The New York Attorney General's (AG) two-year investigation and ongoing enforcement action against the Donald J. Trump Foundation (the Trump Foundation or Foundation) has resulted in the organization's widely publicized downfall. Most recently, the Trump Foundation agreed to dissolve and distribute its remaining assets under the supervision of a court. Now, the New York AG's office is seeking to recover $2.8 million in restitution, plus additional penalties, due to the organization's "shocking pattern of illegality," which included, among other things, the Foundation's unlawful coordination with Mr. Trump's 2016 presidential campaign, and the Foundation "functioning as little more than a checkbook to serve Mr. Trump's business and political interests."1
At the core of the New York AG's case are the serious allegations and findings that the directors and officers of the Trump Foundation consistently put their own, personal self-interests ahead of the interests of the organization. The New York AG's investigation found that the Foundation's board willfully participated in several self-dealing transactions, with its directors acting with a complete disregard to their fiduciary duties, which were owed to the organization. The New York AG says that this "pattern of persistent illegal conduct" by the Trump Foundation's board and officers, resulted in the organization's failure to satisfy even the most basic legal requirements needed to function within its lawful purposes under IRC §501(c)(3).2
Because of the severity and gravity of the many illegal wrongdoings by the Trump Foundation's officers and directors, the New York AG is still seeking to enjoin Mr. Trump and his children from serving as a director of any New York nonprofit for up to ten years.3 This is a significant personal penalty to bring against the Trump family, and one, that if successful, would leave Mr. Trump "in the unusual [and embarrassing] position of not being able to serve on the board of his own post-presidential foundation, should it be set up in New York."4
While the Trump Foundation's legal woes remain ongoing, we can already see the real consequences and steep penalties that can result from a board's poor governance and oversight of a nonprofit organization. Below are the top dos and don'ts for running your own private foundation, learned from the illegal and other egregious errors that led to the Trump Foundation's termination.
Don't | Do |
Use the charity to advance the self-interest of its
executives or directors. |
Act in furtherance of the foundation's charitable
purposes and mission, and annually payout 5 percent of the
foundation's assets to qualified charities. |
Don't | Do |
Engage in self-dealing. |
Establish clear guidelines and internal procedures to
ensure the foundation does not engage in any self-dealing
transactions. |
Don't | Do |
Use foundation funds for lobbying or political
activities. |
Familiarize yourself with federal, state, and local
lobbying rules to ensure the private foundation refrains from
engaging in all prohibited political and lobbying
activities. |
Don't | Do |
Skip annual board meetings. |
Hold at least one board meeting annually, and require
the foundation's board to periodically review and approves all
of the foundation's expenditures and activities. |
Don't | Do |
Assume your foundation is immune from making errors or
unintentionally engaging in illegal activities. |
Create internal and external review processes to prevent
and catch clerical errors and intentional (or unintentional)
illegal activities taken by the foundation's staff, board, or
officers. |
Don't | Do |
Lie in any filing to the IRS (or other regulatory
agency) about the foundation's activities, assets, or
involvement with other groups and organizations. |
Work with financial and legal experts to correctly file
all required paperwork to the IRS on an annual basis, and confirm
the foundation's board of directors understands and affirms all
statements as true before they sign any legal forms on behalf of
the foundation. |
Don't | Do |
Solicit funds, unless you are already registered with a
state charity bureau to do so. |
Work with counsel to confirm that you are abiding by all
local laws and rules, including required state registration to
solicit funds within that state. |
Footnotes
1 Press Release, New York State Office of the Attorney General, Letitia James, A.G. Underwood Announces Stipulation Dissolving Trump Foundation Under Judicial Supervision, With AG Review of Recipient Charities; AG Underwood's Lawsuit Remains Ongoing (Dec. 18, 2018) (quoting Attorney General Barbara D. Underwood); see also New York v. Trump et al., case no. 451130/2018, in the Supreme Court of the State of New York, County of New York.
2 M. Peregrine, Corporate Law & Governance Update: January 2019, The National Law Review (Jan. 20, 2019).
3 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018); E. Orden, Trump Foundation Says NY AG's Comments Show Lawsuit is Political, CNN (Feb. 11, 2019). See also M. Peregrine, Corporate Law & Governance Update: January 2019, The National Law Review (Jan. 20, 2019), ("A November 23, 2018, decision sustained all but one of the causes of action (relating to a preliminary injunction), and the parties entered into a stipulation relating to the dissolution of the foundation on December 19, 2018. According to published reports, the attorney general continues to pursue foundation officers and directors (the president and his children) on the fiduciary breach, waste of assets and related allegations.").
4 S. Goldmacher, Trump Foundation Will Dissolve Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018).
5 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).
6 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).
7 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality',NY Times (Dec. 18, 2018).
8 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).
9 B. White, Avoiding Conflicts of Interest and Self-Dealing for Family Foundation Boards, National Center for Family Philanthropy (May 2013).
10 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018); T. Snell, Think the Trump Foundation Case is Over? Think Again., CNN (Dec. 19, 2018).
11 New York v. Trump et. al., case no. 451130/2018, Supreme Court of the State of New York, County of New York (Manhattan), Petitioner's Verified Petition (as filed June 14, 2018) at 13.
12 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).
13 A. Ebeling, Foolproof Foundations: How to Stay on the Right Side of the IRS, Forbes (Dec. 14, 2016).
14 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018).
15 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018); D. Fahrenthold, Trump Boasts About His Philanthropy. But his Giving Falls Short of His Words., Wash. Post (Oct. 29, 2016).
16 A. Ebeling, 10 Private Foundation Do's and Don'ts, Forbes (Dec. 14, 2016).
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