to the Foundation Directory, held $372 million of assets. There were eight Ford-controlled foundations. Seven of these were infinitesimal in size compared with the monster Ford Foundation, which holds nearly a quarter of all foundation assets. Five Carnegie foundations had aggregate assets of $413,465,429. Out of nine Du Pont foundations six were stated to have aggregate assets of $18. 9 million, but the Alfred I. du Pont estate, set up in the form of a trust destined for The Nemours Foundation, had aggregate assets of $292 million at the end of 1962 compared with its originating valuation of slightly less than $40 million in 1935. 9
Patman in his text seriously understated the value of the Du Pont foundations as compared with the showing in his detailed table of foundation assets, which shows the Longwood Foundation, Wilmington, Delaware, alone with total assets of $122,712,483, and the Winterthur Corporation, a foundation, with assets of $32,271,151. Putting these together with the Nemours Foundation and other Do Pont foundations mentioned in earlier chapters, one finds Du Pont foundations totaling nearly $500 million. 10
Protean Uses of Foundations
While the largest foundations and flotillas of foundations have been mentioned, size is not alone important. Smaller foundations act as conduits and control points, useful in all sorts of secret business affairs and especially in tax evasions. Nearly every large corporation and many of the large banks now have their own foundations. And small foundations often suddenly flower into huge growths.
-Among other things, as Patman found, foundations can become tax-free receptacles for capital gains. An individual or corporation may have an investment it wishes to
360
310
268
223
liquidate but which stands to incur a huge capital gain on large long-term appreciation. Payment of a capital gains tax may be avoided by turning the investment over to a foundation (no gift tax) and then having the foundation sell the investment (no capital gains tax). The foundation may now lend the entire liquid sum back to the donor at a nominal interest rate (no law requires that the foundations seek maximum earnings), or it may with the untaxed money obtain a controlling block of stock in some company the original donor wishes to control. With this control he can raise or lower the company's dividend rate, obtain power over its possibly large cash funds and management and perhaps even obtain for himself some further low-interest loans.
With low-interest loans received, a donor can make lucrative investments. He could, for example, with a loan on which he paid 1 per cent, itself tax deductible, go out and buy tax-free local government bonds paying him a tax-exempt 3 per cent.
Let its suppose that an original investment of $10 million was now valued at $100 million. If it were sold it would incur a capital gains tax of approximately $22. 5 million. But if it were all given to a foundation the foundation could sell it and pay no gains tax. Now if the foundation lends the whole sum back to the donor at 1 per cent he pays it $1 million a year. And if he makes $3 million on a tax-free investment in government bonds he keeps $2 million annually, tax free. But if he had sold the original amount he would have had only $77. 5 million after-tax capital which, invested at 5 per cent, would have brought him $3,875,000. After payment of about $2,712,500 (or 70 per cent) income tax, he would have remaining $1,162,500 annually or almost a half less than by the first procedure. It was clearly financially advantageous to filter the money through the "charitable" foundation.
If he so desires he can in fifty years build the original sum in his personal name back, all tax free. After fifty years he or his family can possess, in fee simple, $100 million in free new assets and also control the disposition of the original $100 million in the foundation, which may satisfy legal requirements by using its small income to assist crippled newsboys or homeless dogs.
But this is only a minimal sort of deal that can be arranged either once or preferably in a confusing series through the handy medium of a foundation. Patman showed that foundations can do anything that is financially possible, without any sort of public supervision or regulation. In the sphere of finance, name it and they can do it, tax free.
It is mainly because of the Protean utility of the foundation, particularly in the evasion of taxes, that nearly everyone in the community of wealth has come now to share the original insight of only a few such as the pioneering Carnegie and Rockefeller. Actually, the Rockefeller foundations appear to be the most efficiently run of the foundations, although their major function is definitely not the simple allocation of money to various ,vortby causes.
Whether they were so intended or not, the Rockefeller foundations are instrumental in keeping in being and under family control the Standard Oil empire that the Supreme Court ordered dissolved in 1911.
At the close of 1960, 7 Rockefeller-controlled foundations owned 7,891,567 shares of common stock of Standard Oil of New Jersey with a market value of $324,946,110. The same 7 foundations owned 602,126 shares of the common stock of Socony Mobil Oil Co. with a market value of $23,610,770. Two Rockefeller foundations owned 306,013 shares of Continental Oil capital stock with a market value of $17,060,224 (the Rockefeller Foundation itself held 300,000 of these shares with a market value of $16,725,000); 4 Rockefeller foundations owned 468,135 shares of Ohio Oil common stock with a market value of $17,998,495; 5 Rockefeller foundations owned 1,256,305 shares of the common stock of Standard Oil Co. of Indiana with a market value of
$59,736,991; and the Rockefeller Foundation, itself, owned 100,000 shares of the capital stock of Union Tank Car Co. with a market value of $3,100,000.
If Standard Oil Co. (New Jersey) were to attain substantial ownership in its competitors, it would certainly tend to eliminate competition and again tend toward monopoly, and engage the Department of justice in inquiry.
The use of a subterfuge--in the form of Rockefeller-controlled foundations--in effect produces the same result as if Standard Oil Co. (New Jersey) owned substantial stock interest in Continental Oil, Ohio Oil, Standard Oil Co. (Indiana), et al. 11
The Rockefellers also have stock holdings in these companies through personal trust funds, as shown by TNEC, Monograph #29, and perhaps directly.
One is impeded from ascertaining precisely what the Rockefeller interest now is in each of the Standard Oil companies through the spreading around of stock ownership in foundations, personal trusts and personal accounts. Under the law establishing the Securities and Exchange Commission, as we have noted, any holding of a publicly offered stock by any individual or enterprise in excess of 10 per cent of the issue must be reported. But, as I pointed out earlier, a man could secretly hold most of the stock in a company by having 9 per cent in his name and 9 per cent in each of various trusts. If he never changed his holdings the fact would never be reported. He could hold more by adding foundations to the scheme, although the foundation holdings would be on the public record. just what the percentage of Rockefeller ownership/control now is in any of the Standard Oil companies cannot be ascertained from the record because apparently no individual or trust owns as much as 10 per cent of any issue.
"It is a well-known fact that the Rockefeller family controls Standard Oil Co. (New Jersey), and the Rockefeller-controlled foundations own a substantial part of the corporation," Patman remarks in the same place.
Only once has Rockefeller dominance ever been challenged. That was in 1929 when strong-willed Colonel Robert W. Stewart, chairman of the Standard Oil Company of Indiana, appealed to general stockholders over the heads of the Rockefellers for control of the company. In the show-down vote all the Rockefeller foundations, funds, trusts, personal holdings and holdings of old Standard Oil families were massively counted against Stewart. Ile was ignominiously snowed under.
Rockefeller family control of the giant Standard Oil flotilla is unchallenged and unchallengeable. Foundation-held stock helps insure it to perpetuity. No possible combination of financial interests under existing law could dislodge that control.
I am not suggesting that this control should be altered. I am simply stating a fact of financial-political life. One may be entirely satisfied to see the Rockefellers rather than some other group in control. But control is what is at stake. One deduces this because this is the way it is. This, one must suppose, is the way it was planned by the wily master architect of Standard Oil.
True, one could suppose that the major intent was philanthropic. It is not logically impossible that the outcome of control was unplanned. But John D. Rockefeller I, whatever else he was, was a planner. I conclude, possibly erroneously and uncharitably, the situation is the consequence of a plan that visualized the retention of control as a goal.
The Rockefeller foundations, as Patman found, are by no means unique as mechanisms for corporate control.
Two Du Pont foundations owned 6,931 shares of Christiana Securities Company worth $83. 8 million, and 358,105 shares of E. I. du Pont de Nemours worth $20. 4 million.
Six Mellon foundations held 120,294 shares of Aluminum Company worth $8. 2 million, 3,729,933 shares of Gulf Oil Corporation worth $124. 5 million and 48,750 shares of First Boston Corporation worth $3. 2 million.
The Herbert H. and Grace A. Dow Foundation owned 645,238 shares of Dow Chemical Company worth $48. 1 million. The Howard Heinz Endowment owned 314,104 shares of H. J. Heinz Company worth $42. 5 million. The Timken Foundation owned 427,760 shares of Timken Roller Bearing Company worth $20. 5 million. The Charles A. Dana Foundation held 500,000 shares of Dana Corporation worth $16 million. The Gulf Oil Foundation held all the stock of Pontiac Refining Corporation, worth $32 million.
Foundations as Untaxed Holding Companies
Foundations often serve as tax-free holding companies that maintain working control by means of 10 to 100 per cent ownership of many large corporations, the Patman inquiry made certain. But 73 foundations out of 534, including some large ones, did not report such ownership positions to the Treasury as required by law. 12
Some of the leading corporations in addition to the Standard Oil group entirely or supplementarily controlled by foundations are as follows: 13
(Asterisks mark those not reporting ownership as required by law. )
Controlled
Corporation
Kaiser Industries
Callaway Mills
Coca-Cola
George D. Roper
Midwest Oil
Eli Lilly
Kellogg
preferred
S. S. Kresge
United States Sugar
B. Altman (N. Y. )
Connecticut Railway
and Lighting
preferred
Duke Power
preferred
Ford Motor
W. T. Grant
Great Atlantic & Pacific
Tea
S. H. Kress
Untaxed
Foundation
Henry J. Kaiser Family
Foundation
*Callaway Community
Foundation
Emily and Ernest Woodruff
Foundation
Sears, Roebuck Foundation
*Standard Oil Foundation,
Inc.
Lilly Endowment, Inc.
W. K. Kellogg Foundation
W. K. Kellogg Foundation
Trust
Kresge Foundation
Chas. Stewart Mott Founda-
tion (General Motors)
Altman Foundation
Charles Ulrick and Josephine
Bay Foundation
*Duke Endowment
Percentage
of Ownership
15. 4 100. 0
15. 21 11. 77
18. 34
46. 24 common
10. 40 class B
58.
51. common
34.
48. 2 84. 59
99. 25
51. 07 common
57. 24 common
82. 02
Ford Foundation 100. class A
Grant Foundation 10. 7
*John A. Hartford Foundation
Samuel H. Kress Foundation
33. 98 common
41. 9
American Chain & Cable
Federal Cartridge
preferred
Reinsurance Corp. of
N. Y. Faberge
pref.
pref.
Electrolux
Enna Jettick
Pittsburgh Steel
preferred
Sun Oil
National Bank of
Commerce, Houston
Allen Bradley
preferred
Miller Brewing
National Lead Co. of
South America
preferred
James S. Kemper
preferred
Wieboldt Stores
preferred
Sahara Coal
preferred
Tecumseh Products
Hormel
Ralston Purina
American National
Insurance
Beaunit
Jonathan Logan
Cudahy
common
Springmaid of the West
William T.
Morris Foundation
*Olin Foundation
Richardson Foundation
*Samuel Rubin Foundation
17. 8 100.
14.
100. common
100. 1st
70. 2nd
Wenner-Gren Foundation for
Anthropological Research 24. 2
Fred L. Emerson Foundation 100.
Donner Foundation 10. A
Pew Memorial Trust 21. 29
Houston Endowment 23. 4
*Allen-Bradley Foundation 64. 62
De Rance, Inc. , Milwaukee 29.
*National Lead Foundation 100.
*James S. Kemper Foundation 34. 2
*Wieboldt Foundation 90. 6
*Woods Charitable Fund 20. 7
Herrick Foundation 23.
*Hormel Foundation 11. 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.
A third effect is the corporate-control effect. Corporate control, which would otherwise be undermined by the tax laws, is preserved to perpetuity by many foundations, permitting the hereditary transmission, tax free, of vast corporate power.
A fourth effect is that the foundations extend the power of their founders very prominently into the cultural areas of education (and propaganda), science, the arts and social relations. While much that is done in these areas under foundation auspices meets judicious critical approval, it is a fact that these dispensations inevitably take the form of patronage, bestowed on approved projects, withheld from disapproved projects. Recipients of the money must be ideologically acceptable to the donors.
There is a positive record showing that by these means purely corporate elements are able to influence research and many university policies, particularly in selection of personnel. While the foundations are staunch supporters of the physical sciences, the findings of which have many profit-making applications in the corporate sphere, among the social disciplines their influence is to foster a prevailing scholastic formalism. By reason of the institutional controls that have been established, the social disciplines are largely empty or self-servingly propagandistic, as careful analyses have disclosed. 3
Whether or not these various effects were sought by the foundation creators, they are present, and the realistic observer must suppose they were what the realistic founders had in mind. (We must be particularly impressed by the frank analyses of their tax advisers. ) Via the foundations they get more mileage out of their dollars--and retain more dollars.
The Foundation Panorama
There are now so many tax-exempt foundations in the country that the number cannot be precisely ascertained.
The Foundation Directory, 1964, published by the Russell Sage Foundation, lists 15,000 foundations but says the number is increasing heavily year by year. 4 In this figure it challenges the total of 45,124 given by Representative Wright Patman, chairman of the Select Committee on Small Business of the House of Representatives. Patman's figure, the Directory holds, included civic, educational, welfare and religious organizations as well as pure foundations. 5 But the Patman investigation of the foundations in the early
1960's is the most complete available and will be cited throughout this chapter. It was focused, moreover, on the 534 largest foundations (within the Russell Sage meaning of the term) with total book-value assets exceeding $10 billion at the end of 1960.
As of early 1967, a total of 6,803 foundations in the United States had total assets of $20. 3 billion by market values (as distinct from book values), an increase of almost $6 billion in three years, according to the foundation-supported Foundation Library Center of New York, as reported in the New York Times, April 4, 1967 (32:3-4). These were record high figures, a measure of lush prosperity in Foundationland.
Total foundation assets in the period 1960-63, according to the Foundation Directory, were $14,510,765,000; so it is evident that Patman's inquiry covered most of the field. 6 Of these, $8. 161 billion were concentrated in New York; Pennsylvania came next with $853 million; then Michigan with $752. 9 million; and Texas with $744 million. New York is far in the lead here as in all other aspects of finance.
Prior to 1910 there were only eighteen American foundations, with just one exceeding $10 million. (Until 1913 there were no income taxes, until 1916 no estate taxes. ) In the next decade 76 were launched, in the 1920's 173, in the 1930's 288, in the 1940's 1,638 and in the 1950's 2,839. Of 5,050 leading foundations, 32 per cent were launched in the 1940's and 56 per cent in the 1950's. 7 In their magnitude and pervasiveness, then, the foundations are something recent, a new thing. They are plainly a reflex to the tax laws which give them exemption.
The Foundation. Directory sets forth thirteen foundations with $100 million or more in assets. ' But this listing, although impressive, is misleading because some interests have established many foundations, and small foundations in their various ways are themselves significant. Patman more revealingly shows them by groups.
The thirteen leaders according to the Foundation Directory are: Source
Ford Foundation
Rockefeller Foundation
Duke Endowment
John A. Hartford Foundation
W. K. Kellogg Foundation
Carnegie Corporation
Alfred P. Sloan Foundation
Moody Foundation
Rockefeller Brothers Fund
Lilly Endowment, Inc.
Pew Memorial Trust
Danforth Foundation
Commonwealth Fund
Assets
(millions)
$3,320
632
478
Pacific Tea
Kellogg cereals
Carnegie Steel
General Motors
W. L. Moody, Texas oil,
realty, newspapers and
banks 188
Standard Oil 152
Eli Lilly pharmaceuticals 151
Sun Oil Company 135
Purina cereals 126
Harkness family;
Standard Oil 125
Ford Motor
Standard Oil
Duke Power
Great Atlantic &
The inadequacy of the above listing on the side of understatement is readily shown. Patman detailed eleven out of fourteen Rockefeller-controlled foundations with aggregate assets of $1,016,440,732. These represented about one-seventh of all foundation assets. Among six in all there were four Mellon-controlled foundations, none with assets of $100 million but with aggregate assets of $160,651,388. Nine Mellon foundations, according to the Foundation Directory, held $372 million of assets. There were eight Ford-controlled foundations. Seven of these were infinitesimal in size compared with the monster Ford Foundation, which holds nearly a quarter of all foundation assets. Five Carnegie foundations had aggregate assets of $413,465,429. Out of nine Du Pont foundations six were stated to have aggregate assets of $18. 9 million, but the Alfred I. du Pont estate, set up in the form of a trust destined for The Nemours Foundation, had aggregate assets of $292 million at the end of 1962 compared with its originating valuation of slightly less than $40 million in 1935. 9
Patman in his text seriously understated the value of the Du Pont foundations as compared with the showing in his detailed table of foundation assets, which shows the Longwood Foundation, Wilmington, Delaware, alone with total assets of $122,712,483, and the Winterthur Corporation, a foundation, with assets of $32,271,151. Putting these together with the Nemours Foundation and other Do Pont foundations mentioned in earlier chapters, one finds Du Pont foundations totaling nearly $500 million. 10
Protean Uses of Foundations
While the largest foundations and flotillas of foundations have been mentioned, size is not alone important. Smaller foundations act as conduits and control points, useful in all sorts of secret business affairs and especially in tax evasions. Nearly every large corporation and many of the large banks now have their own foundations. And small foundations often suddenly flower into huge growths.
-Among other things, as Patman found, foundations can become tax-free receptacles for capital gains. An individual or corporation may have an investment it wishes to
360
310
268
223
liquidate but which stands to incur a huge capital gain on large long-term appreciation. Payment of a capital gains tax may be avoided by turning the investment over to a foundation (no gift tax) and then having the foundation sell the investment (no capital gains tax). The foundation may now lend the entire liquid sum back to the donor at a nominal interest rate (no law requires that the foundations seek maximum earnings), or it may with the untaxed money obtain a controlling block of stock in some company the original donor wishes to control. With this control he can raise or lower the company's dividend rate, obtain power over its possibly large cash funds and management and perhaps even obtain for himself some further low-interest loans.
With low-interest loans received, a donor can make lucrative investments. He could, for example, with a loan on which he paid 1 per cent, itself tax deductible, go out and buy tax-free local government bonds paying him a tax-exempt 3 per cent.
Let its suppose that an original investment of $10 million was now valued at $100 million. If it were sold it would incur a capital gains tax of approximately $22. 5 million. But if it were all given to a foundation the foundation could sell it and pay no gains tax. Now if the foundation lends the whole sum back to the donor at 1 per cent he pays it $1 million a year. And if he makes $3 million on a tax-free investment in government bonds he keeps $2 million annually, tax free. But if he had sold the original amount he would have had only $77. 5 million after-tax capital which, invested at 5 per cent, would have brought him $3,875,000. After payment of about $2,712,500 (or 70 per cent) income tax, he would have remaining $1,162,500 annually or almost a half less than by the first procedure. It was clearly financially advantageous to filter the money through the "charitable" foundation.
If he so desires he can in fifty years build the original sum in his personal name back, all tax free. After fifty years he or his family can possess, in fee simple, $100 million in free new assets and also control the disposition of the original $100 million in the foundation, which may satisfy legal requirements by using its small income to assist crippled newsboys or homeless dogs.
But this is only a minimal sort of deal that can be arranged either once or preferably in a confusing series through the handy medium of a foundation. Patman showed that foundations can do anything that is financially possible, without any sort of public supervision or regulation. In the sphere of finance, name it and they can do it, tax free.
It is mainly because of the Protean utility of the foundation, particularly in the evasion of taxes, that nearly everyone in the community of wealth has come now to share the original insight of only a few such as the pioneering Carnegie and Rockefeller. Actually, the Rockefeller foundations appear to be the most efficiently run of the foundations, although their major function is definitely not the simple allocation of money to various ,vortby causes.
Whether they were so intended or not, the Rockefeller foundations are instrumental in keeping in being and under family control the Standard Oil empire that the Supreme Court ordered dissolved in 1911.
At the close of 1960, 7 Rockefeller-controlled foundations owned 7,891,567 shares of common stock of Standard Oil of New Jersey with a market value of $324,946,110. The same 7 foundations owned 602,126 shares of the common stock of Socony Mobil Oil Co. with a market value of $23,610,770. Two Rockefeller foundations owned 306,013 shares of Continental Oil capital stock with a market value of $17,060,224 (the Rockefeller Foundation itself held 300,000 of these shares with a market value of $16,725,000); 4 Rockefeller foundations owned 468,135 shares of Ohio Oil common stock with a market value of $17,998,495; 5 Rockefeller foundations owned 1,256,305 shares of the common stock of Standard Oil Co. of Indiana with a market value of
$59,736,991; and the Rockefeller Foundation, itself, owned 100,000 shares of the capital stock of Union Tank Car Co. with a market value of $3,100,000.
If Standard Oil Co. (New Jersey) were to attain substantial ownership in its competitors, it would certainly tend to eliminate competition and again tend toward monopoly, and engage the Department of justice in inquiry.
The use of a subterfuge--in the form of Rockefeller-controlled foundations--in effect produces the same result as if Standard Oil Co. (New Jersey) owned substantial stock interest in Continental Oil, Ohio Oil, Standard Oil Co. (Indiana), et al. 11
The Rockefellers also have stock holdings in these companies through personal trust funds, as shown by TNEC, Monograph #29, and perhaps directly.
One is impeded from ascertaining precisely what the Rockefeller interest now is in each of the Standard Oil companies through the spreading around of stock ownership in foundations, personal trusts and personal accounts. Under the law establishing the Securities and Exchange Commission, as we have noted, any holding of a publicly offered stock by any individual or enterprise in excess of 10 per cent of the issue must be reported. But, as I pointed out earlier, a man could secretly hold most of the stock in a company by having 9 per cent in his name and 9 per cent in each of various trusts. If he never changed his holdings the fact would never be reported. He could hold more by adding foundations to the scheme, although the foundation holdings would be on the public record. just what the percentage of Rockefeller ownership/control now is in any of the Standard Oil companies cannot be ascertained from the record because apparently no individual or trust owns as much as 10 per cent of any issue.
"It is a well-known fact that the Rockefeller family controls Standard Oil Co. (New Jersey), and the Rockefeller-controlled foundations own a substantial part of the corporation," Patman remarks in the same place.
Only once has Rockefeller dominance ever been challenged. That was in 1929 when strong-willed Colonel Robert W. Stewart, chairman of the Standard Oil Company of Indiana, appealed to general stockholders over the heads of the Rockefellers for control of the company. In the show-down vote all the Rockefeller foundations, funds, trusts, personal holdings and holdings of old Standard Oil families were massively counted against Stewart. Ile was ignominiously snowed under.
Rockefeller family control of the giant Standard Oil flotilla is unchallenged and unchallengeable. Foundation-held stock helps insure it to perpetuity. No possible combination of financial interests under existing law could dislodge that control.
I am not suggesting that this control should be altered. I am simply stating a fact of financial-political life. One may be entirely satisfied to see the Rockefellers rather than some other group in control. But control is what is at stake. One deduces this because this is the way it is. This, one must suppose, is the way it was planned by the wily master architect of Standard Oil.
True, one could suppose that the major intent was philanthropic. It is not logically impossible that the outcome of control was unplanned. But John D. Rockefeller I, whatever else he was, was a planner. I conclude, possibly erroneously and uncharitably, the situation is the consequence of a plan that visualized the retention of control as a goal.
The Rockefeller foundations, as Patman found, are by no means unique as mechanisms for corporate control.
Two Du Pont foundations owned 6,931 shares of Christiana Securities Company worth $83. 8 million, and 358,105 shares of E. I. du Pont de Nemours worth $20. 4 million.
Six Mellon foundations held 120,294 shares of Aluminum Company worth $8. 2 million, 3,729,933 shares of Gulf Oil Corporation worth $124. 5 million and 48,750 shares of First Boston Corporation worth $3. 2 million.
The Herbert H. and Grace A. Dow Foundation owned 645,238 shares of Dow Chemical Company worth $48. 1 million. The Howard Heinz Endowment owned 314,104 shares of H. J. Heinz Company worth $42. 5 million. The Timken Foundation owned 427,760 shares of Timken Roller Bearing Company worth $20. 5 million. The Charles A. Dana Foundation held 500,000 shares of Dana Corporation worth $16 million. The Gulf Oil Foundation held all the stock of Pontiac Refining Corporation, worth $32 million.
Foundations as Untaxed Holding Companies
Foundations often serve as tax-free holding companies that maintain working control by means of 10 to 100 per cent ownership of many large corporations, the Patman inquiry made certain. But 73 foundations out of 534, including some large ones, did not report such ownership positions to the Treasury as required by law. 12
Some of the leading corporations in addition to the Standard Oil group entirely or supplementarily controlled by foundations are as follows: 13
(Asterisks mark those not reporting ownership as required by law. )
Controlled
Corporation
Kaiser Industries
Callaway Mills
Coca-Cola
George D. Roper
Midwest Oil
Eli Lilly
Kellogg
preferred
S. S. Kresge
United States Sugar
B. Altman (N. Y. )
Connecticut Railway
and Lighting
preferred
Duke Power
preferred
Ford Motor
W. T. Grant
Great Atlantic & Pacific
Tea
S. H. Kress
Untaxed
Foundation
Henry J. Kaiser Family
Foundation
*Callaway Community
Foundation
Emily and Ernest Woodruff
Foundation
Sears, Roebuck Foundation
*Standard Oil Foundation,
Inc.
Lilly Endowment, Inc.
W. K. Kellogg Foundation
W. K. Kellogg Foundation
Trust
Kresge Foundation
Chas. Stewart Mott Founda-
tion (General Motors)
Altman Foundation
Charles Ulrick and Josephine
Bay Foundation
*Duke Endowment
Percentage
of Ownership
15. 4 100. 0
15. 21 11. 77
18. 34
46. 24 common
10. 40 class B
58.
51. common
34.
48. 2 84. 59
99. 25
51. 07 common
57. 24 common
82. 02
Ford Foundation 100. class A
Grant Foundation 10. 7
*John A. Hartford Foundation
Samuel H. Kress Foundation
33. 98 common
41. 9
American Chain & Cable
Federal Cartridge
preferred
Reinsurance Corp. of
N. Y. Faberge
pref.
pref.
Electrolux
Enna Jettick
Pittsburgh Steel
preferred
Sun Oil
National Bank of
Commerce, Houston
Allen Bradley
preferred
Miller Brewing
National Lead Co. of
South America
preferred
James S. Kemper
preferred
Wieboldt Stores
preferred
Sahara Coal
preferred
Tecumseh Products
Hormel
Ralston Purina
American National
Insurance
Beaunit
Jonathan Logan
Cudahy
common
Springmaid of the West
William T.
Morris Foundation
*Olin Foundation
Richardson Foundation
*Samuel Rubin Foundation
17. 8 100.
14.
100. common
100. 1st
70. 2nd
Wenner-Gren Foundation for
Anthropological Research 24. 2
Fred L. Emerson Foundation 100.
Donner Foundation 10. A
Pew Memorial Trust 21. 29
Houston Endowment 23. 4
*Allen-Bradley Foundation 64. 62
De Rance, Inc. , Milwaukee 29.
*National Lead Foundation 100.
*James S. Kemper Foundation 34. 2
*Wieboldt Foundation 90. 6
*Woods Charitable Fund 20. 7
Herrick Foundation 23.
*Hormel Foundation 11. 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.
