Commentary: When Charity Begins At Home

With the IRS focused on corporations, abuse among foundations is spreading

James Beard Foundation President Leonard F. Pickell Jr. resigned under a cloud in September after board members discovered that the New York culinary group had squandered hundreds of thousands of dollars. Sure, that's pocket change compared with many corporate scandals, but the missing money -- allegedly frittered away on hefty salaries and extravagant meals -- is a big chunk of the nonprofit's $4.7 million annual revenue.

It also includes taxpayer dollars, since the organization is tax-exempt. Now, as the New York State attorney general investigates, board members are moving to overhaul the foundation's governance. "We have to restore the public's trust," concedes Beard Chairman George P. Sape.

When scandal hit Corporate America several years ago, the Internal Revenue Service shifted resources into corporate tax audits. Of course, the move made sense, but a little-known consequence is that it also gutted audits of foundations such as Beard, which have been cut 44% since 1998, to 5,754 audits last year -- out of the country's 1.8 million-odd nonprofits.

With greed left to take its course, a spate of scandals has erupted among foundations and charities. Last summer the IRS announced a probe into 2,000 nonprofits after congressional investigations revealed inflated compensation packages and insider dealing. But little has happened, since Congress hasn't O.K.'d the $300 million to fund the crackdown. If it does, it would be only a first step toward a much-needed look into what appear to be widespread abuses of taxpayer money. "This a large and threatening problem," says Paul C. Light, a New York University public service professor.

Much of the spotlight so far has targeted nonprofits whose top execs sport million-dollar pay packages -- usually hospitals, universities, and elite cultural institutions. But there's often more egregious abuse among the tiny nonprofits that operate below the radar. While state attorneys general can play a role, it's primarily up to the IRS to put a stop to such nonsense.

Family foundations are one problem area. Financier Paul C. Cabot Jr. took less than $60,000 a year as a trustee of the Needham (Mass.) Paul & Virginia Cabot Charitable Trust, which his late father founded in 1988 to fund arts and education. But in the mid-1990s the energy company that Cabot ran went downhill. Between 1999 and 2003, he took a total of $5.2 million out of foundation coffers -- while giving away just $2.1 million. All this was exposed in the Boston media last year, but no legal or IRS action has been announced. Cabot declined comment.

Then there is Peoria's Bielfeldt Foundation. According to the Peoria Journal Star, Gary and Carlotta Bielfeldt had given $26 million to local community groups since 1984 but paid themselves and family members $21.6 million over that same time. Although the couple endowed the foundation with $30 million in 1986, they apparently hit trouble, too: They face a $70 million lien from the IRS. Gary Bielfeldt says he and his family took more like $14 million. Douglas Stuart, who took over as the foundation's president in September, says he wants it to be independent from now on.

The IRS can prevent more of this. In addition to restoring its nonprofit auditing budget, the agency should require foundations to report all family members on the payroll. Longer term, it could boost oversight by requiring nonprofits to file audits electronically, says Diana Aviv, director of the Independent Sector, a nonprofit trade association. Then it could write programs to highlight out-of-line compensation or suspicious-looking contracts.

Nonprofits pay no taxes, since they help society. But if they help themselves instead, taxpayers end up footing the bill.

By Jessi Hempel

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