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Charity money funding perks

This story was reported by Globe Spotlight Team reporters Beth Healy, Francie Latour, Sacha Pfeiffer, and Michael Rezendes, and editor Walter V. Robinson. It was written by Healy. Second in a series of occasional articles.

It looked like a high-end corporate jet, the luxurious, long-range Bombardier that landed at the Lynchburg, Va., airport on a sunny Thursday afternoon in September. But no corporate executive disembarked.

Instead, out stepped Nancy

Leigh DeMoss. She is a trustee of the Arthur S. DeMoss Foundation, a private charitable foundation whose mission is to support Christian organizations. The Globe Spotlight Team determined the foundation spent $36 million in 2001 to buy the 12-seat, transoceanic jet -- and millions more over the last two decades to own and operate two prior jets. It is the kind of extravagance that has infuriated shareholders of public companies during the corporate scandals of the past two years. Yet private planes and other big-ticket expenses go virtually unnoticed in the world of philanthropy, even though foundations are publicly subsidized through huge tax breaks for the wealthy donors who set them up. A Globe review of foundation tax returns revealed numerous instances of money earmarked for charity being used to fund travel and lavish perks for foundation trustees -- the people charged with protecting foundation assets.

In Dallas, two officers of the Carl B. and Florence E. King Foundation, established by a Texas oil man to fund educational programs, used foundation credit cards to pay for family vacations to Australia and at least six European countries.

In New York, 14 part-time paid trustees of the Herman Goldman Foundation stand to collect a total of $1.8 million in retirement benefits, thanks to a 1993 vote by the board. And at the largest foundation in Oklahoma, a $5.7 million jet has been used to ferry trustees to meetings and to shuttle a part-time consultant 43 times in the last two years from Athens, Ga., to foundation headquarters.

Larry A. Pulliam, executive vice president of the $900 million Samuel Roberts Noble Foundation in Ardmore, Okla., mused during an interview, ``Maybe the homeless people in Dallas need their soup more than our trustees need their plane.'' But, he added, ``I don't think it's valid.''

Beyond the enormous paychecks some foundation trustees take, excesses documented in a Spotlight report last month, the Globe has uncovered evidence of charitable assets being used to pay rent for plush office space and health club dues and to buy luxury cars, Persian rugs, and fine art.

Some examples:

At the King Foundation, president Carl L. Yeckel arranged for himself and his top aide to receive pensions totaling more than $1 million a year, creating an unfunded future liability that experts say could drive the $41 million foundation into insolvency, according to lawyers involved in a lawsuit against the foundation.

Oklahoma City's Kerr Foundation, established to fund local social and cultural causes, bought a $44,000 Jaguar for the personal use of foundation officials. The $28 million foundation, which also spent $616,000 to buy a headquarters building, spends twice as much money on salaries and expenses as it donates to charities.

The John & Mary R. Markle Foundation paid $837,291 in rent last year for offices at Rockefeller Plaza in midtown Manhattan, where it funds research on health care and national security. And the $53 million Pollock-Krasner Foundation, started by the widow of artist Jackson Pollock to support artists, bought a $2.3 million co-op apartment on Park Avenue in New York's exclusive upper East Side for its office.

In an interview, Pollock Foundation chairman Charles C. Bergman said the co-op purchase was a bargain compared to the $156,000 in annual rent the foundation had been paying. The foundation also spent $187,000 to renovate the new office, according to its tax returns.

At the Markle Foundation, spokesman Todd Glass said the board is looking to reduce the rent by subletting some space to other nonprofits. ``We expect to cut our rent by 50 percent in the next six months,'' he said.

Extravagant spending

Although extravagant spending is not uncommon, the vast majority of private foundations do not drain their assets this way, the Globe review found. Similarly, most foundations do not overpay trustees and foundation managers.

The exceptions, however, are many and striking. Last month, the Globe disclosed cases in which foundation executives who claimed to be working full time were taking annual salaries approaching or exceeding $1 million, while many part-time trustees were being paid tens of thousands of dollars, and sometimes hundreds of thousands, for attending a handful of meetings each year.

After the report, attorneys general in California, New York, and Massachusetts opened inquiries into the apparent abuses. In the most egregious case reported by the Globe, Paul D. Cabot Jr. of Needham paid himself $1.4 million in 2001 and $1.3 million in 2002 for overseeing a family foundation whose assets have dwindled from $14 million in the mid-1990's to $4.9 million early this year. Cabot told the Globe he gave himself a $400,000 raise in 2001 to help defray the cost of a daughter's wedding.

In exchange for the tax breaks given to people who establish private philanthropies, the law requires foundations to donate at least five percent of their assets to charity each year. ``Reasonable'' expenses are allowed, and may be deducted from the mandated 5 percent.

Such expenses can put a considerable dent in what foundations give to charity. For example, at the Kerr Foundation, endowed by a former Oklahoma senator who made his fortune in oil, nearly half the 5 percent distribution in 2001 was eaten up by administrative expenses, travel, and salaries.

Alan L. Feld, A Boston University law professor and an expert in nonprofit law, said that the pattern of spending reported by the Globe goes ``way beyond what any reasonable person would think was appropriate.''

Said Feld: ``For foundation officials to behave as if a private foundation is another pocket of their own is wrong, and it deprives the intended beneficiaries of charities what they are entitled to.... This is part of a pattern where people are treating foundation assets as a pot of money they can dip into as they wish.''

Feld, in a view echoed by other experts, said that foundation spending now goes almost unregulated, with the Internal Revenue Service and state attorneys general providing little oversight. Each year the IRS audits only about 100 of the nation's 60,000 private foundations. State regulators complain that they don't have the budget or staff to audit foundation filings.

In the rare cases when they are discovered, abuses of foundation spending rules can result in stiff penalties. If the IRS finds that foundation executives are ``self dealing,'' or taking perks that ought to be counted as part of their personal compensation, those executives can be forced to repay the funds, plus a penalty that can range from 5 to 200 percent. Foundation managers or trustees who know of abuses can also be penalized. And, in egregious cases, foundations can lose their tax-exempt status.

Public perception

If Cabot represents the extreme in compensation, then the DeMoss Foundation's jet is its match in the perks category.

Bruce Hopkins, a lawyer at the Kansas City law firm Polsinelli Shalton & Welte and an expert on foundations, said he would advise his clients not to buy a jet because it is nearly impossible to justify the cost as reasonable under IRS rules.

``It just doesn't wash,'' Hopkins said of the DeMoss jet. ``I'm confident if the IRS or a court looked at this, it simply would not hold up.''

Often, however, the IRS has no way of knowing about such purchases. Foundation assets are supposed to be listed on a depreciation schedule included with each tax return, but the Globe found that many foundations do not file the schedules.

The $444 million DeMoss foundation did file its depreciation schedule, which shows that the Bombardier - nicknamed the ``Gold Star II'' - was purchased in 2001 to replace a more modest jet. The foundation spends more than $1.5 million a year to pay the salaries of two pilots and to operate and maintain the aircraft, which the manufacturer calls an ``ultra long-range, high-speed business jet.''

According to a former foundation pilot, who asked that he not be identified, the aircraft was purchased at the request of chairman Nancy S. DeMoss, the widow of Arthur S. DeMoss, who founded a Pennsylvania mail-order life insurance company. Mrs. DeMoss wanted to make flights to remote destinations in Asia and Africa, where the foundation supports missionary work, with fewer fuel stops, the pilot said.

Larry R. Nelson, the foundation's chief financial officer, sidestepped most of the Globe's questions about the jet. But in an e-mail, he said the foundation supports many causes and projects, ``most of which are overseas, many in the third world.'' The foundation's latest available tax filing, covering 2001, shows that two-thirds of its $36 million in grants went to domestic Christian ministries and churches.

Two former foundation executives said the foundation uses the jet mainly ``for charitable purposes.'' But not always: Since July, flight records tracked by the Globe show the DeMoss jet being flown routinely in and out of Palm Beach International Airport, near the foundation's headquarters, often to places where the foundation doesn't make grants. The jet has also flown to Washington, D.C., New York, Atlanta, and Scottsdale, Ariz., among other cities, and to Little Rock, where daughter Nancy Leigh DeMoss tapes a religious radio program.

In September, the daughter's trip to Lynchburg was for a speaking engagement. The jet picked her up that morning in South Bend, Ind., 20 miles from her home. In July, her mother took the jet to Orlando, Fla., a three-hour drive from her $10 million home in Palm Beach, to attend a friend's funeral. And the DeMoss grandchildren have occasionally flown on the jet, the former pilot said.

DeMoss family members - the mother and four others are trustees - refused to be interviewed for this story.

As for the Noble Foundation, Pulliam said it received an OK from its attorneys before buying its seven-seat Cessna Bravo jet. ``We talked about the public perception of this before we went ahead, that some people would say, `You're a charitable organization and you've got a plane,''' he said. ``It is a public relations issue.''

Pulliam said the foundation uses the plane to help Noble's scientists travel more efficiently from rural Ardmore to remote sites in Texas, Missouri, Kansas, and Colorado, where it funds agricultural and biotechnology programs.

After the Globe raised questions about the more than 40 flights back and forth to Athens, Ga., Pulliam said that a foundation consultant, Joe Bouton, a professor of crop and soil sciences at the University of Georgia, has been shuttling back and forth to Oklahoma on the jet twice a month over the last two years. Bouton, he said, plans to move to Oklahoma next spring.

``Using commercial airlines, it takes Dr. Bouton about 8 hours to get to Ardmore from Athens,'' including two hours driving time on each end of the trip, plus waiting time in airports, Pulliam wrote in an e-mail to the Globe. ``Using our aircraft, it takes less than three hours.''

Pulliam said buying the jet, with its annual operating costs of about $600,000, was the brainchild of the foundation's trustees. Nine of the 15 trustees are descendants of Oklahoma oil man Lloyd Noble, who started the foundation in 1945. Pulliam said the trustees, especially those who live in Atlanta, use the jet to travel to Oklahoma for trustee meetings and to monitor the foundation's farflung projects.

The use of the aircraft, both for Bouton's commuting and the trustees' flights, is ``quite appropriate,'' Pulliam said. He said the plane has never been used for nonfoundation business.

Nonetheless, in the post-Enron era, corporate executives have found it increasingly difficult to justify the purchase of aircraft, much less long-range jets like the DeMoss Bombardier, according to people who sell and lease business jets

``A big piece of owning a jet is ego,'' said Mark Stone, chief executive of Sentient Jet Inc., a Norwell company that leases jets to customers on short notice. ``A lot of corporations have sold their aircraft, because they just didn't feel that it was giving the right image to their shareholders.'' At many other foundations, executives are given luxury cars for their use. When the president of the M. B. and Edna Zale Foundation in Dallas was ready to retire in 2001, the foundation let him keep his company vehicle - a 1999 Lexus.

The sedan was part of a $325,000 retirement package given to Michael Romaine, who worked for the Zale family's jewelry company before heading their foundation, according to the foundation's current president, Leonard Krasnow. With Romaine driving off in the Lexus, the foundation bought Krasnow a 2001 Infiniti.

Reached at his retirement home in North Carolina, Romaine, 64, at first said he bought the Lexus from the foundation for $24,000. But when told what Krasnow had said, Romaine asked, ``Did they give it to me? I'd have to look it up. ... I can't remember if I bought it or not.''

The foundation's original purchase of the Lexus for him was justified, Romaine said, calling it ``a very basic car.''

A lawsuit in Texas

At the King Foundation in Dallas, Yeckel, 67, and his deputy, Thomas W. Vett, used foundation credit cards to take at least one foreign vacation a year. But it took years for anyone to discover the excessive spending. In early 2002, Yeckel's sister, Dorothy Yeckel, became suspicious of her brother's lifestyle, including his $1.5 million home and the exotic vacations he took.

Todd Amacher, the sister's lawyer, looked over the foundation's tax returns and alerted the Texas attorney general to the $1 million in compensation Yeckel was taking. Assistant Attorney General John Vinson filed suit, and ultimately a new board took control of the foundation. The suit became public last year, but the details of Yeckel and Vett's free-spending ways had not been disclosed.

During an October 24 deposition, Vett testified that he and Yeckel each used King Foundation credit cards to travel with their wives and other family members to England, Scotland, Australia, Russia, the Czech Republic, Germany, and Italy. There were also numerous trips to San Francisco and New York, according to a lawyer familiar with Vett's testimony.

The globetrotting cost the foundation an estimated $200,000 over five years, according to one person who is involved in the case. That money came straight out of the pockets of charities the foundation might otherwise have funded, because the executives counted the travel on foundation tax returns as a charitable expense.

And their foundation-subsidized lifestyle went well beyond vacations. The foundation maintained three memberships at a private downtown Dallas dining club, at a cost of more than $5,000 a year. In 2001, according to the attorney's general's lawsuit, the foundation credit cards were billed for $6,442 for restaurant bills; $23,000 for purchases in retail stores and $6,531 for health-club memberships.

Yeckel, in a brief telephone interview, declined to answer questions. An attorney for Vett said he could not discuss his client's testimony.

In other cases, relatives of those who established foundations spend the assets as if they were their own personal funds. At the $43 million Roy F. & Joann Cole Mitte Foundation in Austin, Texas, Scott Mitte began to run up personal expenses almost as soon as he took the helm of the foundation his parents founded.

Since 1999, the foundation has purchased Tony Bennett concert tickets worth $4,003, a $4,037 custom tuxedo, and six doors totaling $6,090 that were delivered to Mitte's home, according to an audit of foundation expenses. During Mitte's tenure, the foundation's spending on travel and meetings rocketed from about $50 a year in the late 1990s to $183,000 in 2001, while his compensation also leapt from $31,000 in 1999 to $220,000 in 2001.

And it paid $368,000 in legal fees last year, up from $6,689 the year before, in part to cover a legal battle between the foundation and Roy Mitte's company. Also last year, the foundation footed the bill for an out-of-court settlement with a woman who sued Mitte for alleged sexual harrassment. The foundation disclosed a $139,000 ``legal settlement'' on its 2002 tax return.

The foundation's lawyer, Jeffrey T. Knebel, declined to discuss the settlement or answer questions about other foundation spending. Mitte resigned as executive director in August, 2002, when the harassment charge became public, but remains on the foundation's board of directors and serves as its senior vice president. He did not return calls from the Globe.

In a statement, the foundation said it believed its expenses were ``reasonable, appropriate, and have been greatly justified.''

Some large foundation expenses are tucked into a category on tax filings called, ``travel, conferences, and meetings.'' The IRS does not require detailed accounting for such costs. At several foundations, officials refused to provide the Globe with documentation to justify the costs, or declined to answer questions.

The $13.5 million Chiles Foundation of Portland, Ore., for example, reported spending $591,415 on travel, conferences, and meetings from 1998 through 2002, according to its tax returns. Another $128,115 was reported for ``autos and parking'' during that period, while the foundation paid $300,000 in rent for its offices. The largest beneficiary of the foundation is Boston University, where foundation chief Earle M. Chiles, 83, is a trustee.

Foundation officials turned aside Globe efforts to interview Chiles, the son of the founder. In a written note, the foundation attributed its spending to ``grant-related work'' and to periodic meetings with its investment advisers. One foundation official, Sharron D. Mathews, said in a brief telephone interview: ``If our spending is out of line, it is only the Internal Revenue Service we need to account to.''

Matt Carroll of the Globe Staff contributed to this report.

Paul Cabot
Paul Cabot
Paul Cabot Jr.
Paul Cabot Jr.
Lucille and Vic Wertz
Lucille and Vic Wertz (1955 Globe File Photo)
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