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There's a new twist to the story about Health and Human Services Secretary Mike Leavitt and his family's charitable foundation. Last week, NPR and others reported that the Leavitt foundation is a special kind of foundation, just the kind bi-partisan forces in Congress want to restrict. The foundation offers huge tax deductions, it loans money back to donors and though it's a charitable foundation, it gives little away.

Now, NPR's Howard Berkes has discovered another questionable Leavitt foundation practice.

HOWARD BERKES reporting:

How's this sound? The Leavitt family puts $440,000 into its charitable foundation. The Leavitts get significant tax deductions. The family foundation then funnels the money into another charity, the Southern Utah Foundation. It passes the cash to Southern Utah University for housing scholarships for needy students. The students are then placed in housing units owned by the Leavitts, so when the rent's paid, they get their $440,000 back.

Ms. RHEA TUFT (Former Treasurer, Southern Utah Foundation): I don't think it was illegal, I just don't think it was right.

BERKES: Rhea Tuft used to be the volunteer secretary-treasurer of the Southern Utah Foundation in Cedar City, Utah. That's the boyhood home of Health and Human Services Secretary Mike Leavitt and the base for the Leavitt family's businesses and charities.

Ms. TUFT: I felt like we were being used to just muddy the waters so that if someone did come in and look at it, there was just one more foundation involved so that they might get bogged down, they wouldn't look at it all the way through, wouldn't see the whole picture.

BERKES: Tuft quit her volunteer job with the Southern Utah Foundation, but not before leaving a trail for the curious. She prepared the group's tax returns showing the Leavitt Foundation scholarship contributions going right back to the Leavitt Foundation.

Mr. RICH COHEN (National Committee for Responsive Philanthropy): It looks very suspect when the source of the money is the Leavitts and the end beneficiary of the payments of the housing money is also the Leavitts.

BERKES: Rick Cohen directs the National Committee for Responsive Philanthropy.

Mr. COHEN: I don't think the public anticipates that money that is put into an entity that is supposed to be something like a philanthropic institution would be used in a way that directly benefits the people who receive the charitable deduction for their donations. It makes the charitable purpose somewhat suspect.

BERKES: The Leavitt family foundation is what the Internal Revenue Service calls a Type III Supporting Organization. The designation makes it completely legal to loan foundation money back to family donors and to transform charitable donations into rent paid to family businesses. These loans and rent payments must be at market rates and that appears to be the case for the Leavitts. Dane Leavitt is the family spokesman.

Mr. DANE LEAVITT (Spokesman, Leavitt Family): It appears to me that the whole philosophy behind the Type III was that you utilized the economic ecosystem of a strong business to help foster philanthropy. We believe we've been good stewards of seeing that there are sound investment returns and that the investment returns were used for valid charitable purposes.

BERKES: At Southern Utah University, vice president Mark Barton has no problem with placing scholarship students in Leavitt housing and using Leavitt contributions to pay rent to the Leavitts.

Mr. MARK BARTON (Southern Utah University): When we received this gift from the Leavitts, we asked attorneys what they thought of this gift. The answer then, the answer continues to be, there is nothing illegal about this. There's nothing unethical about it. We're grateful that people like the Leavitts are willing to help needy students as they progress in their educational plan.

BERKES: Rick Cohen of the National Committee for Responsible Philanthropy is not convinced.

Mr. COHEN: It's really not their money. Once the money is in a non-profit institution, it is money that the American taxpayer has entrusted to them for the best public uses. The trail of the money going from the Leavitts' charitable interest to the Leavitts' business interests look like one that any outside observer would raise questions about.

BERKES: A House-Senate Conference Committee is considering a bill right now that would limit the practices of Type III foundations. Health and Human Services Secretary Mike Leavitt is a shareholder in the family companies making the charitable contributions and receiving the rent payments and he has his own charity. It also funnels money through the Southern Utah Foundation. But NPR's review of the foundation's records suggest it no longer qualifies to receive contributions from any of the Leavitt charities. The foundation and the Leavitts say they'll look into that.

Howard Berkes, NPR News.

SIEGEL: This is NPR, National Public Radio.

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