Private Foundations affiliated with certain political aspirants were a key point of criticism during the fall 2016 election cycle. A significant number of accusations arose from public inspection of the Forms 990 and 990-PF associated with these foundations. Windes derived several lessons for private foundations to take away from these political allegations.
Lesson 1: Avoid Self-Dealing
The Donald J. Trump Foundation received public scrutiny for violating the IRS rule against self-dealing. On its 2015 Form 990-PF, the organization reported that it engaged in self-dealing by transferring income or assets to a disqualified person. Any business transaction between a private foundation and an officer, director, substantial contributor or other disqualified person is considered self-dealing. Violation of self-dealing can give rise to taxes imposed against the organization and against the disqualified person. Paying self-dealing tax penalties are not only an inadequate use of a foundation’s charitable assets, but acts of self-dealing open the door for public scrutiny, as they reflect poorly on the organization’s governance and IRS compliance.
Lesson 2: Monitor Grant Funds
U.S. Representative Corinne Brown was accused of fraud for soliciting donations for a scholarship foundation that had used less than 0.2% of its funds for scholarships. Private donors had given more than $800,000 to the charity over a span of five years. Unfortunately, a large portion of the charity’s contributions were allegedly used for Brown’s personal financial gain. While it is unknown whether the private donors supervised their grants to this charity, private foundations can avoid giving grants to ineffective charities by monitoring the use of grant funds. IRS Publication 4221 requires that private foundations exercise expenditure responsibility by maintaining copies of any reports that demonstrate the grant funds are used for exempt purposes. It is important for private foundations to monitor grant funds to ensure their charitable contributions achieve the greatest possible impact.
Lesson 3: Update Board of Directors Annually
Betsy DeVos, now the United States Secretary of Education, was closely questioned during her 2017 congressional nomination hearing after being incorrectly listed as a director on the Form 990-PF of her mother’s private foundation. This private foundation had given grants to charities opposing certain Democratic positions, which became the focal point of criticism. This could have been avoided if the Form 990-PF had reported an up-to-date board of directors list on the current and prior-year tax return. Congress, the media, the public, and watchdog organizations are all readers of the Form 990-PF and can use the list of directors to make conclusions about a specific director’s political stance. This list should be updated each year the return is filed as a best practice.
Lesson 4: Abstain from Conflicts of Interest
Large foreign donations to The Clinton Foundation during the years Bill Clinton served as President and Hillary Clinton served as Secretary of State caused political opponents to accuse the Clintons of having a conflict of interest. The alleged conflict was that foreign donors to the foundation might have received political benefits from the Clintons. The IRS strongly recommends that foundations avoid transactions in which an officer, director, or trustee’s obligation to further the organization’s charitable purposes is at odds with their own financial interests. To abstain from conflicts of interest, private foundations should adopt a conflict of interest policy. The policy should ensure that when conflicts of interest arise, the organization has a process in place mandating that the affected individual advise the governing body about all relevant facts concerning the situation. Once the facts are presented, the policy should lay out appropriate consequences for the conflict (such as removing voting power from the conflicted person) that will allow the governing body to make objective decisions and protect the foundation against any liabilities that could derive from the conflict.
For more information or questions about this article, please see IRS Publication 4221 or contact Chérie Williams at cwilliams@windes.com or toll free at 844.WINDES.
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