Billionaire Kaiser Exploiting Charity Loophole With Boats

Photographer: Tom Gilbert/The Tulsa World via AP Photo

A file photo shows Oklahoma energy billionaire George Kaiser speaking at the Rotary Club of Tulsa on July 8, 2009. Close

A file photo shows Oklahoma energy billionaire George Kaiser speaking at the Rotary... Read More

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Photographer: Tom Gilbert/The Tulsa World via AP Photo

A file photo shows Oklahoma energy billionaire George Kaiser speaking at the Rotary Club of Tulsa on July 8, 2009.

(Corrects description of loan between BOK Financial and the foundation in the 34th paragraph.)

When Oklahoma energy billionaire George Kaiser opened the Northeast Gateway liquid natural gas terminal in 2008, the floating depot’s first delivery was shipped on the Excellence, a 909-foot supertanker that holds 138,000 cubic meters of LNG -- enough gas to meet more than 4 percent of daily U.S. demand.

The Excellence is owned by the George Kaiser Family Foundation, a charitable organization that also owned a 36 percent stake in Solyndra LLC, the Fremont, California-based solar system maker that went bankrupt in 2011 after receiving a $535 million U.S. Energy Department loan.

BILLIONAIRE TAX HAVENS

The nonprofit organization paid $110 million for the tanker in 2003. It later gave control of the vessel to Woodlands, Texas-based Excelerate Energy LP, a for-profit gas delivery company Kaiser owns with publicly traded German electric utility RWE AG, according to RWE’s 2012 annual report.

“It is an excellent investment,” Frederic Dorwart, a trustee of the foundation and longtime attorney for Kaiser’s various banking and energy companies, said in a telephone interview. “It pays out this year and we’ll still own the vessel.”

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The Excellence is also an example of how federal laws and U.S. Internal Revenue Service regulations forbid forms of self- dealing in one kind of tax-exempt organization while creating loopholes that allow them in another.

‘Anything Goes’

At least $1.25 billion of the charity’s $3.4 billion in assets is invested in ways that benefit Kaiser’s for-profit endeavors, according an analysis of the George Kaiser Family Foundation’s 2011 tax return by Bloomberg News. The charity invests alongside the billionaire’s stakes in some companies. In other instances, it directs funds in ways that support his for- profit businesses, such as the Excellence, which provides guaranteed shipping capacity.

“There are very wealthy people who play by the rules and others who don’t, who use public charities to further their business interests,” said Pablo Eisenberg, senior fellow at the Georgetown University Public Policy Institute. “One of the problems is the laws are so vague as to be absent of any serious regulation by the IRS or any state’s attorney general. Almost anything goes.”

There are two primary types of philanthropic vehicles in the U.S. The most common is a private foundation, which allows the donor to manage the foundation’s assets and decide who gets its money. These entities must give away 5 percent of their assets annually, according to IRS regulations.

Photographer: David Paul Morris/Bloomberg

Auction signs sit in front of Solyndra LLC signage displayed outside the company's headquarters in Fremont, California, during December 2011. The Kaiser foundation was dragged into the media spotlight because of its 36 percent stake in bankrupt Solyndra, the solar system maker that failed after receiving a $535 million U.S. Energy Department loan. Close

Auction signs sit in front of Solyndra LLC signage displayed outside the company's... Read More

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Photographer: David Paul Morris/Bloomberg

Auction signs sit in front of Solyndra LLC signage displayed outside the company's headquarters in Fremont, California, during December 2011. The Kaiser foundation was dragged into the media spotlight because of its 36 percent stake in bankrupt Solyndra, the solar system maker that failed after receiving a $535 million U.S. Energy Department loan.

Tax Deductions

The second type is a public charity, in which the donor gives up all rights to control and direct the charity’s investments and gifts. In exchange for that loss of control, the donor can deduct as much as half of their annual income in future years, as opposed to 30 percent for donations to private foundations.

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The George Kaiser Family Foundation is a type of public charity known as a public foundation. It isn’t obligated to donate a penny, according to IRS rules. In 2003, the year it purchased the Excellence, it gave $677,000 to public causes, about one-10th of one percent of its assets, according to its tax return for that year.

“It is perfectly clear that Congress has established a public policy that there be no minimum distribution for public charities of our kind,” Dorwart said. “Someone who is articulating that criticism is criticizing the law.”

Tax Havens

The charity gave away $302 million from 2002 to 2011, according to data compiled by Bloomberg. Kaiser, who has a net worth of $13.5 billion and is the world’s 69th richest person, according to the Bloomberg Billionaires Index, donated $3.12 billion to the charity during the period. He could have claimed enough personal income tax deductions to sidestep hundreds of millions of dollars in personal federal taxes, according to Richard Sills, senior partner for tax-exempt organizations with Holland & Knight LLP in Washington, D.C.

Kaiser declined to comment through spokesman C. Renzi Stone, who referred inquiries to the charity’s executives.

Some of the foundation’s investments are based in corporate tax havens, such as Mauritius, Ireland and Belgium, allowing it to avoid U.S. corporate taxes because businesses not central to a charity’s mission can be subject to levies, according to IRS regulations.

Executives from Kaiser’s for-profit companies also manage some of the charity’s investments, an activity that is forbidden in a private foundation structure, according to Bruce R. Hopkins, senior partner at law firm Polsinelli LLP in Kansas City, Missouri, and author of more than a dozen books on charitable organization tax issues.

Unusual Charity

The Kaiser foundation is one of just four public foundations in the U.S. with more than $1 billion in assets, according to the Washington-based National Center for Charity Statistics. David Scott Sloan, the chairman of the national estate planning practice at Holland & Knight (1118L) in Boston, said that in his 25 years of advising clients on charity and trust structures, he can’t recall one who has asked about establishing a public charity.

The George Kaiser Family Foundation makes donations through the Tulsa Community Foundation, a nonprofit organization the billionaire co-founded in 1998 and was chairman of until February 2007. The public charity is required by the IRS to have an independent board, with the majority of the members chosen by the 29-member board of the Tulsa Community Foundation. The Kaiser foundation has a three-member board and, according to its tax returns, gives Kaiser the right to appoint its directors, although the charity says he has not done so.

Three Directors

“If there is an independent board of directors, then really the investments are OK,” said Hopkins. “The two people picked by the community foundation should not have any business or family connection with him because if they did they would be deemed part of his control group and then he would be deemed to be in control.”

Of the three Kaiser Foundation directors -- all of whom were chosen by the Tulsa Community Foundation during Kaiser’s tenure as chairman -- one is Dorwart, who is also secretary at BOK Financial Corp (BOKF)., a Kaiser-controlled bank holding company. His law firm -- Frederic Dorwart, Lawyers -- provides legal services to Kaiser’s companies, according to Dorwart.

A second board member is Phil Lakin, a Tulsa city councilman and chief executive of the Tulsa Community Foundation. He was the organization’s first employee, and has collected more than $1.5 million in compensation since 2006, the first year the details of his pay were disclosed.

Dorwart, Frohlich

In his 2011 city council election campaign, Lakin raised $82,090 in donations, according to filings with the Oklahoma Ethics Commission. Kaiser gave Lakin his first donation for that election -- $2,500 on June 27 -- followed four days later by $2,000 from BOK Financial’s political action committee. Kaiser’s son and nine executives from Kaiser’s companies gave an additional $6,550. Dorwart and his colleagues gave $5,000.

“It should not surprise anyone that those who knew him best were active in his campaign,” Ken Levit, executive director of the Kaiser charity, said in an e-mail. He said $13,000 in donations came from people who work with Lakin at the charities.

The George Kaiser Family Foundation’s third director is Phil Frohlich, founder and owner of Prescott Group Capital Management LLC, a Tulsa-based fund manager with $521 million in assets under management as of the end of 2012, according to a filing with the U.S. Securities and Exchange Commission.

Prescott managed $132 million of the foundation’s assets in 2011, according to its tax return for that year, when Frohlich collected $1.5 million in fees. He was a director of the foundation during that time.

Legal Independence

“Mr. Frohlich does not manage any funds for Mr. Kaiser and has no relationship with Mr. Kaiser, Mr. Lakin, or Mr. Dorwart, though Mr. Dorwart’s law firm provides immaterial legal services to Mr. Frohlich’s funds on occasion,” Dorwart said in an e- mail, responding to questions sent to Frohlich.

Dorwart said in a phone interview that the foundation’s board and charity meet the legal test of independence required by the IRS. Members of the Tulsa Community Foundation board include four executives of Kaiser’s BOK Financial, Dorwart and one of his lawyers, and an employee of Frohlich’s.

Management of the Kaiser charity’s assets involves a range of investments and strategies. It takes positions in derivatives -- more than $180 million worth at the end of 2011 –- sells stocks short and invests in diversified funds, including one focused on Australian beef farming and another on disaster- linked insurance products, according to IRS filings.

‘Reasonable Percentage’

During the past decade, the charity has spent more than $152 million on non-charitable expenses, including investment fees. Its last year of net unrealized gains was in 2009, when it earned $453 million. The foundation reported unrealized losses of $721 million for 2010 and $424 million for 2011, much of that related to Solyndra, Dorwart said.

“If the suggestion is that, as a foundation, we ought not to allocate some reasonable percentage of investments to propositions that we think have a particularly high upside and thus attempt to achieve a return in excess of average, then I reject that notion,” Dorwart said by phone.

The charity also allocates assets to entities the billionaire profits from. The charity holds more than $500 million in Memjet IP Holdings Ltd., a San Diego, California- based printing technology company that Kaiser has a personal stake in; $300 million in stock of Kaiser’s majority-owned BOK Financial; and $577 million invested through Kaiser’s Sausalito, California-based venture capital company, Argonaut Ventures LLC, according to the 2011 tax return.

‘Alongside Investment’

Kaiser and his foundation owned 61 percent of closely held Memjet in 2012, according to a legal action filed by the charity. Don P. Millican, president of Kaiser’s closely held energy concern, Kaiser-Francis Oil Co., helps manage the charity’s investment in Memjet, according to Dorwart.

“The interests of Mr. Kaiser in Memjet are fully subordinated to the foundation,” Dorwart said. “If that’s what somebody wants to call an ‘alongside investment,’ that’s OK. It’s not what I would call an alongside investment.”

The charity is the second-largest shareholder of BOK Financial, a bank holding company with operations in 10 states holding $28 billion in assets. Kaiser is the largest shareholder, with 59 percent of the shares.

Other ties to BOK include an outstanding loan of more than $2.3 million the charity took from a BOK subsidiary. The lone bonds held in the charity’s portfolio, according to its latest tax return, are $10.7 million issued by Tulsa County Industrial Authority. The industrial authority invested at least $70 million of its $85 million in cash with BOK Financial, according to the authority’s financial statement ending June 30, 2012.

‘Smell Test’

“There is a smell test -- the IRS really has to be satisfied that the charity is really engaged in charitable activities and these other businesses are really separate from the day-to-day activities of the charity,” said Sills of Holland & Knight.

Levit, the charity’s executive director, said the organization intends to move closer to disbursing 5 percent of its assets annually. He said the entity’s charitable interests are early childhood centers that serve more than 2,000 infants and toddlers in the state, and funding a medical school at the University of Oklahoma that will provide free tuition to students who pledge to practice in areas underserved by doctors.

“Our personal view is that we are spending the money very, very wisely. The money is in the public domain for perpetuity,” Dorwart said. “It never reverts back to the donor.”

To contact the reporter on this story: Brendan Coffey in Boston at bcoffey10@bloomberg.net

To contact the editor responsible for this story: Matthew G. Miller at mmiller144@bloomberg.net

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