Does This Schwab Charity Satisfy the IRS Perfume Test?

10/13/2014 04:08 pm ET Updated Dec 13, 2014

Should a tax exempt charity under the Internal Revenue Code retain its charitable status if it does business with an individual notorious for staggering corruption and the cold-blooded assassination of anyone who tries to hold him to account?

The question is not academic. It arises from a troubling chronicle.

Charles Schwab made a fortune in stock brokerage. His current net worth approximates $5 billion.

At some point in time, Schwab's son Michael came to know Tommy Suharto, son of the late Indonesian President Suharto. The latter made an art of manipulating the powers of the Indonesian government to enrich his family.

Tommy may be the most corrupt individual in modern history, leaving Bernard Madoff in the dust. His illicit riches approach $850 million.

President Suharto granted Tommy a monopoly on the import and sale of cloves, a key ingredient in Indonesian cigarettes. The monopoly constituted a virtual license to print money because Indonesia is the fifth largest tobacco market in the world, and 88 percent of cigarettes are clove flavored. Tommy also owned an auto manufacturer enriched by substantial government subsidies to produce a native car called the Timor. He has also been reported to have employed the Indonesian Army to force landowners on the island of Bali to sell land at discount prices to his development company. The land has been used by Tommy to develop luxury resorts in collaboration with Western resort operators.

The United Kingdom is currently investigating allegations that Rolls-Royce paid Tommy $40 million to ensure its aircraft engines would be used by Garuda, the national airline of Indonesia. And the Stolen Asset Recovery Initiative spearheaded by the World Bank, has implicated Tommy in money laundering through the Guernsey office of BNP Paribas. As the son of the former Indonesian President, Tommy is a politically exposed person under banking laws, and whose transactions require special scrutiny.

In 2000, Tommy was convicted of corruption in connection with a 1995 land-swap involving government property which caused losses to the state of between $11 and $55 million. Supreme Court Judge Syafiuddin Kartasamita presided over the case and sentenced Tommy to 18 months' imprisonment. A year later, the Judge was gunned down in broad daylight by assassins acting under the direction of Tommy, who was sentenced to a 15 year prison term for his crime, of which he served but 4 years. Any mention of his conviction in the Indonesian media is supposedly forbidden by libel laws.

Tommy's notoriety received widespread coverage in the United States, the international media, and among NGOs. Even a hibernating bear would have been wary of doing business with him.

Michael Schwab, nevertheless, was apparently thrilled at the prospect of collaborating with Tommy to develop environmentally friendly upscale resorts on Bali. To implement that collaboration, Michael formed a tax exempt charity named Seathos, Inc. under section 501(c)(3) of the Internal Revenue Code. The United States Supreme Court explained in Bob Jones University v. United States that a qualified charity must both confer a public benefit and avoid contradicting or undermining established public policy. On that latter score, the Court added, substantial deference was owed to the judgment of the Internal Revenue Service.

Tax exempt Seathos has become a joint investor in an L.L.C.--Sealutions--along with Charles and Michael Schwab and arch-knave Tommy Suharto. Sealutions contemplates contracting with Western developers to construct luxury resorts on the Indonesian lands acquired by Tommy via the dubious means elaborated above. A portion of Sealutions profits would inure to Seathos.

Seathos' collaboration with Tommy, however, would seem to contrary to the public policy of the United States against money laundering, including the United Nations Convention Against Corruption and the Bank Secrecy and Money Laundering Control Acts. The probability that Tommy's investment in the endeavor derives from illicit funds is overwhelming. His motive is not charity or any other public purpose, but private enrichment through instruments that would tend to conceal their nexus to his ill-gotten wealth.

Think of this analogy. Suppose a tax exempt art museum knowingly displayed works that it knew had been looted from Jewish owners by Adolph Hitler's deputy Hermann Goering. It is the public policy of the United States to have looted artworks returned to their true owners, and if the museum continued with the exhibition despite knowing the provenance of the works, it should forfeit its tax exempt status. Charities should not get tax breaks for their complicity in violence and venality.

The IRS should thus consider examining Seathos to assess its continued qualification for tax exempt treatment in light of its association with Tommy Suharto. Seathos' board of directors has reported that "it has voted to remove Mr. Schwab from the organization in light of recent revelations."

The IRS should also consider promulgating a general rule that would prohibit section 501(c) (3) organizations from doing business with international pariahs like Tommy Suharto.

Genuine charities associate with Good Samaritans, not Lucifer.

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