By: Philip Hackney
The news yesterday was focused in part on the fact that in 2013 the Florida AG Pam Bondi personally solicited a political contribution from Donald Trump. And, shortly thereafter the Donald J. Trump Foundation (“Foundation”) made a $25,000 contribution to a political organization called And Justice for All that supported the reelection effort of Pam Bondi for AG of Florida. Bondi’s office ultimately dropped any investigation into Trump University. Bondi denies the allegation that she ended an investigation in exchange for a political contribution. She says her office was never investigating Trump U in the first place. She does acknowledge, however, that her political organization should not have accepted the donation from a charitable foundation. She claims she tried to refund the contribution in March.
The claims against the AG are obviously a serious issue and should be looked at, but I of course see things through a bit of blinders. I see a nonprofit behaving badly. The level of negligence here and misuse of a private foundation frankly drives me crazy. As discussed below, the Foundation’s excuse is that it made a mistake and did not know what it had done. In this post I examine all of the tax code violations involved, and I look at the Foundation’s excuse and try to assess whether it is believable and whether it matters. Much of the information below has already been reported on by Citizens for Responsibility and Ethics in Washington (“CREW”) in a letter to the IRS. It establishes most of the following facts.
The Foundation is a section 501(c)(3) charitable organization that qualifies as a private foundation. It is a private foundation because it receives the vast majority of its support from one person or family. Congress applies very restrictive rules to the activities of these organizations. I look at the application of a couple of excise taxes that apply to private foundations and may apply in this case. If you have access to Guidestar, you can see the Foundation’s Form 990 PF from 2013 (the year of the political contribution) here. Notably the Foundation did not disclose that it made any political contribution that year. In fact it expressly checked a box stating that it made no political contributions.
As a charitable organization under section 501(c)(3) of the Internal Revenue Code the Foundation may not “participate in or intervene in any political campaign.” The Foundation made the contribution to a “political organization” And Justice for All (“And Justice”), an organization that qualified with the IRS under section 527 of the Code. And Justice disclosed the contribution to the Florida Division for Elections because And Justice was registered with that office as an Electioneering Communications Organization. Furthermore, the FL attorney general filed a “statement of solicitation” with that office as well because as documented by CREW the attorney general solicited or accepted this contribution on behalf of an organization that she “established, maintained or controlled.” In this particular statement of solicitation, Bondi apparently said she established or maintained the organization.
These facts establish a strong prima facie case that the Foundation intervened in a political campaign. The fact that the Foundation appears to have not disclosed this information on its Form 990PF makes the situation worse.
Under the Code, there is an absolute prohibition on intervening in a political campaign. That would mean that as a result of the contribution the organization should lose its status as a tax exempt organization. In practice though, the IRS generally assesses each individual situation. If an organization is genuinely apologetic and intends to not violate that prohibition again and institutes policies and procedures that should help to insure the organization will not intervene again, the IRS may just issue a letter of admonishment as it often did in its Political Activities Compliance Initiative.
The Foundation’s problems do not end there. The contribution to aid Trump himself or an organization he controls could, and probably should, be viewed as a contribution to Trump. This would violate another prohibition in section 501(c)(3) that prohibits earnings inuring to the benefit of a private shareholder or individual. Given that Trump is the biggest contributor to the foundation he has the control of the organization needed to show that he could be a private shareholder. Additionally, the $25,000 should be viewed as a value directly to Trump. The contribution seemed to clearly benefit Trump. He even personally connected himself to the donation in a news story from the time. There is an absolute prohibition on inurement and this seems to meet all of the requirements to demonstrate inurement. This violation could be an independent ground for the IRS to revoke the Foundation’s exemption.
There are also private foundation excise taxes that likely apply to the Foundation’s behavior. The easiest lift for the IRS is to impose a tax on the “taxable expenditure” of the Foundation under section 4945 of the Code. 4945(d)(4) includes in the definition of a taxable expenditure any payment “to influence the outcome of any specific public election.” The Foundation would owe a 20% tax on the $25,000, while any management who knowingly approved the transaction would owe a 5% tax on that same amount. Where the amount is not corrected upon finding the violation, that tax can increase precipitously. In fact, if the Foundation concludes this is what happened, the Foundation should report the violation, pay that excise tax, and seek to correct the payment. In all circumstances in fact the Foundation should immediately correct this situation.
Now the above excise tax would hurt primarily the Foundation itself rather than the party benefitted. The IRS could try to tax Trump himself by bringing a case under section 4941, which prohibits self-dealing. That term includes “transfer(s) to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation.” Arguably the $25,000 check to And Justice was a transfer to a disqualified person (Trump here) who then turned it over to the campaign. In the case of self-dealing the IRS is to impose a 10% tax on the self dealing transaction on the self-dealer, presumably Trump in this case. Any manager who knowingly approved the transaction can owe a tax as well. Again, the Foundation failed to report this political contribution of $25,000 on its Form 990 PF, which surely they would have realized was paid out. Any self-dealing that a private foundation does not correct becomes subject to much higher excise taxes.
Finally, it is illegal to knowingly provide false information on your Form 990PF. If it were found that the organization officers were aware of the choice to fail to report this contribution, and in fact to state that it was contributed to another organization, there could even be criminal charges based on the filing of a false Form 990 PF.
So what does Trump and the Foundation say about the transaction. Trump’s campaign spokeswoman, who also happens to be the Treasurer of the Foundation, said that the Foundation was unaware of the transfer. until CREW wrote its letter in March of this year. The spokeswoman said the transfer was a mistake. The Washington Post reported back in March that “Weisselberg, the foundation’s treasurer, said the mistakes began with an accounts-payable clerk at the Trump Organization. The clerk received a request for payment, Weisselberg said, in the name of Bondi’s group, And Justice for All. Then, the clerk had to decide whether the check would come from Trump’s charity or his personal funds.” Furthermore: “The listing she found for And Justice for All was actually for a nonprofit with the same name, located in Utah. So the clerk, Weisselberg said, wrote a check for that name, drawn from the charitable foundation’s funds. If the clerk had known that the check was meant for a political group, Weisselberg said, “we would have taken it out of [Trump’s] own personal account.” And furthermore: “The next mistake, Weisselberg said, was made by Trump’s accounting firm. When compiling the foundation’s donations for 2013, it did not list a donation to either of the groups called And Justice for All. Instead, it listed a $25,000 donation to Justice for All, in Kansas.”
Of course, the difficulty with this defense now, other than an Occam’s razor problem, is that the Trump Foundation was in the news back in 2013 in the Tampa Bay Times for making this exact contribution. “Trump dismissed the litigation as he voiced support for the Sunshine State’s Attorney General: “The case in New York is pure politics brought by an incompetent attorney general, a political hack,” reports the Tampa Bay Times. “Trump’s contribution comes from the Trump Foundation. It was made to a political action committee raising money for Bondi’s re-election.”
While it is odd that the private foundation made the payment in the first place, it is also odd that the campaign with professional staff would accept such a contribution it knows should not come from a charitable organization. The whole thing is terribly curious and if not intentional, seems terrifically negligent on the part of a lot of people in both organizations. This was a $25,000 payment, which was not an insignificant amount for the Foundation; it reported a little over $900,000 in expenses that year. There is no good faith defense involved in inurement or intervening in a political campaign. The IRS though likely generally allows such a factor to be brought into those two matters. If the IRS were to audit the Foundation it would need to establish if this behavior was a pattern, or if this was a one time mistake. If it were a mistake, and the Foundation can show it made payments in all other situations in order to accomplish charitable purposes, the IRS almost certainly would not revoke the Foundation’s exempt status. On the other hand, if there is a pattern of making payments that benefit Trump individually, we might have a different case. This incident is certainly questionable enough to open an audit on the Foundation. On the excise taxes, section 4945 does seem to have an intentional element involved as it requires a payment “to influence.” If the Foundation could show it actually made a mistake in paying the wrong And Justice organization, it presumably could argue that it did not make a payment “to influence.” As for the self-dealing excise tax, however, it seems harder to find an intentional element there. The money clearly went to an effort that would benefit Donald Trump, a disqualified person. It seems to be a strict liability statute. Given the significant length of time now between the payment, the fact that it was publicly reported in the news at the time, that Trump himself was quoted in that news, and that it appears Trump received a benefit from that payment it seems hard to make a claim that a self-dealing excise tax should not apply here.
Will the IRS go after this transaction? It really should. But it probably won’t, and that is a problem. The pressure on the IRS from the Republican Party has been tremendous and continuous. It is likely suicidal for the IRS to go after that party’s political candidate for president even through the Foundation that is named after him. The sad reality is that the IRS has no political constituency who will protect it today. When the Republicans attacked the Service for the Tea Party matter President Obama chose to abandon the IRS employees. He left each employee to her own resources in defending herself from lawsuits. I have a number of friends who have ended up in this terrible position. This is no way to build a smart civil service that you can expect to enforce the law when tough cases come its way. This is a way to neuter the agency, end the rule of law and encourage the rule by dominance. I fear we will pay for these choices for a long time to come.
I promise at some point I will take a look at the Clinton Foundation too. It is worth noting that it is not a private foundation like the Donald J. Trump Foundation. For now, before I get a chance to cover that organization’s activities, I note that Lloyd Mayer did a great job over at the Nonprofit Law Prof Blog, looking at the most recent allegations in the WSJ against the Clinton Foundation.