Foundation Helps Herb Kohl Get $20 Million Windfall

Yesterday was a big day for the Greater Milwaukee Foundation. The foundation announced it was receiving “the largest charitable gift in its history,” exactly $100 million from Herb Kohl.

“This wonderful news comes as the Greater Milwaukee Foundation embarks upon its celebration of 100 years of service to this community,” said Ellen Gilligan, President and CEO of the Greater Milwaukee Foundation. “From his years in business, philanthropy, and the U.S. Senate…. Sen. Kohl has been a shining example of service. He has always served with both distinction and a generous spirit.”

At first glance, that sounds like a fantastic windfall, increasing the assets of the $711 million foundation by more than 14 percent. But it turns out this isn’t a gift at all. The foundation will simply pass-through the $100 million Kohl had already promised for a new arena to that project. And so Kohl gets a charitable write-off for money that will essentially go to benefit a private business.

“It’s a classic tax avoidance maximization approach,” says Aaron Dorfman, executive director of the Washington, D.C.-based National Committee for Responsive Philanthropy. Dorfman notes that because Kohl sold the team this year, “he needs to get the donation on the books for this tax year.” And the foundation was happy to help Kohl. “We are honored to help a dedicated philanthropist fulfill his charitable wishes,” Gilligan told Urban Milwaukee.

Kohl sold the Bucks for $550 million, with the understanding he would commit $100 million to help pay for a new arena. It helped make the sale more attractive to new owners Marc Lasry and Wesley Edens, which in essence meant Kohl was getting $450 million for the team. That was still huge windfall for him: Kohl purchased the team in 1985 for $18 million, meaning the $450 million sales price gave him a magnificent, 25-fold return on his investment.

But it turns out his return will be even better because Kohl is converting part of that business deal into a charitable donation. Kohl will be taxed at 20 percent for capital gains in selling the team, Dorfman notes, and as high as 36 percent for his other income, meaning he will get a $20 million to $36 million tax write-off on his $100 million contribution to the new arena. “It means the taxpayers will be paying $20 million to $36 million of his $100 million gift,” Dorfman notes.

Actually, this only includes the federal tax exemption. Kohl will also get a state tax exemption for his gift, which will increase the taxpayer-paid portion of his contribution.

For the foundation, this presents an issue. It cannot contribute this money to a for-profit business. “They have to give the money to a non-profit,” Dorfman notes. That’s correct, says Jeramey Podolski, marketing and communications manager for the Greater Milwaukee Foundation, “the gift must be made to a tax-exempt entity, not unlike the nonprofit corporation that currently owns and operates the BMO Harris Bradley Center.”

In short, Kohl and the new owners of the Bucks are already planning to make the entire new arena some kind of non-profit that will be tax-exempt, even though it must be built solely to create for revenue for the team. As I’ve often noted, the Bradley Center, which opened in 1988, works perfectly fine for all of its other tenants; only the Bucks need the new arena, in order to create new amenities and profit-making opportunities for the team.

To date, no one involved with the push for a new arena has divulged that it will be tax-exempt, and for good reason. This means the taxpayers of Milwaukee will be subsidizing all the city services the arena receives and which any business would have to pay for through property taxes. Assuming the arena costs the current estimate of $450 million, this means it would be paying about $13 million a year in taxes, or about $325 million over 25 years — all money Milwaukee’s taxpayers will instead be charged.

Kohl and the new Bucks owners couldn’t be counting on the arena being a non-profit unless Mayor Tom Barrett has already okayed that idea or Gov. Scott Walker has agree to create some kind of state-created entity like the Bradley Center — or to allow the state-created entity that runs the Bradley Center to run the new arena. Whichever is the case, not a word of this has been shared with taxpayers.

And no, it’s not the same scenario as the Bradley Center. In that case, philanthropist Jane Pettit gave the facility as a gift to the city and received no benefit for doing so, and it was the city’s choice to accept or reject the money. In this case the owners are demanding a subsidy, which they hope to get from the state, to pay for most of the facility, and yet will not pay any taxes on a facility built solely to increase the team’s annual revenue. Adding insult to injury, Kohl’s $100 million offer to help pay for the facility, which helped cement the deal to sell the Bucks, will now be treated as a charitable donation.

Though the foundation’s willingness to essentially launder Kohl’s money is legal, Dorfman says a foundation gift to a pro basketball team’s arena does raise questions. “It could be questionable whether an arena that benefits the Bucks has a broader community benefit,” he says.

There is a historical parallel here. When Miller Park was built, the Bradley Foundation provided a loan at a below-market interest rate to help build the facility. The loan meant the foundation lost in the neighborhood of $4 million in interest it would have gained through its typical investments. It would have been illegal had the money gone directly to the Milwaukee Brewers, but instead it went to the Southeast Wisconsin Professional Baseball Park District, the government entity which runs the stadium for the benefit of the pro-profit Milwaukee Brewers. Here too, charitable dollars were passed through a tax-exempt entity to a private business.

At the time, the decision was critiqued by Douglas Jansson, who said “the question is raised whether that’s the best use of charitable funds.” Jansson, as it happens, was the executive director of what was then known as the Milwaukee Foundation. His successor Ellen Gilligan appears to be doing something similar to the deal he once questioned.

Short Take

The Milwaukee Journal Sentinel hasn’t exactly been digging into the question of why the deal to sell the Journal Sentinel building to the Bucks has fallen through. Given that the reporters work for the company, that becomes a very uncomfortable situation.

The best Don Walker has been able to do is get this statement: “The Journal thing appears to have fallen by the wayside,” one source said. “It’s a great site, but it’s hard to get an agreement.”

Why the problem reaching agreement? The likely answer is that the Journal Company and its CEO Steve Smith want too much money for the site. The sales price, moreover, might involve the question of who would have to pay for environmental remediation for any problems related to the printing presses that ran there for decades. I doubt the Bucks owners would want to be responsible for that.

This presents the ironic scenario where a newspaper likely to editorialize in favor of the new arena is a key obstacle to a deal being done.

There is, however, one other complication: the Journal company’s new buyer, E. W. Scripps, is about to takeover the company, and that may raise sticky issues about who benefits from the sale.

All of which, it appears, is pushing the Bucks owners to consider a different site.

Update 2:30 p.m. December 18: Mayoral spokesman Jodie Tabak informs me that Barrett has not agreed to make the new NBA arena tax exempt.