This is a repost from Forbes.
In the daily flood of claim and counter-claim about lawbreaking by President Trump and members of his Administration, on June 14 the New York State Attorney General filed suit against the state-chartered Donald J. Trump Foundation. The complaint said the foundation engaged in “persistently illegal conduct” through “repeated and willful self-dealing transactions,” treating the charity as “little more than a checkbook” for Trump’s business interests, while “directors failed to meet basic fiduciary duties,” making the foundation “little more than an empty shell.” (You can read the entire filing here.)
The suit is a sharp blow to the President, as it will be argued by New York state lawyers in state court, where Trump has no direct administrative authority. The claimed violations are severe, and if true, violate many of the most basic rules of tax-exempt charity. But perhaps even more shocking, such activities are by no means confined to just a few bad actors. Many small family foundations effectively have no regulation whatsoever, making them attractive vehicles for tax dodging, illegal self-dealing, and using tax-exempt funds for self-interested economic and political purposes.
The Trump Foundation allegedly committed many violations. Annual board of director meetings are required by law, but the foundation’s last recorded board meeting was in 1999. Foundation expenditures are required to be separate from donors’ business interests, but the suit says Trump repeatedly used tax-exempt money to cover business expenses—covering the prize costs at a golf tournament, resolving fines against Trump’s Mar-A-Largo resort, and even paying $10,000 for a portrait of Trump hung at his for-profit Doral golf club. And foundations must stay out of politics, but the suit says Trump’s campaign was assisted by direct control of charitable donations intended for veterans. (You can find details from Washington Post reporter David Farenthold, who was awarded a 2017 Pulitzer Prize for his persistent reporting on Trump’s charities and other business dealings.)
All of this will now play out in court, and also on television and Twitter. But as bad as the allegations are, they are not unique to the Trump Foundation. Experts believe that many small foundations would flunk the procedural and fiduciary tests administered here, with conduct including donations to their children’s private schools in return for favorable treatment, employing (at high salaries) donors’ relatives in foundation jobs, and paying for personal travel and other expenses disguised as charitable activity.
While some commentators argue that these charity abuses don’t amount to much, others disagree. But others disagree, seeing abusive foundation practices as eroding trust in charities while costing taxpayers billions of dollars in inappropriate foundation expenditures. The last major legislation trying to fix charitable abuses was too long ago -- 2002 Sarbanes-Oxley Act, aimed at private corporate abuses, led to some concerns among non-profit directors, but ultimately resulted in little change of regulations, behavior, and sadly norms. Perhaps the tired shibboleth that there is little appetite for increased federal oversight is wrong. Charitable organizations get substantial tax breaks at the federal, state, and local level – their tax breaks means higher taxes for us. At the federal level the tax break for charities is $64 billion in revenue not collected in 2017. To put that number in perspective, the tax expenditures for retirement plan contributions and earnings is over $140 billion. Tax breaks for the under scrutinized charities is one of the largest in our budget.
If the federal government won’t investigate, states, like New York have the responsibility to oversee private foundations, uphold the public trust, and attack tax dodging and self-dealing done behind the protective screen of charity. Let’s hope the New York effort succeeds, but let’s all advocate that such oversight not be confined to politically appealing targets like the Trump Foundation, all charities need this much scrutiny.
New School Professor Rick McGahey assisted with this blog.