California to Take Steps to Force Disclosure of Nonprofit “Taxable Expenditures” and Prevent Deductibility of Earmarked “Charitable Contributions”

Internal Revenue Code Section 4945 is one of the excise tax provisions applicable to private foundations.  It was enacted because Congress thought wealthy private foundations were “increasingly active in political and legislative activities” by way of well-funded junkets and the like, generating unintended charitable contribution deductions for polticial supporters.  It is also generally the case that charitable donations are generally not deductible if the donation is actually earmarked for a particular recipient, using the eligible entity as a funneling device.  Recently, the Los Angeles Times has raised similar concerns with regard to gifts by nonprofits to state agencies actually intended for use by a certain politician.  Under current California regulations, the identities of donors to nonprofits who make such gifts need not be disclosed, provided the agency gifts are not explicitly earmarked for any particular politician or individual.  In a July 2007 editorial, the Los Angeles Times complained that Governor Schwarzenegger and other influential politicians at the state and local level were skirting this requirement and that donors were getting undeserved charitable contribution deductions.

California’s larger-than-life governor is unabashed about living large, but keeping him in luxury sometimes depends on the same taxpayer subsidies granted to hand-to-mouth charities.  Arnold Schwarzenegger, a millionaire many times over, bills much of his overseas travel to an obscure nonprofit group that can qualify its secret donors for full tax deductions, just as if they were giving to skid row shelters or the United Way. Whether journeying to China, Japan or last week’s destinations — Austria, England and France — Schwarzenegger typically flies on top-of-the-line private jets like the plush Gulfstream models and has booked hotel suites that can run thousands of dollars a night.  Nonprofit watchdogs say using charitable write-offs to pay for sumptuous travel is an abuse of tax codes.

In today’s editorial, the Los Angeles Times again points out that California nonprofits are being used to skirt campaign disclosure and charitable contribution deduction laws:

Politicians and their lawyers are often several brainstorms ahead of the law. They seek out loopholes in conflict-of-interest and fundraising regulations, then exploit them. Having done so — having hidden from the public the identities of the special interests that fund their travel, or their entertainment budgets, or their other expenses — they protest, truthfully enough, that they never broke any laws.  Gov. Arnold Schwarzenegger, for example, does nothing strictly illegal when he flies around the world using money funneled through a nonprofit corporation by — well, we don’t know. That’s the point. And Assembly Speaker Fabian Nuñez broke no laws when he used political contributions to wine and dine his way across Europe, hosting guests with interests then-unknown to the public.  Yes, they obey the law — but they are hardly on the up-and-up. So it’s refreshing when one of our government watchdogs snaps its jaws, especially if that watchdog is someone as unlikely as Ross Johnson.

Of course, these sorts of expenditures would result in a federal excise tax on private foundations and would call a public charity’s tax exemption into question under federal law.  Earmarked charitable donations would also not be deductible.  Today’s L.A. Times editorial goes on to support a measure pending before California’s Fair Political Practices Commission. The newly proposed regulation is designed to shut down the use of 501(c)(3)’s to shield the identities of political donors and will likely have the effect of preventing the deductibility of purported gifts to state agencies that everyone knows are actually earmarked for a certain politician.  Staff members to the FPPC have prepared a useful memorandum explaining the manipulation.  The IRS ought to take a look at the memorandum and the proposed regulations for adoption on the federal level (at least with respect to earmarked gifts to “public agencies” that result in a private benefit to a particular politician).

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