LETTERS

Sweet charity: In defense of NHF

I would like to make a few comments regarding Frederick P. Gabriel Jr.’s spin on what the National Heritage Foundation is actually all about (“Charity scheme a scam? IRS watches,” Feb. 1), especially since your magazine should be addressing financial matters, and not making assumptions regarding the legal issues of the non-profit world.

First, I take offense to Mr. Gabriel’s opening statement: “The world of charity could be headed down a most uncharitable path.” Please point out which activities that we are involved in are “uncharitable.”

As a matter of fact, throughout your article you seem to be implying that the IRS is questioning our charitable purpose, which is “to restore, maintain and extend our national heritage in people to people action.” The last time I checked, we already won that battle.

In 1987, we pointed out both in the lower court and on review that we are a project-by-project approach to the restoration of our national heritage of people-to-people action. The judge said, “The program of (NHF) may be unique and innovative, but they are the essence of what Congress intended when they set up Section 50l(c)(3).”

As a result of this decision the legal credibility for what we and others are doing was established. Nowhere in your article do you state this fact.

I would like to correct your second paragraph, and state it in the objective way an impartial, unbiased, responsible reporter should have: “A growing number of individuals are embracing the strategy of the National Heritage Foundation, a 501 (c)(3) public charity. With an application approval, a donor can form their own charitable project (which NHF calls “foundation”), make tax-deductible donations, conduct fund-raising activities and even pay themselves and family members for their philanthropic efforts. Some are also directing charitable dollars to financial advisers as payment for helping to raise contributions.”

Here is our philosophy, and one of the reasons why I started the National Heritage Foundation. Charities traditionally raise funds with uncompensated volunteers, whose efforts are encouraged and coordinated by the staff of the charity, usually called development directors. In our opinion this system hasn’t worked very well in the past and will work worse in the future. Demographically speaking, our volunteer base is shrinking and aging. Our charities cannot depend on volunteers for the funds they need. Compensation — reasonable compensation — is necessary.

Consider your own position at InvestmentNews. Would you be able to do the job that you do without continuous reasonable compensation for yourself?

Would you also call it “troublesome” (as you did in your article) if the head of the American Red Cross accepts payment for services she performed for the charity? Of course not. She, and other heads of corporations and charities, are being paid a reasonable compensation for the work they do.

Why should an employee for a small charity expect any less? Their charitable causes are very real, but they cannot afford salaries. Therefore they must depend on results-based compensation programs.

I’ve witnessed many of these plans offered to charities, and some are what I would call a “scheme.” Some charge as much as 90% of total donations raised. This outrages me, as it should you, a prospective donor.

This is why we have designed an equitable compensation program to those who are raising funds for charitable causes. I call it “non-commission results-based compensation.” In regard to our compensation, the courts ruled that this compensation plan was reasonable and not part of the net earnings of the charity.

We are, and always have been, extremely open and above board with all of our activities and policies on compensation. A full disclosure policy, which we have in all our printed material and on our publicly accessible website at www.nhf.org, certainly attests to this fact.

There were many errors in your example of how a financial professional could be compensated. So, rather than correct them, let me take you through each of our compensation methods one by one and see if I can give you an idea of what we are trying to do:

* Direct charge. We have the philosophy that “the workman is worthy of his hire.” With the concurrence of the donor, we will pay reasonable fees, charges and even commissions. It is perfectly legal for an attorney to charge his normal fee for work performed for a corporation, whether that corporation in non-profit or for-profit.

* Marketing charge. Here we pay for the processing of the gift and the development of our marketing program. We intend to introduce charities to the financial profession, and that will take some doing. The counselor can obtain a part of this 2.5% with certain minimums applying.

* Harvester plan. Here we are trying to design a way to compensate a financial professional for raising funds without exposing the charity to charges if no funds are raised.

* Money management. The only money managers that NHF will approve are registered with the Securities and Exchange Commission, and we will pay no more than their normal fees.

* Administrative management. This is our effort (offering to bring the financial professional on board within a reasonable budget) to build the ability throughout the country to set up and supervise foundations. The financial professional is and becomes an employee of NHF, and as such has tasks and duties assigned and supervised by the NHF staff.

* Recruiting. Building our “representatives” to the size where we can rival the stockbroker community in ability to raise funds for charitable endeavors will take great effort and financial incentives.

Compensation is, in our opinion, an important key in the success of our program. With our experience of more than 30 years, we have found that the flow of funds to charities is fraught with income tax, estate tax and gift tax implications. The best advice is obtained from financial professionals who do this for a living. I personally don’t see how it will work without compensation.

But I am aware that there are charities that are content with volunteerism and slow, slow growth. I, however, believe that our national heritage is too precious and too “at-risk” to settle for this slow growth.

You say that this “strategy is aimed primarily at the wealthy.” Absolutely untrue. Ask the mother in Suquamish, Wash., who began a foundation “to provide assistance and support to families with medically fragile foster children.”

She is a woman of very modest means whose neighbor is a foster parent to children who are so sick that they will, in all likelihood, die. She rallied her friends, family and community members to donate money to her foundation. With the funds she raised, she was able to update this neighbor’s van with a wheelchair lift. This was an expense not covered by the government. Instead of simply shaking her head and saying, “Gee, what a shame,” this woman took action. This is the essence of what we are trying to promote through people-to-people action.

I could give you hundreds of examples of this kind of generosity within the NHF, yet you chose to take the path of the “media alarmist” and focus merely on the possibility of abuse within the foundations.

Mr. Jeffrey R. Lauterbach of the American Guaranty & Trust Co. says, “It’s a way for people to have their cake and eat it, too.”

As a matter of fact, this could be true, if you consider “having their cake” as meaning “donate to the causes that they believe in and directly affect them and their community,” and “eating it, too” as meaning “receiving a tax deduction for doing so.” Any compensation given to those who are working for the foundation is taxable income, for which we issue a 1099.

I feel sorry for Mr. Lauterbach, who feels “it’s a stretch to believe that people would not act in their own self-interest.” What a dim view of the American public he has. To restore his faith in humanity, I would like to share with Mr. Lauterbach the story of another foundation of ours, “Trevor’s Endeavors.”

Trevor, then 11 years old, watched a news story about the homeless. He asked his parents if this could possibly be true in America. His parents admitted that, yes, there were homeless people living right in the heart of the downtown area. Immediately he felt compelled to help. After much cajoling, his parents reluctantly took him downtown to see these people, and to bring them food and blankets. This was 20 years ago, and now Trevor and his father run a foundation to house the homeless.

You also state: “Abusers could inflate the amount of contributions eligible for tax-deductions or even improperly use the charities as shells to pay for a child’s college tuition or generate personal income.” I assure you that we scrutinize every request for disbursement from each of the foundations.

We have very strict guidelines (which you can also read on our website or find in the notebooks provided to each new foundation) and a knowledgeable staff. We are in constant contact with our foundations to make sure that these expenditures comply with NHF and IRS regulations.

We are not just a donor-advised fund. We are, from different views: (1) a charitable greenhouse, (2) an experiment in charitable entrepreneurship, (3) A service organization to promote the involvement of individuals, corporations and communities in local charitable activities and (4) an experiment in the new technique of charitable underwriting — getting the financial professional involved in the flow of funds for charities.

Mimicry is the sincerest form of flattery. Certain competitors have come on the scene, including a recent listing of the Fidelity Charitable Foundation, which began after long personal conferences with our staff, and is now at the $l.5 billion level, and last year was named the fifth-largest charity in the country. To me, this says that they must be doing something right to compel people to donate that sum of money.

I am sorry that the director of services at the Council on Foundations, Carol Simonetti, used the phrase, “It just doesn’t smell right to me.” I certainly don’t know Ms. Simonetti and can’t understand how she could make such a value judgment. I would offer that she visit us in our offices and see, first-hand, the charitable works that we are conducting.

I do appreciate the compliment you paid to me, stating that I have the “zeal of a street preacher.” I may sound preachy sometimes, but that’s because I sincerely believe the National Heritage Foundation is changing the face of philanthropy and building an endowment stream that will benefit charities in the future.

J.T. Houk

Chief executive officer

National Heritage Foundation

Falls Church, Va.