After a two-year investigation, the New York Attorney General sued President Trump and his three oldest children last week in State Supreme Court over “misuse of charitable assets” by their family-run charity, the Donald J. Trump Foundation. Attorney General Barbara Underwood asked the court to dissolve the Foundation, distribute its remaining assets to other nonprofits, and pay the State of New York $2.8 million in penalties and restitution for state taxes due from improperly reported transactions.
Calling the organization “little more than an empty shell” with no stated policy or supervision, the petition brought by Underwood concluded that the non-profit acted as a piggy bank to use tax-exempt funds to buy expensive auction items, advertise Trump Hotels, pay legal settlements, and finance campaign activities.
In addition to alleging abuses of state law, the New York investigation uncovered potential violations of federal tax and election finance laws. As those actions fall outside state jurisdiction, Underwood referred the relevant matters for enforcement by the Internal Revenue Service (IRS) and Federal Election Commission (FEC) respectively. The federal agencies are not required to follow up on the New York referral, but the strength of the case presented may add to the President’s growing list of legal problems. Marcus Owens, the former chief of the IRS's charity oversight division, told The New York Times, “This is not a good case to try to defend.” Not only did the President sign the foundation’s tax returns, Owens said, he “directly participated in the events that should have been accurately reported on the tax return.”
Suggesting there is a case for federal criminal charges of campaign finance violations, conservative attorney George Conway also tweeted that the New York evidence should be referred to the U.S. Attorney for the Southern District of New York, a part of the Justice Department. Conway is married to presidential counselor Kellyanne Conway, and the Conways are not the only ones whose interests may collide related to this matter. The New York Office of Attorney General requests that the federal agencies conduct investigations at odds with the President's interests.
New York’s IRS complaint is addressed to Acting Commissioner David J. Kautter (page 1). One of the alleged violations that illegally benefited the Foundation’s leadership, according to the Attorney General, is that the “Trump Campaign extensively directed and coordinated the Foundation’s activities” to “to influence the outcome of the 2016 presidential election” (page 2), using “deceptive or improper fundraising practices.”
On January 28, 2016, only days before the Iowa caucus, the Foundation held a “nationally televised fundraiser in Iowa to raise funds for veterans’ organizations . . . but in fact, the Iowa Fundraiser was planned, organized, and paid for by the Trump Campaign,” and “the website through which the public could get tickets ... listed a Campaign staffer ... for Donald J. Trump for President, Inc., as the event Organizer.” Consequently, “the Trump Campaign co-opted the benefit of a tax-free charitable giving process to it’s political ends”(page 7).
The Office of Attorney General also found that the charity’s less-than-charitable activities included repeated episodes of alleged “self-dealing” (page 8). For example, Trump’s “Foundation made a $158,000 payment to…a charitable organization” as a settlement after that charity’s founder made legal claims against The Trump National Golf Club because “he had been improperly denied a prize for shooting a hole in one;” the Trump Foundation made a $5,000 payment to the DC Preservation League, a charitable organization, ‘for promotional space featuring Trump International Hotels in charity event programs” and “the Foundation made a $10,000 payment to the Unicorn Children’s Foundation, a charitable organization, for a painting of Mr. Trump purchased at an auction…and displayed at Trump National Doral Miami.”
President Trump’s response was to tweet against Underwood’s predecessor (who recently resigned after numerous women made allegations of physical abuse):
“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!"
(This isn’t the first time a charity closely associated with a high-level government official has come under scrutiny. According to a Washington Post article in January, the FBI has been investigating the Clinton Foundation since 2015, looking at a number of donations and trying to determine if any are “linked to official acts when Hillary Clinton was secretary of state from 2009 to 2013.”)
Regardless of how the New York case goes forward, the referrals put the IRS and potentially the Justice Department in the awkward role of evaluating whether their boss broke tax laws. (The FEC is an independent regulatory agency but its Commissioners are appointed by the President.)
Over the last several years, the IRS has had to increasingly pick and choose its battles. Acting Commissioner Kautter has a second full-time job as Assistant Treasury Secretary. The agency’s criminal enforcement division has been deeply depleted, and the division overseeing charitable organizations has been systemically gutted through budget cuts, leaving it largely unable to perform audits. According to a 2014 Government Accountability Office report, the examination rate—the percentage of returns reviewed by the IRS—had fallen to 0.71% as of 2013. “This rate is lower than the exam rate for other types of taxpayers, such as individuals (1.0 percent) and corporations (1.4 percent).” The report recommended the IRS work more closely with state agencies that flag charities that seem to be breaking the law. The Trump Foundation referral to the IRS from the New York Office of Attorney General seems to fit the bill.