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Exactly how much trouble is the Trump Foundation in?

Updated 1:16 PM ET, Tue June 19, 2018

(CNN) - Last Thursday, the attorney general of New York sued the Trump Foundation, alleging that the organization affiliated with the President of the United States and his family had broken a number of laws governing charitable groups. "As our investigation reveals, the Trump Foundation was little more than a checkbook for payments from Mr. Trump or his business to nonprofits, regardless of their purpose or legality," said Barbara Underwood, the Empire State's AG.

The Trump Foundation dismissed the lawsuit as entirely politically motivated, noting that it had given out more money ($19 million) than it had even received in donations.

Where does the the truth lie? And just how normal -- or abnormal -- is the way in which the Trump Foundation operated? I reached out to Marc Owens, the former director of the exempt organizations division of the Internal Revenue Service, for answers.

Our conversation, conducted via email and lightly edited for flow, is below.

Cillizza: Let's start simple: How odd is the way the Trump Foundation operates when compared to other similar-sized foundations?

Owens: Whether the Trump Foundation is compared to similar-sized, i.e. small, family foundations or it is compared to foundations of any size and type, my answer is the same: the Trump Foundation may be unique in the variety and scope of its transgressions of state and federal law, as well as the visibility of the transgressions.

Since the enactment of the private foundation excise taxes in the Tax Reform Act of 1969, the IRS has undertaken a variety of audit programs focused on federal tax law compliance. The results have not generally been made public, but some have, including a report released in 1990 of a statistically valid audit project of private foundations that involved a review of 882 organizations. The project, known as the "Grant-making Administrative Expenses Study," was required by Congress in the Deficit Reduction Act of 1984, and the study was made public as a result. In a concluding observation, the study noted, "Overall, we found that private foundations are in substantial compliance with the provisions of the tax laws that apply to them." None of the 882 foundations in the study exhibited behavior even distantly close to that of Trump Foundation as detailed in the New York attorney general's petition.

In fact, while my years at the IRS brought me into contact with many charities and foundations that had violated federal tax law, few approached the variety of the Trump Foundation's transgressions.

Cillizza: What is being alleged here? And what is the most serious charge?

Owens: The petition, because it was filed by the New York attorney general, focuses on state charity law violations, including violations of the duty of care, that is, a foundation's board has a duty to see that a foundation uses its funds for charitable purposes and not for private, personal benefit of board members.

The most serious state charge is essentially the basket of violations of the duty of care as reflected in the purchase of paintings to decorate Trump resorts, the use of foundation funds to settle lawsuit disputes between the Trump Organization and various third parties, the use of foundation assets to support Donald Trump's political campaign and, finally, the misreporting of the preceding on the foundation's federal Form 990-PF return, which New York law also requires to be filed with the New York attorney general. It should be noted, however, that the facts described in the petition have analogs in federal tax law, where the same transgressions that are outlined in the petition could trigger civil tax penalty excise taxes, revocation of tax-exempt status and potentially the application of the "termination tax" under section 507 of the Internal Revenue Code which authorizes the IRS in cases of repeated, flagrant violation of the rules for foundation behavior, to levy a tax equivalent to 100% of the assets of the foundation. Of course, the New York attorney general has asked that the foundation be dissolved and its assets transferred to other charities. Finally, the filing of knowingly false or inaccurate Form 990 federal tax returns has triggered criminal sanctions in at least five or six cases in the last 10 years. The charges in those case included conspiracy to defraud the United States, the making false statements on tax returns and the aiding and abetting of the filing of a false tax return. The penalties can include substantial fines and jail time.

Cillizza: What's the Trump defense?

Owens: In my opinion, there are no effective defenses that Donald Trump and/or his foundation can deploy to either the attorney general's petition or to federal tax charges. About the best he can do is plead ignorance of the law (generally ineffective with the sort of allegations being made) and to try to shift the blame to his accountants and attorneys (which will be factually difficult given Trump's personal involvement in many of the actions. It's unlikely, for example, that one of Trump's attorneys or accountants said that it is fine to contribute to the Florida attorney general's PAC or to buy a painting of himself and hang it in one of his clubs.)

Cillizza: How often do foundations get in trouble like this?

Owens: I am not aware of any other private foundation that has had the degree of involvement in a political campaign as the Trump Foundation has had; there are examples of foundations making grants for non-charitable purposes, foundation directors violating their fiduciary duties, foundation directors using foundation assets and funds for their personal benefit ("self-dealing"), but very few, if any, have demonstrated such a pattern of violation and of such variety. Harkening back to the closing observation in the report of the 1990 IRS audit project, the vast majority of foundations are considered by the IRS to be in general compliance with the tax law and state attorneys general would probably say the same thing about state charity law compliance.

Cillizza: Finish this sentence: "The most likely outcome of this case against the Trump Foundation is _____________." Now, explain.

Owens: In my view, the most likely outcome of the Trump Foundation matter is that a New York court will apply penalties and remove the current directors, but suspend dissolution of the foundation pending resolution of any federal charges (something that is required by New York law). With regard to federal issues, the IRS will have to decide whether to move for civil penalty excise tax sanctions against the foundation and its board or whether the criminal aspects will become a factor in Robert Mueller's investigation, thus leading to suspension of any federal civil tax investigation pending resolution of the criminal case. Of course, President Donald Trump could pardon himself and his family members for federal tax law violations, leaving the matter up to the New York courts to handle.


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