Credit: Gage Skidmore via Flickr (CC BY-SA 3.0)Earlier this month, Politico wrote a story with the intriguing headline that “Trump’s charity claims could violate fraud laws.” I don’t want to venture into the political mess that is currently providing so much entertainment in our country, but this article raised an issue that should be of concern to charities around the country.
According to Politico, Trump may have violated Section 349 of New York’s General Business Law. This section of the law forbids deceptive business practices. Trump and many other people frequently make the claim that “proceeds from this event” or “proceeds from the sale of this book” “will be going to charity.” And then, when you try to find out how much money actually went to charity, you find either a very small amount or none at all.
So what does the phrase “all proceeds will go to charity” actually mean? Proceeds, as defined by Dictionary.com, actually has two meanings. The first one is the total amount derived from a sale or other transaction. This is what I always thought that the word "proceeds" meant. However, Dictionary.com provides a second definition: the profits or returns from a sale, investment, etc. As a CPA, I think there is a significant difference between the proceeds from an activity and the net income (after deducting expenses) from an activity. Sometimes, CPAs refer to "gross" proceeds and "net" proceeds in an effort to reduce confusion.
When a charity has a bake sale and they advertise that the proceeds will go to this or that program of the charity, I believe that everyone is assumes that if you buy a cake for $10, the entire $10 will benefit the charity. No one thinks that the volunteer who baked the cake is going to be reimbursed for their time or out-of-pocket expenses.
But when an author indicates that the proceeds from the sale of a book are going to support ABC Charity, what are we to believe? Do we think that the author is paying the publisher for their publishing and distribution costs so that the $30 you pay Amazon for the book is all going to the charity? Or do we assume that the author meant only the profits that they would otherwise have received will be going to charity? Do we think that the author is keeping some of the profits to compensate her for the time and out-of-pocket costs associated with writing the book?
As you can see, the reality of claim that “all proceeds are going to charity” is way too vague for us to draw any conclusion. And we may actually use the word differently in different situations—the bake sale vs. the book sales. This is not just an issue with Donald Trump; it's an issue with almost all events that claim to benefit charity.
A client once told me that a fellow stopped in at his nonprofit one day and offered to run a golf tournament to benefit that charity. Unfortunately, when all was said and done, the charity received less than $5,000. During the annual audit of the organization, when I demanded an accounting from the fellow, we found out that this chap paid himself a handsome fee for organizing the golf tournament and that it was only after that fee and other costs were paid that the charity actually benefited.
If your reason for buying a cake or attending an event is that the proceeds will benefit a charity, it is a good idea to obtain some clarity of this vague term that Dictionary.com says could mean two very different things. Hopefully, the charity that is benefiting has a clear understanding of how it will be benefiting; you can start by asking them. Ethical fundraising principles actually require that a charity take special care not to mislead donors. But many charities do not understand that all ethical fundraising principles apply equally to self-organized events and events run by outside parties.
The New York Attorney General and Politico are making a lot of noise about Donald Trump, but his actions in this regard are unfortunately quite consistent with what has been going on for years. However, if the spotlight directed at Trump during this campaign season heightens awareness with donors and the charities they hope they are supporting, that's a good thing.