Tuesday, June 14, 2011

Newt's Nonprofits Under Scrutiny


ABC News today is reporting today that Newt Gingrich is operating a nonprofit charity in a way that comes "dangerously close . . . to crossing a bright line that is supposed to separate tax-exempt charitable work from both the political process and [Gingrich's] profit-making enterprises."

The charity, Renewing American Leadership, not only featured Gingrich on its website and in fundraising letters, it also paid $220,000 over two years to one of Gingrich's for-profit companies, Gingrich Communications. It purchased cases of Gingrich's books and bought up copies of DVDs produced by another of the former House speaker's entities, Gingrich Productions. 

ABC News was engaged for weeks in discussions with top Gingrich advisors about money from Gingrich's tax-exempt charity that went to his for-profit businesses -- known as related-party transactions -- which were never disclosed on the charity's tax forms. ABC News found evidence of the payments in a May 2011 audit commissioned by the West Virginia secretary of state's office. Many of ABC News's questions remained unanswered last week when Gingrich's presidential campaign team resigned en masse, citing dismay with the candidate's lackluster approach to his bid. Questions were resent to Gingrich's new team, but they still have not generated a reply.

One of those who quit the campaign, longtime Gingrich spokesman Rick Tyler, told ABC News in a series of email exchanges prior to his resignation that the charity spent no money on political activity and "did nothing to promote anyone's political career." Tyler also revealed that he personally was the beneficiary of the six-figure payments the charity made to Gingrich Communications – money he was paid to run the charity until he began helping prepare Gingrich for a presidential bid.

Boiled to its essence, the report alleges that Gingrich founded and operated charities in a manner that necessarily benefitted his private profit-making entities and, to a lesser extent, his political ambitions.  For example, the charity mentioned in the quoted text above purchased books and DVD's produced by Gingrich's for profit publishing companies and also paid for charter jets used by Gingrich to promote movies his private businesses produced.  The report notes with respect to the books and DVD's (relating to Gingrich's views on a host of social issues) that the exempt organization paid retail price (in other words, "fair market value") for the Gingrich's books and DVD's.  The report suggests that the exempt organization is violating what exempt organization experts call the "private benefit doctrine."  In another context, though, I have suggested that when a charity is operated in such a manner that it necessarily benefits an insider's private businesses, the charity violates the private inurement prohibition even if the charity can be said to receive a quid pro quo from the profit making entity.  I call this sort of relationship "joint venture private inurement."  It is the charity's grant of the franchise to an insider, I think, that makes such cases a private inurement/excess benefit violation as opposed to a private benefit issue.  Why is this distinction important?  Because the latter issue allows too much wiggle room.  In other words, the private benefit issue tolerates a certain degree of private profit.  Charities must benefit someone in order to achieve a charitable purpose.  But when that "someone" is an insider, the benefit seems less coincidental and more purposeful, as is the case when an insider "skims" profit for his own benefit.  Conventional wisdom holds that if the charity "gets what it paid for" no private inurement/excess benefit violation occurs.  The only objection is whether the charity should be engaging in the particular transaction and that requires an illegitimate second guessing of the charity's business judgement, something I don't want to condone.  But when its the insider who is the intended, not just coincidental collateral beneficiary of the charity's pursuit of its charitable goal, the rest of us are justified in questioning even a quid pro quo transaction.  In other words, the presence of the insider in a fair market value transaction makes the transaction more like a skimming than an incidental private benefit.  I don't mean to foist the private foundation rules on public charities lock stock and barrel, but cases like this -- which are also rampant amongst the megachurches where the churches typically grant what amounts to a lucrative, fair market value franchise to an insider's private benefit -- demonstrate that the deference inherent in simply asking whether the transaction was had at fair market value is wholly insufficient. 





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