During the Gilded Age of the late Nineteenth Century, affluent individuals and families in the United States popularized the idea of creating vehicles to distribute wealth for charitable purposes.[1] Today, the modern day charitable entity (“charity” or “charities”) is pervasive in American society.[2] From five-time Super Bowl-winning quarterbacks[3] to the Forty-fifth President of the United States[4], the heads of charities contribute billions of dollars each year to noteworthy causes through their organizations.[5] While this philanthropic activity can make a positive impact on society, charities must comply with federal regulations and state laws designed to prevent misuse of charitable funds by the charities’ directors.[6] Under federal tax laws, a charity receives tax-exempt status, and thus is required to apply all of its funds to support the charity’s mission.[7]
Directors of high-profile charities are often criticized in the media for misusing charitable funds[8] and are subject to investigations focused on whether a director has engaged in activities from which he or she personally benefited.[9] This concept, known as self-dealing, generally applies where a director uses funds from the charity in a transaction that benefits the director, her business or her family.[10] The current New York Attorney General, Eric Schneiderman (“Schneiderman”), has taken a tenacious approach in pursuing allegations of self-dealing by charitable directors within his jurisdiction.[11]
The Non-Profit Revitalization Act of 2013 (the “Act”), which Schneiderman authored, is an example of a legislative effort by New York State to curb self-dealing. Additionally, the Attorney General’s recent investigations into high-profile charities show the scrutiny that can be applied to a New York charity’s operations with respect to self-dealing.[12] One such case involved the Eric Trump Foundation, which held a number of charity events at a golf course in Westchester County owned by the Trump family (the “Trump Case”).[13] The investigation surfaced after $1.2 million in charitable funds was paid out to the Trump Organization (the holding company for Donald Trump’s business ventures) for use of the golf course, while Eric Trump, the director of his foundation, informed donors the course was being used free of charge and that almost all proceeds donated at the events would be distributed to benefit sick children.[14] Schneiderman’s office was also alerted to transactions where over $500,000 in charitable funds, pledged to St. Jude’s Children’s Research Hospital by the Eric Trump Foundation, was allegedly donated to other charities with connections to Trump family members or interests.[15]
As seen in the Trump Case, the prohibition on self-dealing focuses on transactions between the director of a charity and certain parties that may result in personal gain for the director. The Act addresses these issues by: (i) requiring that a charity have a conflict-of-interest policy in place, and (ii) prohibiting “related party transactions.”[16] A related party transaction occurs between the charity and an insider—a director, trustee, officer, key employee (or relative of such person)—of the charity.[17] Although the charity may be permitted to engage in a related party transaction if the directors determine that the transaction is “fair, reasonable, and in the organization’s best interest,” the charity is required to consider an alternative if a director (or other related party) is deemed to have a substantial financial interest in the transaction. [18] With respect to the Trump Case, the $1.2 million payout to the Trump Organization would be considered a related party transaction under the Act, and may violate the provisions on self-dealing.
In addition to the compliance requirements described above, the Act provides the Attorney General with broad authority to combat self-dealing through a range of measures, including, but not limited to: voiding related party transactions,[19] suspending a charity’s fundraising abilities,[20] reaching a cash settlement,[21] or, most severely, ordering the charity be dissolved.[22] A recent high-profile case where Schneiderman exercised this authority involved the Homeland Foundation, which was founded in 1938 by philanthropist Chauncey Stillman of the prominent New York City banking family (the “Homeland Case”).[23] In the Homeland Case, the directors authorized grants to organizations with a direct connection to the charity’s president, E. Lisk Wyckoff, his wife Elizabeth, and other directors of the charity.[24] Approximately $6 million in charitable funds[25] went to the private schools that the Wyckoff’s children attended, and to schools that E. Lisk Wyckoff had attended himself.[26] As a result of Schneiderman’s investigation of self-dealing in the Homeland Foundation, the charity’s directors agreed to personally repay $4.3 million in misused funds to the charity, and Elizabeth Wyckoff has been indefinitely banned from serving as a director of New York not-for-profit organizations.[27]
The Homeland Case saw Schneiderman exercise discretion by reaching a cash settlement with the directors rather than pursuing the charity itself, one of the many options at the disposal of the Attorney General in deterring self-dealing.[28] Regarding this case, Schneiderman stated: “The use of charitable assets for personal gain is both deplorable and illegal . . . When individuals charged with advancing a charitable mission instead treat a charity’s assets as a personal piggybank, my office will hold them accountable.”[29] Based on the Attorney General’s heightened enforcement of New York law on self-dealing, New York charities will likely have to consider the consequences of related party transactions for the foreseeable future.
[1] See Joanne Fritz, The History and Types of Foundations, The Balance (Nov. 9, 2016), https://www.thebalance.com/the-history-and-types-of-foundations-2502444.
[2] See National Philanthropic Trust, Charitable Giving Statistics, Individual and Family Philanthropy (2016), https://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/.
[3] Michael Wyland, Tom Brady’s Philanthropy Gets No Charity from Him—It Comes from Best Buddies, Nonprofit Quartlery (Apr. 24, 2017), https://nonprofitquarterly.org/2017/04/24/tom-bradys-philanthropy-gets-no-charity-comes-best-buddies/.
[4] David A. Fahrenthold, Trump Foundation Admits to Violating Ban on ‘Self-Dealing,’ New Filing to IRS Shows, Wash. Post, (Nov. 22, 2016), https://www.washingtonpost.com/politics/trump-foundation-apparently-admits-to-violating-ban-on-self-dealing-new-filing-to-irs-shows/2016/11/22/893f6508-b0a9-11e6-8616-52b15787add0_story.html?utm_term=.147585f18d9a.
[5] National Philanthropic Trust, supra note 2.
[6] See Foundation Source, What is a Private Foundation? (Last visited Sept. 20, 2017), https://www.foundationsource.com/learn-about-foundations/what-is-a-private-foundation/; State of New York Attorney General, Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013 (Apr. 13, 2015), https://www.charitiesnys.com/pdfs/Charities_Conflict_of_Interest.pdf.
[7] See Foundation Source, supra note 6.
[8] See Wyland, supra note 3; See also Fahrenthold, supra note 4.
[9] Natalie Olivo, NY AG Examining Eric Trump Foundation Alleged Self-Dealing, Law 360 (June 9, 2017), https://www.law360.com/articles/933312/ny-ag-examining-eric-trump-foundation-alleged-self-dealing.
[10] Fahrenthold, supra note 4.
[11] See Olivo, supra note 9; See sources cited infra notes 22-23.
[12] Id.
[13] Ian Simpson, New York Attorney General Looking at Eric Trump Charity’s Payouts, Reuters (June 9, 2017), https://www.reuters.com/article/us-usa-trump-foundation/new-york-attorney-general-looking-at-eric-trump-charitys-payouts-idUSKBN191007.
[14] Id.
[15] Id.
[16] News Alert by Kenneth A. Lefkowitz & Spencer L. Harrison, Partners, Hughes Hubbard & Reed, in N.Y.C., N.Y. The First Major Revision to NY Nonprofit Laws in 40 Years (April 2014), https://www.hugheshubbard.com/news/ealert-the-first-major-revision-to-ny-nonprofit-laws-in-40-years.
[17] Id.
[18] Id.
[19] Id.
[20] Jacob Gershman & Joshua Jamerson, Trump Foundation Ordered to Halt Fundraising in New York, Wall Street J. (Oct. 3, 2016), https://www.wsj.com/articles/trump-organization-ordered-to-halt-fundraising-by-new-york-attorney-general-1475517138.
[21] See source cited infra note 23.
[22] New York Office of the Attorney General, A.G. Schneiderman Obtains Court Decision Shutting Down Major Charitable Fundraiser for Defrauding the Public (May 3, 2013), https://ag.ny.gov/press-release/ag-schneiderman-obtains-court-decision-shutting-down-major-charitable-fundraiser.
[23] New York State Office of the Attorney General, A.G. Schneiderman Announces $4.3 Million Settlement with Former Leaders of New York City-Based Charity Over Misuse of Funds (Sept. 2, 2015), https://ag.ny.gov/press-release/ag-schneiderman-announces-43-million-settlement-former-leaders-new-york-city-based.
[24] Id.
[25] Additionally, these grants were in excess of the amount authorized by the Homeland Foundation’s charter. See supra note 22.
[26] Id.
[27] Id.
[28] See id.
[29] Id.
