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Sept. 20 — Recently uncovered expenditures from Donald Trump's private foundation likely constitute self-dealing, and could put the foundation's tax exemption at risk, several lawyers with experience in nonprofit tax told Bloomberg BNA.
The Washington Post on Sept. 20 reported several expenditures—including two where Trump allegedly used money from the Donald J. Trump Foundation, exempt under tax code Section 501(c)(3), to settle lawsuits involving his for-profit businesses—that add to growing public scrutiny of the foundation. Trump also allegedly used $5,000 from the foundation to buy advertisements for his hotel chain and used $10,000 from the foundation for a portrait of himself, according to the Post.
“There seems to be a pattern of personal use of the foundation's assets,” said Marcus Owens, a partner at Loeb & Loeb LLP, and a former director of the Internal Revenue Service's Exempt Organizations Division. “He has a range, it appears, of transactions that are quite suspicious from the standpoint of federal tax law and in fact are rather conclusive in a number of cases.”
Trump's spokeswoman didn't return Bloomberg BNA requests for comment. Federal law bars the IRS from commenting on cases involving individual taxpayers, a spokesman at the agency said.
The attorney general in New York, where Trump's foundation is registered according to its tax return, is investigating the allegation that Trump used foundation money to settle lawsuits, ABC News reported Sept. 20. It began investigating the foundation Sept. 13 following news reports that the foundation gave a $25,000 campaign donation to allegedly influence Florida Attorney General Pam Bondi. Trump paid the IRS a $2,500 penalty earlier this year for that donation, in line with Section 4955 (174 DTR G-1, 9/8/16).
Trump and any businesses in which he owns more than 35 percent can be considered “disqualified persons,” according to IRS regulations on private foundations. The IRS bars several transactions between a private foundation and a disqualified person. Those banned transactions include transferring foundation assets to benefit the disqualified person—like using foundation money to advertise Trump hotels, said Jody Blazek, a partner at Blazek & Vetterling LLP.
“I would hope that the IRS would be concerned about these issues,” she said.
A disqualified person can face an excise tax of 10 percent on the amount involved in the act of self-dealing, according to tax code Section 4941. If the self-dealing isn't corrected within the taxable period, the IRS can ratchet the tax up to 200 percent.
In a 2007 case, Trump's Mar-a-Lago Club in Palm Beach, Fla., faced $120,000 in unpaid fines. In a settlement, Trump sent $100,000 from the foundation to a charity, according to the Washington Post. But using foundation money to settle a lawsuit crosses the line, and the club should have paid the penalty if it was the guilty party, Owens said. In another case, the foundation made a $158,000 donation to settle a lawsuit involving one of Trump's golf courses, according to the Post.
“It’s pretty visible, it’s a pattern and it’s the sort of issue that the IRS is supposed to look at—they are charged with enforcing the tax law,” Owens said.
While the IRS can't impose a tax on the 2007 case because it falls outside the statute of limitations, it could use it as the basis for future enforcement action, Owens said.
The usual procedure for correcting self-dealing is for the self-dealer to pay an excise tax and to correct the self-dealing by repaying the amounts, Suzanne Ross McDowell, a partner at Steptoe & Johnson LLP, said.
But the IRS can take more severe action if necessary. If there is a pattern of violations and a foundation doesn't fix it, the agency can impose what Owens called “the death tax.” The IRS can terminate a private foundation's status and impose a tax potentially equal to its net assets if there are either “willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act),” according to Section 507.
The lawyers said the tax is very rare, and Owens noted he has only seen it applied once or twice in his 40-year career, because most organizations correct their behavior. Still, “the Trump foundation seems to be flirting with that tax,” he said.
But another tax lawyer said it is likely that Trump's foundation will have to pay excise taxes—if the IRS takes any action at all.
“There are very, very few cases involving the termination tax being imposed,” the lawyer said. “Quite honestly they’d be a lot more egregious that this.”
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