disclaimer: I'm uncommitted in this election cycle--but I'm one of those people who has uneasiness with Edwards that I can't quite put my finger on. That being said, the point of my diary is really not to support or attack Edwards, but merely to provide some information regarding some of the tax issues and regulations that apparently escaped some of the MSM and might help all of you evaluate the story. E
In her front page diary, Miss Laura highlights some of the NYT's questionable reporting on the expenditures from John Edwards' two tax exempt organizations. There's a lot of hue and cry about this, so I though what I would do was set out some of the tax law and definitions to help evaluate the story. More on the flip
Nonprofits, Charities, Tax-Exempts and Foundations
To start, I wanted to define some terms. There are "terms of art" in this area, and some of the confusion in this story stems from a lack of precision in these terms.
"Nonprofit" Under state law, an organization that intends to be tax exempt is usually created as either a nonprofit corporation or a charitable trust. Thus, when we use the term "nonprofit" in a technical legal sense, it usually means an organization that is created under state law in a nonprofit corporate form. You can have a nonprofit corporation that does not have tax exempt status. You can have a tax exempt organization that is not a nonprofit corporation (it can be a trust, an unincorporated association, or even in rare cases, an LLC). You can have a tax exempt organization that is a nonprofit corporation that isn't a charity. Nonprofit corporations generally don't allow anyone to have "equity" or distribution rights in the assets as a general matter, but they aren't limited to being used only for what is commonly thought of as "charitable" purposes.
"Tax Exempt" The IRS recognizes a lot of different organizations as tax exempt entities. Pension plans are exempt under Code Section 401 et seq. Section 529 education savings plans are tax exempt. Section 527 organizations are tax exempt. The primary section for exemption, however, is Section 501(c) -- which lists, I think off the top of my head, 27 different types of tax exempt organizations. Therefore, being tax exempt doesn't mean that you are a nonprofit -- one is a federal tax classification and the other is the state law way in which you are organized. Also, being tax exempt doesn't mean you are a "charity," either as how the term charity is used commonly or in a technical legal sense.
"Charity" As indicated, Section 501(c) lists a lot of different tax exempt entities. Of these, Section 501(c)(3) exempts organizations that are organized and operated exclusively for charitable, educational, religious, scientific, literary (and some other stuff) purposes. In my mind, as a tax matter, when we talk about "charities" generally, we are talking about Section 501(c)(3) tax exempt organizations. Section 501(c)(3) status is the "highest and best" tax exempt status as it is, as a general matter, the only classification that qualifies for deductible contributions for income, estate and gift tax purposes.
On a related note, Section 501(c)(4) exempts something called "social welfare organizations." Section 501(c)(4) organizations do not pay income tax, but donations to a C4 are not tax deductible. The difference between a C3 and a C4 are two fold. There are some differences on the benefits that you can give to a "member" of a C3 versus a C4 -- as a general matter, most membership organizations, like AARP and NRA, are actually C4 organizations. In addition, the rules regarding lobbying and political activites for C4 organizations are much looser than those for C3s. Therefore, it is quite common to have a C4 organization, like the AARP or the NRA, have an affiliated C3 organization. This affiliate accepts tax deductible contributions, but its activities are limited to those purely "charitable" activites within the meaning of C3, while the membership and lobbying activites occur at the C4. To distinguish between these affiliated organizations, the C3 is often referred to as a "Foundation". Just to make it messier, these "families" of organizations often also have a related PAC or 527 to undertake political activities, so what might appear to be one organization at first blush may actually be three, all of which are subject to different rules and regulations.
"Foundations" Section 501(c)(3) organizatiosn are subdivided into private foundation, which is typically an entity that receives its contributions from a single family or corporation, and "public charities," which have a broad base of public support. As indicated above, however, it is very very common for an organization to be called a "Foundation" even if it is not technically a private foundation. Again, it is often the way in which to distinguish between the C3 and the C4 in an affiliated group of exempt entities.
What Does Edwards Have?"
In taking a look at the Edwards story, then it appears that Edwards has set up affiliated C3 and C4 entities. The Center for Promise and Opportunity is a C4, as indicated in the article; the Center for Promise and Opportunity Foundation appears to be a C3. As such the lobbying rules for the C4 are much looser than the C3--which is probably why it was set up. Only the C3 gets tax deductible contributions. And just to close the circle, if both were set up as nonprofit corporations, they would both be "nonprofits" but only the Foundation/C3 would be a "charity." And I'd have to look at the tax return to be sure, but I'm bettig the "Foundation" is probably not a "private foundation" as a technical tax matter, but that doesn't prevent them from using the term foundation in the name of the organization.
Open Questions for the Next Diary
Having established the appropriate status for these organizations, there are open questions that remain. The allegations in the NYT article appear to be two fold. First, Edwards may have received some compensation from one or both of these entities. Second, these entities may have made expenditures of a "political" nature--and I quote that term because "political" also has a technical tax meaning.
What the NYT isn't telling you is that there are specific rules governing the payment of compensation and expense reimbursements to insiders, called the excess benefit transaction rules of Code Section 4958 also known as intermediate sanctions. These rules apply to both C3s and C4s.
In addition, there are specific rules regarding what is educational, what is lobbying and what is political activity, all of which are regulated by Sections 501(c)(3) and (c)(4), but regulated differently.
If I get the energy and people think its worthwhile, I'll try to go over these rules in another diary, I guess on Sunday now. Prior to doing so, though, I would like to look at their Forms 990, if they are available on Guidestar (the article appears to indicate that they aren't yet available)
Of course, both of these sets of rules have some gray areas, and whether you think what Edwards did is okay will probably depend on your point of view. This also doesn't answer the question of whether its politically wise or ethically advisable, but I'm just a tax lawyer, so I'll defer on that one