Monday, April 7, 2008

Does the Clinton Family Foundation Prove the Necessity of the Convoluted PF Excise Taxes? Paul Caron Comments on Clinton Use of Private Foundation "Loophole"

President and wishful President-to-be Clinton released their tax returns for the years 2000 - 2007  last Friday, just in time for me to allow their use in my tax exempt organizations class this Tuesday.  Tomorrow we wrap up our overview of the private foundation excise taxes.  I've been teaching and complaining about IRC 4940 through 4945 all last week, apologizing to my students all along for the overwrought detail.  Here is my favorite quote regarding the regulatory morass regarding private foundations:

On the basis of the congressional enactment, 26 U. S. C. §501, et seq., the Internal Revenue Service has drafted fantastically intricate and detailed regulations in an attempt to thwart the fantastically intricate and detailed efforts of taxpayers to obtain private benefits from foundations while avoiding the imposition of taxes.

Windsor Foundation v. United States of America, 77-2 U.S. Tax Cas. (CCH) 9709 (E.D. Va. 1977).  According to a February 27, 2008 Washington Post article, the Clintons donated about $5 million to charity, most of it to the Clinton Family Foundation, operated from their kitchen table with Bill and  Hillary serving as the only Foundation executives.  According to that article, "the foundation has enabled the Clintons to write off more than $5 million from their taxable personal income since 2001, while dispensing only $1.25 million in charitable contributions over that period."  Some of the private foundation excise taxes are designed to prevent charitable organizations from funneling tax exempt funds, for which a charitable contribution has previously been granted, to their own use or to favorite political causes or persons.  Others are designed to prevent the use of family foundations to generate donations for charitable expenditures that will not be made for years to come.  Those laws seem hardly effective, though I would not argue for more detail -- an increased payout requirement would be appropriate, but even do-gooders have their effective lobby.  A few years ago, the Congress tried to increase the annual payout requirement by what would have amounted to a mere pittance and was shouted down.  The February 27 article notes, for example, that at least one Clinton Family Foundation grant went to a Clinton political supporter.  Yesterday's Washington Post article allows a further implication:

The family foundation also gave $25,000 to to support the McGovern Library and Center for Leadership and Public Service in Mitchell, S.D, in early 2007.  Later in the year the center's eponym, the former Democratic presidential nominee George S. McGovern, said he would endorse Clinton for president. "  It was the furthest thought when I decided to endorse Hillary last October," McGovern said yesterday.  The Clintons also gave $5,000 to the Jon Michael Moore Trauma Center at West Virginia University, which was named for the late grandson of Hillary Clinton's Senate colleague, Robert C. Byrd (D-W.Va.). Byrd, a superdelegate, has not yet endorsed a candidate for president.

I am willing to believe these donations were entirely conicidental to Senator Clinton's run for the White House.  If the donations were for endorsements, they certainly came cheap.  Mitchell or Byrd ought to have demanded a lot more for their superdelegate votes.  The article also states:

Between 2001 and 2006, the years for which tax records are available, the family put nearly $6 million into the foundation. The Clintons took a tax write-off for that money even though the foundation gave away less than half that amount -- about $2.5 million. A Clinton campaign official said that trend did not continue in 2007 -- the family moved $3 million through the foundation to other charities. Paul Caron, a tax expert at the University of Cincinnati College of Law, said the Clintons did not take full advantage of the loophole that allows taxpayers to capitalize on exemptions even when the money is not distributed. The family foundation was legally required to give away [only] 5 percent of its money to qualify for tax-exempt status, Caron said.

Did Caron really say "loophole"?  Anyway, these types of stories, taken out of context of course, usually become rallying cries for more regulation of charitable organizations, as similar anecdotal accounts did in 1969 when the Congress enacted the statutes giving rise to the "fantastically intricate" regulations of private foundations.  See generally S. Report 91-552, 91st Cong. 1st Sess., 1969-3 C.B. 423.  And, to be sure, the Clintons have brought needed attention and financial largess to causes as diverse as the rehabilitation of the gulf coast after Hurrican Katrina to cheaper and more widely available HIV medication.  When I first read the story, I thought something was wrong with this picture.  On second thought, though, I suppose so long as a taxpayer permenantly sets aside part of her wealth to charitable causes she should be entitled to a charitable contribution deduction even if the charitable goal is not felt for years to come.  In any event, the taxpayer's divestment of wealth ought to reduce her taxes.  When that wealth is finally devoted to charitable purposes is another issue.  We certainly cannot say that the taxpayer is getting a deferral benefit; deferral requires use of money now and tax liability later.  Donors to private foundations immediately give up the use of the money.

For a thoroughly informative discussion of the history leading to the extensive and probably unnecessary regulation of private foundations see William H. Byrnes' excellent article The Private Foundation's Topsy Turvy Road in the American Politicial Process.


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