The complexities of our tax system sometimes obscure the nature and severity of wrongdoing.  Using a charity to achieve self-enrichment, though, is tax fraud.  Those who do it knowingly and systematically belong in jail.  There is serious societal danger in treating it any other way.

Let me explain why.  Our income tax system dictates that an individual’s earnings are subject to tax unless used for certain specific purposes. For example, gross income that is spent to continue doing business or attract new customers is generally not taxed.  This is accomplished through a deduction that makes it (for tax purposes) as if the money had never been earned.

One of the areas that Congress decided should be free from taxation is money earned but then dedicated to charitable purposes.  The portion of income given to a recognized charity is shielded from taxation through a deduction. That seems pretty fair and we have achieved a social consensus that it is appropriate.

Some rich people accomplish their charitable goals by setting up a “private foundation.” Such a foundation is defined and regulated by a series of laws that can get rather complex.  The idea, though, is straightforward enough.  These wealthy folks are, essentially, creating their own charity. They can give to their foundation, get a tax deduction for the gift, and yet retain a fair amount of control as to what charitable efforts and organizations receive the money.

What they cannot do under the law, however, is direct money from the foundation to “non-charitable” purposes.  And, needless to say, they certainly cannot use money from their foundation to enrich themselves directly or indirectly.  It violates the letter and the spirit of the law to funnel foundation money away from charitable endeavors and toward self-interest or personal reward.

Why is such a legal dictate absolutely essential?  What is the harm if society turns a blind eye toward using the money in a charitable foundation for personal purposes?  Let’s think it through. If those privileged folks who can afford to fund a private foundation are allowed to misdirect money supposedly for charity to other uses, they can effectively turn all sorts of spending into tax deductions.  Want a giant picture of yourself to hang on your wall?  Pay for it out of your foundation.  Seek to curry favor with an out-of-state prosecutor?  Make a donation to her from your foundation.  Need a vacation?  Let the foundation pay for it.

The result is that income used to pay for all those personal expenses is effectively untaxed.  It creates a way to side-step the income tax.  What follows is a whole range of potentially tax free activities for those rich and bold enough to take advantage.  And, of course, it is absolutely illegal.

The integrity and fairness of our income tax system absolutely requires that the IRS and prosecuting authorities police charitable foundations with the vigilance of a hawk.  They must come down on violators like the proverbial “ton of bricks.”  Failure to do so creates a pay-whatever-you-feel-like-it tax system.  Looking the other way rewards the brazen, venal and imperious.  Such incentives must surely lead to a very bad outcome.  It is self-evident that allowing the well-heeled to side-step part of their tax obligations will lead toward greater overall non-compliance.  A tax system that people correctly perceive to be rigged in favor of the rich and crooked will be almost impossible to maintain.

The argument here is that criminal enforcement of rules against self-dealing in a private foundation must be rigorously enforced because the failure to do so endangers a major pillar on which our society stands.  It is worth pondering what other foundational principles might be imperiled if a spirit of “get away with whatever you can” rises to the very top of our national leadership.