President-elect Donald Trump probably won’t face legal liability over the latest controversy surrounding the Trump Foundation — its admission of self-dealing — but he will have to reimburse the charity and pay a fine to the IRS, experts say.
The timing of the disclosure — two weeks after the election and as questions about his financial entanglements dog the transition — indicates Trump is eager to put an embarrassing episode to rest before he takes office, similar to the recent settlement of the lawsuit against Trump University.
The admission of self-dealing was “highly unusual” — if only because most foundations don’t report it, one tax lawyer for nonprofits said.
“Most foundations work hard to not engage in these prohibited acts, and if they do it’s usually by accident and they don’t report it,” said the lawyer, whose firm did not permit him to discuss the matter publicly.
At the same time, the self-dealing disclosure came safely after Trump’s win, since the foundation received two automatic extensions to file the disclosure form, originally due in May.
Questions about the way Trump used the tax-exempt foundation swirled throughout the campaign. The Trump Foundation checked a box on its 2015 Form 990-PF, made public Tuesday morning, saying it had transferred “income or assets to a disqualified person” and that it had done it before.
The worst-case scenario for the foundation is the loss of its tax-exempt status — but that’s unlikely at this point. It’s also highly unlikely it would be referred for a criminal investigation. The foundation could also face state sanctions in New York, where it is organized.
While the form does not include details of the acts of self-dealing, instances reported by the Washington Post this year — using the charity’s money to settle legal disputes and purchase portraits of Trump and a football helmet without clear charitable uses — probably do not rise to the level of a revocation of its tax exemption, lawyers said.
When self-dealing occurs, the “disqualified person” — most likely Trump or a Trump-owned business — has to pay an excise tax worth 10 percent of the value of what they received, in addition to reimbursing the charity for that value, plus interest.
“The IRS does not have any authority to abate this tax or to waive this tax,” said Steptoe & Johnson’s Suzanne Ross McDowell, who specializes in tax-exempt organizations.
Taxpayers can’t dispute the tax, in other words — and Trump wouldn’t be able to call off the IRS as president even if he wanted to.
Lawyers cautioned that without the additional form detailing the self-dealing, which hasn’t been released, it’s hard to know what Trump would owe.
The two paintings and helmet are valued at $1,675 total in the “other assets” section of the form. The Foundation put up $20,000 for one of the paintings in 2007, $12,000 for Tim Tebow’s helmet in 2012 and $10,000 for the other painting in 2014, the Post reported. It also kicked in $258,000 to settle legal disputes.
“As a technical matter, if the act of self-dealing was the use of the painting for a period of time in one of Trump’s businesses, the excise tax would be paid on the value of the use of that painting, so basically it would be trivial in terms of the dollar amount,” said Mark Owens, former director of the IRS Exempt Organizations division.
It’s an established pattern of self-dealing that jeopardizes a foundation’s tax exemption, lawyers said.
“A single incident for what’s really a small family foundation, I do not think the IRS would do anything more than impose the excise tax. If there are willful and repeated acts of self-dealing, then the IRS can take action to terminate the organization’s status,” McDowell said.
The Trump Foundation’s form indicates there are at least two instances of self-dealing: The foundation also checked the box saying it had engaged in those acts “in a prior year…that were not corrected before the first day of the tax year beginning in 2015.”
But it takes more than a couple of oversights to get a foundation’s status revoked, McDowell said, noting “the IRS typically does give people a chance to become compliant.”
The agency, she added, tries “to educate the foundation, the people involved with the foundation, and to get them to be compliant going forward. The idea here is that private foundations do valuable work … They don’t want to be punitive in a way that’s going to hurt the beneficiaries of the foundation.”
Owens said the reporting on the foundation’s activities over the years suggests “There is a pattern going back years of using the foundation for personal benefit, so a revocation is a theoretical possibility.”
“But much more likely an outcome is that the New York attorney general, who already has an [earlier] investigation open, will simply expand that if he hasn’t already,” Owens added. “These sorts of transgressions are also important for state law purposes … Misuse of charitable assets, that’s grounds for sanctioning the board, it’s grounds for appointing a receiver and winding up the foundation’s assets.”
New York Attorney General Eric Schneiderman has said he is investigating the foundation “to make sure it’s complying with the laws governing charities in New York.”
If the self-dealer fails to reimburse the foundation within a certain amount of time, meanwhile, the IRS ups the excise tax to 200 percent of the amount involved.
“You have to, in effect, correct the act, which is probably what he’s attempting to do, so he ends the running of the penalty,” BlankRome’s Michael Sanders said.
“What I think they’re doing here is attempting to correct and clean up a whole bunch of things, so he doesn’t have to deal with these issues in the future,” Sanders added.
In any case, it’s unlikely the IRS Criminal Investigations Unit, which coordinates with the Justice Department, is involved.
“There are criminal tax law violations in the nonprofit world, but this isn’t one of them,” said the nonprofit lawyer.
The “nuclear option,” according to the lawyer, is to end a group’s tax-exempt status — but it would take an IRS audit of the foundation finding significant and repeated violations of tax law for that to happen, he said.
But the Trump Foundation isn’t the first to run afoul of the rules, McDowell said.
“Private foundations are often created by people who do have family businesses, and they’ll bring that family business mentality to the operation of the foundation and find themselves violating rules,” she said.
Getting extensions — the foundation received two automatic three-month extensions to file the form — is fairly common, lawyers said.
The foundation paid an IRS penalty earlier this year for contributing to the political campaign of Florida Attorney General Pam Bondi, violating a prohibition on tax-exempt charities making political contributions.
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