For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...
Aug. 30 — Questions of whether Clinton Foundation donors received special access to Hillary Clinton while she was secretary of state have dominated headlines for the last several weeks.
But the criticism swirling around the foundation may prove to be a teachable moment for other politicians and tax code Section 501(c)(3) organizations. Whether politicians choose to donate to a charity that supports a cause they care about, or create their own private foundation, they should tread carefully, a lawyer and two law professors who specialize in tax-exempt organizations told Bloomberg BNA.
“Depending on how cynical one wants to be, you can find examples of the good, the bad and the ugly, so to speak, among tax-exempt organizations that have some affiliation with a political figure,” Marcus Owens, a partner at Loeb & Loeb LLP, said Aug. 29. Owens is a former director of the Exempt Organizations Division of the Internal Revenue Service.
The Clinton Foundation, a 501(c)(3) organization focused on global health, announced plans last week to restructure if Clinton is elected in November: programs would become separate nongovernmental organizations and former President Bill Clinton would step down from the board. It would also stop accepting donations from foreign and corporate sources, NPR reported.
The high-profile focus on the Clinton Foundation could make some politicians more wary of using their status to raise money for their organizations or even for other charities, said Lloyd Hitoshi Mayer, a law professor at University of Notre Dame Law School.
“Even though I don’t think the foundation has done anything illegal, it builds into this narrative that the system is rigged—that the wealthy and the establishment get what they want and this is one of the channels to do that,” Mayer said, adding he thinks the foundation should be shut down if Clinton wins.
Clinton met with 40 people who donated more than $100,000 to the foundation, and 20 who donated more than $1 million during her time at the State Department, though there is no evidence any favors were exchanged for donations or pledges, according to the Associated Press. Her campaign called the tally a “distorted portrayal” of her tenure.
Those statistics illustrate what Mayer said is the main concern with foundations like the Clintons': politicians have a limited amount of time and can only meet with so many people. If donors get special meetings, those who can't afford to make gifts could be shut out.
“One thing that happens with these politician-created foundations is they raise money from people who want to buy access—and sometimes the access is quite expensively sold,” he said. “There’s nothing illegal about it, but obviously people are concerned about that. It has a bad appearance.”
An organization could shield itself from some of the criticism by turning away donations from people other than family members, Owens said. Or organization could have a large board, give to notable causes and ensure the politician—like Bill Clinton—doesn't raise money on behalf of the organization, he said. Bill Clinton created the foundation in 2001 to fund his presidential library. Since then, more than $2 billion has been raised, the initiatives have expanded and the full Clinton family has gotten involved.
“One could come up with situations where he might be able to remove the aura of some kind of return benefit, of access, or things of that nature. But it would be pretty difficult,” he said.
Politicians who are independently wealthy may choose to create private foundations as vehicles for their own philanthropy, a route that can be less controversial “as long as who they give to is not problematic,” Mayer said.
“No one is buying access, there’s no question of that, and they give to the causes they support sort of quietly,” Mayer said.
For example, Mitt Romney, who ran for president in 2012, put $9.5 million into his family foundation—the Tyler Charitable Foundation—from 1999 to 2010, according to the Chronicle of Philanthropy. In that time, the foundation made grants of $7 million, primarily to the Church of Jesus Christ of Latter-day Saints.
The Clintons gave away $18.4 million of their own money between 2001 and 2014 through the Clinton Family Foundation, a private foundation, according to the Washington Post. Republican presidential candidate Donald Trump, Sen. John McCain (R-Ariz.) and House Minority Leader Nancy Pelosi (D-Calif.) also have private foundations.
Section 6033(b)(5) requires the annual reporting of substantial contributors for 501(c)(3) organizations, and Section 6104 and the regulations under it require private foundations to publicly disclose the information on Schedule B of Form 990-PF, Return of Private Foundation. Thus, politicians should make sure to use their private foundations to “give to innocuous charities or ones that bolster their political reputation,” not tarnish it, Mayer said.
The biggest lesson for politicians is to be careful—and strategic—when considering charitable work, said Eric Chaffee, associate dean for faculty research and development and a law professor at the University of Toledo College of Law.
While it is common for politicians to create foundations named jointly for them and their spouse, it may be better to create it as an individual, he said. For example, if President Barack Obama starts a foundation after leaving office, tacking on First Lady Michelle Obama's name could open them up to scrutiny if she eventually runs for office.
“You might get inquiries from people about ‘If I donate $100,000 or $1 million, can I get a meeting with Michelle Obama about a particular issue,' ” Chaffee said. “He might make it just the ‘Barack Obama Foundation' and do his best to screen his wife from his foundation and make sure her political career isn't threatened by it.”
There are also lessons for charities, which must balance their exempt status with the desire to use ties to a prominent politician for fundraising purposes.
Charities can face excise taxes and the revocation of their tax-exempt status for participating in political campaigns, according to Section 501(c)(3). Thus, if a politician heads a fundraising event for a charity, the event must not be focused on politics. A charity can't endorse a politician—even though “you love their support and really appreciate it, you can't get involved,” Mayer said. Charities should also realize that ties to certain politicians could alienate prospective donors later—and plan accordingly, he said.
Organizations should ensure politicians and their families are protected “in the event that there might be concerns about how fundraising is undertaken,” Chaffee said.
“Nonprofits want successful fundraising campaigns. They need the involvement of prominent people, including politicians,” Chaffee said. “They don’t want politicians to become so concerned about basically being involved in nonprofits that they just completely shy away from those types of fundraising efforts.”
To contact the reporter on this story: Colleen Murphy in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Cheryl Saenz at email@example.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)