August 13, 1998 | Read Time: 6 minutes
Fifteen years ago, the Internal Revenue Service revoked the tax-exempt status of the National Heritage Foundation, and J. T. (Dock) Houk found himself thrown out of the organization he had created in 1968. The tax agency charged that the group violated federal laws governing charities, but ultimately the organization was able to win back its exemption by going to court.
Now, Mr. Houk is at again. He’s bracing for a fight with the government over a controversial fund-raising approach known as charitable split-dollar insurance, which his organization sees as the salvation to fund-raising problems for charities nationwide.
Under such arrangements, charities appear to pay for life-insurance policies on donors using tax-deductible gifts from the donors or their estates — then share in the policies’ proceeds.
The strategy has drawn the attention of the tax service because it raises questions about the proper role of charities in insurance deals that benefit donors and their heirs.
Critics say split-dollar plans could lead to tax penalties for donors and the loss of tax-exempt status for participating charities. Marc Owens, director of the tax service’s Exempt Organizations Division, says the I.R.S. is looking into the legality of arrangements.
Mr. Houk, however, isn’t waiting for a ruling from the revenue service. For more than two years he has been using the National Heritage Foundation as a platform to promote the split-dollar strategy. For example, the organization’s Web site (http://www.nhf.org) provides a great deal of information justifying the arrangements.
The foundation acts as a clearinghouse for so- called donor-advised funds. It receives lump-sum, tax-deductible contributions from wealthy donors, invests the money in stocks, bonds, and other investments, and — generally in response to the suggestions made by donors — parcels out portions of money to charities. Already it has agreed to participate in nearly 1,000 split-dollar insurance deals with donors, arrangements that ultimately will provide some $1.2-billion for charitable purposes, Mr. Houk says.
During 1997 alone, Mr. Houk says, the foundation paid out more than $21-million in life-insurance premiums. And that, he says, is only the beginning. “This year, we will do twice as much as we did in 1997.”
While maintaining that the split-dollar strategy is perfectly legal, Mr. Houk acknowledges that it resides at the boundary of existing tax law.
The foundation’s lawyer, Michael Goldstein, concedes a similar point. “We have told our clients that this is not for the risk-averse individual,” says Mr. Goldstein.
If the revenue service should challenge split-dollar insurance deals, as many charity officials expect, Mr. Houk says he’s prepared to do battle. He has set up a $200,000 legal-defense fund to fight for the strategy.
“If the I.R.S. wants to step on our toes,” declares Mr. Houk, “we are going to be bristly like a porcupine.”
Mr. Houk’s intractable position has left him open to sharp criticism from some quarters of the charity world.
“In my opinion, some of the charities engaging in this practice should lose their tax-exempt status, and I am talking about the National Heritage Foundations of this world,” says Douglas Freeman, a Los Angeles tax lawyer who has analyzed split-dollar arrangements for the National Committee on Planned Giving, which has issued a report sternly condemning the approach.
But the 66-year-old Mr. Houk, a lean and tawny former top-ranked tennis player, is hardened to controversy.
In 1968, as Congress was preparing to impose tough new curbs on private foundations as part of sweeping reform of the nation’s tax laws, Mr. Houk founded an organization that was also called the National Heritage Foundation.
After Congress passed the restrictions a year later, the foundation began attracting contributions from people who decided to shut down their foundations, rather than comply with the new restrictions. The law prohibited grant makers from owning profit-making businesses, required them to distribute at least 5 per cent of their assets each year to charity, and forced them to file detailed financial reports.
Mr. Houk maintained that the rules were so cumbersome and draconian that they would undermine private philanthropy in America. So he set up his foundation as a haven for people who controlled private foundations, offering them a way to transfer their money and control what happened to it without having to meet the government’s new regulations.
His approach didn’t survive for long.
In 1983, the I.R.S. withdrew the foundation’s tax-exempt status. The service charged that Mr. Houk’s group was nothing more than a collection of private foundations seeking to operate as a charity — and doing so to avoid the regulations that grant makers must follow.
The tax agency also alleged that Mr. Houk’s foundation violated rules that forbid charity officials, foundation donors, and others from reaping significant financial gains through their affiliation with a charity. The I.R.S. said Mr. Houk’s foundation had overpaid financial advisers who brought contributions into the organization.
The group challenged the government in the U.S. Court of Claims, winning in 1987. But in the meantime, the foundation’s board ousted Mr. Houk because his leadership had invited the I.R.S. inquiry. The trustees also changed its name to the National Foundation Inc., which still operates.
Mr. Houk says the court victory vindicated his fund-raising approach. In 1994 he created the current National Heritage Foundation to promote his avant-garde visions of philanthropy.
Mr. Houk, who once taught economics at Liberty University, the institution run by televangelist Jerry Falwell, excoriates other charity managers with the zeal of a street preacher, saying they are too timid and ill-informed to see the merits of controversial strategies such as charitable split-dollar insurance plans.
He complains that most charity fund raisers lack the skills or contacts to tap into the large fortunes that could be available for philanthropy. “Middle-class charities get these retreads, these dropouts, these hangovers, who don’t know ‘sic ‘em’ from ‘come here’ in financial matters,” he declares.
“We offer dynamite,” Mr. Houk adds, referring to his foundation’s approach.
Most non-profit groups have been unable to attract highpowered financial advisers because the charities are reluctant to pay enough for business advice, Mr. Houk maintains. Instead, he asserts, charities rely on volunteers and paid fund raisers who lack the ability to provide wealthy people with sound advice on planned-giving strategies.
“Charities think volunteers will raise all the money we need,” Mr. Houk says. “That won’t work. Volunteers suffer from bitterness and burnout.”
Whether the split-dollar strategy is an appropriate remedy remains a question for the government to decide.
Many charity officials think the I.R.S. should put a quick halt to the split-dollar approach. Jack Shakely, president of the California Community Foundation, alleges that it is little more than a profit-driven scheme that ultimately will damage charities. “It’s a bad deal for philanthropy,” he insists.
But Mr. Houk, ever the contrarian, insists that the split-dollar strategy stands for nothing less than redemption after years of onerous regulation. “This is the salvation of America’s charities,” he declares.
And if government regulators don’t see it that way?
“If they say we violate the law,” Mr. Houk declares, “we will say, ‘Okay, we’ll see you in court.’ ” — Vince Stehle Michael Geissinger, for The Chronicle J. T. (Dock) Houk, founder of the National Heritage Foundation, is an ardent supporter of “charitable split-dollar” insurance plans: “This is the salvation of America’s charities.”
