Trump’s Abuse of Trump Foundation — Criminal Tax Implications?

 

By: Philip Hackney, Oct. 3, 2016

Much attention is being paid to how Donald Trump could have amassed a $900 million NOL in the mid 90s. I remain laser-focused on the Donald J. Trump Foundation.  For this blog post I ask the question: could Mr. Trump’s misuse of the private foundation that he leads result in criminal sanctions under tax law?

I think there is enough evidence to open a criminal investigation into his activities. Nevertheless, a criminal prosecution is highly unlikely for both political reasons and issues of proof (ignorance of the law is a defense). Still, I think the IRS has a duty to open an investigation under the egregious set of facts I lay out.

Here is the important thing to keep in mind as you consider the arguments I lay out in this post: Donald Trump does not own the Foundation and its property does not belong to him. It does not matter from whom the money came. He is the president of a nonprofit organization that is entrusted with money to be used for charitable purposes that benefit the public.

When I first wrote about the Foundation we knew that in 2013 it had improperly paid $25,000 to Pam Bondi’s political campaign for AG of Florida. I noted then the potential application of tax criminal law because there was a false statement on the Foundation’s Form 990PF, (the Foundation claimed the money went to a KS charity “Justice for All”) but said it was highly unlikely under the circumstances that the IRS would invoke criminal sanctions in a single situation.

Today, we know a lot more about Foundation’s highly questionable transactions largely due to the intrepid work of Washington Post reporter David Fahrenthold. For instance: the Foundation purchased expensive portraits of Trump and sent those to Trump’s private clubs; it has paid money to settle Trump Organization private lawsuits; it has acted as the receiver of what appears to be Trump income, but counted it as a donation from the payors.

In this post, I first discuss the criminal statutes most likely to apply and then consider the broad themes of violations upon which a case might be built. At the end of the piece, in an appendix, I list all the questionable acts by year with links to sources to show the quantity and quality of the violations.

Criminal Tax: A criminal tax violation typically either involves tax evasion or false statements on a tax return. Both require voluntary, intentional violations of a known legal duty. The Department of Justice brings such cases, but does not tend to bring just any case. Plenty of tax returns likely contain underpayments and false statements. But the IRS and the DOJ rightfully do not prosecute most instances where this occurs. They look for egregious situations.

Tax Evasion under section 7201  provides that “[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof, shall” be guilty of a felony. The elements include (1) a tax deficiency that (2) the individual willfully failed to pay and (3) upon which the individual engaged in an affirmative act of evasion or attempted evasion. The government can prosecute a taxpayer on a separate count for each year there is an evasion or attempted evasion.

False statements under section 7206 of the Code makes it a felony to willfully make and subscribe “any return, statement or document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter.” The elements are (1) a signature on a return under penalties of perjury that (2) contains a materially false statement, that (3)  the individual knew was false, and that (4) the individual willingly made.

The government need not prove a tax deficiency to win a false statement case, but must prove that the false statement was material. Relying on the reasonable advice of counsel can be a defense. While there are likely other types of returns Trump might have filed, we only have available for inspection the Form 990PFs. I will consider some of the potential individual income tax possibilities, but we cannot know for sure because we do not have his tax returns. I look at the 2007 period on.

The Basic Case:

Many people likely think of the Trump Foundation as Trump’s property. In their minds, when he directs its assets to himself, it is not theft.

But: Donald Trump does not own the Foundation and its property is not his. It does not matter from whom the money came. He is simply the president of a nonprofit organization that is entrusted with money for public benefit. Because of this, were the Foundation overseen by independent board members, the Foundation could consider pressing charges of embezzlement against a man who seems to have used the Foundation as his private piggy bank. That the NY AG has just sent a cease and desist letter to the Foundation gives new importance to this angle.

Trump as president of the Foundation has apparently signed all of its Form 990PFs (found here) since at least 2007.

The government could anchor a tax evasion investigation upon the serial self-dealing transactions  between Mr. Trump as an individual (and/or his businesses) and the Foundation that I describe in full in the Appendix. From 2007 on he likely generated obligations to pay a self-dealing excise tax of maybe as much as $67,000 that he has yet to admit to or pay. Key to the use of the self-dealing excise tax is that nothing I know of would allow Mr. Trump to use any NOLs or other deductions to offset this obligation. In order to pay the tax he should have filed a Form 4720. This is a substantial tax deficiency that on examination of Foundation documents appears to remain unpaid.

He represented on Form 990PFs (signed under penalties of perjury) that each of the self-dealing payments were “qualified distributions” of the Foundation, meaning he claims that these payments were made to further charitable purposes. There is strong evidence that most of these payments were not for charitable purposes but for Mr. Trump’s private benefit; such false claims could be considered affirmative acts to evade taxes. Furthermore, every year when Mr. Trump signed a Form 990PF he checked NO to the question: did the Foundation “transfer any income or assets to a disqualified person (or make any of either available for the benefit or use of a disqualified person)?” He also checked NO to: did the Foundation “pay compensation to, or pay or reimburse the expenses of, a disqualified person?” Based on the fact that the Foundation sent paintings bought by the Foundation to his private club, and that the Foundation paid his personal expenses of the lawsuits for instance, these questions should have been answered YES. See the Appendix for examples of taxable self-dealing transactions. It is within the realm of possibility that Mr. Trump has some defense to self-dealing excise taxes with respect to some of these transactions. But based on the facts as presented the IRS has well enough to begin a serious investigation into these matters.

Each of the self-dealing transactions also should have been considered income to Mr. Trump. If he did not report those amounts on his tax return, we would have another tax deficiency. The IRS could investigate this matter.

The most difficult hurdle on tax evasion is knowledge. Most recently Mr. Trump has tweeted that “I know our complex tax laws better than anyone who has ever run for president,” suggesting that perhaps he has the knowledge to have intentionally, voluntarily violated a known legal duty. However, at the same time, in other public comments he has suggested in the case of the Foundation that his lawyers handle all those things and he hopes they advised him correctly. At the end of the day, it is impossible without an actual investigation to determine whether the government could prove this part.

A false statement charge would be based upon this same factual predicate. Trump certified on the Form 990PFs filed over many years that purchases of goods and services and settlements of private disputes were qualified distributions from the Foundation. And yet, in 2013, at the least, he has now admitted that $25,000 was a prohibited political contribution. There are many more false statements as a result of these claims to be found on the Form 990PF discussed below, but this is the central problem.  A claim that a payment is a qualified distribution, when in fact that money went to benefit a founder is a material matter that goes directly to the IRS being able to tell whether an organization maintains its exempt status. Of course, again, the government would have to prove knowledge.

While not all of these items are within a 3 year statute of limitations that typically applies to a tax return, the Foundation did not file is 2012 Form 990PF until November of 2013, meaning that any acts from 2012 on are still well within normal civil evaluations of the Foundations tax returns. More importantly though, under section 6501(c)(1), if a false return is filed with the intent to evade tax, there is no statute of limitations. Thus, if you can prove false return with intent to evade tax, we can bring in all of the acts discussed in this piece.

The remainder of this post is a more in depth look at this case and then an appendix with all of the questionable acts.

Potential Return Problems

There are two primary fields that could form the base for a criminal complaint against Trump for his use of the Foundation: expenses and revenue.

On the expense side there are maybe three distinct issues: (1) buying goods or services for Trump or his family, (2) making payments to other charities in order to settle private matters for Trump, and (3) spending money to intervene in political campaigns.

On the revenue side there are again two possible issues: (1) sale of goods, and (2) sale of services.

Expense Side Problems

Mr. Trump has directed the Foundation to acquire 2 paintings of himself totaling $30,000, a trip to Paris for $107,000, a Tebow helmet for $12,000, and advertising for his hotels for $5,000. He has also directed the Foundation to settle two private lawsuits against his properties delivering a total of $258,000 to charities Trump himself or one of his organizations owed. He has also made personal promises to make contributions to the charities of losing celebrities on Celebrity Apprentice in order to aggrandize his private image; he used Foundation money in part to satisfy these obligations (total amount app. $200,000). Finally, he directed the Foundation to pay $25,000 to the political campaign of Pam Bondi. In total, since 2007 he has apparently directed $670,000 of the Foundation’s money to take care of what appear to be his own private needs.

Although, with the exception of the Pam Bondi amount, each expense appears to represent a payment to “charity”, each expense, instead, represents the acquisition of goods or services or the settling of a personal obligation of Mr. Trump. In the case of the charity auctions there may have been a grant, but only to the extent the payment made exceeded the fair market value of the good or service acquired. For practical purposes, I assume that the amounts represented fair market value of each item.

What many people might think is that because the payments were made to charity there is “no there there”. The goods and services acquired are either not worth anything or simply lagniappe as we say in South Louisiana.

But this is wrong. Many of us make payments to charities all the time but don’t consider it a charitable contribution. When you pay a hospital for health care or a university for education you are paying for services from a charity. The Foundation did the same thing when it acquired the paintings, the trip, the helmet, the advertising. In the case of the settling of private lawsuits, the Foundation simply took a debt off the hands of Mr. Trump.

Settling private lawsuits, paying personal debts to charities, and paying a political campaign are per se problematic and should automatically subject Mr. Trump to a 10% excise tax on self-dealing under section 4941. Purchasing the other items is not per se problematic under tax law as long as the Foundation used them for Foundation purposes. However, it appears that the Foundation gave these things to a disqualified person such as Trump, an officer of the Foundation, or it just cannot find them.  In these cases there is a violation of charity tax law self-dealing that necessitates the payment of a tax.

Altogether, self-dealing excise taxes on all of these expenditures likely total $67,000.  This establishes a substantial tax deficiency. Additionally, Trump owed a tax under 4955 for a political expenditure for the payment to the Bondi political campaign. He already paid this. These acts also should end the exemption of the Foundation from the first act of self-dealing . Why? Because charitable organizations are not allowed to let the earnings of the Foundation “inure to the benefit of a private shareholder.” These amounts should be recharacterized as dividends to Trump as a private shareholder. Any inurement is supposed to end the exemption of the organization automatically. Also, intervening in a political campaign should have ended the exemption of the organization immediately. This would mean that at some point, the Foundation stopped being tax exempt and another tax deficiency started accruing.

Under tax law we would most likely think of all of these payments as prohibited dividends from a nonprofit corporation to a private shareholder. We could also envision it as compensation to Mr. Trump as an employee of the organization under which employment taxes would be due too. Because we do not have Mr. Trump’s tax returns, we are unable to know whether he has a tax deficiency for failure to declare income on these amounts. I note it makes no sense that these self-dealing transactions could be described as gifts from the Foundation to Mr. Trump and thus not income. That is entirely inconsistent with the thrust of section 501(c)(3).  Although we don’t need it for our purposes, it is possible that Mr. Trump and the Foundation owe taxes under section 4944 (Tebow helmet and Trump paintings as jeopardizing investments?) or under section 4945 as a taxable expenditure and section 527(f) (the Pam Bondi payment and maybe the Paris trip too as to section 4945)

From the Foundation’s Form 990PFs it appears he has paid none of the excise taxes. Thus, based on the record it appears that there are tax deficiencies at least of the self-dealing excise taxes, if not on his personal income tax.

What about the Foundation’s reporting of these transactions? Each of these payments are represented on the Form 990PFs as qualified distributions to other charities. No matter how these items were used, that is a false statement about a material matter that helps the IRS determine whether the private foundation met its obligations as a charity during the year. The Foundation should have reported some of the expenditures as an acquisition of assets on the Form 990PF. On others it probably should have reported the amounts as income to Mr. Trump. Those amounts would be reported on line 13 of the Form 990PF as compensation to officers and directors. If the assets were indeed for the Foundation, these amounts should have at least appeared on any future Form 990PF as assets of the Foundation. They just disappear because the Foundation acts as if it made a grant to charity in those years. Additionally, Mr. Trump never once checked off that the Foundation engaged in prohibited self dealing under section 4941, nor did he make any other indication that the Foundation violated any of the excise taxes that the Foundation and Mr. Trump appear to have violated.

What does the 7201 case look like? The facts suggest that we have a prima facie case of elements 1 and 3. There is a tax deficiency even if it is just on the self-dealing excise tax on each of these expenditures. The filing of a false Form 990PF signed under penalties of perjury is a sufficient willful affirmative act of evasion under the law. The question is whether we can demonstrate element 2 that Mr. Trump willingly did not pay the tax. In other words, can we show that Mr. Trump voluntarily and intentionally violated a known legal duty?

Most experts in the press say that knowledge will be difficult if not impossible to show. On the one hand, if the question is whether Mr. Trump knew that it was wrong for the Foundation buy these goods and services for his benefit, it seems hard to believe that he would not know such a basic element of a societal norm. You don’t steal from a charity. On the other hand, if the battle is over whether he understood the self-dealing excise tax under section 4941, we get into more difficult territory. It might even be hard to show that he understood that taking these things from the Foundation was taxable income to him. After all, in criminal tax a good faith misunderstanding of the law is sufficient to negate willfulness.

That Mr. Trump is a very smart businessman who knows what he is doing and has lots of money to surround himself with the best advice should provide a case that he had knowledge. And, he has stated, as noted above, that he understands the tax code better than any prior presidential candidate. But he has also indicated that as to Foundation matters he relies on the advice of counsel. It is hard to know how this matter comes out, but given the vast amount of money he has directed to private purposes, at this point it seems that the IRS ought to at least consider the matter. Otherwise it is just allowing a version of the affluenza argument that has received such opprobrium from society.

The lesser crime of a false statement can be proved through these same acts. The false statements regarding payments that amounted to qualifying distributions is almost certainly a material matter. Again, the government would have to prove knowledge.

Revenue Side Problems

In some sense this side is less developed. The Washington Post has reported that Comedy Central owed Mr. Trump a $400,000 appearance fee for a comedy roast in 2011. Instead of Comedy Central paying the amount to Mr. Trump, he directed that Comedy Central pay the money to his Foundation. Under assignment of income principles of Lucas v. Earl this amount would be income to Mr. Trump. The contribution to the Foundation in turn might be deductible by Mr. Trump as a charitable contribution. Because the Foundation is a private foundation, Mr. Trump can only deduct up to 30% of his adjusted gross income. If he had no other income in the year, Mr. Trump would only be able to offset 30% of that amount. Additionally, even if he was able to deduct the entire amount from income, he would still owe Medicare tax on the entire amount.

Mr. Trump’s campaign has provided many different explanations of this transaction. For instance, a surrogate claimed that Mr. Trump forwent the income and told Comedy Central to consider sending it to charity. Alternatively, that same surrogate said Mr. Trump took the amount into income and made a donation to the Foundation. It is not clear what is true. This issue is potentially an issue with regard to payments from Richard Ebers as well. The Washington Post suggested Ebers made these payments in order to acquire some sort of tickets from Mr. Trump. Until we know more, it is hard to make many judgments on these matters. The allegations that Mr. Trump sold goods or services would vastly complicate matters for the Foundation. In any case, the allegations are significant enough to investigate in conjunction with the self-dealing transactions. If anything these types of transactions suggest why Mr. Trump would have a personal motivation to think of the charity money as his own money and then use it in that way.

It’s worth noting that Hillary and Bill Clinton may have an assignment of income issue as well. When they give speeches they are owed a fee. Some of those fees have been directed to the Clinton Foundation. Under basic assignment of income principles, they may have income too just like Trump. This is an interesting tax issue for another post, but here is an article by Adam Chodorow that tries to give some answers to questions of assignment of income and charities

Bottom Line: Mr. Trump’s use of the Foundation that bears his name is not within the norm of mistaken or accidental use. It represents a continued willingness to violate basic charitable norms over and over. It may be petty as to him, but the violation is enormous as to the broader community. We as a community, as a democracy, as a country rely on these organizations to fulfill some of our most important needs and duties. As a matter of the rule of law, the IRS owes it to the public to investigate such egregious acts for potential criminal violations. If he need not be subject to these laws, under these circumstances, why should we? 

Appendix

Self Dealing: From IRM 7.27.15.4.1.3 “If a foundation furnishes an automobile to a disqualified person (other than a foundation manager for purposes that are reasonable and necessary) without charge, it is engaging in an act of self-dealing. Similarly, the rental of aircraft by a disqualified person to a private foundation constitutes self-dealing. See Rev. Rul. 73–363, 1973–2 C.B. 383.”

Also, “if a private foundation makes a grant or other payment which satisfies the legal obligation of a disqualified person, such grant or payment shall ordinarily constitute an act of self-dealing.” Reg. 53.4941(d)-2(f)(1).

Finally, also from the IRM: “the placing of paintings owned by a private foundation in the residence of a substantial contributor, a disqualified person. Such constitutes an act of self-dealing under IRC 4941(d)(1)(E) since the disqualified person has the direct use and benefit of an asset of the private foundation. See Rev. Rul. 74–600, 1974–2 C.B. 385.”

Links to tax crime prosecutions for 2016: For your own reference, and to try to keep myself honest in evaluating this situation,  here is the IRS listing all criminal tax prosecutions during 2016. It also contains links to prior years as well. One element that tends to be included in these is the violation of another law. Theft of company money or assets is probably the most common other crime.

List of questionable transactions with the Foundation. 

2007: (1) Trump Foundation paid $100,000 to Fisher House a veterans charity. The Foundation filed a Form 990PF describing this payment as a contribution or grant. However, according to the Washington Post the Foundation made the payment to settle a lawsuit against his Mar a Lago club that owed $120,000 in fines to Palm Beach. The article says the $100,000 payment was a personal obligation of Trump as a result of the settlement.  Assuming, as the Washington Post reports, that this amount was paid to satisfy Trump’s legal obligation negotiated in a mediated settlement with the town of Palm Beach, this would be income to Trump instead and should have been reported as such. Given that he is president and its founder we should consider the $100,000 amount as either a dividend or compensation to him. It is also a self-dealing transaction upon which Trump would owe a 10% excise tax of $10,000. Failure to pay tax on his individual income tax or failure to pay the self-dealing excise tax could both provide the basis for finding a tax deficiency. The affirmative act could be signing a return with at least a couple of false statements including that the payment was a grant and checking a box stating there was no self-dealing during the year.

(2) It also paid $20,000 that year to acquire a painting by Michael Israel at an auction for the charity Children’s Place at Home Safe at Mar-a-Lago Club. Reporting suggests that the painting was sent to one of Trump’s golf courses. This would be an act of self-dealing. Many have wondered why this $20,000 payment was not just a grant to another charity given that no painting of Donald Trump could be worth all that much. That is not the way charity auctions work or charitable contributions or charitable grants work. To the extent there is a quid pro quo, there is no contribution. Here, the Foundation bought a painting for its fair market value and made a grant only to the extent that the payment exceeded the fair market value. The fair market value had to be at least $10,000 because $10,000 went directly to the artist. The charity that ran the auction should have set the fair market value of the painting before the event in conjunction with the artist. Assuming a fair market value of $20,000 Trump owed a $2,000 self-dealing excise tax.

2008: (3) Trump Foundation pays $107,000 for Paris Trip at auction. Not clear the Foundation used the painting for charitable purposes.  Although it is not clear what the actual fair market value of the trip was, it looks like $100,000 might be in the ballpark. It included a meeting with the actress Selma Hayek. The 2008 Form 990PF claims a $107,000 donation to the Gucci Foundation. The Gucci Foundation reported a $145,000 donation. A Trump surrogate said that the Foundation deducted part of the amount. It is not clear what they mean. The amounts still should have appeared on the Form 990PF as an expense. I think the burden of proof is on the Foundation to demonstrate that the trip was used for Foundation purposes. It is difficult to imagine how a non-operating private foundation could meet this burden, particularly with this luxurious trip.

(4) Trump makes $50,000 pledge to St. Judes Foundation on behalf of Tito Ortiz on Celebrity Apprentice, but used the Trump Foundation to make that payment. You can see this amount reported in the 2008 990PF. This was not a gift but a TV promotion and he used charitable money to accomplish a TV promotion for himself. This should likely be considered income to Trump and an instance of self-dealing upon which Trump would owe a $5,000 excise tax. Some might question again whether this is really money to Trump given that the charity is just paying another charity. However, Trump is clearly using the payment and the fact that he is generous in order to promote the show and build his brand. The payment serves a substantial non-exempt private purpose to aggrandize the image of Trump.

2010: (5) Trump Foundation pays $158,000 to Martin Greenberg Foundation on behalf of the Trump National Golf Club who owed the money according to a lawsuit settlement. It paid the amount in 2012 and that is reported on its Form 990 as a grant in November 2013. Should be income to the golf club that the club should have reported. A three year statute of limitations is still open on this transaction for civil and criminal penalties and do not run until November of this year.

2011: (6) Comedy Central paid the Foundation $400,000. The Foundation reported the amount as a donation from Comedy Central. Reporting suggests this was an appearance fee for Donald Trump appearing  on a Comedy Roast. He has alternatively said that he directed that money to his Foundation and his campaign has said he did not direct the money there, and then they said maybe he did direct the money there. Proper reporting of such a situation would be to include the amount in income and then maybe take a deduction.

(7) Richard Ebers Inside Sports and Entertainment paid the Foundation $450,960. Washington Post reports that this was a quid pro quo for access to Donald Trump businesses. The Foundation reported this amount as a grant to the Foundation on its Form 990PF.

2012: (8)  Purchased a Tebow helmet at a Susan G. Komen live auction. The Foundation has not been able to locate the helmet. Appears to have reported the payment as a contribution, grant or gift.

(9) Trump Foundation pays 7 different charities $10,000 each as a result of a commitment Trump makes on Celebrity Apprentice.

(10) Washington Post reports Richard Ebers Inside Sports and Entertainment paid the Foundation $522,828. Foundation treats it as a contribution or grant. Washington Post reports that people in the Ebers organization say that these payments were made to acquire something from Trump.

2013: (11) Contribution to Pam Bondi’s political campaign. Reported as delivered to Justice for All in Kansas rather than And Justice for All in Florida, but delivered to And Justice for All in Florida. Trump is reported to have paid a section 4955 political expenditure excise tax on this amount this year. It is not clear why he did not also pay a self-dealing excise tax, but it is perhaps because he believes a mistake allows him an out on a self-dealing transaction. The Foundation has maintained that the payment was a mistake.

(12 TF paid $5,000 for advertisement bought at a charitable auction. The Foundation allowed Trump hotels to use this advertising.

(13) On its 2013 Form 990PF, the Foundation indicates it made a grant to a Donor Advised Fund at Fidelity Investments for $115,000. On the Form the Foundation does not check Part VII Q 12 that asks if the Foundation made a contribution to a DAF controlled by the Foundation or a disqualified person. It would be odd for the Foundation to make a contribution to a Fidelity DAF not related to the Foundation or the Trump family generally.

(14) Trump Foundation paid four different charities $20,000 each after Trump made promises to celebrities on Celebrity Aprentice.

(15) Richard Ebers Inside Sports and Entertainment paid the Foundation $435,832. Washington Post reports that this was a quid pro quo for access to Donald Trump businesses

2014: (16) Trump bids $10,000 on a portrait of himself by artist Havi Schanz at a charity auction.The Foundation makes the payment. It is featured at Trump’s private golf club named Doral. The Foundation reported this amount as a qualified distribution on its Form 990PF.

2016: Although we have no Form 990PF for 2015 or 2016 yet, there have been reports of the Foundation issuing checks at Donald Trump for president campaign rallies for photo op purposes with the Donald J. Trump campaign logo featured prominently on the check.