Originally published on Forbes.com.
So Friday I wrote that I think the New York Attorney General complaint against The Donald J Trump Foundation and the frenzied response to it is way out of proportion. Naturally, that got my facebook buds a bit upset with me. One of them directed me to the front page of the New York Times. I love the New York Times, but when it comes to its tax coverage, don’t get me started. Surprisingly though there was a piece by somebody who knows what he is talking about. Philip T. Hackney wrote an opinion piece titled Why the I.R.S. Should Go After Trump.
As a former attorney for the chief counsel of the I.R.S. who specialized in nonprofit organizations, I believe Mr. Trump is also criminally liable for his actions. If I were still at the I.R.S., based on the lawsuit, I would make a criminal referral, on charges of tax evasion or false statements on a tax return , or both.
This is not a sudden flash of insight on the part of Professor Hackney. Back in October 2016, before Donald Trump was even President-Elect, he wrote for The Surly Subgroup – Trump’s Abuse of Trump Foundation – Criminal Tax Implications
I think there is enough evidence to open a criminal investigation into his activities. Nevertheless, a criminal prosecution is highly unlikely for both political reasons and issues of proof (ignorance of the law is a defense). Still, I think the IRS has a duty to open an investigation under the egregious set of facts I lay out.
I decided to give Professor Hackney a call. Since he answered with “Hi this is Phil”, I’m going to go with that. Phil and I had a really nice chat. We are both hardcore tax geeks. He of course is really elite. IRS Chief Counsel’s office and now a law school professor. I on the other hand spent my career in large local then regional public accounting. I did have the distinction of being one of the guys who actually looked things up, which is what sparked my writing career.
That difference in background accounts for a difference in perspective, even though we understand each other’s perspective. As we discussed the issue, Phil kept hammering on what it means for money to be in a foundation. I’m going to tell you a story that I think illustrates the difference dramatically, although I can’t rule out that you will find it fairly dumb or not get it. It is about my seminary days.
It’s Just Bread
From September 1975 to June 1976, I lived in a seminary. I was not studying for the priesthood. The Chicago Theological Seminary for reasons I was not privy to had a lot of extra dormitory space. It was used by the University of Chicago to house graduate students. Quite a few were divinity school, but the balance was a random mix of graduate students. I was the only budding historian (I was nipped in the bud). It was the most fascinating group of people I ever hung out with- or close. Somehow one of the seminarians got me going to University Church. It was the first time I had attended a church that was not Roman Catholic. And after a couple of weeks, I got an incredible shock.
They didn’t have communion all that often, maybe once a month. At St. John’s in Fairview, NJ it was twice a day, except Sunday when it was six times. Well, that wasn’t shocking. And it was regular bread rather than this special wafer that was baked by monks or something and was unleavened whatever that meant. That wasn’t shocking either. Here is the shocker. After the service, there was coffee hour with snacks. And there on the snack table was the leftover bread from the communion service.
If you can’t see why that is shocking you probably can’t reel off “Ad Deum qui latificat, juventutum meam” like an altar boy in 1962 could. The consecrated hosts were locked up in a tabernacle on the altar which was separated from where people sat by an altar rail. They would kneel at the altar rail and have the host placed on their tongue by the priest who was allowed to actually handle it. We would stand there holding this gold-coated thing under their mouths in case a crumb dropped (We were told to be careful not to whack them in the throat). There was a lot more to it. If you want to get into the theology of it, google transubstantiation.
Here is the thing. In the legal view that Phil was putting out putting money into your private foundation is an act of transubstantiation. It is now holy money to be used for holy purposes. Doing anything else with it is as bad as breaking into the church at night to go into the tabernacle to get hosts to use in a Black Mass. Think of the Attorney General as being the bishop or maybe even the inquisition, although nobody expects that anymore. And you can’t just say “Oh, I didn’t know that was the communion bread. I’ll go get another loaf for you.” There need to be consequences. Serious consequences.
Cash Is Fungible
In the real estate world, it is generally not like that. For much of my career, I did audit and tax work for low-income housing projects. It would be an exaggeration to say that it was fiendishly complicated, but it was complicated enough that many of the people involved did not understand or care about the structure. The financing agencies, HUD or MHFA, considered the project to be an entity apart from its owner. The owner was a limited partnership. In our case, the limited partners were mostly dentists. The general partner was a corporation without much substance. Its sole purpose was to be the general partner of that partnership. The general partner was owned by a community development corporation (a special type of not for profit). There were cash inflows and outflows related to syndication, construction financing, permanent financing, and operations.
Our task was to sort all that stuff out and create the required reports including tax returns. The other people involved had a housing project to build and run and had to make a living themselves. There were bills to be paid. Often more bills than money to pay them or some bills had a higher priority and were due before the pot of money designated to pay them. In the end, it would often get sorted out on green analysis paper with a lot of journal entries referring to “Due from sponsor” or “Due to general partner”.
As I was coping with all of this I received some insight from people who had been in the business a long time. Once, I was asking a controller for a developer where the development fee, the general partner guaranty fee and the asset management fee were recorded. He sat me down and said “You know. Those are just names for the money that they get to take out of the deal.” A guy who ran a management company once said to me wistfully “It was a lot better in the old days, before there were all these audits. The strong projects could help out the weaker ones.” Those projects might have had the same sponsor who owned each of the general partners, but they likely had different sets of limited partners. Of course, they might not care since what they were interested in was tax savings, but that is another story.
The Most Scandalous Trump Foundation Transactions
Phil directed me to coverage of Trump’s charitable giving by David A. Fahrenthold, which I had missed because up till now I have been too cheap to subscribe to the Washington Post. I ended up springing for his book – Uncovering Trump – The Truth Behind Donald Trump’s Charitable Giving. I want to write a book like that some day. String together six or seven of my blog posts and write an introduction with some anecdotes about my trials and tribulations. Probably getting a Pulitzer Prize helps. I did like the book, by the way.
The really nasty older transactions that people think Trump should get in a lot of trouble for are a political contribution, lawsuit settlements and two paintings that ran through the foundation.
In most cases, political contributions were paid out of Trump’s own account. But, in this case, that didn’t happen. In March, Trump’s chief financial officer told The Post that a mistake occurred when an accounting clerk — following office protocol — looked in a book that contained a list of all official charities. The clerk’s standing order from Trump was that, if the payee was listed in this book of charities, the check should be paid from the Trump Foundation, not from Trump’s own account.
That is really horrible not for profit governance, but it is hardly shocking and no indication of a criminal mastermind at work. It shows a Donald Trump not trying to get away with something, but being kind of sloppy.
The painting and the lawsuit settlements look a lot similar, only they are even dumber. If I was doing the tax planning for those transactions, I would have wanted the business entities which were involved in the settlements to make the payments to get an ordinary business deduction. There was nothing gained by using dollars that had cycled through the Foundation. And it is hard to see what was gained by shifting income to the Foundation rather than recognizing it and donating it.
Finally, the paintings and the lawsuits and the political donation stack up to less than $500,000. If you want to see how a New York billionaire does tax scamming on a grand scale, take a look at Stephen Ross who tried to get a $30 million deduction for going about $3 million out of pocket to the University of Michigan. Or maybe dig into Donald Trump’s conservation easement deductions. There is some real money there – $60 million as noted by Fahrenthold (and me too, by the way).
The paintings, lawsuits, and political contributions can be seen as so horrible, only because of the “Foundation money is holy” belief. And admittedly that is the law. Remember Reilly’s First Law of Tax Planning – It is what it is. Deal with it,
All Pledge No Check
Farhenthold does a great job of highlighting Trump’s aggrandizing of himself, but in some ways that is a little like shooting fish in the barrel. Like the “all hat, no cattle” expression that Chuck Schumer mangled, Farenthold shows us the “All pledge, no check” theme of Trump philanthropy. If you look, though you will see this is consistent with what Trump says about himself in the greatest business handbook since Extraordinary Popular Delusions and the Madness of Crowds – The Art of The Deal
The final key to the way I promote is bravado. I play to people’s fantasies. People may not always think big themselves, but they can still get very excited by those who do. That’s why a little hyperbole never hurts. People want to believe that something is the biggest and the greatest and the most spectacular. I call it truthful hyperbole. It’s an innocent form of exaggeration—and a very effective form of promotion.
Mixing The Campaign With The Foundation
The way the campaign interacted with the foundation in raising money for veterans is the more current issue. It is hard to see how that is going to go anywhere given the way the IRS has been driven from dealing with the interaction of not for profits and politics. That is what is at the heart of the interminable IRS scandal, that has effectively neutered the agency. It would be really tough to make a case for putting resources into untangling that given that it is a fairly unique occurrence. Also, as with the lawsuits and the paintings, it is hard to see what was gained by involving the foundation. The IRS needs to leverage its meager enforcement resources to discourage people from doing things that harm tax collection. I really don’t think you have to worry about this particular travesty being repeated. Paul Streckfus of EO Tax Journal wrote me:
As I’ve indicated the IRS will not want to touch this case but it sets a horrible example that others can use as an excuse for their actions. Because there is little or no IRS enforcement of the more sophisticated tax dodges in the EO area, the standards of practice keep going down. I keep hearing stories of lawyers losing clients because they find someone who will approve pretty much anything they want to do. As Trump might say, sad.
The Lesson
The heart of the AG complaint is not the specific actions, but the poor governance of the Donald J Trump Foundation
The Foundation’s directors failed to meet basic fiduciary duties and abdicated all responsibility for ensuring that the Foundation’s assets were used in compliance with the law
The Attorney General’s Investigation found that the Foundation is little more than an empty shell that functions with no oversight by its board of directors. The Foundation, which does not have any employees, delegated its operations to the accounting office of the Trump Corporation, Inc., a management company owned by Mr. Trump and located at 725 Fifth Avenue. The Trump Corporation supplies back office services to the several hundred Trump business entities that make up the Trump Organization. The accounting staff’s responsibilities for the Foundation are the same as its responsibilities for the businesses in the Trump Organization.
I asked one of the best not for profit CPAs I know for thoughts on the violations.
I do not see a problem with the foundation. I am more of an outcomes based person. If the money is going to charity I don’t care very much about how.
It does highlight the need for good governance that all nfp’s need. Multiple non-related board members is a good place to start. Documentation of meetings is a close second.
With the proliferation of nfps in this country my experience has been that founders are more akin to entrepreneurs than mission driven warriors. Thier ego is imense. When I make suggestions to merge they balk and claim no one does what they do!
Trump may be many things but I don’t see this PF as a criminal enterprise just a poorly run one.
Reilly’s Fourth Law of Tax Planning – Execution isn’t everything but its a lot. If the two Donalds, Eric and Ivanaka had sat with CFO Allen Wessellberg once a year and had some minutes typed up about the approved donations for the coming year, that would have defused a significant part of the AG complaint. When donations not on the list came up, there could have been an email vote. There is a decent chance that would have prevented the political contribution. Somebody should have been following up on acknowledgments which would have uncovered the problems with the paintings. Why did it not run that way? Because it is not Trump’s style. Again from Art of the Deal.
To me, committees are what insecure people create in order to put off making hard decisions.
And of course a board would have wanted advice on coordinating with a political campaign. Also not Trump’s style.
I like consultants even less than I like committees.
So what do you do if that is your style? What you do is not have a foundation. Foundations are a bad idea unless you commit to meticulous compliance.
Where Will It End?
Although Phil has moved me a little on the gravity of what the New York AG has on the Trump players, I’m still not convinced that there is something worth pursuing. If Trump got away with something, it is not much. You have to really internalize that sense of the sacredness of not for profit money to get really excited about it, making me think that the frenzy is a possible instance of Trump Derangement Syndrome. Of course, there is that measured response from President Trump where he acknowledges the errors and suggests that the AG may be going a little too far.
The sleazy New York Democrats, and their now disgraced (and run out of town) A.G. Eric Schneiderman, are doing everything they can to sue me on a foundation that took in $18,800,000 and gave out to charity more money than it took in, $19,200,000. I won’t settle this case!…
— Donald J. Trump (@realDonaldTrump) June 14, 2018
That should raise the level of discourse.
Irresistible Personal Note
I think this is the first time I have bragged about flunking out of the University of Chicago on this platform. The irresistible detail is that the Chicago Theological Seminary dormitory where I lived was half a block from the spot on which Harry met Sally for the very first time and roughly the same era. I love that movie.
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