Hughes, however, was not satisfied. He didn’t want O’Brien’s team, and he didn’t want O’Brien’s unofficial help. He wanted O’Brien.
“I was very impressed with the line up of political talent you mentioned,” he wrote Maheu, approving his roster of operatives. “However, Bob, I want a political oriented executive to be available full time.”
Hughes had already hired Richard Danner, a longtime Nixon associate who handled dealings between the penthouse and the White House through the new president’s closest friend, Bebe Rebozo. That took care of the Republicans.
“What I would like best would be to have both O’Brien and Danner,” continued Hughes, seeking control of both parties.
“Do you think O’Brien can be persuaded, on any reasonable basis, to change his mind and come back?
“I realize he is limited with Republicans, but that does not disturb me particularly.”
No, not with the Democrats in control of both houses of Congress and most of the federal regulatory agencies. He was not disturbed at all. And, as it turned out, O’Brien needed no persuading. His Wall Street firm had gone bankrupt, he was saddled with worthless stock options, and he had plunged deeply into debt. In mid-August 1969, Larry O’Brien returned to Las Vegas, eager to join up with Howard Hughes.
O’Brien Associates opened for business October 1, just in time to help rewrite national tax legislation for its chief client, Howard Hughes.
The Tax Reform Act of 1969 was the most sweeping overhaul of the country’s revenue system in history, and it posed a real problem for Hughes. It was not that the richest man in America had paid no personal income tax for seventeen consecutive years, until his windfall profit on TWA finally forced him to ante up. It was not that the holding company for his entire empire, Hughes Tool, had paid no corporate income taxes for the three years its sole owner had been hiding out in Las Vegas. No, the big problem was the billionaire’s big charity—the Howard Hughes Medical Institute.
Like the other great philanthropists—Ford, Rockefeller, Carnegie—Hughes had discovered a way to get great public acclaim for hoarding his wealth and evading his taxes. He created a foundation. Hughes, however, almost seemed intent on exposing the entire racket by making his foundation an outrageous parody.
In his sole act of philanthropy, he had turned over all the stock of the Hughes Aircraft Company to the Hughes Medical Institute, thereby making his billion-dollar-a-year weapons factory a tax-exempt charitable organization. He named his personal physician, Verne Mason—the Hollywood doctor who had long been his codeine connection—director of medical research. But Hughes himself remained president of the defense plant and became sole trustee of the new foundation, retaining absolute control over both. He had generously given all his stock to himself. And now that incredible act of benevolence was about to be undone.
It was Wright Patman who started all the trouble. For years the Texas populist had been using his power as chairman of the House Banking Committee to push a congressional investigation of the foundation game. His probe had uncovered hundreds of self-styled charities that were nothing more than fronts used by the wealthy to amass vast fortunes tax-free. And now, in 1969, Patman was zeroing in on the most blatant fraud of all—a top-ten defense contractor, a manufacturer of missiles and spy satellites, masquerading as a charity devoted to medical research “for the benefit of all mankind.”
In fact, Patman discovered, the Howard Hughes Medical Institute had only one real beneficiary: Howard Hughes. In the fifteen years since its founding, the institute had given only $6 million to medical researchers and kicked back almost $24 million to the billionaire. During those same years, Hughes Aircraft piled up accumulated profits of $134 million but never paid a dividend to the charity that owned it and donated just $2 million to good works. Under a complex double-lease arrangement with Hughes Tool, the foundation received another $20 million, but most of that went to pay Hughes himself interest on a loan. Nearly a million dollars every year to the shylock trustee. And every penny Hughes-the-Benevolent gave to his foundation—including all the money he took back—was tacked onto the bills Hughes-the-Defense-Contractor presented to the Pentagon, so that other taxpayers picked up the entire tab for his philanthropy. Indeed, he turned a profit. By 1969 the medical institute, however, was flat broke. It had to borrow a million from a bank. Not to make research grants, but to pay the interest it owed its generous founder.
“This sounds more like high finance to me than charity,” complained Patman. And another member of his committee, in grilling a foundation director, sharply ridiculed the whole setup: “You mean Mr. Hughes, the trustee, has never felt that Mr. Hughes, the chief executive, ought to be hamstrung in paying Mr. Hughes the money Mr. Hughes owes Mr. Hughes?”
Dangerous talk. Into the breach stepped Larry O’Brien.
“I am thoroughly knowledgable of the affinity which has existed for years between Patman and O’Brien,” Maheu reported to the penthouse philanthropist. “In addition, I accidently found out last night that Dick Danner and Patman have been close friends for many years. Unless you advise me to the contrary, it is my intention to coordinate among Danner and O’Brien a program which perhaps could get Patman off our backs.”
But Wright Patman could not be stopped. He was on a crusade, and his revelations were finally forcing Congress to impose strict controls on all tax-exempt private foundations.
Except one. Larry O’Brien was seeing to that.
“It was Larry O’Brien’s people who called to my attention the deficiencies in the pending Tax Reform Bill,” Maheu told Hughes. “O’Brien and his people detected deficiencies which could be devastating to HHMI and Hughes Aircraft.”
Devastating indeed. Under the bill passed by the House, the medical institute would actually have to become a charity. It would be forced to spend at least $10 million each year on good works—probably two or three times that amount—far more than what it had paid out in the past fifteen years combined. Worse yet, the new law would prohibit “self-dealing.” Hughes would have to pay a 200 percent tax penalty on all the kickbacks he received from his foundation. And worst of all, he would have to surrender control of Hughes Aircraft, sell off 80 percent of his stock within ten years.
O’Brien had his work cut out for him. But he also had powerful allies. In addition to Nixon’s pal Danner, Hughes deployed a team of lobbyists that included Gillis Long, a former congressman from Louisiana who just happened to be a cousin of Russell Long, chairman of the Senate Finance Committee—next stop for the Tax Reform Act.
By the time the tax bill emerged from that Senate committee, it had a special loophole. One tailored just for Hughes. Now hidden in the 225-page law was a single sentence that exempted “medical research organizations”—namely the Hughes Institute.
Maheu flashed the good news to the penthouse: “In meetings today and yesterday, the Senate Finance Committee adopted all the amendments we were pressing on behalf of HHMI.”
The revised bill still had to survive a House-Senate conference and a final vote of the full Congress, but mainly it had to get past one man—Wilbur Mills, chairman of the House Ways and Means Committee. O’Brien took his old friend Mills out to lunch. For two hours they discussed the impact of the new tax law on foundations, and while O’Brien later insisted he never even mentioned Hughes, Wilbur Mills became a fervent advocate of the Hughes loophole.