Questions regarding the operation of the Clinton Foundation and the presence of a potential conflict of interest between the Clinton Foundation and the Democratic presidential nominee, Hillary Clinton, have been swirling through the news in recent weeks. If all the charges against the Clinton Foundation have you wondering what charitable organizations are all about and how they work, you have come to the right place. Below is a summary to help you get acquainted with the basics of charitable organizations, and understand what some of these allegations mean for the Clinton Foundation.
A charitable organization is exempt from income tax under §501(c)(3) of the Tax Code, and can be in the form of either a public charity or a private foundation. Private foundations are typically funded and controlled by a single individual, family, or corporation. Charitable organizations are generally presumed to be private foundations unless they fall into one of four exceptions. The four types of public charities can be categorized as: (1) those which conduct inherently public activities (e.g., churches, schools, hospitals, governments); (2) those which receive a substantial part of their support from the general public and governmental bodies (e.g., the Clinton Foundation); (3) those whose exclusion is derived from their close association with other charitable organizations; and (4) those organized and operated exclusively to test for public safety. Unlike public charities, private foundations are subject to more detailed operating restrictions and excise taxes for failure to comply with those restrictions. When donors make a contribution to a charitable organization, they may eligible to take a charitable deduction for income tax, estate tax, and/or gift tax purposes.
Generally, an organization is required to file an application with the IRS requesting the recognition of exemption as a charitable organization (see the Clinton Foundation’s Form 1023 and the IRS Determination Letter granting recognition as a public charity under §509(a)(1)). To qualify for recognition, an organization must be organized and operated exclusively for public purposes, which includes religious, charitable, scientific, or educational purposes. An organization must not use any part of its net earnings to benefit a private individual. Additionally, an organization must not engage in any substantial activity that attempts to influence legislation and must not participate or intervene in any political campaign on behalf of, or in opposition to, a candidate for public office. Charitable organizations must generally file an annual information return with the IRS and make them available to the public (see the Clinton Foundation’s 2014 Form 990).
While charitable organizations are generally exempt from income tax, an exception exists for income from an unrelated trade or business that is regularly carried on and is not substantially related to the organization’s exempt purpose (known as the unrelated business income tax). Charitable organizations are also subject to sanctions, under which the IRS imposes excise taxes or revokes exemption, if excessive private benefits are received by disqualified persons (i.e., insiders, family members of insiders, entities of insiders or their family members) or managers of the organization.
Now, how do these requirements stack up against the allegations made against the Clinton Foundation?
In a letter signed by more than 60 House Republicans, the Republicans alleged that the Clinton Foundation engaged in unlawful activity because its global activities go beyond what is described in its 1997 application for exemption. However, tax law does not explicitly require that a charitable organization disclose new exempt activities. Still, the Clinton Foundation appears to have covered all its bases. First, the Clinton Foundation’s Articles of Incorporation, which are attached to the application, state that it “may engage in any and all other charitable, educational and scientific activities permitted to an organization exempt from federal income tax under Section 501(c)(3) of the Code.” A broad purpose, such as this one, is permitted (and tends to be a best practice used by drafting attorneys) under Reg. §1.501(c)(3)-1(b)(1)(ii), which provides that “the organization’s purposes, as stated in its articles, may be as broad as, or more specific than, the purposes stated in section 501(c)(3)”. Second, the Clinton Foundation’s 2004 Form 990 provides an updated statement of purpose — “To advance the mission the foundation has developed programs and partnerships in the following areas: economic empowerment; health security with an emphasis on HIV/AIDS; racial, ethnic and religious reconciliation; leadership development and citizen service.” Further, there is no question that these additional purposes are not exempt purposes and they would not cause the Clinton Foundation to lose its exempt status. Thus, the Clinton Foundation notified the IRS of its expanded exempt purposes several years ago through both the Clinton Foundation’s Articles of Incorporation and annual information return.
The letter next makes allegations of instances where Hillary Clinton, acting as Secretary of State, provided large governmental benefits in exchange for contributions to the Clinton Foundation. Though tax law prohibits charitable organizations from providing private benefits to the organization’s managers or disqualified persons, in the alleged transaction, the Clinton Foundation did not provide private benefit to Hillary Clinton, its donors, or others with ties to the organization. Rather, the allegation is that Hillary Clinton, not serving the Clinton Foundation at the time, provided benefits. Thus, there does not appear to be any wrongdoing by the Clinton Foundation, itself, that would cause it to lose its exemption. However, one plausible argument against the Clinton Foundation, which could result in a loss of its exemption, is that the organization operates for a purpose that is illegal or contrary to established public policy — a subjective law established in a U.S. Supreme Court decision. Such a case could be a difficult and improbable one for the IRS to successfully argue.
In the meantime, the IRS, considering all referrals, is looking into the allegations, but it is unlikely that we will see the Clinton Foundation losing its exemption anytime soon under the applicable tax laws.
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