Finance Committee Tax Staff Review of ACORN Tax-exempt Status

TO: Senator Grassley
FROM: Tax Staff
RE: Review of ACORN Tax-exempt Status
DATE: September 22, 2009

ACORN and IRS Responses

ACORN, through its attorney, provided three responses to your letter of October
25, 2006. ACORN’s response was essentially that it was not a tax-exempt
entity.

After receiving ACORN’s first response dated November 3, 2006, you wrote to
the Internal Revenue Service on November 8, 2006. IRS responded on
December 19, 2006. Most of the response and supporting materials provided by
the IRS are protected under section 6103. IRS confirmed that ACORN is a
taxable entity and that the ten organizations listed in your letter were tax-exempt.
IRS indicated that it would continue to look for additional affiliated organizations.
We have not communicated with IRS about ACORN since receiving that
response.

Staff Work

Shortly after receiving ACORN’s third response, we determined that ACORN did
not intend to comply with your requests for information. We had consulted with
the Chairman’s staff about issuing a subpoena for the requested information.
Because the U.S. Attorney’s office was conducting an investigation of ACORN on
the issue of voter registration fraud, a decision was made not to pursue the
subpoena at that time.

Since then, we have researched over 100 organizations identified by various
sources as affiliated with ACORN. We began with a list published by the
Employment Policies Institute in its report “Rotten ACORN: America’s Bad Seed”.

We then searched Guidestar.org and all online state corporate records
databases, except Maine, New Jersey and Oklahoma because these states
either did not have online records or charged fees. We also searched for entities
on Guidestar.org using addresses affiliated with ACORN. Finally, we conducted
general internet searches for organizations not found on Guidestar or in state
corporate records databases.

Our research indicates that ACORN’s response that it is not tax-exempt is
disingenuous and misleading. Millions of charitable dollars from individuals,
foundations and federal, state, and local governments flow to ACORN and its
related taxable entities from ACORN-affiliated charitable organizations. A memo
prepared for ACORN executives, which was provided to us anonymously,
confirms the existence of numerous charitable organizations. The memo dated
June 19, 2008, details issues regarding governance and commingling of funds,
among other things. This memo was prepared by the same attorney who
represented ACORN in responding to your letter.

Tax Status of ACORN and affiliates

Our review of Forms 990 available on Guidestar.org confirmed that 42 taxexempt
organizations have some affiliation with ACORN. Through our review of
these Forms 990 as well as our state records and general internet search, we
identified 52 other organizations with ties to ACORN.1

Many of these 94 organizations are located at one address: 1024 Elysian Fields
Avenue, New Orleans, LA 70117. The signage on the building identifies
ACORN – Local 100 SEIU as the occupant. See attached picture downloaded
from the internet. The number of organizations listed at this address would make
this building the equivalent of Ugland House for tax-exempt organizations. This
address is used on Forms 990 for 31 of the 42 tax-exempt entities. For the other
52 organizations, this address is the mailing address for 32 and the domicile
address for 36.

Another nine tax-exempt organizations are housed in one of two buildings in
Brooklyn, NY or at another New Orleans address, 2609 Canal Street. Four of the
five addresses that were featured in the investigative videos released in
September 2009, were not found in our research.

The 52 taxable entities include Citizens Consulting, Inc. (“CCI”), Elysian Fields
Corporation, Inc, Elysian Fields Partnership, and People’s Equipment Resource
Center. The primary shareholders and partners of these organizations are the
Rathke brothers, the original founders of ACORN. We understand that CCI
provides consulting services to many, if not all, of the ACORN family of
organizations. We also understand that the Elysian Fields entities actually own
the ACORN buildings in Louisiana, so all the organizations situated there may be
paying rent or other compensation to those for-profit entities. The People’s
Equipment Resource Center is apparently an equipment and/or administrative
services entity whose primary client may be ACORN entities.

Interestingly, we were not able to locate information on the Association of
Community Organizations for Reform Now (ACORN) which is apparently the
taxable parent organization. ACORN is presumably the taxable entity engaging in
the political and lobbying activity.

Review of ACORN Tax-Exempt Entities

We reviewed the Forms 990 available on Guidestar.org in October 2008, for all
42 tax-exempt organizations for the following:

- exempt purpose and activities furthering that purpose
- primary sources of revenue and primary expenditures
- governance, management and compensation
- transactions and relationships with affiliated organizations

The attached spreadsheets contain entity specific information on the 42 taxexempt
organizations and the following is a summary of our observations on the
four categories listed above.

Primary Exempt Purpose & Program Service Accomplishments for Tax-Exempt
Organizations

Of the 42 tax-exempt organizations, two are 501(c)(4) social welfare
organizations, two are 501(c)(5) labor unions and the remaining 38 are 501(c)(3)
charitable organizations. Information about the Primary Exempt Purpose and
Program Service Accomplishments are summarized from Forms 990, Part III.

The primary exempt purpose for 20 of the 38 charities appears to be the
provision of housing for low and moderate income individuals. While three of the
20 did not state a primary exempt purpose, their purpose was assumed from the
name of the organization. It would seem that these 20 organizations are involved
in either constructing and acquiring buildings or holding the land on which
buildings reside. However, almost all of these organizations repeated their
primary exempt purpose for their statement of program service accomplishments.
None of these organizations reported any data on the criteria for residence in
these properties, the number of individuals or families served, or any other
information relevant to understanding how an organization may have
accomplished its primary exempt purpose.

The primary exempt purpose of the remaining 18 charities is as follows:

- 11 can be described as research and community organizing, including
training and leadership development for community members.
- 5 of the 38 charities can be described as promoting or operating
community television or radio stations.
- “fighting pollution in low income and minority neighborhoods in New
Orleans through research, training and information dissemination.”
(American Environmental Justice Program)
- voter registration and education. (Project Vote)

As with the housing related organizations, most of the 18 other charities also
repeated their primary exempt purpose for their statement of program service
accomplishments. None of them reported any other information relevant to
understanding how an organization may have accomplished its primary exempt
purpose.

Primary Sources of Revenues and Primary Expenditures

Over half of the 42 tax-exempt organizations have insignificant or zero revenue
or expenses. However, there are four charitable organizations that received
over $1 million in direct public support which primarily would consist of charitable
contributions and grants. These four also received significant government
contributions and program service revenue in the form of contracting fees. These
four also funnel over 50% of their revenues to ACORN affiliates, including the
taxable entities ACORN and Citizens Consulting Inc. These four are Project
Vote/Voting for America, American Institute for Social Justice (formerly ACORN
Institute for Social Justice), ACORN Housing Corporation, and ACORN Institute.
Per its 2006 Form 990, Project Vote received $8,688,580 in direct public support,
and $250,759 in contractual fees. It then paid $4,649,037 to ACORN for
contractual and campaign services and $779,016 to Citizens Consulting, Inc.
Thus, $5,428,023, or over 60% of its revenues, was paid to two taxable, affiliated
entities.

Per its 2006 Form 990, the American Institute for Social Justice (AISJ) received
over $8,800,000 of revenue, including $8,255,938 of direct public support. Out of
a total of $6,659,145 in grants AISJ made, $4,952,288 went to ACORN and
$1,696,178 went to “Various Other Affil Organizations” so almost 100% of grants
went to ACORN organizations. In addition, AISJ contracted with ACORN for
“personnel, contractual” of $566,136.

Per its 2006 Form 990, ACORN Housing Corporation received $4,258,565 in
direct public support and $1,700,317 in government contributions. Out of a total
of $1,224,850 of grants made, $1,100,152 went to affiliated ACORN
organizations, including $846,817 to AISJ. In addition, it paid CCI $309,350 for
Admin Services and $58,003 to People’s Equipment Resource Center.

Per its 2006 Form 990, ACORN Institute received $1,276,895 in direct public
support and $2,275,182 of government contributions. Out of a total of
$1,476,024 of grants made, $1,471,144 went to ACORN affiliated entities. In
addition it paid ACORN $501,099, ACORN Services $117,261 and CCI $61,443
for contractual services.

The next two biggest organizations in terms of revenues are the New York
Agency for Community Affairs and the New York ACORN Housing Corporation.
Both of these organizations also contract with ACORN.

The next two largest organizations in terms of revenue are KNON Radio, a Texas
radio station with an address in Louisiana, and ACORN International.

In general, the flow of money among the ACORN family of organizations is a big
shell came. Dollars raised for charitable activity appear to be used for
impermissible lobbying and political activity. This is similar to the use of charities
by Jack Abramoff. Similar to those organizations, charities are being used to
raise monies which are then funneled to other charities or other organizations for
purposes other than what a donor may have intended.

Governance, Management, and Compensation

We compiled and compared the list of officers and directors for all 52 non-exempt
organizations with the list of officers and directors from the 42 tax-exempt
organizations. Information on the non-exempt organizations is from state
incorporation records and information on the tax-exempt organizations is from
Forms 990, which also includes compensation information.

There were 24 individuals who were listed as officers or directors of one of the 42
tax-exempt organizations that were also listed as the director of at least one of
the non-exempt entities. Interestingly, it appears that, in all of the 42
organizations, only four individuals received compensation as an officer, director
or trustee. Mike Shea was an officer of four tax-exempt entities and one nonexempt
entity but received compensation from one tax-exempt entity. Carolyn
Carr was an officer of one tax-exempt entity and one non-exempt entity and
received compensation from the non-exempt entity. Keith Kelleher received
compensation from the one and only tax-exempt entity of which he was a
director. Ismene Speliotis was an officer of four tax-exempt entities and received
compensation from only one of those entities.

The following individuals received no compensation from any of the tax-exempt
entities:

- Dorothy Amadi, who was officer for 12 tax-exempt entities;
- Donna Pharr, who was an officer for 27 tax-exempt entities and one nonexempt
entity;
- Maude Hurd, who was an officer of 2 tax-exempt entities, 6 non-exempt
entities, and the National President of ACORN to whom you wrote in
2006;
- Arlene Kimata, who was an officer of 3 tax-exempt entities and 2 nonexempt
entities;
- Donna Massey, who was an officer of 2 tax-exempt entities and 1 nonexempt
entity;
- Dale Rathke, who was an officer of 1 tax-exempt entity and 11 nonexempt
entities;
- Wade Rathke, who was an officer of 3 tax-exempt entities and 24 nonexempt
entities.

The very low levels of officer compensation reported on the 42 Forms 990
suggest that compensation may be disguised in the form of contractual payments
for services and that individuals may be receiving significant compensation from
the non-exempt entities. For example, we found on ACORN International’s Form
990 that Wade Rathke received $94,487 of compensation from the Chief
Organizing Fund.

Note that, while the largest four charities by revenue – Project Vote, AISJ,
ACORN Housing and ACORN Institute – apparently did not compensate any of
its officers or directors, they did make significant payments to tax-exempt and
non-exempt ACORN organizations through grants and payments for contractual
services.

Transactions and Relationships with Affiliated Organizations

We reviewed three specific questions on Form 990 and Schedule A for the 42
tax-exempt organizations.

Eleven of the 42 organizations answered “yes” to Form 990, question 80b. The
question asks whether the organization is related (other than by association with
a statewide or nationwide organization) through common membership, governing
bodies, trustees, officers, directors, etc., to any other exempt or nonexempt
organization.

Three of the 42 organizations provided information about taxable subsidiaries
and disregarded entities in Form 990, Part IX.

Five of the 42 organizations answered “yes” to Form 990, Schedule A, Part III,
question 2. This question asks whether the organization, either directly or
indirectly, engaged in certain transactions with substantial contributors, trustees,
directors, officers, creators, key employees, or members of their families, or with
any taxable organization with which any such person is affiliated as an officer,
director, trustee, majority owner, or principal beneficiary.

Note that the majority of organizations that share the address in New Orleans or
have a common bookkeeper or treasurer would not be considered related since
these would not be criteria that would require a response to any of these three
questions. Most of these organizations would likely not meet the definition of
related for 990 reporting purposes. Note that payments to the taxable entities for
contractual services were reported on Schedule A, under payments to the five
highest independent contractors. If those taxable entities – such as the CCI,
People’s Equipment Resource Center, Chief Organizing Fund, or the Elysian
Fields entities – were not the top five payees, we may not even have had that
information.

IRS Penalties and Excise Taxes

Penalties for Criminal Activities

Aside from an excise tax on excess benefit transactions, which include
embezzlement, no penalties or excise taxes apply to tax-exempt organizations
participating in or furthering criminal activity.

Tax-exempt organizations could be subject to revocation of tax-exempt status.
Reg. 1.501(c)(3)-1(c)(1) states that an organization will not be regarded as
operated "exclusively" for IRC 501(c)(3) purposes if more than an insubstantial
part of its activities is not in furtherance of an exempt purpose. The presence of a
single non-charitable purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly charitable purposes. Better
Business Bureau v. United States, 326 U.S. 279 (1945). Therefore, if an
organization engages in illegal acts that are a substantial part of its activities, it
does not qualify for exemption under IRC 501(c)(3). In ACORN’s case, however,
IRS would likely have a high hurdle to clear in order to revoke the tax-exempt
status of any of the ACORN tax-exempt entities.

First, it is not clear whether the activities under scrutiny - voter fraud, false tax
preparation, child prostitution or human trafficking - were conducted by the taxexempt
entities. Of the five known offices at which the investigators videotaped
employees and volunteers, we were only able to verify one of the addresses as
being related to a tax-exempt entity. The other four may either be under an
organization we have not yet identified or may be an office of one of the 42
organizations.

Second, it is unclear that the level of activity would meet the substantial part test
for any one entity. In order to revoke the exemption of any one tax-exempt
organization, IRS may need to prove that such activity is the primary activity of
that organization.

Penalties for Electioneering

Under section 4955, an amount paid or incurred by a section 501(c)(3)
organization to participate in, or intervene in, a political campaign for public office
is considered a “political expenditure.”2 Section 4955(a) imposes an initial tax on
each political expenditure by a section 501(c)(3) organization equal to 10 percent
of the amount of the expenditure. In addition, an initial tax equal to 2½ percent of
the organization’s political expenditures is imposed on any organization manager
who agrees to the making of any expenditure, knowing it to be a political
expenditure. If the expenditure is not promptly corrected, section 4955(b)
imposes an additional tax equal to 100 percent of the political expenditure upon
the organization, and an additional tax equal to 50% of the expenditure upon any
manager who refuses to agree to the correction.

It is unclear whether IRS could assess section 4955 taxes on any of the ACORN
charitable organizations. The charitable organizations are likely to argue that
they were primarily engaged in voter registration and voter education, which are
both generally permissible activities as long as such activities are generally nonpartisan.
Charities are not allowed to endorse candidates or campaign for them.

In this case, it appears that the charitable entities were contracting out voter
registration and voter education activities to taxable entities such as ACORN and
Citizens Consulting, Inc. It is not clear whether such contractual payments would
be deemed political expenditures.

Form 990 Penalties

Penalties exist for not filing a Form 990 or for filing an incomplete return. IRS
rarely imposes incomplete return penalties and most likely does not impose
penalties for the failure to explain how charitable expenditures further an
organization’s exempt purpose. In addition, IRS frequently abates failure to file
and incomplete return penalties.

Proposals for Reform

Impose a new excise tax on managers when pervasive criminal activity is
conducted by employees or volunteers of an organization that are acting in their
capacity as an employee or volunteer.

Allow IRS to suspend tax-exempt status of an organization when there is
significant evidence of criminal activity conducted by employees or volunteers of
an organization that are acting in their capacity as an employee or volunteer.
Clarify that incomplete return penalties would apply for failing to report how
activities further charitable purpose.

Impose expenditure responsibility requirements similar to those imposed on
private foundations to ensure that grants made by public charities are dedicated
to charitable purposes.

Clarify that IRS 4955 political expenditures tax would apply to grants that are
ultimately used for political purposes.

Require public disclosure of non-individual donors. This is similar to a
recommendation that the majority staff, then minority staff, made in its report
regarding Abramoff tax-exempt organizations.

Require consolidated Form 990 reporting, in addition to individual entity
reporting, so that information about all affiliates is available in one location.
Ensure that volunteer preparers are subject to certain return preparer standards.

¹ We reviewed an additional 15 organizations for which we were not able to confirm relationships
with ACORN.
² I.R.C. § 4955(d)(1).

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