Could two obscure taxes paid by a wealthy heiress save a former politician from prison? Quite possibly, say tax- and election-law experts. The curious tale offers a lesson for ordinary taxpayers as well.  In June, former senator and presidential candidate John Edwards was indicted by a North Carolina grand jury on charges of violating campaign-finance laws. The six-count indictment involves more than $925,000 in secret payments allegedly made by two donors to conceal his mistress, Rielle Hunter, during his 2007-08 presidential campaign.  Mr. Edwards pleaded not guilty. Mr. Edwards's attorney and a Department of Justice spokesman say they aren't permitted to comment on the case. An attorney for Ms. Hunter declined to comment.  A mug shot of former Sen. John Edwards taken June 15.  Although the indictment doesn't name the donors, it says "Person C" gave about $725,000 and "Person D" gave more than $200,000 to hide the pregnant Ms. Hunter. Lawyers involved in the case identify Person D as Mr. Edwards's campaign-finance chairman, Fred Baron, and Person C as Rachel "Bunny" Mellon. Mr. Baron died in 2008. Ms. Mellon, 100 years old, is the daughter of a founder of Warner-Lambert pharmaceuticals, as well as the widow of philanthropist Paul Mellon.  Through her lawyer, Alexander Forger of Milbank, Tweed, Hadley & McCloy, Ms. Mellon declined comment. Mr. Forger said in an interview that Ms. Mellon intended her contribution to be a personal gift, not a campaign donation: "She intended it for his personal use and had no understanding of where the money would go."  The indictment could support this claim. It quotes Ms. Mellon saying in 2007 that she was "furious that the press attacked Sen. Edwards on the price of a haircut."  "From now on," she added, "all haircuts, etc., that are necessary to the campaign—please send the bills to me.… It is a way to help our friend without government restrictions."  This is where taxes come in. Mr. Forger says Ms. Mellon paid both gift and generation-skipping taxes on the amounts she gave Mr. Edwards—underscoring that they were personal gifts and not campaign contributions. In 1932, Congress imposed taxes on gifts to prevent end runs around the estate tax, and later it added the generation-skipping tax to forestall end runs in the form of bequests to much-younger heirs. Ms. Mellon's alleged gifts to Mr. Edwards triggered generation-skipping tax because he was more than 37½ years younger than she.  Mr. Forger didn't say how much Ms. Mellon paid in taxes on the gifts. The rate for gift and generation-skipping taxes at the time was 45%—and you must pay a separate gift tax on generation-skipping tax. Thus, the effective tax rate on such gifts can be greater than 100%.  Attorney Howard Zaritsky of Rapidan, Va., estimates the heiress paid $799,000 in tax to make her $725,000 gift. "It's pretty clear the tax exceeded the gift," he says.  If Ms. Mellon paid the gift taxes, does that mean the donations weren't campaign contributions, and Mr. Edwards didn't violate campaign-finance laws? The law is cloudy, and the case is unprecedented. But as written the law takes seriously the "specific intent" of donors, says election-law expert Richard Pildes of New York University.  Thus Mrs. Mellon's gift tax could help Mr. Edwards's case. On a blog, Mr. Pildes said: "The money spent here was almost certainly not a 'contribution' within the meaning of the election laws" for a criminal case.  Whatever the outcome, Mr. Zaritsky sees a lesson for ordinary folks: Keep good records.  "Most people never think about the gift and generation-skipping taxes, but in this case, scrupulous attention to the law could make a big difference," says Paul Caron of the University of Cincinnati Law School.  According to the indictment, the gifts to Mr. Edwards from Person C—Ms. Mellon—took a roundabout route to their goal. It says she made her checks payable to a friend, who forwarded the money to Person A—a campaign employee—whose wife endorsed the checks in her own maiden name. The indictment says some of the checks contained misleading notations such as "chairs," or "antique Charleston table," or "book case." The reason for this chain of untruths wasn't to deceive the government, according to Mr. Forger, but rather Mr. Edwards's wife.  All seems to have been kept strictly in order with taxes, however. The tax payments could be useful to Ms. Mellon should the Internal Revenue Service or prosecutors inquire further. She hasn't been accused of wrongdoing thus far. "She or her advisers kept in mind an important principle," Mr. Zaritsky says. "It's one thing to mislead ordinary people, but never lie to the government."  Write to Laura Saunders at taxreport@wsj.com
Could the payment of two obscure taxes save the former politician from prison? Here's what the rest of us can learn.