SOME LESSONS ON HOW NOT TO RUN A FOUNDATION, COURTESY OF THE TRUMP FOUNDATION
The Trump Foundation has been in the news, and in ways you don’t want to see. There are several lessons that foundation managers and directors can draw from recent stories about the Trump foundation.
First, what is a private foundation? It is a 501(c)(3) that cannot demonstrate that it gets support from a broad range of the public. A 501(c)(3) is presumed to be a private foundation unless it shows that it has a broad range of public support. The organizations that you see at the beginning and end of shows on public television are usually private foundations. They are set up a by a wealth family that furnishes the endowment.
Foundations are subject to stricter rules than are other public charities. You cannot, as one example, charge reasonable rent for office space to a private foundation. You either give them space for free or not at all. If you run a private foundation, you need to be aware of these stricter rules, because it is easy to run afoul without thinking about it.
There is a section of the Internal Revenue Code that deals with “self-dealing”. Self-dealing happens when there is a direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation.
The Trump Foundation has been in the news with some of these rules. Here are some lessons all family foundations can draw from these stories.
1. Don’t use your foundation as your private piggy bank. One story alleged that Trump took $258,000 from his foundation to pay a personal expense. If true, this is a brazen act of self-dealing. The IRS can (and will) assess fines for such actions.
2. Keep your foundation’s assets separate from other personal or business assets. Another story alleged that a painting belonging to the foundation, purchased with foundation funds, was “stored” at found in possession of one of Trump’s other businesses. It was actually hanging on the wall of the Champions Bar and Grill at Trump National Doral golf resort in Florida. Therefore, a foundation asset was used by one of Trump’s private businesses.
A campaign adviser suggested that this wasn’t self-dealing because the painting was being “stored” free of charge. While it is permissible to put a painting on public display, the IRS has held, in past rulings, that this sort of thing is self-dealing.
3. Remember that the state Attorney General has extraordinary powers to curb abuses, or even close a charity. The New York Attorney General has ordered the Trump Foundation not to solicit contributions in New York. While this may not hurt his foundation (the foundation is mostly other people’s money since 2008), it can put an organization out of business if they rely on fundraising to achieve their mission. The Attorney General said that the foundation was not properly registered in New York.
The Trump campaign did not return phone calls about these matters. Its tax filings with the IRS show no paid tax or legal advisers. Given the complexity of many private foundation rules, having no advisers can lead to many problems.
One more example of self-dealing, which is very common, is to use foundation funds to pay off a personal pledge to an organization. If you make a personal pledge or promise to buy a table at a fundraising event, make sure you use personal assets.
Recommendation to charities: If you find a donor is trying to satisfy a personal pledge with foundation assets, please tell them it is not allowed and can result in penalties.