By Suzanne Garment and Leslie Lenkowsky
This article first appeared in the Chronicle of Philanthropy on January 4, 2019.
It’s probably tempting for many wealthy donors and others in philanthropy to view the Trump Foundation’s legal problems as an aberration. But the closure of the foundation last month speaks volumes about problems that are all too common among wealthy donors. It also raises big questions about the best ways for government to ensure big charity supporters aren’t getting overly large financial benefits from tax-deductible contributions — and how to balance that concern with the need to keep incentives flowing to donors so they’ll give generously.
The problems at the Trump Foundation first came to light not because of regulators but because of determined journalists, especially David Fahrenthold of the Washington Post, who won a Pulitzer for his investigations.
Reporters from multiple outlets uncovered many instances of potential legal violations of nonprofit law at the Trump Foundation, including its involvement in political activity, breaches of fiduciary duty, and actions that allowed insiders generous personal and financial benefits. Eric Schneiderman, then the New York attorney general and a political foe of Trump’s, started investigating after the news reports were published. Once Schneiderman became embroiled in a sex scandal and resigned, however, the attorney general’s office was taken over by Barbara Underwood, a career civil servant who continued scrutiny of the Trump Foundation.
When Trump won the presidency, the foundation tried to dissolve. But Underwood was as appalled as Schneiderman by the foundation’s behavior, so it’s impossible to say that New York State’s pursuit of the foundation was only about politics. Underwood decided not to consent to a voluntary shutdown before public proceedings against the foundation were finished. There would be no quiet, discreet ending.
In November, on the Friday after Thanksgiving, a New York judge cleared the way for the Trump Foundation lawsuit to proceed. Once it became clear to the president and his advisers that the process of discovery involved in a court action would be painful, the foundation bowed to the inevitable and agreed to distribute all of its assets to other charities. The attorney general is still so concerned about the family’s governance of the foundation that it continues to seek a court order to block Trump and other foundation trustees from serving on other nonprofit boards.
From the legal documents filed in the Trump Foundation case, it is clear that Attorney General Underwood was most concerned about how the organization distributed its funds.
State lawyers outlined their evidence that the foundation distributed its assets in ways designed to benefit Trump’s businesses. When the city of Palm Beach, Fla., fined Mar-a-Lago, President Trump’s golf resort, saying its flagpole violated local height restrictions, the foundation paid the penalty by contributing to a nonprofit. When a golfer sued a Trump club over a disputed hole-in-one prize, the foundation settled by contributing to the golfer’s foundation. When a charity event program promoted Trump hotels, the foundation paid the bill. When another charity auctioned a painting of Trump, the foundation bought it – and hung it in a private Trump club. When a Trump property pledged money to manage a conservation easement, the foundation made the payment.
Sometimes it’s not clear how much of a personal benefit a donor receives from a donation compared with the public good that the donation does. Federal and state laws allow no more than an “incidental” personal benefit in relation to the public good. The Trump foundation’s transactions weren’t what you would call carefully balanced in this respect. If the recipient of the check was a nonprofit, the foundation paid. There was no dithering about how much the contribution benefited Trump’s businesses.
That’s partly because there was no one around to dither. The board never met. There were none of those pesky procedures — internal controls, conflict-of-interest policies — that states impose to ensure that charitable assets are used for charitable purposes.
So it wasn’t surprising that the Trump Foundation was available for the most spectacular noncharitable use that the attorney general’s office found: as a prop for the Trump presidential campaign. In 2016, Trump pulled out of a GOP presidential debate and scheduled his own counter-programming: a fundraising event for veterans. The philanthropic problem was that the foundation was billed as the sponsor of the event, while in fact the distribution of the funds to veterans’ charities was directed by the Trump campaign with a view to political benefits.
In short, the Trump Foundation was a philanthropic disaster. But apart from the massive involvement of the Trump campaign, the situation is not really so different for many other small, family-run foundations.
The first general problems involve governance. Many, perhaps most, small foundations almost certainly don’t fully comply with the requirements of state charities laws and the gentle suggestions of the Internal Revenue Service. These rules are easy enough for donors to follow, but they require constant tending. Foundation officials must convene the board regularly, ensure the presence of quorums, parse the rules on remote voting, record meetings, circulate conflict-of-interest rules, gather verification — and this is just the beginning of a very long list.
A foundation with substantial resources typically pays someone to do these jobs. If a foundation can confer large intangible benefits, like social status, unpaid volunteers will step up to perform the work. For all other foundations, compliance will be — well, spotty.
The other common problem is figuring out just what kinds of benefits donors and other foundation insiders can receive in exchange for their gifts. The law says such benefits are okay if they are incidental. But the IRS, a well-meaning bureaucracy faced with a metaphysical puzzle of explaining what that phrase in the law means, can do no more than give examples.
The IRS says that if a building is named after a large donor, the donor is generally considered to have received no more than an incidental benefit. In another IRS example, if a donation improves overall conditions in a neighborhood and the donor owns property in the neighborhood, the donor is generally said to have gotten no more than an incidental benefit.
At the other end of the continuum, the Trump Foundation’s purchase of a painting that was hung in Trump’s private golf club clearly conferred more than an incidental benefit. But according to IRS data, based on foundation filings with the tax agency, less than 1 percent of private foundations acknowledge receiving more than incidental benefits in connection with their donations. Really?
The Trump case will likely spur more scrutiny of what donors get in return for their gifts. The movement has already begun. In 2013, New York revised its nonprofit law to give its attorney general more authority in this area. It wasn’t the new law that exposed the Trump foundation; it took journalists to do that. But we can hope for results down the road.
Where to Draw the Line
In another sign of policy makers’ interest in cracking down on excessive benefits to donors, the 2017 federal tax bill eliminated deductibility for donations to college athletic departments that give donors preferential seating at sporting events. Again, we will see.
It’s not surprising that policy makers want to make sure the average taxpayer isn’t subsidizing tax-deductible gifts that confer special benefits on wealthy people. On the other hand, philanthropy would collapse if we expected all donors to be purely altruistic. So where does the line on acceptable personal benefits get drawn?
In one of its efforts to provide guidance, the IRS began with a story about “an apocryphal domestic relations case” in which a judge asked an “elderly plaintiff about why, after some 50 years of marriage, she was now seeking a divorce. ‘Well, your honor,’ she replied, ‘enough is enough!’” In charitable activity, the IRS observed, “some private benefit may be unavoidable. The trick is to know when enough is enough.” But in this time of poisonous political partisanship, knowing when enough is enough may no longer be enough.
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Leslie Lenkowsky is an Indiana University expert on philanthropy and public affairs and a regular contributor to these pages. He and Suzanne Garment, a visiting scholar at Indiana University, write frequently on philanthropy and public policy.
The views expressed in the article do not reflect the official views of the Lilly Family School of Philanthropy.