By: Philip Hackney
Back in June I wrote disapprovingly of some actions of the Donald J. Trump Foundation. In that piece I promised to write about the Bill, Hillary & Chelsea Clinton Foundation too. Recently, Rep. Marsha Blackburn sent a letter that was scheduled to be sent to the FBI, the FTC, and the IRS. That letter makes a number of allegations about the misuse of the Clinton Foundation, and I figured these allegations would be a good place to analyze the performance of the Foundation that I had promised.
Blackburn alleges a number of things, but I am going to focus on her first allegation in this post because it is the only one that is a pure tax exemption question. She alleges that the Foundation is illegally operating outside the scope of its initial application for tax exemption to the IRS. For reasons explained in the post below, I conclude there is very little involved in this claim and it is a misunderstanding of the law. There could be problems with the Foundation but this is not one of them.
UPDATE: I look at the remaining two Rep. Blackburn allegations here.
The allegation is as follows:
“Foundation’s initial filings with the IRS for 501(c)(3) status appear to prohibit much of its current activity. The Foundation submitted its application to the IRS on December 23, 1997.  The description of its “activities and operational information” notes that it would construct a library, maintain a historical site with records, and engage in study and research.  No mention is made of conducting activities outside of the United States, which is one of the codes included in the IRS “Application for Recognition of Exemption” in effect at that time (see activity code 910).  As a result, the Foundation’s global initiatives appear to be unlawful pursuant to IRS guidance.”
Blackburn makes the claim that there is a tax law that governs tax-exempt charitable organizations that states that a charitable organization can only do those things that are within the scope of their initial determination letter. Is that right? Not exactly. Thus, for reasons I explain below, this first allegation does not make a strong complaint regarding the Foundation.
The place to start is section 501(a) and 501(c)(3). Section 501(a) provides an exemption from income tax for those organizations described in section 501(c) broadly. In this case section 501(c)(3) for charitable organizations describes the vast majority of what the Foundation must do to operate as a tax-exempt charitable organization. The full code article states the organization must be:
“operated exclusively for religious, charitable, scientific, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
Nothing in section 501(c)(3) says anything about limiting a charitable organization to the initial determination letter’s scope. A simple reading of that Code provision would suggest no notice at all is required. Is that the end of the story? No, there are a number of other Code provisions we should consider. Section 508 of the Code, implemented in 1969 by Congress requires a charitable organization to file a notice with the IRS to be recognized as tax-exempt. Additionally section 6033 requires a charitable organization to file an annual information return.
However, section 508 seems to apply only to achieving that initial charitable status and does not provide any law regarding a requirement to notify the IRS about a change in purpose or activity. Section 6033 also does not state in the statute itself some obligation to notify the IRS of a change in purpose or activity.
In the case of both 508 and 6033 the Code provides authority to the Treasury Department and the IRS for setting rules. What do Treasury regulations say about this issue? About the same thing. 26 USC 1.508-1 simply operationalizes this requirement to file an initial notice. 26 USc 1.6033 provides no requirement of disclosure either. Thus, neither of the primary sources of law for charitable organizations suggest that there is such a requirement. We must go deeper to see from where Rep. Blackburn’s understanding may come.
Publication 557 is the major publication on tax exempt status. It makes the following statement regarding a charitable organization changing in some way from its initial application: “If there is a material change, inconsistent with exemption, in the character, purpose, or method of operation of the organization, revocation or modification will ordinarily take effect as of the date of that material change.” This of course suggests that something happens only if the change is material and is inconsistent with exemption. Thus, simply adding another exempt purpose consistent with charitable purposes is not a problem under this statement of the law. On page 20-21 the IRS gives its most substantial discussion in this publication on what to do when an organization makes material changes to its structure or activities that were disclosed in its Form 1023 application. There the IRS advises that the organization should disclose those new activities on their annual information return the Form 990.
Now, before I analyze the particular facts under this stated law, I must note that this publication is relatively new. Thus, we should look back at the old law to see if there is any difference. Pub 557 does suggest that EO used to accept letters that it would respond to that suggested an organization had a change in purpose. Was there any law that required an organization to take this method of disclosure over simply disclosing the change in purpose or activity via the Form 990? To my knowledge, there has never been a law that sets out exactly what an organization must do in such a situation.
Rev. Proc. 2010-4 is likely indicative of the consistent policy of the IRS on whether it will issue determination letters on changes in activities or purpose. It states at 7.04(2) that it will provide an “[u]pdated exempt status letter to reflect changes to an organization’s name or address, or to replace a lost exempt status letter, but not to approve or disapprove any completed transaction or the effect of changes in activities on exempt status, except in the situations specifically listed in paragraphs (3) through (12) below.” None of 3-12 would apply to the Foundation circumstances at issue. Thus, the IRS’s policy has generally been to not accept requests for determination letters on changes in activities or purpose of an organization. The IRS had a stated policy that an organization cannot come in for a new exemption letter for changes in its charitable activities. So that leaves primarily the annual return as a potential place for such disclosure.
What do the instructions to the Form 990 say? On the current Form 990, Part III Question 3, the IRS asks if the organization ceased conducting or made any significant changes in its program services. If it has done this, then it is supposed to provide information on schedule O of the Form 990. On the old Form 990 in Part III there is a request for a statement of purpose and in part VI, line 76, the IRS asks whether the organization engaged in any activity it had not previously reported to the IRS, and if so to attach a detailed description of that activity. Thus, there were a couple of places where the IRS specifically asks if there has been some change in activity.
A review of the Foundation’s Form 1023 suggests that it was initially established as the William J. Clinton Foundation and that the main purpose was serving as the presidential library of President Clinton. (It appeared to change its name to the Bill, Hillary & Chelsea Foundation in 2012) Importantly, the Foundation’s articles of incorporation attached to the application explicitly state that the Foundation is able to operate for any charitable purpose. Furthermore, the application suggests a sort of nondescript indication that it plans to do research and education of some related sort. Representative Blackburn notes that the Foundation failed to indicate activity code 910 which would have indicated that the foundation planned to do international activities.
Through 2003 the Foundation’s Form 990s indicate that its purpose is the support of the Clinton Library (see its statement 4 to Form 990 Part III). However, in its 2004 Form 990, its statement of purpose changes to a dual purpose. In that form, the Foundation indicates that its purpose is not only the library but also to help the people of the United States and people throughout the world to meet the challenge of global interdependence. It additionally states that it is engaging in three different programs to meet the second part of its purpose: (1) health security with an emphasis on HIV/AIDS, (2) racial, ethnic and religious reconciliation, and (3) leadership development. Its statement immediately thereafter describe in significant depth its program service accomplishments including work on HIV/AIDS issues in a number of different countries. The Foundation does not state when this activity began, but from what is now the Clinton Health Access Initiative it looks like it might have begun this activity as early as 2002. Without actual investigative reporting on my part it is hard to determine whether the Foundation conducted these activities in 2002 or if they really began in the 2004 tax year. Notably, the Foundation does not check yes to box 76 in any of the years leading up to and including 2004 that would indicate it had a change in its activities.
What are my conclusions on the first allegation? The first allegation is a very minor issue. The law generally requires that you file an initial notice with the IRS as to what your activities will be. The Foundation complied with this requirement and included notice via its Articles of Incorporation that it had the capacity to operate for any charitable purpose.
No primary source tax law explicitly requires an organization to disclose new exempt purpose activities in some way. The IRS does ask for information regarding changed activities on the Form 990 and failing to provide that information could be problematic; however, such a failure would be highly unlikely to call into question an organization’s tax exempt status. The law says you must operate as a charitable organization and file an annual return. Nothing in the first allegation alleges that any of the HIV or international activities evince a nonexempt purpose that would call the Foundations charitable status into question. Thus, in a strict Code sense, there is no violation. They were always operated for legitimate section 501(c)(3) purposes.
Furthermore, it has been long unclear exactly what an organization is supposed to do when it starts engaging in new charitable activities that are materially different from its initial exemption letter. My sense has always been that if you disclose it in the Form 990 you have covered all of your bases. That is basically the IRS position now as explained in Pub. 557. So did the Foundation meet this standard?
In its application the Foundation says it will mostly operate to create and support the Clinton Library, but it indicates it may branch out; it includes in its Articles of Incorporation that it filed with the IRS that it is able to do all things charitable under section 501(c)(3). Next, in 2004, it indicates on its Form 990 that it is carrying on all the activities that the Blackburn complaint alleges were problematic. Assuming that this is the year that the Foundation began these activities, I think the Foundation met all of its legal obligations. However, it looks possible that it began some of the HIV/AIDS initiative as early as 2002. If that is the case, they probably should have disclosed that activity in the 2002 and 2003 Form 990s. Would this be a violation that would lead to their losing their status? No. Looks like a basic mistake that charitable organizations make. Under that circumstance, they completely correct it by 2004 and are in good graces at that point. If we assume that they should have disclosed the information in those two earlier years, for reasons discussed above, the IRS would have a very hard time bringing any kind of an action against the Foundation. In any case, at this point in time, it has been fully transparent on this issue with the IRS and the public. Additionally, no one questions that this work is charitable. I conclude the first allegation is much ado about nothing