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The New York attorney general’s civil suit against the Donald J. Trump Foundation (the Trump Foundation) and its board of directors earned significant media attention when it was filed on June 14, 2018, contemporaneous with referral letters describing potential violations of federal criminal law sent to the Internal Revenue Service (IRS) and the Federal Election Commission. Subsequently, New York State’s Department of Taxation and Finance opened its own investigation into possible violation of state tax laws.

The civil suit, referral letters and investigation are reminders of the importance of compliance with applicable federal and state laws for charities. Private foundations, in particular, are subject to restrictive federal tax rules, many of which were relevant to the civil suit allegations; violation of a federal tax rule would implicate violation of a New York State statute as well.

Private foundations are charities that do not qualify as public charities. IRC §509(a). Generally speaking, they are funded by a sole individual (or a small group of individuals) and make grants to public charities rather than operate their own charitable programs. The Trump Foundation differed from most private foundations because contributions to it have come recently from third parties other than Trump and his family.

When a charity receives enough of its support from the public, it can qualify as a public charity rather than a private foundation. IRC §§509(a)(1) and (2) and 170(b)(1)(A)(vi). While the Trump Foundation’s support from third parties must not have risen to this level, public charity status would have relieved it of the burden of complying with some, but not all, of the rules described below.

Concern that private foundations could be more susceptible to abuse than public charities because of lack of public watchdogs led to restrictive federal tax rules described in IRC §§4940-4945. A comprehensive review of the rules is beyond the scope of this article, but broadly speaking they impose excise taxes in connection with (i) failure of a private foundation to satisfy a mandatory payout requirement, (ii) net investment income, taxable expenditures, jeopardizing investments and excess business holdings of a private foundation, and (iii) self-dealing transactions between a private foundation and a disqualified person. In addition, an excise tax is imposed on private foundations and public charities that make political expenditures as described in IRC §4955.

The civil suit allegations largely focused on two classes of violations: (1) political participation expenditures and (2) self-dealing transactions described in IRC §4941.

Political Participation

Charities (public and private) are prohibited from participating or intervening in political campaigns and IRC §4955 imposes excise taxes on political expenditures. IRC §4945 also imposes excise taxes, among other things, on private foundation expenditures made to “influence the outcome of any specific public election.” The civil suit alleges several instances of political participation by the Trump Foundation. While few donors may be as personally involved in a public election as Trump, many are inclined to make political contributions. Donors who are should make the contributions from personal funds, or fund alternative not-for-profit organizations which could appropriately use funds in this manner.


Many of the allegations in the civil suit describe self-dealing transactions, which broadly speaking encompass most all financial transactions between a private foundation and a disqualified person.

To understand self-dealing transactions, you must understand the definition of a “disqualified person” (described in IRC §4946). The definition includes an individual or entity that is (i) a substantial contributor to a private foundation, (ii) a manager of a private foundation, (iii) an owner of more than 20 percent of a corporation, partnership, trust, or unincorporated enterprise, which, during the ownership, is a substantial contributor to a private foundation, (iv) a family member of any individual described above or (v) a corporation, partnership, trust, estate, or unincorporated enterprise more than 35 precent of which is owned by individuals or entities described above. A substantial contributor includes individuals and entities that contribute more than the greater of 2 percentof the total contributions received by the foundation, or $5,000.

Self-dealing transactions (described in IRC §4941) specifically include any direct, or indirect (i) sale, exchange or lease of property, (ii) lending of money or extension of credit, (iii) furnishing of goods, services or facilities, (iv) payment of compensation or reimbursement of expenses and (v) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of the private foundation. Subject to limited exceptions, some of which are described below, the prohibition on self-dealing transactions is absolute.

It does not matter if the transaction was at fair market value, or even at below-market terms favorable to the private foundation. The absoluteness of the prohibition is one of the reasons the applicable federal tax rules can seem counterintuitive. It also is why self-dealing transactions are among the most commonly violated of the federal tax rules applying to private foundations. Unwitting actors easily trip them.

In the civil suit, the following self-dealing transactions are alleged. Trump Foundation assets were used to: (1) settle legal claims against Mar-A-Lago, LLC, LC and against The Trump National Golf Club—both companies owned directly or indirectly by Trump, (2) purchase a painting of Trump at a charity auction which then was displayed at an entity indirectly owned by Trump, (3) make a payment to DC Preservation League, a charitable organization, for promotional space which ultimately featured Trump International Hotels in the space and (4) pay a charity in satisfaction of a pledge made by Seven Springs, LLC, an entity indirectly owned by Trump. The transactions describe common self-dealing mistakes of private foundations. A few in particular help to illustrate the contours of the relevant rules.

In considering the payment to DC Preservation League, it is important to note that incidental benefits (like public recognition, or naming rights) received by a disqualified person do not, by themselves, constitute an act of self-dealing. Use of the promotional space as described with this contribution by the Trump Foundation likely could exceed a mere incidental benefit, however.

With respect to the payment in satisfaction of the Seven Springs, LLC pledge, private foundations should not satisfy pledges made by disqualified persons, regardless of whether the pledge is legally enforceable. (The IRS has also ruled that payment of the disqualified person’s pledge could be a taxable expenditure. See TAM 8534001.) A recent IRS Notice 2017-73 described regulations the IRS and Treasury are considering which would treat satisfaction of a personal pledge of a donor, donor advisor or certain related persons as an “incidental benefit” not subject to tax under the rules applicable to donor advised funds. Taxpayers may rely on the notice immediately as it concerns fulfillment of pledges. Therefore, donors who commonly enter into personal pledges but want flexibility to satisfy them from their private foundations may consider funding a donor advised fund for this purpose.

Another common self-dealing mistake of private foundations is sharing office space with disqualified persons. The Trump Foundation did share its office space with for-profit entities owned directly or indirectly by Trump. However, the use is not an alleged violation in the civil suit. Sharing office space is permitted where no rent is charged. A below-market rent, even though favorable to the private foundation, is not okay.

Reimbursement as Remedy and Penalties

The civil suit details that Trump reimbursed the Trump Foundation, directly or indirectly, and in some cases with interest, for some of the alleged violations. Reimbursement does not unwind the self-dealing transaction, but may reduce exposure to excise taxes.

Federal tax rules applying to private foundations are a minefield. A lot may be at stake if the rules inadvertently are tripped. The federal tax rules impose excise taxes for each individual violation. The particular penalty structure differs depending on the nature of the violation, and penalties increase if the violation is not corrected within a period of time. In the case of managers, the excise tax often is imposed on the manager only where the manager acted knowingly. This could prove an interesting element should the IRS choose to pursue any of the allegations in the civil suit. Trump was vocal in the past on alleged misuse of private foundation funds by other political candidates. An element of a manager “knowing” of a violation is awareness that the act could violate provisions of federal tax law. Trump’s prior statements could serve as evidence in this regard.


An allegation at the core of the civil suit is a claim that the board of directors failed to have proper board oversight and lacked internal controls, which is not necessarily a violation of federal tax rules. Appropriate governance structures often prove the first line of defense against inadvertent violations of federal tax rules, however, as they typically lead to more thoughtful behavior and reliance on counsel when needed. Private foundations should heed warning from the civil suit and implement governance and advisory structures to navigate the rules.

Christiana Lazo is counsel at Ropes & Gray.