Paul Newman's Foundation Fights Looming 200 Percent Tax

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By Colleen Murphy

Aug. 17 — When Robert Forrester comes to Washington for several days in September, he will have a familiar, but pressing, task on his agenda: meeting with lawmakers and staffers on Capitol Hill to make what might be the biggest pitch of his decades-long career in philanthropy.

Forrester, the president and chief executive officer of Newman's Own Foundation, has spent the last five years building support for legislation to save the foundation and open the door to more innovation across the nonprofit world. If Congress doesn't act soon, the foundation could face a whopping 200 percent tax at the end of 2018—a problem Forrester told Bloomberg BNA is an “existential” issue.

The solution now sits in bills introduced in the House and Senate that would amend tax code Section 4943 to exempt private foundations from a tax on excess business holdings. Private foundations that own 100 percent of a business—like Newman's Own Foundation—must divest 80 percent of ownership in the business within five years of acquisition or face the tax penalty, a punishment imposed by the 1969 Tax Reform Act.

By the numbers

“Without this legislation, there is no way the model, the legacy of Newman's Own, that has existed will be able to continue—there's no alternative,” Forrester said in an Aug. 10 interview.

The Foundation

When actor Paul Newman created food products company Newman's Own Inc. in 1982, he had a unique plan: All the profits from its salad dressing, and later pasta sauces, salsas and cookies, would be given away. The company donates all after-tax profits to the foundation for distribution to organizations focused mainly on nutrition, children's health and veterans issues. One recipient, SeriousFun Children's Network, started in 1988 as the Hole in the Wall Gang Camp, which Newman opened in Connecticut to offer an escape for seriously ill children. The original camp, named for a hideout in Newman's hit film “Butch Cassidy and the Sundance Kid,” has now expanded to dozens of camps and programs.

Newman died in 2008, and company ownership was transferred to the foundation—triggering the excess business holdings tax. The Internal Revenue Service granted the foundation a five-year extension—until 2018—giving it more time to push for congressional action.

Timeline

The foundation—governed by an independent board of directors—will have given away $500 million by the middle of next year, according to its own projections. But the organizations it supports could be hurt if the foundation can't continue providing support.

The Politics

The topic has come up in several bipartisan bills in both chambers.

In April, Rep. Dave Reichert (R-Wash.) introduced H.R. 5007 and Sen. John Thune (R-S.D.) introduced S. 2750 to exempt private foundations that own business enterprises, donate all profits to charity and are independently operated. The bills have been referred to the House Ways and Means Committee and the Senate Finance Committee, respectively, but the timeline for further action is uncertain.

Reichert “is of course advocating for it, but a path forward hasn’t been decided,” a spokesman in his office said.

If they succeed, it will be the end of a long road for Forrester, who has held more than 325 meetings with lawmakers and staffers on the topic over the last several years.

“I’ve been working on it for so long I think they think I’m part of their office or something—I’m the guy that hangs out at the coffeepot with them,” he said.

Sen. Orrin Hatch (R-Utah), chairman of the Finance Committee, first introduced a bill on the topic (S. 909) in April 2015. Reichert also introduced a companion bill (H.R. 3732) in the House that year.

In a report accompanying Hatch's bill, the committee said it “is appropriate to encourage this form of philanthropy by eliminating certain legal impediments to its use, while also ensuring that private individuals cannot improperly benefit from charitable dollars.” The bill would have “a negligible effect” on budget receipts, the report said.

Not Backing Down

Moving legislation through Congress is a slow process in normal circumstances—let alone in an election year. And with many lawmakers pushing for broader tax changes, some say piecemeal legislation on tax issues has long odds unless it is part of a broader package.

But if that worries Forrester, he doesn't let it show. No lawmaker he has met with has rejected the idea, energy surrounding the legislation has peaked in the last year and some have called Newman's Own “the poster child for the right way to do things,” he said.

“It’s not like I’m Sisyphus in the sense I’m trying to push support for it,” he said. “It’s just trying to get Congress to act differently than they have in the past five years.”

In fact, now could be the right time, one supporter said. There is “real momentum and optimism” behind the bills, which could move in the post-election session, said Maggie Gunther Osborn, chief strategy officer at the Forum of Regional Associations of Grantmakers. Osborn backed the Connecticut-based foundation's exemption efforts when she was president of the state's Council of Philanthropy.

“This is the moment we want to grow philanthropic opportunity,” Osborn said. “Things are moving as much as they're going to move forward right now.”

Paul Godfrey, a business professor in the Marriott School of Management at Brigham Young University, who has advised the Newman's Own Foundation on the tax changes, said Forrester has “absolute bulldog-like persistence” when it comes to pushing for the legislation—a comparison with which Forrester laughingly agreed.

“Nobody is going to get the bone out of my mouth until it's clear it's not going to work and if I keep chewing that bone I'm going to choke on it,” Forrester said.

Open the Floodgates

The pending legislation has the potential to spur more creativity in the nonprofit sector by changing a law that is now outdated, Godfrey and others told Bloomberg BNA. Although no organization is quite on the scale of the Newman foundation, others have sprouted up with similar charitable plans in mind—and Godfrey said hundreds of other philanthropic enterprises could be created if the law changes.

“I think there's a huge potential upside,” Godfrey said.

Impact Makers, a Richmond, Va.-based information technology consulting firm, will give 100 percent of its net profits to charities over its lifetime. When Michael Pirron founded the firm in 2006, he said he was inspired by Newman's vision—and is watching closely to see how Congress will handle the legislation.

Pirron structured his company to skirt the excess business holdings tax—it is owned by two public charities instead of a private foundation. The setup wasn't his first choice, but came about as “an unfortunate consequence of the law,” he said.

“Ultimately we lost control of how that public benefit is created in the long term,” he said. “We came up with a creative solution that's less than perfect and less than ideal than we would have liked.”

Allen Bromberger, a partner at Perlman & Perlman LLP, said although half of his practice involves traditional nonprofit organizations, the rest consists of companies “that want to make money and do good at the same time.”

“Right now there’s a sort of large movement towards the development of socially responsible business and entrepreneurs creating companies and building into the DNA of those companies a social purpose,” Bromberger said. “What they’re saying is ‘The old rules shouldn’t really apply to us the same way, because underlying policy concerns are different,' ” he said.

Plan B

When asked what he will do if Congress doesn't act in time, Forrester was hesitant to detail the options he has considered. Giving current employees a sense of security and honoring Newman's legacy are just two of the considerations weighing on his mind, he said. The financial implications are also a concern.

“Whatever we do will be very costly to us,” he said, adding it would be impossible to sell the company for any value because it gives its profits away.

Forrester said it is also crucial to maximize the assets' charitable value, and keep the company's mission intact as much as possible, so “the public would perceive this to be a good charitable activity, while it's not going to be as inspiring as what Newman's Own has been.”

“While there is no option available that keeps it together as Newman's Own has always been, we are looking at options that can get as close as possible,” Forrester said.

Richard Schmalbeck, a law professor at Duke University who studies nonprofit organizations and wrote a paper on possible changes to the 1969 law, said one possibility would be for the foundation to be reorganized into a “foundation substitute” such as a donor-advised fund. The foundation could transfer stock to the donor-advised fund, which would then make the distributions, he said.

Osborn said while “the Plan B isn't a good one,” the biggest consequence can't be quantified.

“It really does change the absolute ability and nature of the foundation,” she said. “I think it risks going away, which would be horrible.”

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

For More Information

Texts of H.R. 5007 and S. 2750 are in TaxCore.

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