In their tax records, charities take credit for sending supplies - PDF document

Follow the donations: Charities kept most cash for themselves Page 1 of 7 News Follow the donations: Charities kept most cash for themselves In their tax records, charities take credit for sending supplies around the world, even if the goods haven't yet moved an inch by Robert Anglen - May. 3, 2009 12:00 AM The Arizona Republic Each year, more than a million federal employees donate part of their paychecks in the government's annual workplace charity drive, the largest of its kind in the world. The money given in the Combined Federal Campaign — $273 million last year — is directed to groups that say they fight disease, ease hunger and help the needy. But in some cases, much of the cash that charities collect does not go to charity. Some charities direct the donated cash to causes other than what donors may have intended. Charities can make donations to other organizations run by relatives and colleagues. Charities also can transfer ownership of donated goods to other charities without ever handling the items and claim the goods' value on their tax returns. Charities can spend most of their donors' cash on salaries, perks and other expenses. The transfers of cash and goods title improve the financial profile presented to donors in the annual charity drive and may help attract more donations, although charities say that's not their intent. The Combined Federal Campaign assures donors that “only legitimate, accountable, and responsible charitable organizations are admitted” to the program. But limited oversight by the federal campaign and tax loopholes in tax- reporting rules let charities work the system. Because IRS audits are rare, many details of a charity's actions activities aren't revealed. Beginning today, The Arizona Republic publishes the findings of a yearlong investigation into the controversial practices of a network of charities tied to a Phoenix televangelism ministry, the federal campaign that funnels millions of dollars to them each year and the tax system that makes the activities perfectly legal. A seaside home on a picturesque Canadian island is an unlikely place for the headquarters of an international charity operation. But each year, millions of dollars' worth of medicine, medical equipment and school supplies are sent on a curious journey that begins in a four-bedroom house on Gabriola Island, British Columbia. In one case, a shipping container filled with 8,884 pounds of medicine was donated in 2005 from the home on Sea Lovers Lane to a charity in the United States. Then it was donated to another U.S. charity. Then it was donated to charities in foreign countries. At least that's how it worked on paper. At that point, paper was the only thing being moved. During the transfers, one charity marked up the value of the medicine. Both U.S. charities took credit on tax forms for donating the same supplies. But while title to the supplies was passed among charities, the medicine was actually sitting in a warehouse somewhere http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html 5/21/2009

Follow the donations: Charities kept most cash for themselves Page 2 of 7 in the United States or Canada. *** When U.S. charities file tax returns, they reveal how much they got in donations and how much they gave to others as part of their charitable mission. Both amounts, plus expenses, help the government and donors determine how much good the organization is doing. A charity must provide benefits such as relief for the poor, advancing education or religion and other types of community service to remain exempt from taxes. The donations charities receive are usually one of two types: cash, or goods and services known as "gifts in kind." A yearlong investigation by The Arizona Republic found that most of the 22 charities with ties to a Phoenix televangelism ministry performed controversial transactions with supplies that helped inflate their finances. The charities took credit on tax returns for donating millions of dollars' worth of goods on paper that they did not physically collect, store or distribute. In a kind of title transfer, the charities passed ownership of each batch of supplies among themselves at least twice before the batch was actually shipped by a clearinghouse to a foreign mission. Then each charity took credit on its tax returns for most or all of the value of the goods, booking them as incoming revenue and outgoing donations. Each charity involved made a relatively small donation to cover the cost of shipping, often about 1 percent of the total value of the goods. That enabled the charities to pay a few thousand dollars and take credit for donations worth hundreds of thousands or millions of dollars. Charity watchdogs say transactions like these, while legal, raise red flags and can be misleading; some experts view them as unethical. The experts point to one main reason for such transfers: Charities can artificially pump up the amounts they give and receive so their operations appear larger than they really are. The practice also makes their administrative expense ratios look smaller, so the charities appear to be more efficient in the use of their money. These moves improve the financial profile presented to donors and may help attract donations. At least 14 of the 22 charities tied to the Don Stewart Association, the Phoenix ministry, used these transfers to take credit for more than $64 million in donations on federal tax forms from tax years 2003 to 2005. Tax returns for 2006 became available only recently and were not included in The Republic's analysis. The charities' inflated finances, and smaller expense ratios, may have helped them attract more donations in the Combined Federal Campaign, the workplace fundraising drive for federal employees. The transfers likely helped make small charities more appealing to government workers who donated cash. In some cases, the transfers may have helped the charities qualify to participate in the Combined Federal Campaign. Richard Wong, the former president of Gifts-in-Kind International, which served 125,000 charities and distributed about $800 million in donations in 2007, said the practice of passing donations through multiple charities is unethical and should alarm regulators. "This is really, really bad. You are creating a big bubble," Wong said. The law does not prohibit the practice, but Wong said he views it as an ethical issue. Representatives of charities in the network say ownership of goods can legitimately be passed among charities. They say it doesn't matter how many charities take credit on tax forms for donations as long as the supplies get to the needy. They point to personal photos and photos on Web sites showing goods being offloaded from trucks and distributed to the poor. http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html 5/21/2009