Dateline: March 7, 2007, Chicago
Everybody likes to focus on Congress and what is happening at the federal level. That is not surprising given the important issues before the federal government. But state and local governments control billions of dollars in spending and enact laws regulating business. Given that fact, it should come as no surprise that there are troubling interactions between politicians and nonprofits at the state and local level. Tom Chorneau, of the San Francisco Chronicle, highlighted those interactions this past weekend in an article entitled, Using Nonprofits to Pay for Junkets: Corporations Bankroll Tax-Exempt Groups that Finance Legislators’ Trips (Mar. 4, 2007). Chorneau points out that the same practices that have marked...
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the national landscape also have become prevalent in California. According to Chorneau, California businesses are donating funds to Section 501(c)(3) organizations. Those charities then sponsor lavish weekend outings, in the guise of education and public policy forums.
California is a beautiful state. Most people would welcome the opportunity to take advantage of its coast and mountain areas, or the culture offered by its cities. And yet, California legislators are quick to leave the state, particularly if the venture is funded by a charity. Chorneau reports of a weekend for state legislators at a golf resort in Rio de Janiero, a luncheon cruise in New Zealand’s Hauraki Gulf, dinner at Harry’s Bar in Rome, and a trip to Maui. These trips have been sponsored by such organizations as the Pacific Policy Research Foundation--(c)(3), the American Legislative Exchange Council--(c)(3), and the California Foundation on the Environment and Economy--(c)(3).
Who funds these organizations?
According to Chorneau, ChevronTexaco, Sempra Energy, Pacific Gas & Electric, and Altria Corp. California prohibits public officials from accepting gifts in excess of $390. But that rule does not apply to travel and related expenses, assuming such expenses are reasonably related to legislative business. We can certainly understand that a legislator dealing with immigration or environmental issues has a need for some technical knowledge about the problems before shaping public policy. We certainly don’t expect legislators to seek that information at a lecture held in the basement of some dilapidated building. But there was no shortage of hotels with conference facilities the last time we were in Los Angeles, San Francisco, and San Diego. The legislators and other government officials might try to hide behind the fig leaf of a trade mission, but nobody seems to be making that argument in Chorneau’s article.
These trips are not cheap, either. Last year, the California Foundation on the Environment and the Economy sponsored a study group trip to South America. The cost per person was $12,500, paid for by the foundation. There was a December trip to Ireland and the Netherlands. That was slightly cheaper, coming in at $11,500. One legislator, Assemblyman John Laird, who was on the South American trip said it is helpful to see how other countries are dealing with clean energy issues.
According to Chorneau, the Pacific Policy Institute is not quite as generous. It sponsors an annual five-day conference in Maui, Hawaii. The legislators have to pay their own travel expenses, with the Institute picking up conference room and related expenses. But there is a catch. Chorneau discovered through a review of lobbying reports that private groups with business before the state legislature spent $22,000 wining and dining attendees. Jack Abramoff wasn’t in attendance—he is tied up for the time being—but one Indian tribe managed to spend $6,300 on green fees and diners. Not wanting to let the spirit of Jack down, that tribe is involved in gaming activities.
When we go to a conference, it typically is a grueling schedule. Committee meetings often begin at 7:00 AM and the formal session can run to 5PM. Lunch is a nice break, but there usually is a speaker. When the legislators go to Hawaii, they participate in half-day sessions. We can only wonder what they are doing during the rest of day. Golf anybody?
Chroneau does an excellent job of listing the corporations that are funding these innocuous sounding study groups. It typically is big energy, big pharma, and the other usual suspects. When the organizations are charities, the organizations receive a tax-deductible contribution and the public version of the Form 990 does not list the donors. When the organizations are trade associations, the funders receive a tax deduction as a ordinary and necessary business expense.
One can make a strong case that in the case of the ostensible charitable contribution deductions, there is no donative intent, meaning that the payment should not be deductible as a charitable contribution. In the case of the payments to the trade association, these payments are nothing more than disquised lobbying expenses. The IRS has the authority to disallow these deductions, but there is no evidence that it is exercising that authority. It is particularly notable that federal tax law imposes stringent limitations and reporting requirements on the deductibility of foreign travel by business people. It is deductible to extent business related, but the rules are designed to disallow the deduction if there is too much pleasure mixed business.
Many will read this post thinking, "Ah, this cannot happen at the federal level any more because of the congressional bans on lobbyist and their clients funding travel expenses." Think again. The revised House ethics rules do impose such a ban, but there is an exception for conferences sponsored by Section 501(c)(3) organizations. The revised Senate ethic rules are a little bit tighter. They only create an exception for events sponsored by colleges and universities.
For those who are unaware of our very own Jack Siegel's work in this area, you might want to review his article, entitled The Wild, the Innocent, and the K Street Shuffle: The Tax System's Role in Policing Interactions Between Charities and Politicians. The article first appeared in the November issue of the Exempt Organization Tax Review and then in Tax Notes Today.
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Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
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