By: Philip Hackney
A week ago I considered one of three allegations Rep. Marsha Blackburn made against the Bill, Hillary & Chelsea Clinton Foundation in a letter Blackburn sent to the IRS, FBI, and FTC. I found the first allegation stated nothing of significance to the IRS. I now look at the other two and find them significantly wanting as well. Recently, IRS Commissioner Koskinen sent a letter indicating the IRS would investigate these complaints. I conclude they fail to state any complaint actionable by the IRS.
The second and third Blackburn allegations seem to come from a book by Peter Schweizer called Clinton Cash. Both allegations suggest that Sec. Clinton provided large governmental benefits in exchange for donations to the Clinton Foundation and payments to Bill Clinton. Both of the claims, already made by Presidential candidate Donald Trump, regarding Laureate University and Uranium One have been rated False and Mostly False by Politifact. Thus, it is difficult to take these allegations seriously.
Nevertheless, there are two things I do in this post. First. I discuss the factual conclusions of others regarding whether there was a quid pro quo arrangement associated with the second and third allegations. Then, I look at how the tax law might treat such arrangements were they true.
The second and third allegations state the following…
“Second, . . . Laureate University . . . paid [President Clinton] $16.5 million as an honorary chancellor and Laureate “has been a seven-figure donor to the Clinton Foundation, giving between $1 million and $5 million,” . . .. In addition, the International Youth Foundation (IYF), an entity run by Laureate founder Douglas Becker, received over $55 million of USAID grants from 2010 to 2012. [6] USAID operates under substantial guidance from the Secretary of State which creates an appearance that millions of dollars in taxpayer money was channeled to IYF by Secretary Clinton’s State Department as a kickback for her husband’s generous contract as an honorary Laureate chancellor.” (emphasis added)
“Third, Uranium One is a Russian run company that has acquired “control of one-fifth of all uranium production capacity in the United States.” Uranium One’s chairman donated $2.35 million to the Foundation through several donations, which the Foundation failed to report . . . . The New York Times reported that former President Clinton “received $500,000 for a Moscow speech from a Russian investment bank. . . . promoting Uranium One stock” after the Russians declared their intent to acquire control of Uranium One. Secretary Clinton was also one of several Administration officials who approved the sale of the uranium.” (emphasis added)
Blackburn concludes that these two allegations “smack of a “Pay to Play” pattern.” However, reputable news services have called these Pay to Play allegations into question.
The Laureate claim of impropriety appears to be false. When Donald Trump recently made the same allegation Politifact rated it false and the Washington Post came to the same conclusion. Both of them rejected the idea that there was any evidence of a quid pro quo. Among the reasons for this conclusion was that Hillary Clinton had no authority to provide the governmental grants in question.
The Uranium One claim of impropriety appears to be generally false as well. Politifact looked at this claim and rated it “mostly false” because there was no evidence of a quid pro quo. One major problem with the allegation is that eight other agencies besides Secretary Clinton’s Department of State were involved in the approving of the uranium deal in question. Politifact thinks it reasonable to raise the question of the donations to the Clinton Foundation for general purposes, but concluded that there was no evidence of corruption here.
Given that the two allegations have been called into significant question, it seems unlikely that the IRS would take actions against the Clinton Foundation. However, it is still worth examining the tax law implications of these claims to understand how the tax law might treat a charity involved in such a situation. If these facts were true, would they state a claim that would put the Foundation’s tax status in jeopardy or subject anyone to penalty?
Maybe, but it really stretches the boundary of the law and is by no means the normal type of misuse of a charity that is pursued by the IRS. More typically a person who controls a charity takes some money or benefit from the charity. Here, there is no allegation that the Clintons received some impermissible benefit from the Clinton Foundation. The Blackburn allegations in their simplest form claim that a donor gave money to the Clinton Foundation and then Sec. Clinton ensured that a donor received governmental benefits in return.
A tax-exempt charitable organization is primarily guided by section 501(c)(3). This is where we should look to find a tax law violation by the Clinton Foundation. We could also consider section 4958 of the Code on excess benefit transactions to look at whether any individuals could be penalized associated with running the Foundation.
Section 501(c)(3) mandates, among other things, that a charitable organization be operated exclusively for charitable purposes. The Treasury regulations interpret “exclusively” to mean, “primarily”. A charitable organization is said to be prohibited from operating for a “substantial nonexempt purpose.” Additionally, a charitable organization cannot allow its earnings to inure to the benefit of a private shareholder or individual. In simple terms, the prohibition on inurement means that a person who has control of a charity cannot take the earnings from the charity as if the charity were his own for-profit corporation. Finally, there is a separate prohibition on too much private benefit. This latter provision suggests that a charity cannot be operated to give significant benefit to individuals who are not deserving of charity.
Because neither of the allegations suggest the Clintons got money or benefits from the Clinton Foundation in association with either of these sets of facts I don’t think there is any legitimate statement of a violation of inurement, private benefit, or an excess benefit transaction. Also, under the allegations, no donor got benefits from the Clinton Foundation either.
The best case that could be made (IF these allegations were legitimate) is that a substantial purpose of the Foundation is to operate as a means for the Clintons to provide governmental benefits in exchange for donations to the Foundation. Under this theory, it would be argued that the Foundation was operated for a substantial nonexempt purpose. While such use would likely be a nonexempt purpose, it is unlikely that it would rise to the level of a substantial nonexempt purpose. The Foundation engages in large amounts of charitable activity. This fact would make it really hard to ever reach a conclusion that the governmental-benefit-transfer-tool purpose overshadowed the charitable acts of the Foundation.
It might help to explain how the substantial nonexempt purpose analysis works and provide an example. Only when non-exempt activity becomes substantial does a charity’s tax status come into question. To measure substantiality, the IRS looks at work hours dedicated to the activity, expenses of the activity, and the significance of the activity to the overall organization. For instance, assume a charitable organization runs a soup kitchen. It takes in money and provides soup to homeless men and women. That activity furthers a charitable purpose. Assume that the organization one day decides to sell shoes in order to generate funds to run the soup kitchen. The sale of shoes will generally not support an exempt purpose. Thus the organization is engaged in a non-exempt purpose. However, only where the sale of the shoes becomes a substantial non-exempt purpose does the activity become an exemption problem for the charity. Figuring out the way to measure when that violation occurs is subject to much debate but is beyond the scope of this blog post. Assuming we could show that all things considered the shoe activity made up no more than 10% to 20% of time and revenue, I do not even begin to worry about the loss of exemption for the charity.
With this example in mind, it is hard to see that these two allegations even if true could call the status of the Clinton Foundation into question. It’s charitable activity dwarfs this potentially nonexempt purpose and all of the donations are used to further charitable purposes.
There is one other claim to consider: the Clinton Foundation supposedly failed to disclose the 2.35 million dollar donation from Uranium One’s Chairman. There are two major problems with this allegation: (1) the donation was apparently made to a Canadian affiliate of the Clinton Foundation called the Clinton Giustra (Canada) Foundation rather than to the Clinton Foundation, and (2) there is no requirement that a public charity publicly disclose its donors. For an analysis of the Clinton Cash book and in particular a discussion of this donation see this site here.
It is well worth being aware of the way candidates and politicians use charitable organizations to their own purposes. Charitable organizations can be, and have been, misused by politicians. But, charitable tax law focuses mostly on protecting charities and not so much on the actions of individuals operating outside of that charitable organization context. During this election, we should absolutely examine both the Clinton Foundation and the Trump Foundation to do our best to keep these organizations and their politicians as honest as possible, and to inform us about the candidates themselves.
The Surly Subgroup 
Thanks Phil.
Thanks Phil.
I agree with your analysis; it’s difficult to see how any of the allegations (if true) would affect the Clinton Foundation’s tax-exempt status because they generally don’t involve an abuse of the organization’s income or assets, either under an inurement or a private benefit analysis. Additionally, it’s doubtful that the alleged bad acts would constitute the substantiality one would need to conclude that the organization operates substantially for nonexempt purposes under your governmental-benefit-transfer-tool approach.
Assuming arguendo that i) the allegations are true, and ii) there appeared actual proof that the organization is complicit as a governmental-benefit-transfer-tool, do you think revocation for violating the public policy prohibition makes sense? I think the argument might go like this:
1) Section 501(c)(3) does not permit purposes that are illegal or contrary to a clearly defined and established public policy;
2) The foundation is a governmental-benefit-transfer-tool, as elaborated in your post, and being a governmental-benefit-transfer-tool is either illegal or contrary to public policy; therefore
3) The foundation’s tax-exempt status should be revoked.
As a practical matter I think this is very unlikely, but I can’t immediately identify why it is technically invalid. I think this line of attack makes more sense to me because it doesn’t depend on the substantiality required to determine that the organization operates more than insubstantially for nonexempt purposes.
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Thanks for the thoughtful engagement on this one. Yes, if the facts were true and we found that those facts as alleged were illegal there might be a public policy case to be made against the Foundation. That is something I thought about but decided not to address because I mainly thought of the Foundation as not complicit here. In other words under my vision of what if, I assumed that the Foundation itself was simply a place that Clinton told donors to donate to independently of the Foundation itself. You raise the question of what if the Foundation were in fact complicit, so that in effect it is breaking the law. The question is something Ben Leff and I were arguing about in this post https://surlysubgroup.com/2016/08/01/examination-of-allegations-against-clinton-foundation-part-ii/ and this post https://surlysubgroup.com/2016/05/04/marijuana-and-charitable-orgs-response/ Two things going on in whether the IRS can use illegal activity to deny or revoke exempt status (1) is the IRS competent to make the decision and (2) is there a question of substantiality involved. In the sale of marijuana as a primary purpose I argued that the IRS could know that this activity was facially illegal and could deny or revoke on that basis alone. However, I said on a matter like antitrust, I thought it much less likely that the IRS could make that call. My guess, and part of the reason I did not bring the point up in the post, is that this is one of those areas where the IRS should defer to another agency. I think the question of whether this government benefit transfer tool purpose is illegal would be subject to much subjectivity and complexity. On the second issue, regarding whether there is a need to get to substantiality, as I was writing the post I was thinking that even in the public policy context you would have a substantiality question involved and it would look much like the measurement I already did just thinking of it as a nonexempt purpose. Obviously in Bob Jones, the court never addresses the issue of sustantiality. Bob Jones discriminated on the basis of race and that was enough to kill their exemption. With that said there are plenty of IRS rulings and cases where they looked at violations of antitrust laws in an illegality context and applied a substantiality threshold. I think that would apply here.
Anyway, your question is a good one. My gut when I wrote the post is that it would look about the same as the analysis I already did, however, you are correct that there is some question in how that analysis should go.
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Like Phil, I appreciate the engagement here. Even assuming the allegations are true, it doesn’t strike me as a case of illegality (though I could be wrong).
If it’s not illegal, the IRS would have to rest its disqualification on the fundamental public policy test. And there I think they’d face a significant problem. Basically, the only 502(c)(3) organizations to fail the fundamental public policy test have been racially discriminatory schools. And that only came to the fore after Supreme Court cases and federal legislation both came down solidly against segregated schooling.
I don’t see any public policy against the transfer of governmental benefits that rises nearly to that level. Of course, Bob Jones didn’t give any floor on what kinds of bad acts implicate the fundamental public policy, other than discriminatory schools, which may be one reason that the IRS doesn’t use it often.
Which is to say, I think you need illegality (which, again, I don’t think this would rise to if the allegations were true), not just bad acts here.
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Agreed Sam. In my post I was assuming illegality, not some generic violation of public policy. Not gonna happen on public policy alone. You need illegality in order to get to loss of exemption under this scenario.
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Thank you both for the thorough responses.
I recalled Professor Hackney’s previous posts discussing the illegality limitation and figured he would have a good feel for its boundaries as applied to my hypothetical. When drafting my initial comment I couldn’t think of any reason why the limitation was per se inapplicable but felt that the governmental-benefit-transfer-tool allegation needed to be more clearly illegal or against public policy. I understand and agree regarding the IRS’s competence with regard to identifying the illegality here and its inability to lean on public policy without additional authority (e.g., Civil Rights Act in Bob Jones).
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