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Should the Alleged Political Activities of the Trump and Clinton Foundations Result in a Loss of Their Tax Exemption under Section 501(c)(3)?

Election year 2016 has something for everyone, including tax-exempt law practitioners. Along with the discussion of Russian hackers and pocket Constitutions have been charges against the Trump and Clinton Foundations involving whether either has violated the laws regarding their tax-exempt status. Many of the charges against both Foundations no doubt are politically motivated and have political and other legal (non-tax) ramifications. Those issues have been well-covered by the media over the past 12 – 18 months. The focus of this article will be on the implications of the allegations, if true, on the Foundations’ tax-exempt status.1

The Donald J. Trump Foundation received its Section 501(c)(3) determination in 1988 as a private non-operating foundation. According to the latest Form 990-PF posted on Guidestar, its board of directors consists of Donald Trump, three of his children and a business associate. None of the five board members are compensated. Total contributions to the foundation over the past four years have ranged from approximately $500,000 to $1,250,000 per year. Interestingly, all contributions appear to come from business associates of Donald Trump and his various business enterprises. The Trumps do not appear to contribute any funds to the Trump Foundation. Grants from the Trump Foundation are made to a variety of charitable organizations around the country, including, ironically, a $10,000 grant in 2011 to the Clinton Foundation. As is typical of many family foundations, the Trump Foundation appears to be operated by the people that run Trump’s business operations. Also, as is unfortunately typical of those situations, the “Trump organization” appears to have some difficulty keeping the business/personal pocket completely separate from the foundation pocket.

The Bill, Hillary and Chelsea Clinton Foundation received its Section 501(c)(3) status in 1998 as a public charity under Section 509(a)(1). Although it was initially established to build and operate the Clinton Library (and obtained its tax-exempt status on that basis), according to its 2014 Form 990, it has vastly expanded its activities to include, “convening businesses, governments, NGOs and individuals to improve global health and wellness, increase opportunity for women and girls, reduce childhood obesity, create economic opportunity and growth, and help communities address the effects of climate change.” The Clinton Foundation’s board of directors includes Bill and Chelsea Clinton, with Chelsea serving as its Vice Chair. Neither Clinton is compensated. Contributions in 2014 totaled nearly $175,000,000, and total assets as of December 31, 2014 were nearly $350,000,000. While donor information on Schedule B of Form 990 is not publicly available, the Clinton Foundation’s website ( shows a range of donors’ cumulative life-time contributions to the foundation.2 Many of the upper range donors include some of the usual foundation suspects – Bill and Melinda Gates Foundation, Rockefeller Foundation and the Saban Family Foundation, to name a few. Other major donors, however, have raised more than a few eyebrows and have led to charges that the Clinton Foundation is a part of a “pay to play” scheme to gain access to, and exert influence over, then Secretary of State, and now Presidential candidate, Hillary Clinton. Some of those donors include the Kingdom of Saudi Arabia and several prominent Saudi businessmen; the governments (or charities controlled by the governments) of Sweden, the Netherlands, Norway, Australia and Kuwait; Canadian businessman, Frank Giustra (connected to Uranium One, discussed below), and the Clinton Giustra Enterprise Partnership (a Canadian charity alleged to have “laundered” foreign government contributions to the Clinton Foundation) and Laureate Education, a for-profit operator of universities worldwide.3

So, what are the charges against the two candidates’ foundations?

Let’s start with the Trump Foundation. In 2013, the Trump Foundation made a $25,000 donation to a political organization called “And Justice for All” that supported the reelection of Pam Bondi, the sitting Florida Attorney General. AG Bondi is said to have made a personal solicitation of funds to Mr. Trump for her re-election campaign and, soon thereafter, $25,000 was paid out of the Trump Foundation. Shortly before the funds were solicited and paid, AG Bondi had announced publicly that her office may investigate the Trump University on charges that the defunct university had defrauded thousands of customers. Ultimately, no investigation was initiated by the Florida AG.

AG Bondi has claimed that she did not know the funds came from the Trump Foundation and has denied that the contribution had anything to do with her office’s decision to not investigate Trump University. Representatives of the Trump Foundation claim that it was all a mistake. The same accounts payable department within the Trump organization processes payments for both Mr. Trump and the Trump Foundation. When the request came to issue a check for $25,000 to And Justice For All, apparently a clerk thought the intended payee was “Justice for All,” a charity based in Kansas (and a previous grantee), and issued the check from the foundation’s account. Why the check was mailed to a Florida address, however, has not been explained.

Whether the Florida AG’s decision to not investigate was a quid pro quo for the $25,000 donation is subject to debate and is for others to decide. For tax-exempt lawyers, the issue is whether the Trump Foundation could lose its tax-exempt status for making a contribution to a political organization in support of a candidate for public office. The answer is technically, yes, but as a practical matter, that is unlikely to happen.

A Section 501(c)(3) organization may not “participate in or intervene in any political campaign.” There appears to be no question that And Justice for All, a Section 527 organization, was established for the purpose of funding AG Bondi’s reelection campaign. Given the absolute prohibition on political campaigning under Section 501(c)(3), the Trump Foundation, in theory, could lose its tax-exempt status. As a practical matter, however, the IRS generally gives organizations a second chance in circumstances where the organization acknowledges it made a mistake and sets forth a plan of action to ensure that the mistake does not happen again. Assuming the Trump Foundation follows these steps, and assuming there is no pattern of the foundation habitually flaunting the law, the IRS is unlikely to revoke the foundation’s tax-exempt status.

If it is proven that there was a quid pro quo, i.e., the Florida AG chose not to investigate Trump’s business in exchange for the Trump Foundation’s $25,000 payment, there would be an argument that the foundation violated the Section 501(c)(3) requirement to ensure that no part of its net earnings inures to the benefit of any private shareholder or individual. Again, while this argument exists in theory, it is unlikely the IRS would invoke the death penalty against the foundation for this violation.

One reason why the IRS is unlikely to seek revocation of tax-exempt status is that the Code provides the IRS with enforcement tools short of revocation.

For example, Section 4945(d)(4) specifically provides that any payment “to influence the outcome of any specific public election” is a taxable expenditure resulting in a 20% excise tax on the foundation and a 5% tax on foundation managers who knowingly and willfully approved the transaction. The amount of the taxable expenditure must also be paid back. Additionally, if it can be shown that Trump or his business received a financial benefit from the Trump Foundation’s $25,000 payment to AG Bondi, there would be a good case for assessing the 10% excise tax (5% on the foundation managers) under the self-dealing rules in Section 4941(a)(1) of the Code. Where applicable, the IRS typically seeks to impose the excise taxes under these provisions as a less drastic alternative to revoking the organization’s tax-exempt status.

Let’s now turn to the Clinton Foundation.

The main charges against the foundation are outlined in a letter submitted by a group of Republican congressmen to the IRS, FBI and FTC requesting that the federal agencies look into the Foundation’s activities.4

The first allegation is that the Application for Tax Exemption filed by the Clinton Foundation on Form 1023 (filed in 1998) only mentions the Clinton Presidential Library and not all of the other activities currently engaged in by the Clinton Foundation. The letter does not appear to argue that the current activities are inconsistent with Section 501(c)(3) or the Clinton Foundation’s broad articles of incorporation; rather, the argument is that the activities engaged in are impermissible because they were not disclosed on the Form 1023. This one’s easy. Section 501(c)(3) organizations are permitted to engage in activities not mentioned in the Form 1023, as long as the activities are good 501(c)(3) activities and authorized under their organizational documents. Assuming these factors are met, the only requirement is to report any new, previously undisclosed activities on the Form 990 for the year in which the activity took place. The Clinton Foundation’s articles of incorporation permits it to engage in broad charitable activities; its new activities appear to be activities that are permitted under Section 501(c)(3); and the Foundation disclosed the new activities as early as 2004.

The other two complaints, which appear to be more within the FBI’s bailiwick5, are certainly interesting, but only tangentially implicate tax-exemption issues.

One allegation has to do with a for-profit university operator named Laureate Education, which at one time operated over 80 institutions under the name, Laureate International Universities. Between 2010 to 2015, Laureate Education paid Bill Clinton $16.5 million to act as an honorary chancellor of its network of universities. During that time, Laureate Education is shown as having donated between $1 million to $5 million to the Clinton Foundation. In return, it is alleged, the U.S. State Department (then run by Secretary of State, Hillary Clinton), was instrumental in providing $55 million in USAID grants to the International Youth Foundation, an activity affiliated with Laureate Education.

The other allegation is that substantial contributions were made to the Clinton Foundation by those interested in the sale of Uranium One, an international uranium mining company with significant operations in the U.S., to the Russian government. The sale required approvals of various U.S. government agencies, including the State Department. In addition to the contributions to the Foundation, a $500,000 speaking fee was paid to Bill Clinton by a Russian investment bank promoting and facilitating the Russian government’s purchase of Uranium One. These payments, it is alleged, were made in return for the State Department’s approvals on the sale of Uranium One (and presumably for whatever other influence the Clintons could exert on the heads of the other relevant U.S. government agencies).

These “pay to play” allegations, if true, would have criminal implications to the parties involved, including the Clintons. So far, the emails being released from the infamous personal server suggest that the big donors were able to get special access to the Secretary of State, but there seems to be little direct evidence of a quid pro quo, i.e., the donors getting specific, tangible benefits from the U.S. government in exchange for the donations to the Clinton Foundation. Accordingly, without a “smoking gun” email or some other direct evidence linking the donations to government decisions, the FBI will have its hands full trying to build an indictable (let alone convictable) case based on the innuendo and circumstantial evidence. Nevertheless, in the unlikely event these allegations can be proven, what is the effect on the Clinton Foundation and its tax-exempt status?

If it can be shown that the Clinton Foundation conspired with its founders, Bill and Hillary Clinton, to provide U.S. government benefits to Laureate and the Russian government in return for cash contributions to the foundation, the IRS may be able to revoke the foundation’s 501(c)(3) status on the ground that it engaged in acts that are illegal or contrary to public policy. Revocation based on illegality or violation of public policy is rare, but not unheard of (the Bob Jones University decision involving racial discrimination comes to mind). The greater hurdle, however, would be actually proving that the Clinton Foundation, through its officers and directors, actively conspired to break the law. A finding that the foundation was merely the place where the Clintons directed the payments be made in exchange for providing government benefits (i.e., a passive participant in the crime) is unlikely to be sufficient basis for revocation of tax exemption.

Additionally, if it can be shown that the Clintons received a financial benefit from the contributions directed to the Clinton Foundation, there could be a case for revocation based on inurement or private benefit. However, unlike the Trump situation where money was paid by the foundation to a third party allegedly to provide a personal benefit to Trump, there has not been an allegation that the Clintons derived any financial benefit from the Clinton Foundation. Without a finding of improper financial benefits provided to the Clintons (or others), there would be no basis for revocation based on inurement or private benefit, or even the assessment of excise taxes under the intermediate sanctions rules.

The tax case against the Trump Foundation is clear and straight-forward. Its $25,000 payment to a political candidate, whether or not some quid pro quo for benefits can be shown, on its face can be grounds for revocation of tax-exempt status. Also clear, and the more likely result, is that the payment constituted a taxable expenditure subject to IRS excise taxes under Section 4945.

The tax case against the Clinton Foundation is weak to say the least. The argument that the foundation cannot engage in activities not disclosed on its Form 1023 has no merit under the tax law. The arguments regarding revocation based on illegal activities or the provision of personal benefits depend on facts that either do not exist or would be nearly impossible to prove.

The political fallout, however, appears to have fallen most heavily on the Clintons and the Clinton Foundation. While the Trump Foundation’s issues now get a moderate level of attention, the Clinton Foundation continues to make front page news. Much of its (and the Clintons’) political troubles may be well-deserved, as they stem from their failure to abide by the basic admonition we give to our nonprofit clients: do your best to avoid even the appearance of a conflict of interest. Or, as the New Yorker asked in an article on the Uranium One controversy: “Are the Clintons correct in saying that there is an attack machine geared up to go after them? Of course. But why have they made it so easy?”6

  1. For those interested in a much more detailed discussion of the tax issues, I recommend you read the articles on this topic by LSU Law Professor, Philip Hackney, originally posted on The Surly Subgroup Blog (
  2. The Clintons are not listed as donors in any category, although recent news reports related to the release of their personal tax returns indicate that they donated nearly 10% of their income each year to the Clinton Foundation.
  3. Bill Clinton recently announced that should Hillary win the election in November, he will resign from the board and the foundation will no longer accept foreign or corporate donations.
  4. The letter, dated July 15, 2016, can be found on the website of one its authors, Rep. Marsha Blackburn.
  5. The FTC declined to investigate citing lack of jurisdiction.
Posted in Tax Exempt, Tax Laws.