Monday, March 7, 2011

Do we need a "related party" statute for 501(c)(3) transactions?

The Tax Code is replete with provisions designed to prevent the use of "straw persons" to accomplish what a direct participant in a transaction cannot.  IRC 267 is a prime example, and even the definition of "disqualified persons" in IRC 4958 has spawned regulations designed to preventing the use of related parties to accomplish what a principal cannot otherwise do.  Do we need a provisions relating to what related-party charities can or cannot do in order to prevent other charities from violating established prohibitions?  There are already various attribution rules sprinkled throughout the tax (and no doubt the federal election statute and regs) provisions and I am not unsympathetic to the overregulation of transactions in the market-place.  But the question arose when I read a recent NY Times article detailing the contributions made to charities supervised by the relatives of politicians.  Here is a short blurb:

Louisiana’s biggest corporate players, many with long agendas before the state government, are restricted in making campaign contributions to Gov. Bobby Jindal. But they can give whatever they like to the foundation set up by his wife months after he took office.  AT&T, which needed Mr. Jindal, a Republican, to sign off on legislation allowing the company to sell cable television services without having to negotiate with individual parishes, has pledged at least $250,000 to the Supriya Jindal Foundation for Louisiana's Children.  Marathon Oil, which last year won approval from the Jindal administration to increase the amount of oil it can refine at its Louisiana plant, also committed to a $250,000 donation. And the military contractor Northrop Grumman, which got state officials to help set up an airplane maintenance facility at a former Air Force base, promised $10,000 to the charity. The foundation has collected nearly $1 million in previously unreported pledges from major oil companies, insurers and other corporations in Louisiana with high-stakes regulatory issues, according to a review by The New York Times.  It is among the newest of charities set up by elected officials, including members of Congress, or their families that are mutually beneficial: companies seeking to influence politicians or curry favor can donate unrestricted amounts of money, while the officials benefit from the good will associated with charitable work financed by businesses.

An earlier NY Time article discussed the unusual success that charities run by family members of politicians have in gathering donations while the related party is in office as well as the ethical questions attendant to those donations:

But some current and former lawmakers, as well as ethics officials on Capitol Hill, find the charitable donations troubling, calling them one of the last major unregulated fronts in the “pay to play” culture in Washington. The donations typically far exceed what companies are permitted to give to candidates in campaign contributions.  The Office of Congressional Ethics, a House oversight group, twice last year investigated lawmakers’ charities, but took no action, in part because the House granted waivers exempting the congressmen from prohibitions against soliciting donations from companies with business before their committees.  The donations by corporations and lobbyists to politicians’ favorite causes can create expectations that the lawmakers will return the favor, said Mickey Edwards, an Oklahoma Republican who served 16 years in the House.  “Almost all of these foundations, they were set up for a good purpose,” Mr. Edwards said. “But as soon as you take a donation, it creates more than just an appearance problem for the member of Congress. It is a real conflict.”


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