Foundations as Easy as ABC

Everyone has heard of the Ford Foundation. And the Rockefeller Foundation, and the many Guggenheim foundations. But who ever heard of the Robert O. Hayes Foundation of Grand Blanc, Mich.? It exists, however, and according to its records, it made recent grants of $2 each to the Easter Seal campaign, the American Cancer Society and the Muscular Dystrophy Association. But the size of its operations do not legally make a foundation any less taxexempt, and that is the point.

The Robert O. Hayes Foundation is only one of hundreds of small, not-for-profit foundations and trusts that have sprung up under the umbrella of an Illinois outfit known as Americans Building Constitutionally (ABC). The organization was started 18 months ago by an itinerant financial adviser, James Walsh, and Robert D. Hayes, former owner of a private business-administration school (and also, by no coincidence, Robert O. Hayes's father). The two were drawn together by the idea of bringing foundations to the average well-off citizen. If such big shots as the Kennedys and the Johnsons could set up tax-free trusts and foundations, why couldn't the middle shots? After examining the legal details with care, Walsh and Hayes concluded that there was no reason in the world why they couldn't. Through ABC, the two have undertaken to spread their discovery to anyone willing to pay a fee that runs as high as $10,500.

Fringe Benefits. Basically, ABC recommends that a man form a foundation or trust for some stated purpose at least vaguely related to the kind of work he does, and make himself and his family the principal directors. Then he assigns his assets--his car and business--to the foundation. If he is self-employed--a doctor, for instance--his patients' fees are paid to the foundation; if not self-employed, he may be able to get his employer to hire his foundation instead of him, and pay it the salary that would normally go to him.

Next, as controlling director of the foundation, he appoints himself to do his regular work for the benefit of the foundation. For the work, the foundation pays him a relatively small salary, on which he pays income taxes. But the foundation also gives him fringe benefits, such as use of his car, a large life-insurance policy, perhaps even educational grants for his children.

On all of this he pays no income tax, since ABC contends that it legally amounts to expenses and grants of the charitable foundation. The result is that the salary he used to earn and get taxed on is now protected; he pays taxes on only a fraction. When he dies, he leaves no large estate to be taxed; the money is still in the foundation, which has merely lost its most treasured trustee but which can easily replace him with someone else like, say, his son. The obvious attractions of the idea have brought ABC at least 250 members so far, and the number continues to grow, partly because of a bonus paid to those who bring in new members. In fact, the enterprise has become successful enough to attract the attention of Texas' Democratic Representative Wright Patman, whose House sub-committee on foundations has been investigating the whole field for more than five years. One ABC trustee took the Fifth Amendment 83 times when Patman called him, but Managing Trustee Hayes coolly answered many committee questions. Hayes's calm contention throughout was that what he and ABC's members are doing is entirely legal. In any case, Patman was not at all happy about it. "If this sort of thing is carried to its logical conclusion," Patman sputtered, "there would be nobody left to pay taxes."

Vague Warning. The trouble is that, under existing laws, advance approval by the Internal Revenue Service is not needed to form a tax-free foundation. To start up, all that a hopeful foundation founder has to do is to satisfy a few state-set requirements, and they are usually not very stringent. Says Patman: "The IRS tries to give the impression that it double-checks all foundation operations. Nothing could be further from the truth. Only a very small fraction are checked in any given year." But IRS is now warning that it has "doubts about the legality" of ABC-type foundations and trusts. "Tax consequences to those who participate could be adverse," since the burden of proof falls on the taxpayer when IRS challenges a claimed deduction.

Hayes is unfazed, however. He thinks that his loopholes are well knitted, and he cites Judge Learned Hand's 1934 finding: "Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. Everyone does it, rich and poor alike, and all do right; for nobody owes any public duty to pay more than the law demands." Hayes does not believe that the law demands the exclusion of an ABC-style foundation.

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