Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right (10 page)

Meanwhile, the Scaifes lived large. They commissioned a hulking Cotswold-style stone country house on 725 acres in Ligonier, Pennsylvania, next to Rolling Rock Farms, the Mellon family’s 9,000-acre ancestral estate. They called their place Penguin Court, for the pet penguins that Sarah Scaife found amusing to let waddle the grounds. (Rookeries were built in the shape of igloos and filled daily with slabs of ice.) The weekend house was so vast that by Scaife’s reckoning he had four rooms to himself as a boy. Rather than counting sheep, like less well-off insomniacs, he writes, “
When I can’t sleep, I try to recount the rooms, which numbered fifty or sixty.”

The lavish lifestyle didn’t protect Scaife, however, from suffering a terrible head injury in a riding accident at the age of nine. The fall fractured his skull, knocking him unconscious for eight to ten hours and requiring metal clips to be implanted in his head. As a result, he had to be tutored at home for more than a year and avoid vigorous athletics all his life. The injury also barred him from military service. But as he lay at home in his sickbed, he followed current events closely, mapping the troop movements during World War II and developing a lifelong passion for newspapers, which he read avidly as a boy and later would own.

The family’s insulation from workaday life also couldn’t protect the Scaife children from being jeered during the Depression and war years by passersby who catcalled at the sight of them being chauffeured, by themselves in the backs of limousines, as gas was rationed for others. Scaife recalls that by the time he was about ten, he realized that “compared to most people, the Scaifes were different. We were very wealthy.” He says that in his youth he feared people would dislike him because of it. But he writes that unlike most liberals, as he grew older, he came to feel entitled to his good fortune. “Some of my friends—most I’d say—feel a sense of guilt about having money. I do not, and never have.” As he describes it, “An inheritance comes to the person but also to his community and country. It can do powerful good.” He notes, “I’ve felt good about being able to put dollars to work in the battle of ideas.”

Scaife recalled his childhood as happy. He liked the governess who raised him, admired his father, and adored his mother. But his sister, Cordelia, who was four years older, saw their upbringing differently. She described the family as excelling principally in “
making each other totally miserable.” The only substance that appears to have been in nearly as great supply as money in the Scaife household was alcohol. By the time he was sent off to Deerfield Academy at the age of fourteen (the same prep school attended eight years later by David Koch), Scaife was already a drinker. Caught drinking off campus with some local girls in his senior year, in violation of Deerfield’s rules, he almost didn’t graduate. Scaife recalls that his parents hastily donated funds for a new dormitory for the school in order to assure his diploma. Years later, he would nonetheless help fund the social critic Charles Murray, a leading proponent of the theory that a superior work ethic and moral codes account for much of the success among the affluent.

Despite having barely squeaked through prep school, Scaife was accepted at his father’s college, Yale, from which he was soon expelled following several drunken benders. A reputation as a frat boy bully was cemented by an episode in which an empty beer keg was rolled down a flight of stairs, injuring a classmate. (Scaife writes that he was falsely accused of launching the keg, which was actually jettisoned by his friends.) After getting arrested off campus in another drunken escapade, he belittled the dean who was adjudicating his case, hastening his expulsion. Nonetheless, the following year, Scaife was given the chance to repeat his freshman year at Yale. But after spending time at the movies rather than in class, he soon flunked out, this time for good. Yet with the help of his father, who was chairman of the board, he graduated from the University of Pittsburgh and soon went on to enter the family business, Gulf Oil.

His behavior, however, didn’t much improve. At the age of twenty-three, after drinking and in a hurry to visit his fiancée, Frances Gilmore, on a rainy night, he caused a near-fatal car accident that left him with a shattered knee and an expensive legal settlement with the family whose car he had rear-ended. Alcoholism and freakish tragedy continued to dog his adult life. One friend committed suicide in front of him. Another, his sister’s husband, died of a gunshot wound under mysterious circumstances. His brother-in-law’s death was ruled an accident or suicide but caused a scandal and a lasting rift between the siblings because Cordelia suspected that somehow her brother had been involved. In 2005, facing fatal illness, Cordelia, too, took her own life, asphyxiating herself with a plastic bag. She left an estate valued at $825 million.

Before these later tragedies unfolded, though, in 1958, Scaife’s father died suddenly. Scaife was only twenty-six. He recalled that it “was a watershed year for me.” His father bequeathed him the failing family metal company, which he soon sold for a dollar, and a powerless seat on the Mellon Bank board, which his disdainful uncle chaired. More important, Scaife was put in charge of his mother’s finances, giving him responsibility for investing hundreds of millions of dollars. “
The first priority had to be to look after Mother’s affairs, as Dad had done,” he writes. “At the age of fifty-four Sarah Scaife was a woman of wealth, but no experience managing it…so an unavoidable role for me became simply that of investor. Just taking care of it all.”

Soon after his father died, his mother set up two charitable trusts of $50 million each. The beneficiaries were Scaife and his sister. Like the Koch family, the Scaifes designed the trusts so that all net income had to be donated to nonprofit charities for the next twenty years. After that, the $50 million principal could pass to each of the Scaife offspring free from inheritance taxes. In other words, two decades of philanthropy was the price for a tax-free inheritance. As Scaife wrote of the setup, “
Isn’t it grand how tax law gets written?”

Scaife notes that his mother thought it a good deal because in 1961 she created a second pair of similar trusts for her children, this time with $25 million for each beneficiary. This time the terms of the trust required Scaife and his sister to donate the net interest to charity over just ten years. And in 1963, his mother set aside another $100 million more in trusts, this time for her grandchildren, called the Sarah Scaife Grandchildren’s Trust. The net interest, again, had to be donated, this time over twenty-one years. Because Cordelia had no children, control of the entire $100 million in the Grandchildren’s Trust reverted to Scaife, who by then had a small son and a daughter. So for the next twenty-one years, until 1984, he thus directed virtually all of the charitable donations stemming from the interest on all three trusts, which cumulatively held assets of $250 million. Both the assets and the amount of annual interest they spun off were remarkably large sums in those years.

Scaife, in his memoir, describes the method by which his mother was able to pass on her fortune to him tax-free as “a socially useful tax shelter.” He writes, “It enabled a donor to set aside a lump sum for heirs free of inheritance tax or gift tax, but only after an interval of public benefit. To me, that’s a good deal for both sides.”

A consequence, however, was that the tax code turned many extraordinarily wealthy families, intent upon preserving their fortunes, into major forces in America’s civic sector. In order to shelter themselves from taxes, they were required to invent a public philanthropic role. In the instance of both the Kochs and the Scaifes, the tax law ended up spurring the funding of the modern conservative movement.

Motivated in part by tax concerns, Scaife’s role as a philanthropist grew. An immediate question, however, was how to disperse the constantly accumulating piles of interest from the trusts, which needed to be distributed to charity in order to satisfy the tax laws. One attractive solution for enormously wealthy families like the Scaifes and the Kochs was to donate to their own private philanthropic foundations. By doing so, they could get the tax deductions and still keep control of how the charitable funds were spent.

P
rivate foundations have very few legal restrictions. They are required to donate at least 5 percent of their assets every year to public charities—referred to as “nonprofit” organizations. In exchange, the donors are granted deductions, enabling them to reduce their income taxes dramatically. This arrangement enables the wealthy to simultaneously receive generous tax subsidies and use their foundations to impact society as they please. In addition, the process often confers an aura of generosity and public-spiritedness on the donors, acting as a salve against class resentment.

Because of all these advantages, private philanthropic foundations proliferated among the ultra-wealthy during the last century.
Today, they are commonplace, and rarely controversial, but Americans across the political spectrum once regarded the whole idea of private foundations with enormous suspicion. These aggregations of private wealth, intruding into the public arena, were seen as a form of unelected and unaccountable plutocratic power.

The practice began in the Gilded Age with John D. Rockefeller, whose philanthropic adviser Rev. Frederick Gates warned him with alarm, “Your fortune is rolling up, rolling up like an avalanche! You must keep up with it! You must distribute it faster than it grows!” In response, in 1909 Rockefeller sought legal permission from Congress to obtain a federal charter to set up a general-purpose private foundation whose broad mission was to prevent and relieve suffering and promote knowledge and progress. Critics, including the former president Theodore Roosevelt, assailed the idea, declaring, “No amount of charity in spending such fortunes can compensate in any way for the misconduct in acquiring them.” At the time, a parade of notable Americans testified in Congress against the creation of private foundations, including the Reverend John Haynes Holmes, who denounced them as “repugnant to the whole idea of a democratic society.” Frank Walsh, chairman of the U.S. Commission on Industrial Relations, in 1915, suggested that “huge philanthropic trusts, known as foundations, appear to be a menace to the welfare of society.” Rob Reich, a professor of political science at Stanford University and co-director of the Stanford Center for Philanthropy and Civil Society, explains that private foundations, which “
represent virtually by definition plutocratic voices,” were “troubling because they were considered deeply and fundamentally anti-democratic…an entity that would undermine political equality, affect public policies, and could exist in perpetuity.”

Unable to gain congressional approval, Rockefeller got the New York state legislature to approve his plan. Legally, however, the Rockefeller Foundation, the granddaddy of all private foundations, was at first limited to promoting only education, science, and religion. Over time, however, the number of private foundations grew along with the kaleidoscope of issues into which they delved.
By 1930, there were approximately two hundred private foundations, according to Reich. By 1950, the number had grown to two thousand, and by 1985 there were thirty thousand. In 2013, there were over a hundred thousand private foundations in the United States with assets of over $800 billion. These peculiarly American organizations, run with little transparency or accountability to either voters or consumers yet publicly subsidized by tax breaks, have grown into 800-billion-pound Goliaths in the public policy realm. Richard Posner, the iconoclastic libertarian legal scholar, has called perpetual charitable foundations a “
completely irresponsible institution, answerable to nobody,” and suggested that “the puzzle in economics is why these foundations are not total scandals.”

When the robber barons first began donating to charities, their gifts were not tax deductible. With the implementation of the federal income tax in 1913, however, the wealthy soon convinced Congress that unless they were granted a special tax break, philanthropists might no longer donate their fortunes for public purposes. So in 1917 donors were granted unlimited charitable deductions. The rationale was that despite their wealth they deserved the public subsidy, so long as their gifts profited the public, rather than their own private interests. Conservatives who opposed the use of the tax code for all kinds of other social engineering nonetheless fully embraced the loophole in this instance.

Scaife had already set up his own small foundation by the time his father died in 1958. A family lawyer had explained to him when he turned twenty-one and received the first “booster shot,” as he put it, of his inheritance that charitable foundations provided good tax shelters. Called the Allegheny Foundation, his early foundation was focused on local community improvement projects. In 1964, he added the Carthage Foundation, named for his political club. It focused on national security issues at first.

After his mother died in 1965, he and his sister shared control of the much larger Sarah Scaife Foundation. But their different priorities soon created irreconcilable fights. Before long, the siblings were at such odds they ceased speaking to each other for most of the rest of their lives. Cordelia Scaife’s priorities, like their mother’s, were art, conservation, education, science, and population control (Sarah Scaife had been a friend of Margaret Sanger’s and was a staunch supporter of Planned Parenthood). Scaife too was a supporter of Planned Parenthood over the years, but his interests tilted more toward what he terms in his memoir “public affairs.” By 1973, he had succeeded in reorienting the Sarah Scaife Foundation’s grant making almost entirely to his own causes. “
The result,” he writes, “was very considerable grant-making power,” enabling him to “
advance ideas that I believe are good for America.” Spurred by tax avoidance, Scaife became not only one of the country’s richest citizens but also one of its biggest philanthropists. “
This was the beginning of the legend of Richard Mellon Scaife as the dark spirit behind right-wing causes,” he writes archly in his memoir.