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The Giving Pledge and private foundations

By Edward Zelinsky

The Giving Pledge, founded by Warren Buffett and Bill Gates, has announced that eleven more affluent families have taken the Pledge and have thereby committed to donating at least half of their wealth to charity. Among these new Pledgers is Gordon Moore, a legendary founder of Intel and the father of Moore’s Law which postulates that the number of transistors on integrated circuits doubles roughly every two years.

I am a Buffett fan and a fan of the Giving Pledge in particular. It is commendable that so many wealthy families have embraced the ethic of philanthropy. Forbes magazine recently commended this effort, and rightly so.

While the Giving Pledge deserves praise, it does raise important issues which deserve discussion. One such issue is the estate tax revenue lost when wealth is donated to charity. This is a significant problem at a time of enormous budget deficits. It is ironic that both Mr. Buffett and Mr. Gates are outspoken supporters of the estate tax, but have arranged their affairs to avoid the tax by contributing to charity.

One possibility is for the families taking the Pledge to donate voluntarily to the federal Treasury a portion of their wealth equal to the estate taxes they will avoid by donating to charity.

A second and equally important issue has recently been illuminated by the Wall Street Journal. The Pledgers agree to give at least half of their assets to charity. They don’t agree to the form such charity will take. Some Pledgers may give their wealth to private foundations. And private foundations are, well, private. Given the problematic nature of some private foundations, it is particularly compelling for private foundation Pledgers to donate to the federal Treasury as well.

My wife and I started a private foundation in memory of our oldest son. The Barak Zelinsky Foundation, Inc., will never be a charitable behemoth like the Gates Foundation. However, the Foundation perpetuates our son’s name in the interests of what Judaism calls tzedekah. Barak’s foundation is truly a family enterprise: His now-adult siblings are directors of the foundation and help recommend worthy charities to receive contributions in their brother’s name. No one takes a salary or any compensation, directly or indirectly, from our family foundation or its income.

There is, however, a darker side to private foundations. In 1969, the abuse of private foundations led Congress to add to the Internal Revenue Code as series of taxes to regulate such foundations. These regulatory taxes, among other things, deter self-dealing transactions between private foundations and insiders positioned to benefit inappropriately from foundation assets. These regulatory taxes also deter private foundations from investing in undiversified fashion or in ways which jeopardize such foundations’ charitable purposes.

Even when private foundations do not undertake the kind of actions at which these regulatory taxes are aimed, it remains unclear whether the tax law should (as it does today) subsidize through favorable tax treatment enterprises with relatively little public accountability, indeed, enterprises typically controlled by the members of a single family. Advocates of private foundations celebrate their entrepreneurialism and independence. Skeptics suggest that private foundations reflect extensive tax subsidies for rich persons’ personal agendas and dynastic ambitions.

The tax subsidy of our modest private foundation is, by definition, modest. However, to paraphrase Everett Dirksen, when billions of dollars go into larger private foundations, we are talking about real money — and a real subsidy from federal taxpayers.

In light of these concerns, let me suggest a variation of my earlier proposal that the Pledgers contribute an amount to the federal Treasury equal to the estate taxes they avoid by their charitable gifts. In particular, the Pledge could distinguish between the Pledgers who donate their fortunes to publicly-controlled institutions, such as colleges, communal hospitals and museums governed by diverse boards of directors, and the Pledgers who contribute their wealth to private foundations.

Even those who believe that the Pledgers giving their wealth to public charities shouldn’t contribute to the federal fisc may conclude differently about private foundation Pledgers. Through contributions to the federal Treasury equal to the estate taxes they would otherwise owe, such Pledgers would acknowledge that, by donating to private foundations typically controlled by their families, their charity has taken a different and less publicly accountable form.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.

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Image credit: Warren Buffett attends the premiere of ‘Wall Street: Money Never Sleeps’ at the Ziegfeld Theatre on September 20, 2010 in New York City. Photo by EdStock, iStockphoto.

Recent Comments

  1. Michael Janno

    Many large charities are created to just avoid the estate taxes and create a foundation controlled by the hiers forever. In most cases this type of charity gives the least it can to charity and only exists for the hiers.

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