ANNALS OF PHILANTHROPY: THE SHUBERT FOUNDATION

By Milton Goldin

In August 1996, when the 80-year-old theatrical lawyer and producer Bernard B. Jacobs died of complications following heart surgery, the event sent actors, directors, heads of nonprofit organizations, chiefs of theatrical unions, and dozens of other individuals with ties to Broadway on immediate searches for appropriate lamentations.

More than Jacobs' character or business methods affected them. Annual incomes had existed at his pleasure, for Jacobs was an officer of both the Shubert Organization and the Shubert Foundation.

The Organization was (and remains) the mightiest powerhouse in the American legitimate theater; the Foundation, an off-shoot of the Organization, is among the wealthiest foundations in America and makes grants to nonprofit theatrical groups and other agencies. It also owns the Organization.

The accolades flowed.

Larry A. Silverstein, Board Chair of New York's UJA-Federation declared that Jacobs had "used his considerable energy to provide much-valued leadership, through the Shubert Organization, for our Entertainment Division."

Lawrence A. Tisch, Chairman of the Board of New York University, cited Jacobs's services to the "cultural life of New York City" and "most especially...his generous contributions, through the Shubert Foundation, to the NYU Tisch School of the Arts...."

Alan Eisenberg, Executive Secretary of Actors Equity, offered, "He was the father I never had."

And Beverly Sills, Chairman of Lincoln Center for the Performing Arts, extolled him "as a giant in American theater and a champion of all we do here, particularly through the generous support of the Shubert Foundation."

Jacobs had surely been unique. For more than two decades, he influenced everything that took place on Broadway, demonstrating uncanny abilities to back winning shows despite his lack of training in theatrical matters. In a world of dominating personalities, his made a particularly deep impression, despite pouches under his eyes that gave him the appearance of a subdued basset hound. Jacobs could be devastating during business negotiations, and it is said that forceful men staggered away after meetings with him.

Some mourners claimed that he had saved New York's commercial theater during some of its darkest days, in the mid-1970s. But none made mention of what was surely among Jacobs's crowning achievements, possibly because they were unaware of it or did not know enough about it. He had been a major player masterminding a change in how the Internal Revenue Service would regard Foundation operation of the Organization.

In 1979, the I.R.S. issued a highly-unusual ruling that exempted the nonprofit Foundation from regulations having to do with its ownership of the for-profit Organization. The long-term result is that the ruling has come to be seen as a landmark development in tax shelters. One measure of the feat is that the Kellogg Company, a far larger commercial entity than the Organization, had earlier attempted a similar exploit and failed.

Before the importance of this feat can be fully understood, it may be useful to learn the Organization's background. The Shubert brothers who created it as well as the Foundation had come to Broadway in the early 1900s with neither knowledge of nor experience with theater. Utter determination and mind-boggling chutzpah characterized Sam (who died in a 1905 train wreck), Lee, and Jacob (also known as J.J.). No one dared call the surviving brothers by their given names; they were addressed as Mr. Lee and Mr. J.J. But out of earshot, Broadway also called them the "Boys from Syracuse;" Syracuse, New York, being the city in which they grew up as sons of a peddler.

Like Jacobs, the Shuberts had developed an incredible sense of what the masses wanted in the way of entertainment. Their keystone property was the Hippodrome, the largest theater in the world, which spanned an entire mid- Manhattan block. Here, they presented genuine Sioux Indians in war paint and feathers performing a genuine Ghost Dance, a two-ring circus with clowns and aerialists followed by a procession of elephants, and a water tank that represented the ocean, all during the same performance.

By 1927, the Shuberts' hold on Broadway could not be questioned. Lee and J.J. owned no less than 104 theaters and booked shows into another 1000. Both men, strikingly homely, mixed sex and business, utilizing the services of chorus girls as well as leading ladies to satisfy their erotic desires. Lee negotiated with service providers and talent agents in a terse, deadpan tone, never encouraging informality. Neither he nor J.J. made plans for an orderly transition in the Shubert Organization following their demise.

Problems with the I.R.S. emerged in 1950, when Washington filed an antitrust action asserting that the Shuberts were monopolizing the theatrical industry. The brothers vigorously defended themselves, but eventually agreed to divest the Organization of 12 theaters, depart the booking business, and not buy any more theaters without Washington's blessing. It was a bitter pill to swallow, but much was left to exploit and the Organization steamed ahead profitably.

Jacobs's services to the Organization and the Foundation were inextricably linked to those of another attorney in the Organization's service, Gerald Schoenfeld. In fact, the two men had been linked even before they joined up in the workplace. Schoenfeld's older brother was Jacobs's best friend in high school and college, and Jacobs was a frequent guest in the Schoenfeld household, where he is said to have devoured vast quantities of cherries and cashews.

Immediately that he graduated from law school, Schoenfeld, a cherubic and earnest New Yorker whose father made fur coats, took a job with J.J. For months, J.J. never bothered to pay him. Nonetheless, Schoenfeld recommended Jacobs for a position with the Organization. J.J. went along with the idea but warned Schoenfeld that if Jacobs goofed, Schoenfeld would be held accountable.

In 1945, forty years after Sam's death, Lee and J.J. had created the Shubert Foundation, in his memory. Its original purpose was to make charitable donations to religious organizations, but Lee and J. J. had not been overly-generous with grants. Then both men died and left the bulks of their respective estates to the Foundation -- without precise instructions what should thereafter transpire with the monies -- and thus precipitated unseemly rows between heirs about who should serve as a Foundation director. Further complicating matters, ownership of the vast theater network passed from the family to the Foundation, which meant that whoever controlled the Foundation also controlled the wealth.

Organization management responsibilities passed to Lawrence Shubert, a grandnephew of Lee and J.J. and the only Shubert active in the business, but he had certain deficiencies. He battled constantly with Mrs. John Shubert, widow of J.J.'s only child, and he had what the New York Times called "a major-league drinking problem." These deficiencies soon brought operations to the brink of disaster and energized Schoenfeld and Jacobs to become active conspirators in plots to save their jobs as well as the Organization.

Matters got so bad that in 1974, New York State Attorney General Louis J. Lefkowitz entered the picture, filing civil charges against executors of J.J.'s estate. It was to ease Lawrence out of the picture that Schoenfeld and Jacobs then brought in Irving Goldman, who had gotten to know J.J. through paint sales to the Organization.

Goldman was also a confidant of Mayor Abe Beame, who chose him to be New York City's cultural affairs commissioner. This conferred a legitimacy on both him and the Foundation, but he turned out to be a foundation executive of a type not usually encountered on the philanthropic scene. He tied Foundation grants to purchases from his company, and he cut a grant to Yale because in his view the university was not buying enough paint from him. His activities had even more serious repercussions for the Foundation and the Organization after he was indicted by a special grand jury and then a federal grand jury on charges that he had defrauded the New York City Transit Authority.

As if that weren't enough, he was also indicted on charges that he had bribed a witness to disappear to avoid testifying before a grand jury investigating allegations that he had improperly funneled money from the Foundation. With this many indictments hanging over Goldman, Schoenfeld and Jacobs, like Lefkowitz, came to the belief that he might never become an ideal Foundation president. Under pressure from Lefkowitz, Foundation directors amended the Organization's certificate of incorporation and the Shubert board severed Goldman from his duties. Thereafter his health deteriorated, prosecutors lost interest in bringing him to justice, and he died without being tried.

In Washington a few years earlier, developments relating to foundations made even the Goldman episodes pale into insignificance for Schoenfeld and Jacobs. In the mid-1970s, Wright Patman, a Populist congressman from Texas, launched the most thorough investigation of foundations yet in American history. Patman, who had strong feelings about Easterners who sat on foundation boards, knew what he wanted in advance of learning what foundations were up to. He sought nothing less than to restrict the increase in foundation numbers, to compel those in existence to spend more of their assets on grants annually, and an I.R.S. ruling that charities could no longer own a controlling stake in a profit-making entity. Foundations fiercely resisted his attempts at Congressional control and managed substantial damage control. But in the end, a 1969 act spelled out new regulations, and a hundred charities had to divest themselves of profit-making businesses.

Schoenfeld and Jacobs saw financial disaster in a prospective divestiture of the Organization by the Foundation. The way operations worked, they served as chairman and president, respectively, as well as directors, of each arm's board. Other directors included only four men, who also served on both boards and faithfully re-elected each other as well as the chairman and president, year after year. Eight or nine times annually, John Kluge, the media billionaire, Irving Wall, a lawyer, Lee Seidler, an accountant, and Michael Sovern, the former president of Columbia University, convened with Schoenfeld and Jacobs for Foundation board meetings. Then, without leaving their seats, they reconvened for an Organization meeting.

How to obtain relief in Washington?

In July 1975, Foundation by-laws were supplemented by a statement of directors on grant-giving policies, which made clear that the principal goal of the Foundation was to build and perpetuate the live performing arts, particularly the American professional theater. In early 1979, Seidler, along with the accounting firm of Peat Marwick, prepared a request for a so-called I.R.S. private-letter ruling to prevent divestiture.

In its February 5 letter to the I.R.S., the Foundation argued in grandiose terms that if it had to sell its theaters, "the legitimate theater [in New York] will be destroyed." It maintained that new owners of former Shubert properties would most likely exploit them "commercially, such as for the showing of pornographic films [and] parking lots," or would sell them "for their maximum real estate value." Under the best of circumstances, theaters could not be expected to return more than a "marginal profit."

To buttress its position, the Foundation cited the Organization's financial results for the decade ending in 1977. This represented some of its worst years, albeit not always because of the peculiar nature of the theatrical business. The Organization took a noble posture with respect to its distress: "the economics of [theatre] ownership...are dismal. However, ...the Foundation's goal dictates that this cost of foregone profits (or losses) be borne, if the American professional theatre is to be preserved."

The request concluded with the hope "That [the] Foundation's investment in [the Organization] be classified as either `program-related' or as `functionally- related' business...and that [the]Foundation should not be required to dispose of such investment to be in compliance with the excess business holding requirements...."

From Schoenfeld and Jacobs's perspectives, an I.R.S. reply eight months later proved well worth the wait. At the end of October 1979 a five-page letter innocuously addressed "Dear Taxpayer" arrived at the Foundation. It could hardly have been more sympathetic to their situation. It agreed that "your purposes are to carry on religious, charitable, scientific, literary, and/or educational work; to maintain educational institutions; and, to make donations, gifts, contributions, and loans out of income or assets to or for the use of charitable educational purposes." Then it echoed everything else that the Foundation claimed, including the lamentable situation of legitimate theater in America. ("The operation of legitimate Theatre over the long term is not attractive because, at best, it can be expected to produce a minimal return on investments.")

J.J. Griffth, Chief, Rulings Section I, Exempt Organizations, Technical Branch, who signed the letter, further advised that the I.R.S. had concluded that the Organization constituted a "functionally related business," a classification that meant it need not be divested by the Foundation. The I.R.S. also declared the Organization a "program-related investment" of the Foundation, which meant that its assets did not have to be counted in determining how much money in grants the Foundation must disburse annually.

Playing their cards close to the vest, Shubert Organization/Foundation directors did not gloat over economic salvation, at least not publicly. For years, very few people in the philanthropic field, let alone on Broadway, even knew about the I.R.S. ruling. In late 1994, when news about what had happened finally leaked out, the head of the charity division of the New York State Attorney General's office was asked about the ruling and said that as far as she knew, "It is a case without parallel." Asked by the New York Times what he thought, a Washington lawyer specializing in foundation law said, "If the I.R.S. said the theaters are a program-related investment, that's nutty." He added, "That's absolutely the silliest thing I've ever heard."

Another lawyer, whom the Times described as well-versed in charity law, advised, "If there are identical boards then there is concern about all sorts of decisions being made in the interest of business rather than charity. That pitfall is here in spades."

Also in Washington, Mark Owens, director of the I.R.S. exempt-organizations technical division, neatly dodged the issue. He said that he could not comment on a specific ruling but advised that the classic type of program-related business would be a loan for inner-city housing that might not return interest.

At the time of Jacobs's death, none of the Shubert real estate holdings were in inner-city areas, but all of them were owned by the Organization, and perodically the Organization deeded property to the Foundation, which received rent and lease income on which the Organization had been paying taxes. If property was sold (usually at a substantial profit), it was free of capital-gains taxes. There was an additional benefit. After the Organization had made money and given it to the Foundation, the Foundation made grants to nonprofit theatrical groups that generated plays, which later appeared in Shubert theaters and made still more money for the Organization.

The Foundation's wealth swelled. Before Jacobs's death, it had $148 million in assets. Still, Schoenfeld and Jacobs ran a tight ship. The Foundation got by with only two salaried staff members and was headed, for several years, by Lynn Seidler, Seidler's wife. She had been recommended for the job by her husband.

Mrs. Seidler managed the enterprise in a disarmingly informal manner. It published no grant procedure guidelines. "I think they are one of the last foundations that gives grants for quality as opposed to other reasons," claimed Robert Brustein, the artistic director of the American Repertory Theater, in Cambridge, Massachusetts. Brustein, sometimes a severe critic of American theater, was a longtime recipient of Foundation money.

Best of all from Schoenfeld and Jacobs's perspectives, however, was that whether shows were hits or flops became less and less important to the Organization's financial well-being. The Foundation amassed such a reservoir of investments that the Organization hardly needed to make contributions to it. This remains true, today, when it has assets of more than $188 million, and the only officer listed on the most recent I.R.S. 990-PF form to earn a salary is Michael Sovern, who receives $75,000 annually for part-time work.

Milton Goldin, a writer, member of the National Coalition of Independent Scholars (NCIS) and fund-raising counsel, is preparing an almanac of American philanthropy. He is author of Why They Give: American Jews and Their Philanthropies and The Music Merchants.