Anticipate charity by preventing poverty; assist the reduced fellow man, either by a considerable gift or a sum of money. . . .
-Moses ben Maimon (1135-1204), Charity's Eight Degrees
Tutors in the ways of the Internal Revenue Code can come from unexpected places as this week's news shows. One tutor is the trump, and the other, the Church of Jesus Christ of the Latter-day Saints. Each provides us with new insight into the working of Section 501 (c) 3 of the Code. It deals with tax exempt charitable organizations.
The Trump foundation was designated a 501(c)(3) charitable entity many years ago. Donors making gifts to the foundation were entitled to claim a charitable deduction on their income tax returns for the amount of the gift. The foundation, in turn, was required to use its funds for charitable purposes. As in many trump ventures, the way the law dictated that monies be used, and the way they were actually used, did not correspond.
According to testimony from the trump's former lawyer, a blatant example of the misuse of the Trump foundation money, was its purchase of a portrait of the trump painted by William Quigley. At an ArtHamptons gala, the last work of art being sold was a portrait of the trump. The trump wanted to be sure that the portrait would be the highest priced artwork sold at that auction. To achieve that result, the efforts of a fake bidder were employed who purchased the painting for $60,000. The fake bidder had no use for the portrait and the foundation repaid the purchaser, even though he was not a charitable entity. The trump kept the portrait.
The trump's fondness for his likeness was shown again in a lawsuit filed by the New York Attorney General in 2018. In settling that lawsuit the trump admitted to, among other things, permitting his foundation to pay $10,000 for a portrait of him that was turned over to him. The trump never tires, it would seem, of looking at himself not only in mirrors, but on walls. A Washington Post investigation set forth numerous other misuses of foundation assets.
None of the foregoing is meant to be didactic since lots of foundations have misused their funds in the manner of the trump foundation. Here is the didactic part of this piece insofar as the taxpayer is concerned.
As part of the settlement of the New York lawsuit, the trump agreed to pay a fine of $2 million to be paid to assorted non-profit groups. The trump claims that since the fine is being distributed to charities, he should be able to treat the fine as a charitable contribution. Although the imposition of the fine in this case decrees that the fine go to certain named charities, the trump logic, if approved by the court, may have broader application.
If a fine is used by the entity levying the fine to support governmental activities, activities that, if given directly to the entity, would entitle the donor to a charitable deduction, the miscreant should be able, the trump believes, to treat the fines as charitable deductions on the payor's tax returns. That would make fines imposed in criminal cases much less burdensome for defendants. Those more knowledgeable than I can decide whether that argument has any merit.
Shortly after reports surfaced of the trump settlement, 501 (c) 3 was again in the news in a big way. According to a report in the Washington Post, David Nielsen, a senior portfolio manager at the Mormon church's investment division, known as "Ensign Peak," left Ensign and became a whistleblower.
As an integral part of the Mormon church, Ensign is required to operate exclusively for religious, educational, or other charitable purposes. It is not permitted to accumulate wealth. According to Mr. Nielsen, for the last 22 years, Ensign has not used its funds for the required charitable purposes, but has instead permitted the funds to accumulate. Mr. Nielsen says the church now holds billions of dollars that it should have been distributing to charitable causes.
According to Philip Hackney, a former IRS official who teaches tax law, the complaint lodged by Mr. Nielsen gives rise to the question of whether Ensign deserves to retain its status as a tax exempt entity. He suggests that simply amassing an enormous sum of money and not spending it for charitable purposes "does not meet the requirements of tax law."
Church officials have a different take on its accumulated wealth. They say the billions it holds are for the "building of a prudent reserve for the future." They say that practice: "is a sound doctrinal and financial principle taught by the Savior in the Parable of the Talents and lived by the Church and its members." When teaching that, however, the Savior was unacquainted with the requirements of the Internal Revenue Code.
According to Mr. Nielsen, Ensign's president once said the massive funds that had been accumulated would be used in the event of the second coming of Christ.
As of this writing we do not know whether the Judge in the trump case will permit the trump to treat a two million dollar fine as a charitable contribution. And it will probably be many years before we find out whether the IRS agrees that a church can accumulate billions it is supposed to use for charitable purposes as a war chest in anticipation of the second coming of Christ.
Legal scholars will eagerly await an IRS ruling on the trump claim. The rest of us will eagerly await the Second Coming to see how the Mormons will spend the billions. Jesus may well be as surprised as the rest of us, to see what they have planned for Him.
