It’s not every day that someone makes a $373 million grant of shares in a company he co-founded. But on Nov. 12 that’s exactly what Michael Karfunkel did when his Hod Foundation donated 7.21 million AmTrust shares to the Teferes Foundation, whose founder and manager is Barry Zyskind, Karfunkel’s son-in-law.
But the grant disclosed on Friday afternoon, Nov. 20, after the close of trading, becomes a lot more interesting when one understands that Zyskind is the chief executive of AmTrust.
As Southern Investigative Reporting Foundation readers will recall from its August investigation, the 71-year-old Michael Karfunkel is one-half of a fraternal duo (his brother George is six years younger) that founded AmTrust, a high-flying insurance company. What the investigation uncovered was that the two brothers’ foundations—while certainly active grant-makers to synagogues and institutions connected to Brooklyn’s Haredi Jewish community — benefited mightily from using their foundations to maintain family control of AmTrust.
With that in mind, the Southern Investigative Reporting Foundation took a hard look at the deal and it appears that charity is the last reason this was done. Moreover, a close reading of the rules governing inter-private foundation transfers suggests Michael Karfunkel hasn’t done his son-in-law any favors.
In the Southern Investigative Reporting Foundation’s August story, an examination of several years’ worth of IRS Form 990s — the annual report for tax-exempt foundations — revealed the Karfunkel brothers had stuffed their foundations with so much AmTrust stock that they violated longstanding IRS rules governing something called “excess business holdings.”
You can be forgiven if the term doesn’t roll off your tongue, but for tax-exempt private foundations, it’s a very big deal. In short, the permitted holdings of a foundation and its disqualified persons — an IRS term for the network of foundation insiders that include its manager, their family members, the directors and key donors — boil down to a formula: 20% minus the amount held by disqualified persons. Given the Karfunkel insiders fail this test via their ownership of just over 59 percent of AmTrust’s shares, another IRS rule permits their private foundations to each hold as much as 2 percent of a company’s shares outstanding.
(Starting in the late 1960s the IRS began seeking to prevent private foundations from warehousing large holdings in closely held businesses.)
So did the Hod Foundation’s grant of all of its AmTrust shares to the Teferes Foundation put it in the clear?
Not hardly.
As before, there is a long-standing rule in place that somehow Michael Karfunkel or the people advising him missed. It’s called Internal Revenue Code Section 507(b)(2) and it deals with asset transfers between private foundations. The upshot of the rule is that when 25 percent or more of the fair market value of a foundation’s net assets are transferred, the recipient assumes the grantor’s tax liabilities (as well as the obligation to dispose of the excess business holdings.)
In the case of Hod Foundation, this liability is potentially mounting into the tens of millions of dollars. Filings with the Securities and Exchange Commission indicate that the Hod Foundation received a block of shares on Aug. 1, 2008, that pushed its ownership to just below 10 percent of the shares outstanding. Under Internal Revenue Code Section 4943, a private foundation has five years to liquidate the excess business holding; by August 2013, according to the timetable in its own SEC filings document, Hod was in violation of the IRS rules.
Ultimately the Hod-to-Teferes transaction is astoundingly strange: it solves no problems and only serves to highlight the very issue it was supposed to address, and raises additional ones, like charitable intent. The Karfunkels’ and Zyskind private foundations remain every bit in violation of the excess business holdings rule as they were before the move. And Zyskind’s Teferes Foundation has been afoul of the rules from the minute the deal closed, and as such, no holding period “clock” reset would be permitted.
Getting right with the IRS will mean that some painful arithmetic is in store for the Karfunkel family.
Using the figure of 74,886,335 shares outstanding as disclosed in last week’s 13-D filing, the 2 percent exemption means that Barry Zyskind’s Teferes Foundation and George Karfunkel’s Chesed Foundation for America would have to dispose of over 12 million AmTrust shares combined, either through direct sales or grants to public charities. Breaking it down further, the maximum permissible holding for each foundation is 1,497,726 shares, implying that Teferes (which currently holds 7,347,555 shares) would have to sell 5,849,828 shares and Chesed (which currently holds 7,707,918 shares) would have to sell 6,210,192 shares.
What’s more, if they donate these shares to a public charity like the United Way or the Red Cross, the donations must be unencumbered, meaning there are no strings attached — so the charity would almost certainly sell them in the open market in short order.
Given the simple remedy to this expensive problem, and the Karfunkel family’s refusal to do so, it’s obvious that maintaining this status quo is vitally important to them.
The only question remaining is why.
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A spokesman for the Karfunkel brothers, Kekst & Co.’s Robert Siegfried, was asked for comment about the transaction. In response to a question about excess business holdings, he said there was “no excessive business holdings” issue and noted that Teferes was a long time donor to Jewish organizations. The Southern Investigative Reporting Foundation sought clarifications in a follow-up email; Kekst’s Siegfried did not answer the questions and repeated his initial response.
Update: This article has been updated.