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.  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.