Investment in failed solar firm Solyndra raises questions about nonprofit’s purpose

September 27, 2011

Six years ago, Senate Finance Committee investigators mounted an inquiry into an exotic variety of nonprofit organization that they feared affluent families were using to warehouse wealth while simultaneously earning themselves lucrative tax breaks.

One nonprofit group singled out for scrutiny was a low-profile organization based in Tulsa. That group, the George Kaiser Family Foundation, later became the biggest investor in Solyndra, the solar company that collapsed last month after burning through a half-billion dollars in taxpayer money.

Congressional interest in the nonprofit group was so high in 2005, in fact, that an attorney for then-committee Chairman Charles E. Grassley (R-Iowa) used it in an internal memo as a case study into whether the tax loophole should be closed. The memo, previously unreported, pointed out that in 2002 the foundation distributed just 0.2 percent of its assets to charity. That was acceptable under the law because GKFF, as it is known, was founded to financially “support” another nonprofit group, the Tulsa Community Foundation.

Most private foundations must spent 5 percent or more of their assets on charitable work each year or face financial penalties.

“Tax deductions for charitable contributions are intended to encourage transfer of wealth to those in need,” the memo said. “Individuals should not be allowed to ‘park’ their assets in charities in order to preserve their assets in perpetuity, while simultaneously benefiting from a charitable contribution deduction.”

The loophole used by GKFF, the memo concluded, “is now being used by wealthy individuals to avoid the private foundation rules.” Those organizations, it said, were in effect “conducting the abusive activities Congress intended to curb” when it established the 5 percent minimum payout for foundations.

Endowed by Oklahoma financier and Democratic fundraiser George Kaiser, GKFF gives to support early childhood education for the poor, to a University of Oklahoma program focusing on community medicine and toward the beautification of Tulsa.

But despite its name, the $4 billion foundation is not a private foundation under tax law. Instead, Kaiser established the organization as what is known as a “supporting organization.” There are thousands of supporting organizations in the United States, and although they are perfectly legal, some reformers think they shouldn’t be — especially one that stockpiles $4 billion.

“In that case, that’s not supporting anything but itself,” Pablo Eisenberg of Georgetown University’s Center for Public & Nonprofit Leadership said of GKFF. “I think it should be abolished.”

Under current law, Kaiser would be entitled to tax write-offs for cash and stock he donated to the organization.

In a written statement, GKFF stressed that it was lawful and “not uncommon” for a supporting organization to include the word “foundation” in its name.

“The purpose of the structure is to support the community, state and other charities focused principally on reducing the cycle of poverty, mainly in the greater Tulsa area,” the statement said. “We have increased donations as opportunities presented themselves. Someday, we fully expect to achieve five percent giving, although we are under no legal obligation to do so.”

Since 2007, GKFF has made about $300 million in grants to charity, not including millions of dollars in loans and other direct support it has offered to community improvement projects. The organization passed a “full audit” by the IRS, the statement said.

“The programs that the foundation has invested in, like early childhood development and reducing female incarceration rates in Oklahoma, have driven substantial behavioral and policy change in the community and state. GKFF will make an impact for generations to come and we are in the earliest stages of our giving.”

If GKFF were organized as a private foundation, it probably would be barred from owning a large percentage of any single business, tax experts said. That could have precluded it from owning more than a third of Solyndra, they said. At the end of 2009, GKFF listed its Solyndra investment as worth $342 million — more than twice the value of any other securities the organization held. Solyndra said in filings made before its collapse that it had agreed to consider building a future factory in Tulsa.

In 2009, the last year for which records are available, GKFF reported paying out grants of about $46 million, not including management costs. Though substantial, that sum represents slightly more than 1 percent of the organization’s assets. If GKFF had paid out 5 percent of its assets, as most foundations do, it would have spent nearly $200 million that year on grants to charity.

GKFF makes direct payments to some charitable projects that are not reflected in the grant total. Even with those payments included, however, GKFF’s outlays do not add up to 5 percent of its assets, according to a person familiar with the organization’s operations.

GKFF says in financial filings that it exists to support the programs of the Tulsa Community Foundation, a nonprofit that Kaiser co-founded and formerly headed as chairman. Like GKFF, the Tulsa Community Foundation is not a private foundation under tax law and is not subject to penalties if it gives away less than 5 percent of its assets each year.

Two of GKFF’s trustees are current and former board members at the Tulsa Community Foundation; the third trustee is its executive director. The two groups share the same street address.

Solyndra, a Silicon Valley solar panel maker, was a centerpiece of President Obama’s initiative to develop clean energy technologies and received the program’s first loan guarantee, for $535 million. Solyndra reported accelerating sales until Aug. 31, when it collapsed without warning and filed for bankruptcy protection, leaving 1,100 people out of work and taxpayers on the hook for the loans. A week later, FBI agents raided Solyndra’s offices and seized files and computer records.

The collapse has become a political liability for the White House because of ties to Kaiser, an Obama donor and frequent visitor to the White House, where he met with senior officials that included presidential adviser Valerie Jarrett and Rahm Emanuel, who was then Obama’s chief of staff. The visits often preceded, sometimes by days, key events in Solyndra’s history.

Neither Kaiser nor GKFF have responded to questions about how they came to invest in Solyndra.

Securities filings show that in 2010, Argonaut Private Equity and other affiliates of GKFF beneficially owned 35.7 percent of Solyndra and that they had the right to buy up to 15 percent in additional shares in a public stock offering that was planned at the time but later abandoned. The managing director of Argonaut, Steven R. Mitchell, sat on Solyndra’s board of directors.

The records show that another major investor was Madrone Capital Partners, an investment fund associated with the family that controls Wal-mart.

An investigative panel of the House Energy and Commerce Committee has requested documents from Argonaut, seeking all materials related to Solyndra’s $535 million federal loan guarantee, the company’s canceled initial public offering and the company’s bankruptcy. It also is seeking copies of communications with the Obama administration regarding a February loan restructuring, which placed Argonaut ahead of taxpayers for repayment of $75 million in case of a liquidation.

Experts in nonprofit law said that money given to GKFF probably would generate tax breaks for the donor. Funds given to a supporting organization in most cases would eventually be spent on charitable causes, they said.

Opposition to the groups stem from the argument that in many cases donors retain a great deal of influence over the organizations and how they invest. Regulators and watchdog groups suspect that the wealthy often use the organizations more for tax planning than for any charitable purpose.

“I don’t see why they need to exist,” Eisenberg said of supporting organizations. “I’m not sure there is a real rationale.

“And if they do exist, they should be under very tight regulations. ”

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Joe Stephens joined The Washington Post in 1999 and specializes in in-depth enterprise reporting.
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