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

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

• rganizations 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

• f 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

• peration.

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

News

Page 1 of 7 Follow the donations: Charities kept most cash for themselves 5/21/2009 http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html

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

• f 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. Page 2 of 7 Follow the donations: Charities kept most cash for themselves 5/21/2009 http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html

"Do you see the kids on the other end that are getting help?" said Don Stewart, leader of the Don Stewart Association. "Why don't you start with the end, the kids, feeding the kids? . . . The kids got fed, didn't they?" *** The first stop the medicine made on its curious journey was an unassuming brick church in an older, working-class St. Louis neighborhood. The church has no shipping facility for receiving and delivering tons of supplies, no warehouse, no fleet of trucks. But it does act as a virtual transportation hub, arranging to take title to donated supplies from Canada and delivering them to other U.S. charities. In 2005, two charities operating out of the church received more than $11 million in donated supplies from Canada. The

• St. Louis charities reported on their Web sites that they sent the supplies to hospitals, clinics and missions in Africa, Asia

and South America. Tax returns show the St. Louis charities gave ownership of those supplies to a dozen charities in California, Arizona and London. Included in that was the 8,884 pounds of medicine. One of the St. Louis charities reported that the medicine was sent to the Philippines and Guatemala. Instead, it went to a charity called the Breast Cancer Research and Assistance Fund in Glendale. At least it did on paper. The supplies were still sitting in a warehouse. *** From 2003 to 2005, Children's Relief Mission and Christian World Relief in St. Louis reported donating a total of $31 million worth of supplies on paper, of which nearly $29 million went to 12 other charities with ties to the Don Stewart Association. The Web sites for the St. Louis charities, however, don't say that the supplies went to the 12 charities in Phoenix, Glendale, Peoria, Scottsdale, Carmel (Calif.) and London. Instead, the sites report that Children's Relief Mission and Christian World Relief donated the supplies to clinics, hospitals and missions in Cambodia, Congo, Guatemala, Honduras, India, Indonesia, Liberia, the Philippines, Somalia and Zambia. Richard Owsley, pastor of the St. Louis Bible Fellowship, where the two charities are based, confirmed that supplies came to St. Louis on paper from the Universal Aide Society in Canada, a charity and clearinghouse whose business address is a postal box and whose phone number goes to the house on Sea Lovers Lane. Universal Aide's Web site says it

• btains donated goods from U.S. and Canadian companies and other groups.

In all, the St. Louis charities made 44 separate paper transfers of supplies and all but three went to the 12 charities. To help pay for shipping costs, the 12 charities made cash payments to the two St. Louis groups nearly every time a donation was made, tax records show. The two St. Louis charities in turn made cash payments each year to a shipping company operated by Universal Aide's executive director. Universal Aide, which did not physically possess the supplies, arranged to ship them to foreign missions from other non- profits in the U.S. and Canada. Owsley defended the transfers of ownership as a way for charities to share the cost of global shipping. Page 3 of 7 Follow the donations: Charities kept most cash for themselves 5/21/2009 http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html

"We don't have a physical warehouse. We can't afford that," said Owsley, adding that his church and the charities are committed to helping the world's poor and hungry. "I do believe in gifts in kind." Owsley said he has no reason to suspect that the goods and supplies did not make it to their intended foreign recipients, even if they were transferred on paper among charities before being shipped from Canada. He said he has inspected shipping manifests and other records showing that donations were shipped. The shipping company, Ruscan Services, also operates out of a P.O. box on Gabriola, a 22-square-mile island west of Vancouver that is accessible only by ferry, boat or float plane. Owsley had high praise for Universal Aide Society and its executive director, Shirley Gremyachev. "I am impressed with how it works as a kind of conduit," he said. Universal describes itself as a sort of clearinghouse for food, medicine and vegetable seeds that are donated to it by U.S. and Canadian companies. "After donations are received, they are carefully packed into containers and shipped overseas," the company's Web site

• says. "Universal Aide Society partners with reputable government and non-government organizations overseas to

ensure . . . that the supplies get to those who need them most." Phones at Universal Aide and Ruscan Services are routinely forwarded to voice mail. Gremyachev did not respond to multiple requests for an interview by phone and e-mail. *** The headquarters of the Breast Cancer Research and Assistance Fund is a $500,000 private residence on North 52nd Avenue in Glendale. The home, owned by Don Stewart Association Executive Director Larry MacKay and his wife, Joy, does not have any warehouse facilities. In a 25-word statement in the Combined Federal Campaign catalog, the charity says it "provides research grants, medical equipment and supplies to hospitals" and that it "provides cancer support groups educational materials for patients and families." After receiving the title to 8,884 pounds of medicine from St. Louis, the Breast Cancer Research and Assistance Fund made a $34,900 cash donation to Children's Relief Mission to help pay for shipping costs. Then, it marked up the value

• f the medicine.

In St. Louis, Children's Relief Mission had booked the value of the supplies as $1,364,241, or 75 percent of their fair- market value. Breast Cancer Research marked up the medicine to 100 percent of the fair-market value, claiming it was worth $1,818,988 on its tax forms. The charity then donated the medicine to the Philippines and Guatemala. At least on paper. The medicine was still sitting in a warehouse in the United States or Canada. *** James Raftery of Mesa, an accountant for the Don Stewart Association and other charities, said there is nothing wrong with one charity transferring a donation to another. "We could all be sitting around here and I could have an X-ray machine and we could all pass it around to one another and we could all own it for five minutes and that would be completely legal," Raftery said. "Do we go to the extreme and pass around six or seven times? The answer is no." Page 4 of 7 Follow the donations: Charities kept most cash for themselves 5/21/2009 http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html

But can goods in some cases be counted multiple times? "The answer is yes," Raftery said. Raftery said passing the supplies from one charity to another helps cover shipping costs. But he noted that charities have every right to take credit for the goods once they take ownership, even if they paid only a fraction for shipping. "It's not the fact that you paid $20,000 in shipping that you get to include $200,000 in revenue," he said. "It's not the shipping that denotes the value, it's the gift." He also said the charities routinely marked up the value of donated supplies from St. Louis because they have the right to claim the full market value. Raftery and Phil Haney, a lawyer who represents the Don Stewart Association and five charities operated by its employees, said transfers of goods are common in the non-profit world. They denied there is any intent to inflate a charity's finances or to help charities qualify for the Combined Federal Campaign. Raftery said the transfers are allowed by the IRS and generally accepted accounting principles, or GAAP, a set of commonly accepted standards for recording and reporting financial information. Raftery said charities should count the value of the donation rather than just the shipping costs they pay. But Owsley, the St. Louis pastor, disagreed. Owsley said he was disturbed to find out that each of the charities involved in the transfers was taking credit for the full value of each donation. "We just didn't like it," he said. "We come from the position that you avoid all appearances of . . . wrongdoing." Owsley said the St. Louis charities undervalued the goods in order to give partner charities a chance to get some value

• ut of the transaction; so if his charities claimed 75 percent of the value, partner charities would claim 25 percent.

Owsley said he did not know that the goods were actually being counted at 100 percent by the partner charities. The pastor said he was unknowingly drawn into partnerships with the charities tied to the Don Stewart Association when his charities hired a California consultant to expand their operation several years ago. He said he was provided information about where goods ended up but did not realize whom he had partnered with. *** When the paper journey ends, the real journey begins. In exchange for the shipping fee, Universal sent its partner charities a donation letter stating how much the supplies were worth, a bill of lading, customs documents and an agreement showing that ownership had been transferred. Universal then contacted the holder of the supplies somewhere in the U.S. or Canada and arranged to load them into shipping containers. For the 8,884 pounds of medicine, Children's Relief Mission in St. Louis reported on its Web site that the goods went to clinics in the Visayas islands of the Philippines and hospitals throughout Guatemala. Breast Cancer Research and Assistance Fund, which was given title to the goods, reported on tax forms that the medicine went to a Philippines mission, Missionaries of the Poor Sisters, and a Guatemalan mission, Ministerio Esperanza de Vida. Page 5 of 7 Follow the donations: Charities kept most cash for themselves 5/21/2009 http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html

The missions were two of the most frequent recipients of supplies transferred from Universal Aide Society. More than half of the supplies transferred from Universal Aide to the 14 charities tied to the Don Stewart Association ended up with Missionaries of the Poor Sisters or Ministerio Esperanza de Vida. *** Charity watchdog groups take a negative view of the kinds of transfers used by the network of charities. "Just because it is a generally accepted accounting practice doesn't mean it is the best way," said Daniel Borochoff, president of the American Institute of Philanthropy in Chicago, which rates charities on its Web site, Charitywatch.org. "GAAP is the minimum acceptable standard," said Mike Smith, chief operating officer for Charity Navigator, the largest charity evaluator in the country. "Most charities don't do (the transfers) that way." Washington, D.C., lawyer Marcus Owens, who ran the IRS non-profit division from 1990 to 2000, says the transfers raise questions about the tax-exempt status of the charities. He said if the charities tied to the Don Stewart Association are acting primarily as middlemen, "I'm not sure what the exact tax-exempt purpose is . . . except for providing a place of employment." Bennett Weiner, chief operating officer for the Better Business Bureau's Wise-Giving Alliance, also disputed the idea that such transfers are common practice among charities. "That is not true," the Virgina-based charity watchdog official said. "This should be raising red flags." He called the practice "the pass-along game" and said there is a clear motive to engage in the practice. "It jacks up your revenue," he said. "And that will increase the (charity's) perceived amount of programs." *** The curious transfers of goods came to a halt last week in Canada when financial regulators revoked the non-profit status of Universal Aide Society, just weeks after The Republic contacted regulators. The Canada Revenue Agency says an audit determined that Universal was used to personally benefit Gremyachev and her husband, paying for their travel expenses and relocation to Nice, France, during the winter and their return to Gabriola in the summer. Regulators say the company did not function as a charity but operated more as a middleman or broker. They also say the medicine and

• ther supplies Universal donated were often overvalued, nearly expired and shipped without information such as the

manufacturer, expiration date or dosage. *** The move by Canadian financial regulators raises the question of whether the practice of transferring ownership of goods from one charity to another will draw scrutiny from U.S. tax officials. The IRS is reviewing its rules on reporting donations of goods on tax forms. In Canada, tax officials said that Universal could not show that it owned or had "legal title" to the supplies that it transferred to other charities. While Universal agreed to pay shipping fees, regulators said, "it seems unlikely that paying such costs would equate with the charity becoming owner of the goods." They also said charities partnering with Universal could not be considered

• wners of the goods.

After the Canadian regulators' report, Raftery said he believed the goods were valued accurately. He also said that the charities regularly visited the Philippines to monitor donations, and during audits he made sure every donation was not expired and was valued according to standards. Page 6 of 7 Follow the donations: Charities kept most cash for themselves 5/21/2009 http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html

Raftery said the Canadian report posed no long-term problems for the charities tied to the Don Stewart Association. "Despite the trouble in Canada, the goods, in fact, landed on foreign soil," he said Friday. Owsley, the St. Louis reverend, expressed more concern about the report, saying he was dumbfounded and saddened. But he defended Gremyachev. "I know her as a person who genuinely cares about helping others in need," he said by e- mail Friday. "I just cannot believe that her intent is anything other than altruistic." *** While transfers of supplies may no longer come out of the house on Sea Lovers Lane, they continue unchecked in America. Gremyachev is a director for two charities in the United States called Universal Heart in South Bend, Ind., and Universal Aide Society America in Tampa. Both charities were set up after the Canada Revenue Agency began its investigation of Universal Aide in 2005. The two charities operated through Owsley's St. Louis church no longer report on Web sites where they send donations. But their most recent tax records show they continue sending supplies on paper to other charities. Charities in France and Germany have been added to the list. The officers or directors of those charities are some of the same individuals

• perating 12 of the charities tied to the Don Stewart Association.

Contact the reporter at robert.anglen@arizonarepublic.com or 602-444-8694. Page 7 of 7 Follow the donations: Charities kept most cash for themselves 5/21/2009 http://www.azcentral.com/news/articles/2009/05/03/20090503charities-transfers0503.html