An important—and often overlooked—topic for exempt organizations is that they are subject to regulation at the state level, in addition to the more familiar federal level. One key area of state regulations is fundraising or charitable solicitation, and exempt organizations must register in states where they fundraise that have a registration requirement in place. In addition, state attorneys general historically have oversight over the charitable sector, and can step in and shut down organizations that are misleading the public or otherwise violating the law. And as the Donald J. Trump Foundation has just learned, states take their regulatory duties as seriously as the federal government does.
Specifically, Attorney General Barbara Underwood of New York has filed a lawsuit against President Trump and his three oldest children after a twenty month-long investigation into the operation of the President’s private foundation. The investigation found sweeping misuse of the Foundation’s funds, little to no oversight by the board, and what it called “persistently illegal conduct.” The Attorney General seeks $2.8 million in restitution and penalties, the dissolution of the organization with the remaining $1 million in assets be distributed to other charities, and to ban the President from holding a position with any New York nonprofit for a decade as well as a ban on his children who served on the board from being able to serve on any other nonprofit board in New York for a year.
“An extraordinary catalogue of how not to run a private foundation.”
~ Marc S. Owens, former head of the IRS’s Exempt Organizations Division
Indeed, the catalog of abuses and violations alleged in the suit is breathtaking. Attorney General Underwood declined to comment on the suit apart from a written statement that says the investigation revealed that the Donald J. Trump Foundation was little more than a checkbook for the President and his businesses. Trump organization accountants knew to use Foundation funds for any payment made to a nonprofit regardless of the reason in violation of tax rules. Thus leading to the payment of legal judgments against the Trump Organization by the Foundation in several instances as well as the making of illegal political contributions. Ms. Underwood’s statement also noted that after a veterans fundraiser during the 2016 campaign, control of the Foundation and the funds raised was handed over to Trump Campaign staff, including campaign manager Cory Lewandowski who directed which charities should receive gifts in the lead up to the Iowa caucuses. She states “Mr. Trump’s wrongful use of the Foundation to benefit his Campaign was willful and knowing.”
In her statement, Ms. Underwood also noted that she has sent letters to both the IRS and the FEC that detail what she called “possible violations” of tax and federal campaign law by the Foundation. It is unclear what steps these agencies will take, however it is important to note that the President may be subject to criminal prosecution by the Justice Department if his tax law violations are found to be “willful” by prosecutors.
Unsurprisingly the President contends that the suit was politically motivated.
We blogged back in November from a federal tax standpoint about some of the private foundation rules violations by the Donald J. Trump Foundation uncovered by David Fahrenthold’s excellent investigative reporting at the Washington Post. You can click here to see our previous post.