Abirpothi

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How the Ultrawealthy Use Private Foundations to Bank Millions in Tax Deductions While Giving the Public Little in Return

 A Luxurious Bargain and Elusive Access

Private foundations offer a lucrative tax-saving opportunity for the ultrawealthy to donate valuable assets while promising public benefits. However, investigations reveal that some donors have exploited this system to claim millions in tax deductions while offering limited or no public access to their donated assets.

The Carolands Mansion – A Rare Treat for the Public

At the Carolands mansion, an architectural marvel in San Francisco, public access is restricted to just two hours per week. Despite assurances in the foundation’s tax-exempt status application, billionaire Charles Johnson never opened it to the public for 40 hours a week, depriving visitors of self-guided tours promised in the documents. The foundation claimed tax deductions of over $38 million for the estate, raising questions about the true public benefit.

The Carolands Estate Credit: Courtesy: San Francisco Chronicle/AP Images

The Blurry Rules Surrounding Public Benefit

Private foundations, unlike public charities, have fewer regulations, granting donors greater control over their assets even after claiming tax breaks. The lack of clear definitions for “public benefit” and the IRS’s limited enforcement capabilities have allowed some donors to exploit the system. Vague rules make it difficult to determine the required level of public access or the extent to which assets should serve the public interest.

Ken Xie, CEO of cybersecurity company Fortinet, has earned more than $30 million worth of tax deductions by donating shares to a private foundation. Courtesy:K.Y. Cheng/South China Morning Post/Getty Images

Violating Self-Dealing and Misusing Foundation Assets

Despite laws prohibiting self-dealing and personal use of foundation assets, some donors have managed to bend the rules. For instance, a tech billionaire used his foundation to purchase his girlfriend’s house during a divorce, and a real estate mogul transformed his nonprofit art museum into a private guesthouse, rarely accessible to the public.

Inadequate Oversight and Political Influence

The IRS’s limited oversight and budget constraints have hindered effective regulation of private foundations. In some cases, political pressure from high-profile donors and their connections has influenced the approval process. Calls for reform have gone largely unanswered, and the IRS faces challenges in enforcing compliance.

Lijin Gouhua Foundation – Limited Access and Questionable Intentions

The Lijin Gouhua Foundation, established by a venture capitalist couple, claimed substantial tax write-offs for donations but kept the artwork inaccessible to the public. The couple purchased a neighboring property with tax-exempt funds, purportedly for museum space, but the property remained unused. Critics argue that if an asset serves as an investment rather than a charitable use, it should not count as a tax deduction.

Dodging Scrutiny – The Case of Matthew Strauss

Real estate magnate Matthew Strauss sought tax deductions for a guesthouse that held part of his art collection. Initially hesitant, the IRS eventually approved the deduction after the political intervention. Despite a promise to donate most of the collection, much of it remains in a private trust.

Matthew Strauss in front of “Sunshine and Snow,” by Kenneth Noland, at his foundation’s museum. Courtesy:Jeff Ernsthausen/ProPublica

Future Prospects and Responsibilities

As wealthy donors plan their legacies, the public awaits meaningful contributions from private foundations. With transparency, clearer regulations, and increased IRS oversight, the public may have a better chance of accessing and benefiting from these philanthropic endeavours. However, until meaningful changes are made, the ultrawealthy continue to exploit the system, reaping significant tax deductions without fulfilling their commitments to the public good.

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