Bear Left!

This is a Charity? The Seamy Underbelly of Skull and Bones
Tim Francis-Wright
22 April 2001

[For Part II of this report, click here.

It is widely known that George W. Bush, along with his father, George H. W. Bush, are members of the Skull and Bones society since their junior years at Yale. What is not widely known is that Skull and Bones claims to be a public charity and not just a social club. Like every American public charity, its tax returns are open for public inspection: these returns cast doubts on whether Skull and Bones is abiding by the rules that generally govern nonprofit institutions and specifically govern nonprofit organizations.

Skull and Bones is one of several senior societies at Yale University. Many of its members have gone on to illustrious careers in politics and business, although some graduates became known for their essentially dissenting views (like William Sloane Coffin). The group dates back to the middle of the 19th century. When Phi Beta Kappa got rid of its oaths and overt symbolism, some Yalies reacted the only way they knew how: they formed a society of their own.

Ron Rosenbaum's recent article in the New York Observer described the sophomoric and eerie rituals associated with the initiation of new members. Examples include a graphic reenactment of the rape of Abner Louima by New York City policemen, with initiates playing Mr. Louima. Rosenbaum also took a quick look through a recent tax return filed by RTA, Inc., the nonprofit organization behind Skull and Bones:

There [is an] assertion in the 1997 RTA Incorporated filing (Part VI, line 80b) that the organization was not "related through common membership, governing bodies, trustees, officers etc. to any other exempt or non-exempt organization."

Contradicting that assertion is information on the filing of the Deer Island Club Corporation. Deer Island is the private island of the Skull and Bones Society, located in the St. Lawrence River. It is the place where Bones members bring their families for summer get-togethers. It is wholly owned and run by Skull and Bones members, apparently contradicting Bones' claim of "no relationship" to another exempt organization, and appearing to contradict the strictly educational and charitable mission for which RTA gets its exemption for Skull and Bones.

Both George W. Bush and his father, George H. W. Bush, are members of Skull and Bones. While I always thought it odd that windowless buildings stood in the midst of the Yale campus, there is little inherently wrong with a university having, essentially, a set of upper-class fraternities. At the least, it keeps some people off the streets on Thursday nights, when most of the societies meet. I put little credence in conspiracy theorists who see the combination of blue blood and occult symbolism to be the root of all evil.

My objection to Skull and Bones is that it is claiming that it is a public charity under the Internal Revenue Code. While its initiation rites are unseemly, calling its activities to be educational activities worthy of a charitable organization is even more so. I obtained the tax returns for RTA, Inc. for fiscal year 1998 and fiscal year 1999 from the web site www.guidestar.org, which has hundreds of thousands of tax returns available for download.

Rosenbaum's article makes an excellent point that the answer to line 80b on the RTA, Inc. return may be fraudulent. However, only nonprofit organizations must make public their tax returns, so a privately held for- profit entity like Deer Island Club Corporation need not reveal anything about its operations or tax returns to the public. I cannot verify his claim that Deer Island is owned solely by Skull and Bones members.

Here is a table of the finances of the organization according Parts I and II of these two returns:

Examining the depreciation schedules reveals that RTA placed equipment and improvements to buildings into service of $109,162 in fiscal year 1998 and $162,232 in fiscal year 2000.

The returns have a number of potentially important issues, not only legally but also financially for the association, because it owes the federal government a lot of money if it has broken the rules that nonprofit organizations must follow.

Awarding of Scholarships

Each of these returns claims, on line 3 of Part II of Schedule A, that RTA, Inc. grants "scholarships, fellowships, student loans, etc." Yet there is no entry on either return for any grants, any specific assistance to individuals, or any benefits paid to or for members. It is clear, at least from the tax returns, that this box is wrong.

Public Charity status

RTA claims on each return that is exempt from the rules governing private foundations. Public charities get benefits that private foundations do not. For Most importantly, they can accumulate unlimited investment income within certain guidelines. Churches, hospitals, and colleges and universities explicitly receive this treatment. Many other organizations receive this treatment because they meet the "public support" test under Section 509(a)(2). They receive at least one-third of its annual receipts from grants, contributions, membership dues, and gross receipts from their stated purposes and they receive less one-third of their annual receipts from investment income. RTA has far too much investment income to meet this test.

Each RTA, Inc. return claims, on line 13 of Part IV of schedule A, that the organization qualifies for public charity status because it is "supports" Yale University, according to the rules under Section 509(a)(3) of the Internal Revenue Code. This box is very important because it allows RTA to avoid the private foundation rules. It is not enough for Skull and Bones to have its members consist only of Yale students and alumni. According to the Internal Revenue Code, in order to meet the test under Section 509(a)(3), an entity must be "organized, and at all times thereafter...operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of, one or more" public charities. It must also be "operated, supervised, or controlled by or in connection with one or more" public charities. It must also not be controlled, indirectly or directly, by its substantial contributors.

RTA's returns essentially state that it was organized by Yale University; and is operated exclusively for the benefit of, performs the functions of, or carries out the purposes of, Yale University. It is hard to see how Yale benefits from the $4,000,000 of assets that RTA holds: Yale doesn't get any grants or contributions made by RTA, according to the returns, except possibly for "occupancy." It is more likely that RTA is claiming that it performs the functions of, or carries out the purpose of Yale University. In any case, Yale University does not operate, supervise, or control Skull and Bones. Because of this lack of control, supervision, or operation, RTA, Inc. fails to be a public charity.

If RTA were a private foundation, donations to it would still be charitable contributions, but by law it would have to use its net investment income from (but not less than five percent of) its assets every year for charitable purposes. Net investment income is the sum of interest, dividends, and short-term capital gains less any fees related to those investments. Strict rules prohibit a private foundation from joining its substantial contributors from owning a substantial part of any other corporation. Private foundations cannot engage in most transactions, including investment management, with substantial contributors or foundation managers; or their families. In 1998, RTA had net investment income of $228,531. In 1999, the number is between $187,346 and $629,121 (the return lacked the breakdown of capital gains, so the amount of short-term gains is unknown). Even with a very expansive definition of "educational programs," RTA Inc. fails this test in both 1998 and 1999. Any undistributed income is subject to a 15 percent tax.

Charitable Status

RTA lists "educational programs" as its exempt purpose achievement in both returns. According to the instructions for Part III of the Form 990, "All organizations must describe their exempt purpose achievements in a clear and concise manner. State the number of clients served, publications issued, etc. Discuss achievements that are not measurable." Each return says only "Educational Programs" and shows the expenses including all of the charges for occupancy (presumably rent, because no mortgages are listed); depreciation; and conferences, conventions, and meetings.

While the IRS does not want or need reams of information here, the returns are filled out contrary to the explicit instructions on the form. As the bottom of Part IV of the return mentions, "Form 990 is available for public inspection and, for some people, serves as the primary or sole source of information about a particular organization. How the public perceives an organization in such cases may be determined by the information presented on its return. Therefore, please make sure the return is complete and accurate and fully describes, in part III, the organization's programs and accomplishments." Indeed.

RTA needs 501(c)(3) status in order to avoid paying taxes on its substantial investment income (over $600,000 on each return). It also needed that status in order for contributors to claim over $280,000 in donations over fiscal years 1998 and 1999. Social clubs, such as fraternities, pay no taxes on the dues they assess on its members, but donations or dues to them are not charitable contributions. They can only have $1,000 in otherwise taxable investment income, unless the income is specifically set aside for charitable or educational purposes. All investment income (except for extraordinary capital gains) cannot constitute over 35% of the gross receipts of the club. Skull and Bones would fail this last test in both 1998 and 1999, because extraordinary capital gains do not count at all in the gross receipts equation.

Essentially, Skull and Bones is a fraternity operating under the guise of a public charity. Its "educational purpose" is no different than the normal purpose of a fraternity, and it should be classified under Section 501(c)(7) as a social club, just like any other fraternity. Unfortunately for its trustees, including Jonathan Bush, the President's uncle, the club has too much money to maintain its nonprofit status if such a reclassification happened. In that case, it might actually have to distribute a few million dollars to actual charitable or educational causes.

Last week, George Bush released the first two pages of his 2000 income tax return, along with a statement that he and his wife made charitable donations of $143,300. While charities must provide the IRS with lists of contributors who donate over $5,000, even those names are not open for public inspection, and individuals do not disclose the names of charities as part of their tax returns. It would be newsworthy if George W. Bush had claimed a tax deduction for a contribution to an organization that had absolutely no charitable purpose.

Disclaimer: I attended Yale from 1984 to 1988. I knew exactly one person whom I knew to be a member of Skull and Bones, and two others who joined other senior societies. I was not tapped by any of the societies at Yale, and I would have rejected any advances: I was too busy being the Autarch of Story Reading on Thursday nights to attend any meetings. I am neither a tax lawyer, nor a certified public accountant; my experience reading tax returns has been extensive but not based on formal schooling in these matters.