Tax Probe Unfairly Targets Trump's VOA Nominee, Backers Say

Tax Probe Unfairly Targets Trump's VOA Nominee, Backers Say
Scott Applewhite)
Tax Probe Unfairly Targets Trump's VOA Nominee, Backers Say
Scott Applewhite)
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Some supporters have dubbed it a perverse form of poetic injustice, while others argue it’s setting an unprecedented high-stakes norm of scrutiny for a Trump nominee in today’s hyper-partisan Washington.

Conservative documentary filmmaker Michael Pack, President Trump’s choice to head a  taxpayer-funded broadcasting agency, is now facing Democrats’ accusations regarding his business practices even though documentary filmmakers on the left have set up their film companies in similar ways, according to tax documents reviewed by RealClearPolitics.

The Washington, D.C., attorney general’s investigation into the nominee’s business tax practices, launched last week one day after receiving a complaint from Democratic Sen. Bob Menendez, comes on the heels of Pack’s biopic about Supreme Court Justice Clarence Thomas airing publicly for the first time, Tuesday night on PBS.

“Created Equal: Clarence Thomas in His Own Words” ends with the justice’s retelling of the enormous toll the Anita Hill sexual harassment accusations -- which dominated and threatened his confirmation -- took on him and his family nearly 30 years ago, and his insistence that Hill was lying. Thomas also described how he resisted caving to pressure to withdraw as the nominee.

The two-hour film is sprinkled with references to the 1960 literary classic “To Kill a Mockingbird,” where the fate of a black man accused of raping a white girl in the Deep South was sealed before the trial even began, regardless of the facts.

Back in 1991, Thomas deemed the Hill accusations a “high-tech lynching for uppity blacks” who dared to think differently than most of their brethren. Thomas’ insistence on his innocence ended up convincing enough senators to win confirmation, 52-48, but he says he’s carried the scars of the experience ever since.

Now it’s Thomas’ storyteller’s turn to experience intense partisan Senate opposition to his confirmation. Pack is Trump’s choice to head the U.S. Agency for Global Media, the umbrella organization for media outlets such as the Voice of America, Radio Free Europe and Asia and other sources that deliver news in 40 languages all over the world.

It’s been nearly two years since Pack was nominated. Senate Democrats working with now-retired anti-Trump Republicans, previously threw up roadblock after roadblock, expressing concern about Pack’s prior work with former White House top adviser Steve Bannon on two documentaries. In a stream of negative articles, Menendez and other opponents raised fears that Pack could turn the VOA and affiliated outlets into pro-Trump TV and radio.

That’s a charge Pack and his backers vehemently deny. They cite his years of extensive public service in nonprofit television, including stints as senior vice president of programming at the Corporation for Public Broadcasting, leading Worldnet (the VOA’s television side), his service on the National Council of the Humanities and as co-chair of the International TV Council – all jobs he performed in compliance with the organizations’ missions.

The real concern, they argue, is that Pack will replace several current top officials at the VOA and other USAGM entities, including Amanda Bennett, an Obama appointee. In recent years, the USAGM has faced a series of embarrassing management failures and internal turmoil and currently lacks a leader after John Lansing, its previous CEO and director, left last fall.

Though dealing with a lengthy delay, Pack faces nowhere near the glaring and humiliating national spotlight Thomas dealt with nearly 30 years ago. But in the last week Pack’s supporters say there is one similarity: the lengths Democrats will go to prevent his confirmation.

Trump recently expressed frustration over the impasse and lashed out at the VOA for what he said was an anti-Trump bias along with accusations that it published Chinese propaganda about the coronavirus. At an April 15 press conference, he blasted the agency’s coverage of the pandemic as “disgusting” and a “disgrace.”

Following those comments, there was movement in the long-stalled nomination. Sen. Jim Risch, Republican chairman of the Senate Foreign Relations Committee, scheduled a panel vote on Pack last Thursday that would have advanced his appointment to the full Senate for final approval. After the long wait, Pack was poised to finally take the USAGM reins. But the night before the scheduled vote, news leaked in the Washington Post that the attorney general of the District of Columbia had opened an investigation into whether Pack misused funds for his nonprofit charity, Public Media Lab, to finance the documentaries.

Menendez, the ranking Democrat on the Foreign Relations Committee, who has long blocked the nomination, had requested the attorney general look into the matter only a day earlier.

At issue, according to several media reports, is at least $1.6 million in donations to Pack’s nonprofit that were transferred to his television production company, Manifold Productions, since 2011 to fund several films. Pack’s supporters have vigorously pushed back. One close to the filmmaker accused the AG, Karl Racine, of “weaponizing his office to thwart the nomination.”

“Republicans should be outraged by this abuse of power and should double down instead of allowing this to railroad Michael Pack’s nomination,” the source told RealClearPolitics.

It appears Senate Republicans may be following that advice as Risch rescheduled Pack’s committee vote for Thursday morning, an indication that all the Republicans on the panel are expected to support the nomination, including Mitt Romney, a frequent Trump critic.  

The attorney general had informed the committee about the investigation early on the day of last week’s scheduled vote, and Risch ended up postponing the matter.

Menendez this week groused about the “breaking of [bipartisan] comity” that usually exists on the panel, saying that he didn’t hear from Risch himself about the rescheduling.

“[He] noticed a hearing on Michael Pack that I didn’t even know about,” the New Jersey lawmaker told reporters on Capitol Hill Tuesday. “So all of these things, you know, I don’t believe in unilateral disarmament. If this is the way you’re going to operate when you’re in the majority, then don’t expect that somehow comity is going to return” when Republicans are in the minority.

Asked directly what the issue with Pack is, Menendez said, “He’s under investigation by the District of Columbia Attorney General Karl Racine about tax issues that I think should be resolved.” 

The White House over the last week has issued two statements of support for Pack, arguing that he has repeatedly answered Menendez’ details questions about his taxes and denounced the new development as a way for Democrats to run out the clock on the nomination before the November election.

A White House spokesman also took a swipe at Menendez over the irony of someone with a serious ethics taint on his Senate record working to launch an investigation into someone else’s ethics. Menendez was mired in a six-year scandal after being accused of corrupt dealings to benefit a political donor. Although the matter ended in a 2018 mistrial, the bipartisan Senate Ethics Committee severely admonished him over it.

“As someone who has claimed to be a victim of politically motivated investigations himself, Sen. Menendez should know better than to play games with one of the Senate’s highest constitutional responsibilities,” White House spokesman Judd Deere told RealClearPolitics. “When will do-nothing Democrats in the Senate realize the American people demand votes on President Trump’s qualified nominees?”

Critics also point to $40,000 in donations to Menendez’ legal defense fund to help fight the ethics charges from USAGM board member Michael Kempner and his wife, Jacqueline, as a possible motivating factor behind Menendez’ efforts to block Pack.

Risch has said enough is enough, stressing that the nominee had thoroughly answered the senator’s questions.

Like Pack, filmmakers and television producers on the left also use nonprofits to collect contributions from donors, and then set up a for-profit company to make the films. One is Josh Fox, whose anti-fracking film “Gasland” won awards at the Sundance Film Festival in 2010 and later was broadcast on HBO. Fox has a nonprofit, International Wow, that collects the contributions, and a private entity, Gasland Productions LLC, that makes the movies and collects any revenue from them, according to International Wow’s 990 forms filed with the IRS.

Another film producer with no business ties to Pack told RealClearPolitics that he set up the same two-pronged way of funding films last year on the advice of counsel, who told him it was standard operating tax procedure. The main reason for transferring the funds from the nonprofit to a separate company is to protect the nonprofit from lawsuits that any controversial political films might prompt.

“The fiscally responsible thing to do is to set up the separate production company – and the production company only takes the funds needed to produce the films,” said the producer, who requested anonymity out of fear of being targeted by Menendez. “That way the liability is only attached to your production company and you protect other donations from legal action.”

Pack supporters have characterized a Washington Post column by Colbert King over the weekend as particularly unfair. The piece appeared under the headline “Can Karl Racine stop the VOA from becoming a Trump mouthpiece?” with the subhead “Did Trump’s pick to lead the VOA misuse nonprofit funds? D.C.’s AG is on it.”

The article says Racine “had little choice” because the “questions raised by Menendez are serious.”

“Under district law, D.C. nonprofits, as well as their directors and officers, must stick to ‘public nonprofit purposes and not illegally benefit private persons,’” King wrote, referring to lines in Racine’s letter to Menendez.

In the lead, the King column quotes Menendez’ claim that Pack refused “to respond to vetting-related questions relevant to his nomination.” But sources close to Pack tell RCP that is simply untrue.

“It appears that Menendez misled King,” the source said. “Michael had absolutely responded to the questions raised. He provided complete answers with the only exception being that he would not disclose the confidential identities of the donors” to his nonprofit.

James Joseph, a partner with Arnold & Porter who co-chairs the firm’s tax practice, said it’s common for nonprofits to collect donations for the films and then for for-profit companies to make them.

“It has become very common to use a nonprofit to help with documentary filmmaking just because the commercial market is so limited,” he told RCP. “People have become comfortable with it and the IRS has approved these documentary process. There is usually a for-profit production company involved.”

The purpose of setting up related for-profit entities is sometimes done for “liability protection purposes and other times just for accounting purposes,” he said.

What filmmakers need to be careful about in these arrangements, Joseph explained, is to make sure the for-profit side is paying the filmmaker “reasonable compensation for the work they are doing.” Pack’s supporters point out that he hired a team of editors, gaffers, and production assistants, whom he paid to produce the detailed Thomas documentary – and that he makes $160,000 a year for his film work.

To provide clients the most legal protection, Joseph said he advises them to put together a board of directors for the nonprofit that has members in addition to the for-profit side’s executives, so that the board can determine if the compensation is fair-market with the conflicted board members recusing themselves from those decisions. In Pack’s case the board is comprised of himself, Alan Dye, Robert Coonrod, Paula Dobriansky and Juliana Pilon. 

Those are the “best practices” protections Joseph recommends, but he said whether the compensation violates laws guarding against the use of nonprofits for private benefit would depend on whether the IRS believes the compensation is fair or not.

“If you pay too much, you can violate the private inurement doctrine, so you have to be careful that you are paying market rates,” he said.

The way Pack is paying for the film’s production and his compensation is “nothing unusual,” he said. “There’s nothing wrong with it as long as they’re not overpaying.”

He added that he is not a compensation expert, but Pack’s $160,000 “doesn’t sound like an unreasonable amount.”

Several other tax attorneys contacted for this story were reluctant to weigh in on the merits of Racine’s investigation without seeing the full details of Pack’s tax returns and charitable filings with the IRS. To determine whether the filmmaker did anything wrong, they said, would involve a lengthy analysis that could take weeks or months.  

Because of this, they also questioned whether any attorney general could determine whether to launch an investigation into a tax matter like this one after a less-than-24-hour review of a complaint. (Menendez sent his letter to Racine on May 12; the next afternoon, the Washington Post announced the AG had opened an investigation.)

The quick turn of events has infuriated Pack supporters.

“Karl Racine has done no work. You send him a letter on May 12 asking him to look into it, and literally on May 13, he slaps a subpoena on Michael Pack,” a source close to Pack said. “What a joke. That’s outrageous and disgusting….”

“This may become the new norm – find a friend who’s a Democrat AG to repackage the fishing expedition and make it into a subpoena so they can then claim that somebody’s under investigation so we can’t move forward with the nomination until it’s resolved.”  

Michael Sanders, the lead partner at Blank Rome LLP’s Washington, D.C., tax-exempt group, wrote a textbook on tax issues surrounding nonprofits, “Joint Ventures Involving Tax-Exempt Organizations.”  

“It’s an area that calls for very close scrutiny of the specific fact patterns” involved, he said in an interview. “Without doing a very careful analysis, there’s no way to tell if there is any wrongdoing – each case is different. It’s dangerous to jump to a conclusion, and anyone can put any slant they want on the facts.”  

Such cases, when they get to the IRS, are there for “a long, long time” before they are decided, added Gayle Forst, another exempt-organizations tax attorney in the firm, who has contributed to Sanders’ book.  

“In the modern world, charities are engaging in a lot of different activities and the IRS accepts the fact,” she said. “Exempt organizations can have a for-profit-related organization. It’s not per se bad.”  

Sanders also stressed that the IRS could take at least a year, potentially several, to reach a determination after a very detailed examination of the facts in a case like this involving extensive back-and-forth with the taxpayer on the facts.  

Another tax expert, who requested anonymity to speak on the politically charged topic, echoed concerns that the IRS could take years to reach a decision, referring to the Obama-era scandal involving IRS targeting of conservative tax-exempt organizations, some of which were waiting years for an IRS decision.

The expert said the fact that the Thomas documentary aired on PBS, which itself is a nonprofit, could show that the money going to the Pack’s private company is “consistent with charitable purposes of the nonprofit.”

If it’s all disclosed in their tax filings, it will probably work out in Pack’s favor, the expert said.

“It comes down to whether or not the amount [Pack and his wife]  were paid to produce the film was a reasonable amount of compensation,” he said. “There may be aspects of the D.C. law that could impose limitations.”

“It certainly sounds like there’s a lot of politics involved,” the source concluded.

Susan Crabtree is RealClearPolitics' White House/national political correspondent.

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