Among the claims of the suit is that the Trump Foundation engaged in transactions with related parties or in transactions that benefited related parties—activities which are prohibited by private foundations. The implications of these charges should be of interest to other major donors.
Let's take a closer look.
One episode here involves Mar-A-Largo. The City of Palm Beach filed a claim against Trump and Mar-A-Largo, LLC—a National Historic Landmark that Donald Trump has turned into a private club and golf course. As with most claims, the two parties eventually reached a settlement. This settlement called for a $100,000 donation to Fisher House Foundation.
Fisher House Foundation builds comfort homes where military and veterans' families can stay free of charge while a loved one is in the hospital. This is the organization the city named in the settlement agreement. Fisher House received the donation, but it came from the Trump Foundation, not from Trump personally, or from Mar-A-Largo, LLC.
As with everything Trump, there are too many entities and too many charges and counter-charges to sort out easily. It is unclear whether the settlement agreement specifically instructed Mar-A-Largo, LLC to make the contribution, or whether the agreement indicated that all charges would be dropped merely in exchange for a $100,000 contribution to the Fisher House Foundation. The check clearly came from the Trump Foundation, and the city dropped all charges. One must assume the city was satisfied. Perhaps no one checked the details.
When an agreement calls for a charitable contribution, can it be considered a charitable contribution as a benefit received as part of the agreement? The IRS has called naming rights to a building or other property a non-valuable intangible and something not affecting the deductibility of the donation in full by the donor. When two parties agree to walk away from their differences if one makes a donation to the other’s favorite charity, is that different from the naming rights agreement?
I don’t know how many transactions of this type occur each year in America. But I do know that everyone with a private foundation usually makes all of their charitable contributions through their foundation. Anyone contemplating making gifts as a part of an agreement related to litigation or business, or who has made such gifts in the past, should pay attention to this case.
Another example cited by the AG was a $5,000 payment to the DC Preservation League for space in a program booklet for a Preservation League event. Trump used the space to feature Trump International Hotels. The IRS is clear on this issue. Such program book advertising is seen as acceptable because the donor likely receives little benefit in return for the limited exposure that the program booklet provides. There are some limitations on what can be said in such “advertisements,” but the lawsuit does not allege that language in the ad was the violation, claiming rather that the mere mention of Trump International Hotels violated the law.
If your local symphony or ballet approaches you or your company for a full-page ad in its season program booklet and you pay for this via your private foundation believing it is a charitable contribution, as the IRS allows, be aware of the New York AG’s contrary position on this matter.
After this transaction came to light via the AG’s investigation, Trump International Hotels reimbursed the foundation and the foundation reported the transaction to the IRS and paid an excise tax on the transaction. Of course, this appears to be an admission of guilt and acknowledgement that the transaction was inappropriate. This is probably a typical response by a private foundation to a matter raised in an investigation of its activity. In retrospect, this appears to be an ill-conceived attempt at a remedy, given the IRS history of judging such advertisements. If your private foundation is under audit or another type of investigation, it is best to take no actions until the completion of the government’s work.
Another transaction is the Trump painting transaction in which Trump used a check from the foundation to acquire a painting of himself at the Unicorn Children’s Foundation charitable auction. Trump likely donated the painting for the auction and then purchased it so that it would not go unsold. The IRS rule on charitable auction purchases is that the buyer will receive a charitable contribution deduction only for the amount paid in excess of the fair market value of the item acquired. The charity is bound to inform the winning bidder of the fair market value of the item acquired and to collect state sales tax on the fair market value amount of the purchase.
The New York AG’s suit does not provide any details that would support her allegation that this transaction was other than a 100 percent charitable contribution in which the donor received nothing of value in exchange for his payment. The fact that Trump has used the painting as décor at Trump National Doral Miami may not be sufficient to claim that the painting is something of value. Once again, however, subsequent to the investigation, the painting was returned to the foundation and excise tax was paid to the IRS for what an outside appraiser indicated was the painting’s value.
There are a number of other transactions that the AG uses to support her claim of foundation transactions that inappropriately benefited related parties. They are essentially similar to those noted above.
The lessons for private foundation founders is that charitable contribution rules are complex. Be as vigilant in making charitable contributions from your foundation as you would from your own checkbook. If your private foundation is involved in an audit or investigation, wait for the process to work its way through before taking any actions. Follow the resolution of this case, as it is likely to result in some legal interpretations that are different from the conventional thinking today.