On November 27, 1962, the Milwaukee District Office of the Internal Revenue Service sent a letter threatening to revoke WARF’s tax-exempt status. If Washington, D.C., confirmed the district’s recommendation, it would mean more than a new tax bill. An adverse ruling might mark the end of WARF’s existence as a philanthropic foundation.
Like any tax audit, the letter from Milwaukee came as a shock. WARF’s leaders argued that the IRS had mischaracterized the purpose of the foundation’s operations in much the same way the Justice Department had misunderstood the Steenbock patents in the 1940s.1 The foundation set out to prove, once and for all, that WARF’s scientific mission served the interest of the public and deserved proper recognition by the federal government.
As it turned out, the IRS had targeted WARF as part of a political dynamic much larger than the foundation itself. The growth in disposable income for many Americans in the 1940s and 50s had led to bigger charitable giving, which in turn strengthened the political clout of many philanthropies.
In response, the IRS acted to prevent wealthy individuals from using large donations as a way to avoid income taxes, and Congress passed a series of laws designed to prevent the Rockefeller, Ford and Pew foundations from intervening in policy decisions and influencing elections.
This unprecedented expansion in the nonprofit sector and the resulting political scrutiny had forced WARF to adapt even before the tax auditors came calling. Unlike the big money philanthropies whose expansive goals raised the ire of Congress, the foundation’s trustees set their sights on supporting their alma mater. WARF’s $45 million endowment, as of 1962, paled in comparison to the hundreds of millions of dollars held by the Rockefeller and Ford families and the billions spent by the federal government on social programs.
To keep both WARF and the University of Wisconsin competitive within this contentious and profligate political climate, the WARF trustees began diversifying the foundation’s operations. First, in the late 1940s, they protected the legacy of the Link and Steenbock patents by expanding WARF’s drug testing and vitamin manufacturing operations.
Then, when the campus faced a housing shortage after the war, Trustee William S. Kies spearheaded the board’s effort to build the University Houses at Eagle Heights. And, in the mid-1950s, after three prominent families bequeathed their land in the Wisconsin Dells, WARF took on the task of preserving that historic area for public recreation and environmental conservation.2
Each of these new initiatives made WARF more responsive to the needs of the university and less dependent on generating revenue through rare, world-changing inventions. On the other hand, the diversified foundation became difficult to categorize. The tax code had no classification for a nonprofit corporation involved in scientific patenting, financial investments, real estate and outdoor tourism.
As a result, during the 1950s, WARF leaders made a tempting target for an IRS already looking to crack down. The foundation did not pay taxes on its core functions of patenting, licensing and investing but did pay taxes on the laboratory and on operations in the Dells.
Despite this complex situation, when the IRS pounced in 1962 they bypassed the taxable activities and went straight for the core of WARF’s mission. The letter from the Milwaukee office claimed that WARF’s “development and exploitation of inventions… constitute a competitive business carried on for profit.” Even though “the purpose of your income producing activities is to provide funds to the University,” the office ruled that profit, not supporting research, was the “primary purpose of your organization.”3
In other words, the tax auditors decided WARF was just in it for the money. As such, according to the Milwaukee office, WARF should no longer be considered a nonprofit foundation but instead a “feeder corporation.”
WARF officials filed an immediate objection to the letter. A back and forth ensued for several years as lawyers from both sides argued, haggled and bargained through letters, memos and meetings across Madison, Milwaukee and Washington, D.C.
In the end, the district office overplayed its hand by attacking WARF’s exempt status instead of just its for-profit business. Rather than having to defend its taxable activities, the foundation’s lawyers established the goodwill of the foundation by showing that WARF had been a responsible taxpayer for more than a decade.
They also demonstrated to the IRS national office that WARF had taken proactive steps to streamline its organization and simplify its tax obligations. The trustees had already donated University Houses back to the university. Then, in 1962, they began the process of setting up separate, subsidiary corporations for their remaining taxable businesses. That arrangement allowed WARF to continue owning property in the Dells and the WARF laboratories but with a distinct separation between taxable operations and tax-exempt activities.
Most important, foundation officials proved that WARF had been designed to advance academic research, not to make a profit. They offered written evidence of the close, productive relationship between WARF officials and university administrators. They also pointed out that, contrary to the assertions of the district office, the foundation’s Articles of Organization declared a primary mission “to promote, encourage, and aid scientific investigation and research at the University of Wisconsin.”
This three-pronged strategy convinced the IRS to reject the district’s recommendation. In a “technical advice memorandum,” issued May 24, 1967, the national office determined that “WARF is primarily organized and operated for the benefit of the University of Wisconsin and as such is carrying out charitable, educational, and scientific purposes within the contemplation of section 501(c)(3)” of the tax code.4
Over the following years, WARF leaders took aggressive action to avoid any further misconceptions. They also had to keep pace with a series of tax reform acts passed by Congress in 1962, ’64, ’66, ’68 and ’69.5 As the tumultuous decade came to a close, the trustees passed extensive revisions to WARF’s bylaws and filed restated Articles of Incorporation with the state of Wisconsin.
Four years later, foundation officials and university administrators signed an agreement to formalize the existing relationship between their two institutions. Together, these changes clarified and updated the language governing WARF while retaining the original founding mission.
Ironically, when all the laws had been passed and the agreements ratified, the new tax code no longer categorized WARF as a “private foundation” at all.6 Instead, in legal terms, WARF was now a “supporting organization for a public charity,” with that charity being the University of Wisconsin.7
This supporting organization classification would protect the foundation for years to come any time the IRS showed up on WARF’s doorstep. Both its founding documents and its legal status now defined WARF according to its dedication to the University of Wisconsin and advancing the public good.
Once again, WARF’s leaders had taken on a decadelong struggle with the federal government. And once again, the foundation emerged stronger with a new, modern vision for the future. But the IRS fight tells only half the story of WARF’s encounter with the federal government in the postwar era. To find out the other half, stay tuned for next month’s Decade by Decade.
Kevin Walters
Historian-in-Residence
2015