American billionaires are making waves with politicized models of philanthropy, from Mackenzie Scott’s massive donations to Elon Musk’s controversial use of deductible nonprofit contributions amid his larger critique of national tax policy. On this week’s episode of Now & Then, “Tax Dollars and Tech Dollars: Who Supports Society?” Heather Cox Richardson and Joanne Freeman explored past debates over the relationship between government, the financial elite, and the impoverished. In 1962, a congressional uproar over the Howard Hughes Medical Institute’s tax status offered an early political debate over the shifting norms of postwar American giving.
On August 18th, 1962, Democratic Texas Congressman Wright Patman, the Chairman of the House Small Business Committee, released the first in a series of reports that he dubbed “an agonizing reappraisal” of non-profit corporations in American life. Patman studied 534 powerful non-profits, highlighting waste, potential tax irregularities, and seeming conflicts-of-interest that could limit the organizations’ tax-exempt statuses.
Patman had been in Congress for 34 years. Upon entering the House in 1929, Patman quickly developed a reputation as an anti-business bruiser. In 1932, he led a high-profile investigation of President Hoover’s Treasury Secretary Andrew Mellon for conflicts of interest. After World War II, he quarterbacked the quest to pass the 1946 Employment Act, which set up the parameters for federal supervision over the postwar economy.
In the 1950s, Patman’s main target was the Federal Reserve; in his infamous Oval Office tapes, President Nixon would tell his Chief of Staff H.R. Haldeman of a popular mid-1950s joke: “If Elizabeth Taylor and Patman were alone together on a deserted island, he would lecture her about the Federal Reserve.”
By the time that Patman began his nonprofit crusade, he had long been Chairman of the House Small Business Committee and was slated to take over the Chairmanship of the immensely powerful House Banking Committee in 1963.
Over the days following his nonprofit report, Patman threw accusations at a plethora of the organizations detailed therein. He reserved particular attention for the Howard Hughes Medical Institute (HHMI), the nonprofit arm of the reclusive aviator, filmmaker, and engineer’s financial empire.
In the fall of 1953, Howard Hughes’ business legacy was in disarray. Hughes, on the hook for several military plane contracts, met with Air Force Secretary Harold E. Talbott, who gave the magnate 90 days to tidy up his tax bills and reorganize his industrial assembly.
Hughes and his allies came up with a scheme. In December 1953, Hughes became the sole trustee of the Howard Hughes Medical Institute (HHMI), a non-profit incorporated in Miami Beach.
What followed was what Patman dubbed a “ring-around-rosey” of exchanges between HHMI and other Hughes concerns. Hughes Tool Company, the massive conglomerate that Hughes’ father had started as a Houston-based drill bit company, transferred to HHMI trademark rights and $74 million in assets, including a number of industrial properties.
The Institute eventually transferred the Hughes Tool capital to another newly-independent offshoot corporation, Hughes Aircraft, which then granted the Institute $18 million in stock. The Institute claimed a $2 million tax deduction on the stock. HHMI also rented out the properties to Hughes Aircraft, bringing in millions of additional foundation dollars.
Patman positioned HHMI’s beginnings as those of a glorified middleman between the two for-profit corporations. He further alleged that the shuffling of funds and rents between the nascent non-profit and the industrial giants–all with Hughes ostensibly in control–effectively amounted to a tax dodge.
Patman highlighted that the IRS in 1955 initially rejected HHMI’s application for tax-exempt status, arguing that the exchanges were “merely a device for siphoning off otherwise taxable income to an exempt organization.” In 1957, however, the IRS reversed course and granted HHMI the vaunted status.
HHMI’s most notable early success came in 1960, when the organization helped to fund scientist Theodore Maiman’s creation of an “atomic radio-light,” dubbed the “laser” (Light Amplification by Stimulated Emission of Radiation).
United Press International called the innovation “a 1,000-mile death ray” and argued that the invention could turn “horror movies into a grim reality.” Maiman, dispeling with the Cold War fears, highlighted the laser’s possibilities as a long-range search light, medical surgery tool, and secure communication channel.
Beyond the laser, however, HHMI’s publicity remained tied up in shady business dealings. In the closing days of the 1960 presidential campaign, a scandal briefly cropped up surrounding a 1956 Hughes Tool Company no-interest $205,000 loan to candidate Richard Nixon’s brother Donald. The more famous Nixon was Eisenhower’s Vice President at the time, and pundits suggested that the sweet deal could have somehow been tied to the IRS’s reversal on HHMI’s tax-exempt status, which came shortly thereafter.
Just as the Nixon loan scandal had died down, Patman had emerged. In his post-report House speeches, Patman put his problem with HHMI bluntly: “It doesn’t look to me…as if the Institute met the express requirements of the law that it be organized and operated exclusively for charitable purposes.”
Patman’s ad hominem attacks extended far beyond Hughes. Of the 524 nonprofits he investigated, Patman also singled out the Ford Foundation for particular grief, questioning their $33 million in loans to foreign governments and private corporations over the course of the previous year. Patman’s larger contention was that the growth in sheer number of nonprofits–from 12,295 in 1952 to over 46,000 ten years on–required immediate regulatory action.
On August 22nd, 1962, President Kennedy fielded a question on Patman’s inquiry during a White House press conference: “Mr. President, referring to the recent disclosures by Wright Patman, do you think that the Ford or Rockefeller Foundations or any other tax-exempt foundation should be able to control the ownership of a large segment of the business community by owning manufacturing plants and retail establishments and such?”
Kennedy responded somewhat cautiously, making sure to praise foundations even as he agreed with Patman about tighter enforcement. “This is an extraordinary development, these foundations, and have done a tremendous job in wide ranges in a most efficient way,” Kennedy said. “So I think we want to be fair, but we want to be sure to catch those who are penalizing the others.”
Patman wrote to IRS Commissioner Mortimer Caplin on October 2nd, 1962, inquiring about the 1953 HHMI transfers, the 1957 granting by the IRS of tax-exempt status, and the legality of the Institute’s rental arrangement. In the following weeks, Patman publicly excoriated the Treasury Department for “dragging its feet” in the Hughes matter.
By December, Patman had pushed Kennedy to organize a presidential panel to assist in the investigation of non-profits. Myer Feldman, the Deputy Counsel to the President, headed the fact-finding mission.
Patman wrote a Hughes-focused memo to the new panel: “The Hughes Medical Institute is not eligible for tax-exempt status for several technical reasons, principally that it is conducting the unrelated business of managing the operations of Hughes Aircraft.”
On January 5th, 1963, Patman made his next play. He released yet another report on nonprofits, this time with a proposed new law that would limit the life of tax-exempt nonprofits to 25 years. “Such a time limitation will tend to redistribute the control of American industry among wider groups in the population and return public funds to the government if they are not distributed.” Patman further claimed that his reports indicated a return to the topheavy wealth concentrations of the Robber Barons: “The foundations have replaced the trusts which were broken up during the Theodore Roosevelt administration.”
Alongside the new proposal, Patman levied a fresh charge against HHMI: the revelation of a $750,000 bill to public relations firm Carl Byoir and Associates from 1955 to 1962. Patman called the steep PR investment “an abuse of a public trust, an imposition on the kindhearted American people who subsidize the foundations.”
Patman and Byoir had history. In 1938, Byoir, a political insider who had run PR on FDR’s famed polio fundraisers, took a contract with grocery store chain A&P, who were then under attack by a Patman proposal that would have limited the reach of chains in favor of mom and pop stores. Byoir took out a full-page ad in 1,600 publications decrying Patman’s bill, which promptly died in Congress.
Patman quickly got revenge. During the first years of Hitler’s reign in the 1930s, Byoir had taken a retainer from the Nazi government to advertise German tourism stateside. In 1940, as the U.S. geared for war with Germany, Patman argued that Byoir’s arrangement was a cover for building the “greatest spy organization in the history of the world.” Byoir was forced to appear before the House Un-American Activities Committee, where he claimed that he got daily death threats as a result of Patman’s allegation. Byoir was never charged.
Byoir died in 1957, but Patman’s discovery of his fingerprints on HHMI’s potential impropriety added a new element of personal pathos to the inquiry. Byoir and Associates President George Hammond quickly replied that the hefty invoice was actually for Hughes Tool, and that all consulting work on HHMI had been done pro bono.
Patman’s personal crusade against nonprofits–and especially against HHMI–would continue for another dozen years. He continued issuing his reports, proposing ever-tighter legislation, and, in 1969, securing new federal regulations on nonprofit minimum yearly distribution and investment income tax in that year’s Tax Reform Act.
Patman’s fixation on HHMI and Hughes’ use of nonprofits as a business balm would burst into the headlines in 1973, when Watergate investigators revealed that Hughes had given $100,000 in 1969 and 1970 to Nixon confidante Bebe Rebozo, which amounted to illegal campaign contributions to Nixon’s re-election effort. At the same time as the donations, HHMI was lobbying the IRS and Nixon’s White House Counsel John Dean for $36 million in tax exemptions resulting from potential loopholes in the Tax Reform Act legislation.
Patman, predictably, reacted with shock and opprobrium. By this point, however, Hughes had descended so deeply into nefarious dealings and mental instability that the story became lumped in with the larger scandal of his decline and death.
Patman died at 82 in 1976, still serving in the House. HHMI, for its part, would surprisingly rebound from its questionable beginnings. The nonprofit, under IRS pressure, sold all of its rapidly-appreciating Hughes Aircraft holdings in 1984, ending up with a $5.2 billion endowment and becoming a global leader in genetics and molecular biology research.
Now, as legislators cast a look at Elon Musk’s money-juggling and Mackenzie Scott’s pleas for more intentional philanthropy, the long regulatory saga for nonprofits seems increasingly likely to hit the headlines again.
For more on Wright Patman, read Nancy Beck Young’s 2000 Wright Patman: Populism, Liberalism, & the American Dream.
And head to the Twitter account of author and Now & Then Editorial Producer David Kurlander for supplemental archival threads on each Time Machine piece: @DavidKurlander.
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