Phony and Corrupt

There is so much that is good about the charitable world. But simply calling something “charitable” does not make it worthy. Which brings me to two troubling and destabilizing trends: 1) the proliferation of phony charities, and 2) a growing lack of transparency.

These two trends amplify one another. When a phony charity receives its funding from unknown and unknowable sources, the result is a corrupt and murky organization that makes a mockery of charitable tax law and tarnishes the reputation of legitimate charitable organizations.

To demonstrate this corruption and dysfunction, and to highlight what I mean by “phony charities,” let’s turn to a heated February 8th  hearing of the House Judiciary Committee with then-Acting Attorney General Matthew Whitaker. If you follow the news, you may be familiar with the broader themes of that day, where Mr. Whitaker was called to testify before the House Judiciary Committee. The most widely reported moments of the hearing involved Democratic members grilling a recalcitrant and combative Mr. Whitaker about the degree of his involvement with the Mueller investigation.

But for those of us who care both about good government and the charitable world, an exchange between Congressman Jamie Raskin and Mr. Whitaker was particularly illuminating, depressing, and infuriating.

Congressman Raskin probed Whitaker’s recent tenure as the president of a 501(c)(3) public charity called the Foundation for Accountability and Civic Trust (FACT). Running FACT was an absurdly lucrative gig for Whitaker: He received compensation of $1.2 million over the course of three years. Leading the organization was hardly a heavy lift, given that Whitaker was the only full-time staff member. He also served on FACT’s board, along with only two other people – hardly a model for good nonprofit governance.

FACT does not feed the hungry, educate children, treat diseases, showcase the arts, save endangered species, or prevent environmental disaster. FACT is a public charity only in terms of its tax status.  Unlike the typical nonprofit CEO, who does difficult work for a small fraction of Mr. Whitaker’s salary, Whitaker was running a one-person shop that the average person would not even consider charitable.

In its activities, FACT is essentially a political organization with the ostensible mission “to strengthen the republic by demanding truth.” It purports to uncover corruption and to pursue openness, accountability, and ethical conduct within the political world. In practice, FACT is a partisan, conservative organization that exists mostly to expose and publicize real or imagined ethics violations by Democratic politicians.

The role of the executive director of FACT in large part seems to be to appear on cable news, denouncing liberal politicians and defending conservative leaders, while providing a veneer of intellectual neutrality. Cable news networks, desperate to fill 24 hours of air-time a day, choose to interview the executive director of the Foundation for Accountability and Civic Trust – a charitable group with a seemingly objective, noble mission. In fact, this enterprise exists to provide a respectable entrée for its leader to dish out his partisan point of view. For three years, the person filling that role and doing the dishing was Matt Whitaker.

How does an organization like FACT get public charity tax status? With distressing ease. Partly, that’s because of reduced IRS budgets. Staffing levels at the IRS have dropped steadily in recent years, and the number of employees in the Exempt Organization and Government Entities Division that oversees charitable organizations dropped by 27% between 2010 and 2017, according to a December 2017 article by Robert O’Harrow in the Washington Post. There’s no in-depth review of applications.

Moreover, for years Republicans in Congress have alleged that the IRS targets conservative nonprofits. Though most of these claims are unfounded, they have taken their toll on the IRS and its enforcement responsibilities. The Republican Congressional attacks have “completely neutered” the IRS, says law professor Philip Hackney in the Post article.

So nonprofits like FACT spring up like weeds, quickly given public charity tax status and then operating without much of any federal regulation, even though they function more like partisan political entities than like charities. And their funding sources? Well, in the case of FACT nearly all the operating money came from a single gift. In the video from the House Judiciary Committee, Congressman Raskin asks Mr. Whitaker where that gift to fund FACT came from. Mr. Whitaker said it was from a larger charity called DonorsTrust, a donor-advised fund sponsoring organization. Congressman Raskin pressed Mr. Whitaker on who the donor was who originally provided those funds to DonorsTrust. Mr. Whitaker responded (starting at 4:40 on the tape) that he had “no idea” who the donor was, and that there was no way of knowing.

In fact, there’s no way for us to know who funded FACT and underwrote Mr. Whitaker’s huge salary. But the chances that Whitaker didn’t know? I would say it’s zero.

And there’s one last twist to the story. Public charities need to pass what’s called the “public support test,” which shows that the bulk of their dollars come from many different sources. If, in fact, most of the money to fund an organization comes from one or two sources, then the organization is not considered a public charity but a private foundation, and it then is subject to more restrictive and less advantageous tax laws. We can assume that the money for FACT indeed came from a single source, but because it was laundered through DonorsTrust, a donor-advised fund sponsor, it is technically considered an anonymous gift from the many donors to DonorsTrust – that is, it’s classified as a donation from many public sources. This allows FACT to qualify as a public charity, rather than a private foundation.

It’s moments like this that leave me shaking my head, wondering about the correct spelling of the word, “Arghh!”

Those of us who urge reform of donor-advised funds sometimes receive criticism that we are imagining a problem that doesn’t exist, that abuses are rare and inconsequential. I agree that most donors set up DAFs for the right reasons, and most, of course, are not using them to launder their identity for political purposes or to fund phony charities. So, yes, the abuses may be fairly rare – but they are hardly inconsequential. After all, here we have a case where the chief law enforcement officer of the United States had been paid $400,000 a year to run a partisan “charitable” organization, and we have no idea of the identity of the person or business who made that possible. Would Mr. Whitaker as Acting Attorney General make special provisions to support the financial and political interests of his secret patron? You can draw your own conclusions. And should taxpayers have been subsidizing these exchanges through charitable deductions? Well, no.

Let’s compare the regulation of donor-advised funds to the laws governing automobiles. Most people drive cars safely. That doesn’t mean we don’t need speed limits and laws against driving south in the north-bound lane, or careening down sidewalks, or driving while intoxicated. Laws prohibit behavior that society understandably deems dangerous and not in the public’s interest. Donor-advised funds by comparison have for too long operated in an unregulated gray area, where anything goes, and bad guys are taking advantage to the detriment of the nonprofit world, democracy, and tax collection. This has to stop.

Copyright Alan Cantor 2019. All rights reserved.

 

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2 Comments. Leave new

Great article Al! I agree wholeheartedly.

Reply
Adam Creighton
February 26, 2019 8:25 pm

I hope that your criticisms are being heeded by policy makers, Al. Thank you for raising two important issues:
1) Oversight of 501(c)3 applications, and compliance with the laws governing their operation, is woefully understaffed. This is major concern for our democracy.
2) A Donor Advised Fund grant is somehow a work around for the public support rule (which, given #1, doesn’t seem at risk of being enforced anyway).

Maybe a possibility is to convince more nonprofits to host DAFs? It seems like an increasing amount of capital is being steered to them. Maybe adding financial fund management to more nonprofits’ core operations could be a way to capture these funds–and at the very least, collect the fees for managing them.

Maybe when absolutely everyone in the nonprofit sector is competing for the same donor dollars…maybe then it will get the attention of policy-makers.

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