The John Edwards cover-up and the IRS (updated)

John Edwards allegedly has been funneling $15,000 a month in hush money/child support to his mistress Rielle Hunter. Has he paid a gift tax and avoided money laundering pitfalls?  The mother of his love child reportedly received the funds through an intermediary named Andrew Young, who claims to be the child's father in behalf of his friend Edwards. Nearly everyone (but people who rely solely on the MSM for news) knows this courtesy of the National Enquirer,

AT editor Thomas Lifson raised the question of tax liabilities for these transactions, and the possibility of money laundering regulations coming into play with these transfers.

From the IRS Gift Tax FAQ web page:

Who pays the gift tax?
The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

From IRS Publication 950"

Gift Tax

The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.

Generally, the following gifts are not taxable gifts:

  • Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
  • Tuition or medical expenses you pay directly to a medical or educational institution for someone,
  • Gifts to your spouse,
  • Gifts to a political organization for its use, and
  • Gifts to charities.
Annual exclusion.   A separate annual exclusion applies to each person to whom you make a gift. In 1998, the gift tax annual exclusion became subject to cost-of-living increases. The exclusion for 1998 through 2001 was $10,000 and for 2002 through 2005 the exclusion was $11,000. For 2006 and 2007 the amount is $12,000. Thus, in 2007, you generally can give up to $12,000 each to any number of people in 2007 and none of the gifts will be taxable.

Filing a Gift Tax Return

Generally, you must file a gift tax return on Form 709 if any of the following apply.

  • You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
  • You and your spouse are splitting a gift.
  • You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
  • You gave your spouse an interest in property that will be ended by some future event.
You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.

You also do not need to report the following deductible gifts made to charities:

  • Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use; or
  • A qualified conservation contribution that is a restriction (granted forever) on the use of real property.
If we assume Edwards is paying Hunter $15k/mo and it is not court-ordered child support, then the gift tax issue seems to hinge on whether he is receiving "full consideration in return". I have to believe determination of this is subject to IRS review.

If it is a gift, then he is required to file a gift tax return and pay gift tax, perhaps unless Hunter agreed to pay the gift tax. If it is not a gift and not court-ordered child support, then she is required to report it as income and pay tax on it.

18 USC §1956(a) says (via Wikipedia);  

"Whoever . . . knowing[ly] . . . conducts or attempts to conduct . . . a financial transaction which in fact involves the proceeds of specified unlawful activity . . . with the intent to promote the carrying on of specified unlawful activity . . . shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both."

I think it is reasonable to assume that this transfer, if it exists, is not court-ordered. Otherwise, there is little reason for Edwards to run from the Enquirer when they confronted him.. Also, as reported in the article, the three elements of money laundering appear present; placement, layering, and integration.

So, my take on all this is that tax is owed on the transfer of money regardless of whether or not it is ruled a gift. Failure to pay required tax is an unlawful activity. Edwards, a lawyer, must know all of this. It is hard to believe he would not be sure to obey all regulations and tax liabilities. On the other hand, former prosecutor Eliot Spitzer apparently ran afoul of money laundering charges. These things get complicated for people trying to keep a secret.

Is the IRS is completely unaware of this transfer because of the MSM blackout? If the blackout crumbles (as it may be doing) will the IRS check to see that taxes have been paid? Should Edwards, Hunter, and any intermediaries (Andrew Young?) be investigated for possible tax evasion, money laundering, and conspiracy to commit same? The IRS has a policy of prosecuting high profile tax evaders. A former US Senator and Vice Presidential nominee certainly qualifies as high profile.

Shouldn't these questions be part of the public conversation?

James Baker is not the former cabinet member of the same name.

Update -- Brett Wolf writes:

Tax evasion alone is not a "specified unlawful activity" that can trigger a money laundering prosecution under Title 18 US Code, Section 1956. Congress intentionally left tax evasion out of the mix as it wanted to focus on funds that were generated by illicit activity. Of course, tax evasion is one of the "intents" that can support a 1956 prosecution, but only if the untaxed money is the proceeds of another crime, such as drug trafficking or wire fraud. Even if he did make secrect payments, the Edwards situation is nothing like that of Spitzer, who allegedly made his secret payments to an international prostitution and money laundering ring. In that case, the structured payments may have contributed to a money laundering conspiracy. Just a thought...
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