The small family foundation’s application to the Internal Revenue Service for tax-exempt status was clear: Money from the estate of Winfield Cook would be donated to scientific, literary, and other causes. A handful of Cook’s favorite nonprofits, including Dickinson and Piedmont colleges, would get special attention.
Since it was recognized by the IRS in 2003, the Winfield C. Cook & Isabelle K. Cook Charitable Foundation has indeed awarded grants, mostly ranging from a few hundred to a few thousand dollars, to a variety of causes, tax filings show. But recently it’s the Board of Directors, all members of the extended Cook family, who have benefited the most.
From 2014 to 2016, the foundation paid $220,000 in compensation for charitable purposes — and $275,000 in total compensation — to its directors, tax filings show. During the same period, the foundation disbursed $64,023 in grants. In other words, the directors paid themselves about $4.29 for every $1 they helped give away.
The Winfield C. Cook & Isabelle K. Cook Charitable Foundation is an outlier. The vast majority of its fellow small grant makers do not compensate officers, board members, or trustees at all. When the Chronicle reached foundation president Roger Cook by phone and asked if the foundation’s compensation was high compared with its charitable grant making, he responded, “I can’t disagree with that.”
No Formula
Still, the Cook family fund is not entirely alone. A Chronicle analysis of the 2014-16 tax filings for 20,000 grant-making foundations identified 49 organizations where the compensation paid to officers and board members accounted for more than half of the foundation’s expenses made to further a charitable mission.
At another 338, compensation accounted for 20 to 50 percent of all qualifying charitable distributions.
Underlying the variation in approaches to compensation is the fact that there is no formula that dictates how much foundations can pay. The IRS requires only that compensation be “reasonable” and that organizations look at what other similar-size groups are paying for similar work. That leaves ample leeway for interpretation and application. Nonprofit public-disclosure rules do not require detailed explanations of the work trustees or directors do to earn compensation.
Where compensation exceeds grants to nonprofits, “that per se is not a law violation,” said Bruce Hopkins, a Kansas City lawyer who has written extensively about nonprofit law and served as chair of the American Bar Association’s Committee on Exempt Organizations.
Hopkins says a person’s experience, education, and leadership capability are among the many traits to consider when evaluating the value of someone’s pay. “There are so many factors that go into account in determining if somebody’s compensation is reasonable,” Hopkins said.
Nonprofit tax lawyers say there are sound reasons that some organizations pay compensation levels that are high relative to grant making and that each must be considered on a case-by-case basis.
Even where some foundations might test the limits of “reasonable” compensation, there’s little the IRS, which has seen cuts to its staffing, is doing about it, said Marc Owens, a former director of the IRS’s exempt-organizations division. The number of foundations is simply too large for effective oversight by the IRS, he said.
“The problem is enforcement,” said Owens, who is now a Washington lawyer. “If there were no traffic cops on the street, after a while everybody would be speeding. That’s the same for the tax law.”
How the Analysis Was Done
The Chronicle analysis covered foundations that filed tax forms electronically and whose primary function is to make grants to charities. The analysis excluded “operating” foundations — those that use most of their financial resources to run their own charitable programs rather than making grants. The Chronicle analysis also excluded foundations that appear to be functioning like operating foundations even though they don’t classify themselves as such in their IRS filings.
The Chronicle analysis focused on compensation directly related to charitable activities. In some cases, foundations paid their officers and trustees additional compensation for activities that weren’t related to charitable activities, such as managing a foundation’s investments.
For the vast majority of foundations in our analysis, compensation was relatively small compared with their charitable grant making.
But there were outliers.
‘Nothing Is Hidden’
The Friends of David Mian Foundation in New Jersey paid its two officers — brother and sister Riaz Mian and Cyrene Chiarella — $350,000 each in total compensation from 2014 to 2016 for five hours of work weekly, according to IRS Forms 990-PF. The tax filings listed $250,000 of that as being for charitable purposes. The total compensation during the three years included $150,000 to each individual in the foundation’s 2015 fiscal year and $100,000 each in 2014 and 2016.
During the same three-year period, the charitable foundation made seven grants totaling $100,000 to churches, cancer charities, a theater, a research hospital, and a donor-advised fund. In other words, the siblings’ pay from the tax-exempt foundation, a total of $700,000, was seven times as much money as was given to charity.
When reached by telephone and asked about the foundation’s expenses, Riaz Mian said the foundation was created with his mother’s individual-retirement-account assets after her death. Noting that his late mother did not provide explicit directions for how the foundation should direct its funding, Riaz Mian said that foundation compensation is required only to be “reasonable.” The term is subjective, he added. He said that as a lawyer, he has a very high billable rate. “The grants are what they are. The compensation are what they are. Nothing is hidden,” Riaz Mian said.
When told his and his sister’s compensation was much higher than that at other similar-size foundations, Mian said that was “news to me” and that he would take it “under advisement” when he and his sister next meet. He also asked that the family foundation not be included in the Chronicle’s article.
The Chronicle asked several nonprofit tax experts to review the tax documents of the Friends of David Mian Foundation. Hopkins, the Kansas City nonprofit lawyer, said a lawyer’s billable rate for practicing law is not an ideal way to evaluate his or her worth to a foundation board.
While Hopkins said he did not know exactly what work Mian did for the foundation, he said compensation levels, when considered against the size of the foundation and the volume of grant making, “seems high for the amount of work,” Hopkins said.
Reasons for Compensation
To be sure, compensation accounting for a large fraction, or a higher-than-typical share, of a foundation’s spending does not mean the foundation is violating any rules.
“There can be legitimate reasons why compensation costs could make up the majority of expenses in certain cases,” said Brian Vogel, a compensation expert at Quatt Associates who works frequently with nonprofits. “It is important to always look at the individual circumstances.”
Compensation vs. Grants for 10 Foundations
The Chronicle analyzed compensation and charitable disbursement data for 20,000 foundations. The 10 foundations below are those that paid out the most in salaries compared with their total charitable giving and expenses during fiscal years 2014 through 2016.
Note: These 10 foundations were selected by looking at compensation, expenses, and grant making for charitable purposes — in other words, those expenses that qualify toward the 5 percent of assets that foundations must pay out annually under federal law. All data is from IRS Forms 990-PF. The Chronicle analyzed only foundations that filed electronically for fiscal years 2014 through 2016. Foundations that filed paper returns were not included. The analysis included only those foundations that appeared to be primarily grant making in nature; it excluded operating foundations, which run their own charitable programs, and foundations with less than $100,000 in qualifying distributions over the period studied.
Nonprofit tax experts offered up a list of possible scenarios at private foundations where compensation might make up the majority of all outlays. A nascent foundation, for example, could be paying compensation as it sets priorities and designs strategy before its charitable grant making begins.
In other cases, a foundation might pay compensation to someone running a specific program, conducting research, or serving as a subject expert in a specific field. For example the Chronicle found that oncologist Tim Kinsella, a director, drew annual compensation as high as $250,000, nearly 100 percent of all dollars disbursed by University Radiation Medicine Foundation for charitable purposes.
In an interview with the Chronicle, Kinsella and another foundation board member, Mel Resnick, said Kinsella’s compensation helped support his medical research and extensive publishing, including writing and editing for medical journals. “I don’t know if you know what radiation oncologists make,” Resnick said. “He hasn’t been overcompensated for running this foundation. We are very comfortable with what he has done.”
Paying for a Wedding
There have been several high-profile cases of high compensation by foundations in recent decades. In a 2003 series, for example, the Boston Globe reported on a foundation trustee who paid himself $5.1 million over five years. He needed the money, Paul Cabot Jr. told the news organization, to keep up with his family’s expenses, including a $200,000 wedding for his daughter. In 2004, Cabot reached an agreement with the Massachusetts attorney general to pay back more than $4 million to the family foundation. The Massachusetts attorney general also referred the case to the IRS. It’s unclear whether the IRS took any action; a spokesman for the agency said it does not comment on individual cases.
The IRS has waged few battles to address the problem, say nonprofit tax experts.
“It is a tough spot for the IRS to be in because they don’t have the resources right now to do this, and even if they did, it might not be the most prudent way to spend taxpayers’ money because they may spend more money litigating the case than getting anything back,” Hopkins said. Of the nearly 113,000 private foundations recognized by the IRS, only a small fraction of these get additional scrutiny. Official figures from the IRS show the agency audited fewer than 300 Form 990-PFs in the 2017 fiscal year.
That year, the IRS completed 109 examinations of all types of nonprofits for potential “inurement” — using the assets of a tax-exempt entity to benefit people close to that organization. Three of these organizations saw their tax-exempt status revoked as a result of the examinations, while other penalties included excise taxes. It’s not clear how many private foundations were included in these figures. Agency representatives declined requests for an interview.
Despite its limited resources, the IRS could send a message and help foundations better understand what is reasonable by calling attention to specific instances where it felt foundations were not meeting the “reasonable” test, nonprofit experts say.
“If the enforcement data is not particularly scary, which it isn’t these days, at least the IRS should be doing everything they can in terms of public statements about how they are going to be looking for excessive compensation,” Owens said.
Making ‘Adjustments’
One foundation executive director contacted by the Chronicle about her compensation said the foundation is being audited.
“We’re making some adjustments right now,” said Holly Book of the Peter Glenville Foundation, which paid $804,524 in total compensation — $781,724 to Book — while making $205,100 in grants from 2014 to 2016. The foundation reported that $586,293 of the $804,524 in compensation was for charitable purposes.
“Some of this is going to be addressed,” Book said and referred additional questions to the foundation’s lawyer. At the Weisell Baber Foundation in Peru, Ind., population 11,000, manager Eric Baber has long taken six figures in compensation — numbers that dwarf the organization’s grant-making activities. The foundation states on its tax filings that its primary function is to make student loans. During the three years examined by the Chronicle, the foundation reported paying Baber $594,900 and spending an additional $276,500 on compensation to other trustees and staff. Meanwhile, it issued $87,000 in student loans ranging from $1,000 to $5,000. On its 2016 Form 990-PF, the foundation reported a total outstanding student-loan balance of $966,573. Neither Eric Baber nor another trustee responded to multiple requests for comment.
The David Chow Humanitarian Award Foundation in Los Angeles paid its trustees a total of $800,000 — $500,000 reported as being for charitable purposes — for five hours of work a week from 2014 through 2016. In 2015 and 2016, five trustees each took $50,000, tax filings show. In 2014, four trustees received $50,000, while a fifth received $100,000.
The foundation made $90,000 in grants during that time — cash prizes of $1,000 to $10,000 awarded annually to a handful of “local philanthropy leaders” whose work would otherwise have gone unrecognized, trustee Daniel Hales told the Chronicle.
Trustee compensation levels weren’t always so high. In 2007, the year that namesake David Chow died, trustees were paid $2,000. That shot up to $50,000 in 2008, tax filings show.
The David Chow Humanitarian Award Foundation maintains as its headquarters an estate in the Hollywood Hills — the late Chow’s former home — which the foundation’s website says is available for film shoots and corporate events. When asked how compensation was set and what kinds of work the trustees do, Hales said he and his fellow trustees meet regularly to discuss grant making. The foundation has given more than 100 awards, and trustees regularly reach out to community leaders to encourage philanthropy, he said.
“It takes a lot of time,” Hales said, before ending the call. He did not respond to subsequent, repeated requests for comment on compensation. He also did not respond to the Chronicle’s questions about other aspects of the foundation’s finances, including more than $1 million in loans made since 2011.
Paul Streckfus, a former IRS official and editor of the EO Tax Journal, said the compensation being paid to the David Chow Humanitarian Award Foundation trustees, as reported in its tax filings, raised questions. “The problem is lawyers and accountants do argue with a straight face that this is all now reasonable compensation.”
