Lessons from the Trump Foundation
Why your donor can’t use their donor advised fund to purchase tickets to your nonprofit event
The Trump Foundation has been in the news lately over some questionable uses of its funds, including settling legal matters related to Donald Trump’s companies and buying a huge portrait of Trump to hang at one of his resorts. Though this is an extreme example of misuse of funds, it is also an instructive example for nonprofit organizations.
What does this have to do with the average nonprofit? Sometimes our well-intentioned donors are not fully aware of IRS regulations that affect them. As fundraising professionals, sometimes we have to gently educate our donors on what kinds of gifts we are able to accept, so that we can all avoid angering the IRS.
With a continued increase in donor advised funds, more and more donors are using giving vehicles that subject them to different IRS rules than they faced as individual donors. This arises most commonly when it comes to events. Some donors would prefer to pay for event tickets using their donor advised fund or their personal foundation. Unfortunately, the IRS is not having it.
Both the Trump Foundation’s questionable use of funds, and your donor’s use of their foundation or donor advised fund to buy event tickets, are examples of “self-dealing”. Self-dealing means personally benefiting from a purportedly-charitable contribution. Charity, by its definition, is about benefiting people other than yourself, so you can see the issue.
Trump is facing the self-dealing issue as both a contributor and as a leader of his foundation. We'll break down the issues with self-dealing specifically pertaining to his status as a donor, but it's helpful to know that these same issues pertain to any foundation leader due to their leadership status.
When an individual donor gives their money to a private foundation or a donor-advised fund, that is considered a personal charitable contribution. Later, when the fund or foundation makes a gift to a nonprofit organization, that gift is legally from the fund/foundation, not the individual donor. This is why you don’t send a tax receipt to an individual donor when their fund or foundation makes a gift.
When the individual gave to their fund or foundation, they were potentially able to claim the full amount of their contribution as tax-deductible. If this same money is later used to benefit the individual donor, say by settling his lawsuits or buying a giant painting of him, then the donor has now benefited from a contribution that was supposed to be fully charitable.
Because attendance at your event involves a quid pro quo element (that is, the donors receive something of value in exchange for their donation), use of foundation or donor advised fund money to obtain this benefit would be considered to be self-dealing. If audited, they would be in hot water with the IRS.
And, no, smarty-pants: you can’t just split that event payment into the charitable and non-charitable portion, though that seems like a reasonable solution. Here’s a great long post from Patterson Belknap on why “bifurcated payments” are a no-go.