Wednesday, September 24, 2008

Interesting Case Study on Private Benefit and Quid Pro Quo Charitable Contributions

There is an interesting article in today's Wall Street Journal that provides useful context for a discussion of several tax exempt doctrines (including the private benefit doctrine, private inurement and the meaning of charitable contributions for purposes of IRC 170).  According to the article, many large corporate retailers, like CVS Caremark Corp. (a national drug store retailer) hold "charity" events through their charitable organizations.  Those events are typically attended by donors who are also wholesalers hoping that the retailers will purchase their goods for retail sale: 

Access to company decisionmakers is a hallmark of the CVS Caremark Charity Classic, the drugstore chain's annual golf tournament, which this year featured golf pros Nick Faldo, Rocco Mediate and Davis Love III vying for $1.55 million in prize money. Held each year at the Rhode Island Country Club, the four-day event attracts scores of donors, many of them CVS vendors. Companies that underwrite the event are granted time with top CVS officials, including department heads and executives who make important purchasing decisions.  Generous contributors are rewarded with rounds of golf at the tournament with CVS employees. Top sponsors get fairway-view pavilions and private visits by company officials. The highlight of the event's gala dinner is an auction where this year, KKM bought one of the seven vacations for golf, game fishing, riding or yachting. Each auction lot included high-level CVS executives as guests; one promised a day of golf with the company's CEO.  "I take advantage of this Classic, asking the different manufacturers I work for if they want to participate," said KKM's president, John Malmborg. "They all chip in and we work to get to a high level of participation and have access to CVS executives on an informal basis. It really is helpful."

The article goes on to explain that only a relatively small percentage of the "donations" go to charity in the case of CVS's annual event.  Other retailers that have set up charitable organizations also rely on donor's implicit hope of more business but which direct more on the scale of 60% to charitable operations.  Do the benefits derived by the executives constitute private inurement?  Does the fact that the charitable events serve as venue to attract new vendors mean that the charitable organizations are operating for private benefit?  And do the donors' expectation of a quid pro quo disqualify the donations from being classified as charitable contributions?  And assuming the organizations are private foundations, to what extent are the private foundation excise taxes implicated by the cozy business relationships fostered by the charitable events?  Regardless, this is a good news article to stimulate classroom discussion of a host of issues pertaining to the grant and retention of tax exemption. 

dkj

http://lawprofessors.typepad.com/nonprofit/2008/09/interesting-cas.html

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