TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, November 4, 2016

The IRS Scandal, Day 1275: The Impact Of The IRS Scandal On The Investigation Of The Clinton Foundation

IRS Logo 2Dallas Observer, The Dallas IRS Office That's Quietly Determining the Fate of the Clinton Foundation:

The Earle Cabell Federal Building in downtown Dallas is an all purpose office complex, a bastion of federal bureaucracy located at 1100 Commerce St. Most people come for a passport or to get business done in front of a federal judge. But inside, a quiet review is underway that has direct ties to the raging presidential election: The local branch of the IRS' Tax Exempt and Government Entities Division is reviewing the tax status of the Bill, Hillary and Chelsea Clinton Foundation.

This IRS review has not generated similar waves as Department of Justice probes into the foundation, and has largely been forgotten in the campaign's melee. It's just not as sexy as private email servers, FBI infighting and charges of political pressure applied to law enforcement.

But even though this examination is less scrutinized and is harder to conceptualize, it's impact may be important. The report won't likely be done in time to influence the presidential campaign — even though the review started more than four months ago — but it could certainly influence the first term of a Hillary Clinton presidency.

As with anything tax related, the status of the foundation may be determined using rules few understand. And that makes understanding the work at 1100 Commerce St. in Dallas that much more important. 

In Washington, D.C., many things start with words printed on congressional letterhead. Earlier this year, 64 GOP members of Congress asked the IRS to investigate why the foundation can keep its nonprofit status. The letter includes “media reports” claiming pay-to-play relationships between former President Bill Clinton, who received large speaking fees, and decisions made by Hillary Clinton to approve choices that benefited foundation donors. The sources of these reports range from The New York Times to hit-piece investigative books.

In July, the IRS sent letters back to the Congress informing members the review had begun. The letter also noted that the Tax Exempt and Government Entities Division (TE/GE) office in Dallas would be conducting the review.

IRS spokespeople in Dallas and Washington won’t say why the review is being conducted in Dallas. Spokespeople claim even this information would violate rules — Code 6103, staff make sure to cite — that stop them from discussing ongoing examinations. IRS officials declined to provide details about the Dallas office, including its size, or comment on the TE/GE work in general. ...

The TE/GE focuses on nonprofit groups, which is specialty work that requires experience. “They are pretty much career people,” says Ben Stoltz, an attorney with Perliski Law Group, a Dallas boutique firm with half of its business representing nonprofit groups. “It’s a different side of the IRS than people are used to seeing. ... They're generally very cooperative, but they're also the watchdogs."

The mix of awareness and enforcement dovetails with cases that get publicity. "They have a limited budget, which is a problem, so they have to pick their targets wisely," Stoltz says. "Because this is a high profile case, they can make an example and show that no one is above the law.” ...

Instead of money changing hands, the IRS is looking to see if the Clintons traded money for preferential treatment. The IRS rules lay out what qualifies as inurement:

Any transaction between an organization and a private individual in which the individual appears to receive a disproportionate share of the benefits of the exchange relative to the charity served presents an inurement issue. Such transactions may include assignments of income, compensation arrangements, sales or exchanges of property, commissions, rental arrangements, gifts with retained interests, and contracts to provide goods or services to the organization.

Given this language, citing “gifts” and “quid pro quo benefits” in emails is a pretty bad move for anyone involved in a nonprofit group. Another bad move: When senior Clinton advisers like Doug Bland call the intersection of the foundation fundraising and the former president’s personal activities “Bill Clinton Inc.” ...

This all leaves the IRS investigation in Dallas as a sideshow to the main Clinton Foundation events playing out in the offices of other federal agencies. However, if other investigations expose pay-to-play schemes, the IRS could take that into consideration, strip the foundation of its nonprofit status and seek payment of back taxes.

Looking forward, there’s one last wrinkle: If the IRS gives the foundation a clean bill of health, it will likely resurrect charges that the tax exemption office operates with a political bias. In 2011 Lois Lerner, the IRS’ head of TE/GE, pleaded the 5th and left her position after a scandal broke surrounding the denial of nonprofit exemptions to right-wing groups.

A Department of Justice probe found "substantial evidence of mismanagement, poor judgment and institutional inertia leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints.” A Government Accountability Office report in 2015 found "there are several areas where EO’s controls were not well designed or implemented. The control deficiencies GAO found increase the risk that EO could select organizations for examination in an unfair manner — for example, based on an organization’s religious, educational, political, or other views."

The GAO said the expertise of the TE/GE staff could be a problem, if there are too few "gatekeepers" to pass along referrals for closer looks:

The specialization of the classifiers allows for in-depth knowledge of complex issues and for the opportunity to apply experience; however, internal control risks accompany this approach. First, for political activity, church, and high profile referrals, the classifier appears to serve as an initial gatekeeper for determining whether a referral is reviewed by a committee. Although committee reviews are intended as a safeguard against unfairness in the examination selection process, referrals that do not make it past the classifier do not undergo committee review. 

The GAO recommended a host of changes, much of it focused on better documentation, more training and an increase in staff rotations. The IRS agreed to them — without admitting any guilt. In a response letter by deputy commissioner John Dalrymple, he says the IRS agrees that "internal controls are necessary to ensure we are applying the tax law with integrity and fairness. Although the report says that a hypothetical risk exists that returns could be selected unfairly, the draft report did not find any evidence that this has happened. Nevertheless, Exemptions Organization is committed to further strengthen our internal controls to ensure we continue to select organizations for examination in a fair and consistent manner. "

The DOJ determined that no crimes had been committed but the damage had been done — for many, the TE/GE will forever be partisan. The ruling on the Clinton Foundation's status, either way, will lead some to see continued partisanship inside the IRS or overreaching in a high profile case to prove they are not partisan.

But there is actually a bigger issue at stake as politics batters the nonprofit tax world. After all, the whole point of the IRS' involvement is to ensure that donations are actually used for charitable work.  

“It boils down to the public trust,” Stoltz says. “This division is responsible for the integrity of the system. Americans donate more money to charity than anywhere else in the world. But for the public to donate, people have to believe that it’s legit.”

(Hat Tip:  Glenn Reynolds.)

https://taxprof.typepad.com/taxprof_blog/2016/11/the-irs-scandal-day-1275-the-clinton-foundation.html

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Comments

The IRS is irrelevant to the Clinton Foundation investigation; tax irregularities aren't the issue. Besides, the IRS only investigates conservative groups who've done nothing other than request tax-exempt status.

The issue here can only be investigated by the FBI and prosecuted by the DOJ. The law is pretty clear on this matter:

https://www.law.cornell.edu/uscode/text/18/201
"Whoever being a public official or person selected to be a public official, directly or indirectly, corruptly demands, seeks, receives, accepts, or agrees to receive or accept anything of value personally or for any other person or entity, in return for being influenced in the performance of any official act... shall be fined under this title or not more than three times the monetary equivalent of the thing of value, whichever is greater, or imprisoned for not more than fifteen years, or both, and may be disqualified from holding any office of honor, trust, or profit under the United States."

Some evidence, so far:

http://abcnews.go.com/Politics/fobs-hillarys-state-dept-gave-special-attention-friends/story?id=42615379
"In a series of candid email exchanges with top Clinton Foundation officials during the hours after the massive 2010 Haiti earthquake, a senior aide to Secretary of State Hillary Clinton repeatedly gave special attention to those identified by the abbreviations 'FOB' (friends of Bill Clinton) or 'WJC VIPs' (William Jefferson Clinton VIPs)."

I'm not holding my breath, though...

Posted by: MM | Nov 8, 2016 7:42:07 AM