What Our Presidential Candidates Can Teach Us About Tax-Exempt Legal Compliance

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What do Donald Trump and Hillary Clinton share in common?  Among so many things political and otherwise (go ahead, use your imagination), they both head up charitable foundations, which have recently received media scrutiny for apparently operating outside legal boundaries.  What are the problems?  More importantly for us regular folks, what can prudent and responsible nonprofit leaders learn from these examples?  We will focus here on several areas related to:

  1. State charitable regulation requirements,
  2. Tax exemption principles against private benefit for nonprofit insiders, and
  3. IRS requirements for staying on course with an organization’s tax-exempt purpose.

Both foundations’ allegedly legally aberrant behaviors are cautionary tales for nonprofit directors and managers.  This article reviews some of the allegations against both foundations and identifies multiple takeaways for nonprofit leaders to consider as they lead their organizations. 

  1. State Charitable Registration Requirement

A. Reporting

Recently, New York Attorney General Eric Schneiderman’s office issued a “cease and desist” order to the Donald J. Trump Foundation, requiring it to stop fundraising in New York based on its failure to provide annual financial reports and annual audited financial statements.  According to the New York AG’s Charities Database, the Foundation registered in 1989 and filed annual reports through 2014, but not thereafter.  Allegations have also been made that Trump improperly collected donations for his political campaign that should have gone to his charity and used charitable funds to settle his business disputes. 

Takeaways:

  • Make sure your charitable organization is registered in states where it fundraises, and keeps its annual filings complete and up to date. 
  • Keep your political fundraising and business finances separate from charitable resources (especially if you are going to run for president!)

B. Disclosing Donors

Interestingly enough still in New York, the Clinton Foundation’s spin-off organization Clinton Health Access Initiative has allegedly failed to comply with the NY AG’s donor disclosure requirements.  Such requirements are squarely at issue in Citizens United v. Schneiderman, in which the NY AG’s office is requiring two organizations to disclose donor information or - like in the Trump cease and desist order - be forced to stop fundraising in New York.  The Clinton organization reportedly failed to disclose donor information for $225 million in foreign government and other grants. 

Takeaways:

  • Some jurisdictions, like New York, require disclosure of grants from foreign countries. 
  • Increasingly, state attorneys general are also developing internal rules that require disclosure of Form 990 Schedule B donor information.   See our September 30th blog for more information.  The Citizens United New York litigation referred to in that blog, and which is currently on appeal, may render such requirements moot.  But for now, nonprofits should be aware of, and be prepared to comply with state-mandated revenue-related disclosures, such as in New York State.
  1. Prohibitions Against Inurement and Private Benefit

Trump’s alleged use of his foundation for private benefit may definitely be a serious problem with the IRS too.  He previously was accused of using charitable funds to buy a $12,000 football helmet at a fundraiser for personal use, which – charitably speaking - was perhaps an oversight (wrong wallet?).  However, using charitable funds to settle Trump’s for-profit business disputes, reportedly to the tune of $258,000 is a gigantic IRS no-no.  In IRS parlance, such activities constitute illegal “self-dealing.”  The penalties for self-dealing include penalty taxes as well as repayment requirements.  At least from news reports, Trump’s financial dealings between his businesses, charitable foundation, and political campaign seem messy at best, and downright flagrantly illegal at worst. 

Takeaways:  

  • Remember to keep finances – and different types of activities – separate among different kinds of organizations. 
  • Make sure to have a conflict of interest policy to govern interested party transactions and use it.  In a nutshell, that means that (a) people too close to a situation (financially, through family relationships, or otherwise) should not deliberate or vote on any decisions involving them, and (b) the “disinterested” governing nonprofit leaders make decisions in the best interests of the organization – i.e., what is fair for the organization.  
  • In other words, no self-dealing or even the appearance of such improprieties!
  1. Staying on Course

A. Don’t Get Side-tracked:  Pursue the Organization’s Purpose

It looks like the Clinton Foundation has veered far off the rails of its originally communicated exempt activities and the basis for its exemption without telling the IRS.  That’s another significant tax-exempt compliance problem (and completely separate from the far graver non-tax issue of whether Clinton used the foundation as a machine for selling political influence, while she served as U.S. Secretary of State).  According to the Clinton Foundation’s original IRS tax-exemption application filed in 1997, the foundation’s purpose was limited to developing former President Bill Clinton’s archival library in Arkansas, focused on the “papers or events of the official or personal life of President Clinton that have historical or commemorative value.”  No mention of global initiatives was made.  Notably, the IRS approval letter recognizing the Foundation’s tax-exempt status required notification of any change in “purposes, character or method of operation . . . so we can consider the effect of the change on your exempt status.”  The Foundation, however, disregarded such requirement and instead evolved into its current website description as “build[ing] partnerships between businesses, NGOs, governments, and individuals everywhere to work faster, leaner, and better . . . helping people realize their full potential.” 

Takeaways: 

  • Understand that IRS tax-exempt recognitions are granted on the basis of the activities set forth in the Form 1023 or 1024 Application.
  • Make sure to notify the IRS through annual Form 990 filings of programmatic adjustments.  In the case of a radical departure from an organization’s original mission (as happened with the Clinton Foundation), a new IRS tax-exemption application may be required, particularly for assurance of continued tax-exempt status.
  • On the bright side, the tax and charitable regulation rules are generally good to follow, for successful nonprofit governance with integrity and peace of mind, our candidates’ apparent noncompliance notwithstanding. 

B. Reputation is Precious and Fragile

Final lesson, and one that applies uniformly to all of the above, is the fragile nature of a nonprofit organization’s reputation.  All of the alleged violations set forth above caused significant damage to the nonprofit organization’s good will, and in this case to the founders that started the organizations.  Because nonprofit organizations receive the special benefits of non-taxation and deductibility of charitable contributions for donors, they are almost always subject to increased scrutiny.  Nonprofit leaders do well when they carefully consider this public image perspective in their decision-making.