Paul L. Caron

Wednesday, June 8, 2011

John Edwards and the Gift Tax: A Dissenting View

Following up on Friday's post, Will the Gift Tax Save John Edwards?: Mike Dorf (Cornell), A Strong Case Against John Edwards:

At its core, the indictment alleges that Edwards knowingly: 1) in violation of federal campaign finance law, accepted money well in excess of the individual campaign contribution limits; 2) spent that money to hide his extramarital affair with Rielle Hunter; and 3) in violation of federal campaign finance law, failed to disclose either the donations or the expenditures. Edwards does not appear to contest number 2), which is not, in and of itself, illegal. Instead, his defense appears to be that, with respect to 1), the hundreds of thousands of dollars provided by Fred and "Bunny" Mellon were personal gifts, and that with respect to 3), the money spent to hide l'affaire Hunter was a personal expense rather than a campaign expenditure that needed to be disclosed.

Assuming the facts alleged can be proven, the government's argument with respect to 1) is very strong. Last week, the Huffington Post and Paul Caron both suggested that Bunny Mellon's gift tax return could help Edwards. Apparently, she filed a return listing a $700,000 personal gift to Edwards. This supposedly shows that the money was intended as a gift rather than as an unlawful campaign contribution. With due respect, it shows no such thing.  Unless Mellon gave Edwards the $700,000 in cash (perhaps fourteen $50,000 bills?), a transaction that large would have called attention to itself, and thus would have to be characterized in some way. If, as the government alleges, this was all a big conspiracy to evade campaign finance laws, then calling it a gift was part of the conspiracy, not a defense to it.

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The Federal Election Campaign Act (FECA) of 1971 doesn't seem to care if the money was a gift, taxed or not. The purpose of the gift is the point in contention.

(8) (A) The term “contribution” includes—
(i) any gift, subscription, loan, advance, or deposit of money or anything of value made by any person for the purpose of influencing any election for Federal office;

Posted by: Rabel | Jun 10, 2011 9:12:35 AM

I think everyone is missing the point, the Gift Tax was created to prevent the transfer of wealth from one individual to another without the government getting a piece of the action. By reporting the gift on a gift tax return and paying the gift tax related to that gift, the funds became the property of the recipient and the recipient could do with those funds what ever he or she desired. If the recipient was running for public office and want to use what was now their own funds this does not violate the campaign finance laws.
Conspiracy is a crime only in this country not in the rest of the world. Only in the U.S. can one be convicted of a crime for merely planning to do something deemed to be illegal even if the actual crime is never commited.
If congress wishes to make giving a gift to an individual who happens to be running for public office illegal congress has the absolute right to do so. As of this moment in time congress has not passed any such law so the gifts involved were not illegal and no one violated the campaign contributions laws.
Let's clear the air by getting the current congress to pass a law making the gifting of funds to an individual, who happens to be candidate for public office, in excess of the campaign finance law maximum a crime. Then in the future these types of transactions would be punishable. But to punish a person for making a gift prior to the passing of such a law is in itself a crime.
I am not an attorney but understanding the laws of the country one lives in is the resposability of all citizens.

Posted by: Ed | Jun 9, 2011 8:54:03 AM

Banks are not required to report such transactions unless a foreign payee is involved. See 31 USC 5311-5330.

Posted by: Bob | Jun 9, 2011 5:54:54 AM

Bob, The difference is that one is conducted through a bank (and banks are required to report such transactions). If you do it in cash only you and the other party know, so it could escape reporting.

Posted by: anon | Jun 8, 2011 9:32:47 PM

Yes, I am a lawyer. I am aware of the requirements for reporting currency and coin transactions, which makes it all the more incomprehensible why someone would say that a cash transaction would have escaped reporting requirements when a check would not have. I am also aware of laws regarding foreign accounts and foreign bank transactions. I was not aware that North Carolina is a foreign country. Or maybe the centenarian Bunny resides offshore?

Posted by: Bob | Jun 8, 2011 1:10:34 PM

Bob, not sure if you are an attorney or not. See 31 USC 5311-5330. You can also look up "anti-money laundering" on Wikipedia.

Posted by: asdf | Jun 8, 2011 12:21:17 PM

News to me. Large transactions get reported by financial institutions? Reported to whom? How large? Is there a Bureau of Large Transaction Reports? Or has its name been changed to the Large Transaction Reports Service? When was the last time the reporting trigger was adjusted for inflation and dollar devaluation?

Nelson Rockefeller gave Harvard professor Henry Kissinger a $50,000 gift, days before Kissinger went to work for the Nixon Administration. Rockefeller filed a Form 706 and paid the gift tax. Kissinger is a known womanizer best known for his quote, "Power is the ultimate aphrodisiac." (Rockefeller had a certain reputation also.) The so-called "gift" did not become public until Nixon resigned, Ford moved up and appointed Rockefeller as VP. Kissinger, of course, stayed on the job. Has the statute of limitation expired on this conspiracy?

Posted by: Bob | Jun 8, 2011 9:40:54 AM

At the risk of fueling more snarky comments, I would point out that I did not say that Bunny Mellon's declaration of the money as a gift proves it wasn't a gift. I said that "if" there was a conspiracy to evade the campaign finance laws, then declaring the money a gift rather than a campaign contribution was exactly how one would expect the transaction to be characterized. My point about cash was made in anticipation of a possible response that goes like this: No, if they were trying to evade the campaign finance laws, they wouldn't have mentioned the money at all. I was saying that this would be hard to do unless the money was handed over in a bag of cash, because large transactions are typically reported by financial institutions. On reflection, I think that even a large cash donation would have called attention to itslef unless the Mellons kept gigantic sums of cash in their possession, because large cash withdrawals would also have been reported.

Posted by: Mike Dorf | Jun 8, 2011 8:24:41 AM

I don't get it. Why does it matter if the gift was made using cash rather than a check? And why would that draw scrutiny? People make large cash gifts all the time.

Posted by: anon | Jun 8, 2011 6:12:16 AM

Dorf seems to be saying that having an alibi is proof of a commission of a crime. Nice! There is a reason why some of us seek work in academe.

Posted by: Bill | Jun 8, 2011 5:21:44 AM

What a witch hunt.

Posted by: anon | Jun 8, 2011 4:59:24 AM