Inspired by recent news stories
Fred D’Up inherited a sizable amount of money, which he used to grow a business empire filled with plenty of successes and failures (including multiple business bankruptcies). Regardless of whether his businesses were doing well or not, Fred felt compelled to develop his image as a rich, powerful celebrity, and he was very good at it. In fact, he was so good at selling himself that polls showed that almost half of the country would vote for him as president notwithstanding his vulgar comments about, and abusive treatment of, women; his overt racism; his public mocking of the disabled; his disrespectful treatment of veterans and gold star families; his openly adulterous behavior; and his many lies.
Fred loved to exclaim how charitable he was but dubiously declined to identify any of the many charities he claimed to support with financial contributions. Investigative journalists were unsuccessful in finding any such supported charities. Fred explained he didn’t want to call public attention to his generosity. Yet, he shamelessly showed up uninvited to high profile charity events posing as a major donor and gave out fake million dollar bills. He also made very public pledges to donate to a number of charities that he failed to fulfill. Only on one occasion, upon four months of intense media fire, did he begrudgingly fulfill his pledge to a veteran’s charity.
Fred started the F. D’Up Foundation in the late 1980s. It was incorporated in New York and received from the IRS recognition of 501(c)(3) tax-exempt status and classification as a private foundation. Fred and three of his adult children served as board members of the Foundation. Fred also served as its president.
As would be expected, Fred initially funded the Foundation. But for the past eight years, the Foundation has relied entirely on others for funding its grantmaking. Sometimes, these others made donations to the Foundation, hoping to curry Fred’s favor. Other times, they gave money to the Foundation because they owed money to Fred and Fred directed them to pay the Foundation instead. This, however, was no act of generosity.
Fred did not want to recognize the payments as his own taxable income. Fred believed it was “smart business” to escape paying any taxes and freeload off of others paying for our country’s security, schools, roads, public health, and safety nets. But Fred didn’t realize that he would have to recognize as his own taxable income monies owed to him that he directed be paid to the Foundation. Tax laws logically treat such monies as first paid to Fred and then donated by Fred to the Foundation. For most taxpayers, recognition of such taxable income would be offset by a charitable contribution deduction in the same amount. However, there are limits to a taxpayer’s ability to take deductions. For someone like Fred, who reported a nearly $1 billion net operating loss (NOL) in the mid-1990s and was likely to have had NOLs in other years, a charitable contribution may offer no tax benefit (particularly if he is paying no federal income taxes).
Fred figured it would therefore be better to have some of the people who owed him money pay it the Foundation and improperly ignore such amounts as his own taxable income. He rationalized that he could then spend such money as president of the Foundation to buy things for himself or that benefited his businesses.
Fred chose not to understand the laws that require 501(c)(3) organizations to be operated to serve a public interest and not be operated for the benefit of private interests (private benefit doctrine). He also blatantly ignored the 501(c)(3) prohibition against political campaign intervention or electioneering, causing a payment to be made to an electioneering communications organization (which he explained as an accident) and making ceremonial checks containing a political campaign slogan for his own candidacy. And he disregarded the private foundation rules, including the prohibition against self-dealing (generally, private foundations are not allowed to engage in business transactions with their board members, subject to certain specific exceptions).
Fred considered the Foundation just another pocket from which he could spend money however he liked. When he saw a sculpture of himself, albeit with bigger hands, he didn’t think twice about having the Foundation buy it and display it in the lobby of a fancy hotel he owned. When someone challenged whether buying a $30,000 sculpture of himself to publicly display at his hotel was charitable, his representatives answered that his hotel was storing the sculpture generously without cost to the Foundation. If the IRS and the Attorney General scoffed at such claim, Fred would simply complain that they were nasty people on a politically motivated witch hunt. If that failed, he could always blame his lawyers. As long as he paid them enough, he was sure they would willingly take the fall.
When one of Fred’s companies was in litigation with another party, he caused his company to settle, and agreed as part of the settlement that the Foundation would make over $250,000 in payments to charities. Having the Foundation pay its monies to settle legal claims against one of its directors (or his companies) is for all practical purposes stealing from the Foundation. Instead of making the $250,000 in payments himself, Fred caused the Foundation to pay its monies, which are held in charitable trust to be safeguarded by its board of directors.
As a private foundation, the Foundation is required to engage in some grantmaking or other forms of charitable distributions to avoid a penalty tax for failure to meet its minimum distribution requirement. The Foundation’s biggest grant to date has been for renovating a monument located outside of Fred’s hotel. While it’s likely that Fred’s decision to make such grant was influenced by the potential it had for enhancing the value of his own property, such grant would probably pass muster. Fred could argue that such benefit was merely incidental to furthering a true charitable purpose. He could not make a similar argument to defend the Foundation’s purchase of expensive autographed sports memorabilia, which Fred displayed (stored) wherever he liked, in apparent disregard of the private benefit rules.
Sadly, the Foundation has caused many to view the philanthropic sector as corrupt. But Fred is an outlier. Who else does that?!