The recent filing of a civil action to dissolve the National Rifle Association by the New York State Attorney General will generate headlines and political debate for months to come. I have done a lot of work over the years with “not-for-profit” organizations (more commonly called “non-profits”), serving on the boards of several in various roles, including president and treasurer. Self-dealing is one of the most serious charges that can be lodged against a non-profit, and this action is a good opportunity to look at self-dealing more closely.
A disclosure here: I dislike the NRA intensely. But to skip to the end, the best defense the NRA has against this charge is that its self-dealing has been so big and so open for so long, and that it is so common (perhaps to a lesser extent) in comparable non-profits, that this particular prosecution looks suspiciously targeted and political. For that reason alone, the NRA may pull itself out of this mess.
Thus, the problem: most non-profits are small, barely making cashflow, and honest to a fault. My organizations have typically spent a lot of time and effort with their auditors to create a “clean” Form 990, the required IRS filing in lieu of a tax return, which must in turn be officially approved by the board of directors. These are public documents, and you normally want your donors to have confidence in the honest running of your organization. However, in recent years, many “non-profits” really are not, and do not care if you know that. The laxity of the IRS and state taxing authorities in even attempting to curb non-profit status abuse has left the door open for blatantly crooked non-profits like the (now-convicted and dissolved) Trump Foundation and the NRA to flourish.
An important distinction: c3’s and c4’s
Complicating the NRA case is that it is really a complex web of more than ten non-profit entities. The largest body is organized as a 501(c)(4), with some fund-raising affiliates organized as classic 501(c)(3) entities. The primary difference between the two is that c3’s can solicit tax-deductible contributions while c4’s cannot. Officially, c3’s are supposed to stay more in a “charitable and educational lane” in their activities, while c4’s have some more flexibility to dabble in the political sphere.
The NRA has long played fast and loose with both definitions, and this complex web helps them evade regulation while at the same time creating several interlocked “pots of money” where people can get paid several times through multiple channels.
Escaping the taxman and the squirrelly definition of “profit.”
The effective regulation of non-profit entities is essential because the state and federal governments normally tax financial transactions or “profits” wherever they can capture the data. This provides huge incentives to escape the hand of the “taxman” if you can claim that your excess cash flow is not really “profit.” [1] In 2017, the NRA declared over $36 million in “net assets,” which is the non-profit accounting term for what would be called “retained earnings” in a for-profit firm. [2]
This is an exercise not confined to official non-profit entities. Amazon amassed its unparalleled fortune for Jeff Bezos by showing minimal profits and even annual “paper losses” for over 20 years through “creative accounting.” If any organization is amassing millions or billions of dollars of assets stashed away in investments, that smells a lot like “profit” coming from revenues that exceed expenses, regardless of current IRS rules.
Even though the official designation of a non-profit entity, in terms of federal tax law, comes from the federal government, it is usually up to the individual states to enforce when petitioning organizations qualify to “do business” in that state with a “non-profit” tag. In many jurisdictions, a non-profit organization can escape paying state and local sales taxes on many transactions, as well as other corporate taxes, which can amount to a huge savings.
Cooking the books
Two years ago I wrote a tongue-in-cheek primer on how to “cook the books” called “Non-profit accounting for fun and profit.” It does not take a lot accounting expertise to disguise all the trappings and rewards of a multi-million-dollar business in the guise of a non-profit. Here are a few common strategies:
Excessive salaries and expense reimbursements. In the great majority of non-profits in the U.S., the wages for workers from entry level up to the CEO are usually well below “the market” of comparable jobs in private industry. The “mission” of the organization is usually seen as more important than personal gain, and even highly skilled professionals with good options will choose the lower pay because they believe in the mission. Non-profits also use many volunteers; the boards of directors on which I have served did not compensate any of their members, often even when they traveled internationally on behalf of the organization (not so in the NRA).
The NRA and far too many organizations like it intentionally maximize salaries, bonuses, and luxury travel, aiming for a high, for-profit level of comparability. In 2017, the NRA reported an effective salary for CEO Wayne LaPierre of nearly $1.5 million. His extensive and luxury-level travel expenses, including the use of a private yacht in the Caribbean, are key revelations from the New York action, documented as averaging $300,000 per year. The difficulty here is “Where is the line?” At what point does a salary and the attached trappings of power become excessive, indeed illegal?
The board of directors of a non-profit has a fiduciary duty to see that the contributors’ funds are wisely directed to the mission of the organization. In 2019, red flags were raised by then-president Oliver North and he was forced out of office. The presidential role in the NRA is mostly an honorary one (although compensated), with most actual power sitting with LaPierre. And of course, Oliver North has his own personal and political baggage. But that board-level dispute has likely provided evidence of board awareness of wrongdoing and their failure to act, as documented in the New York complaint.
Hiring of unqualified cronies and relatives. Much of the New York complaint details the incompetence, lack of credentials, and outright financial mismanagement by three people hired by LaPierre. John Frazer, the group’s general counsel, Wilson “Woody” Phillips, the NRA’s former treasurer and chief financial officer, and Joshua Powell, the former chief of staff, were all paid large salaries and allegedly assisted in the financial looting documented in the complaint.
Shoveling business to close for-profit businesses. Large charities often use outside fundraisers and outside media companies. These are usually for-profit businesses and the cashflows can be huge. For instance, in 2017, the NRA paid over $37 million to just two fundraising companies, and in one of those cases, the profit-making fundraiser passed on less than half of the money raised back to the NRA. Suffice it to say, competitive bidding for services was likely not followed here (see page 53 of the Form 990 linked in Note 2 below). The complaint documents how several of these for-profit businesses have interlocking boards and management with the NRA, and are even headquartered in the same building with the NRA in Fairfax, Virginia.
For forty years the NRA used a company called Ackerman McQueen to handle most of the organization’s advertising and media. Employees and relatives of employees commonly went back and forth between the two organizations. Oliver North also had a financial side deal with that media company for paid television appearances while he was NRA president. As part of the North dispute fallout, the NRA has been engaged in protracted litigation with Ackerman McQueen, with charges of mismanagement of funds thrown on both sides.
Charities that advertise incessantly on television often have very high fundraising costs going to for-profit companies. Check them out carefully before donating.
Financial conflicts on the board of directors. As noted above, each member of the board of directors of a non-profit has a fiduciary duty to the mission of the organization. In every board I have served on, the members take this responsibility seriously and sign statements disclosing any possible conflicts of interest every year. Like everything else in this story, the financial conflicts on the NRA board involved a lot of money, such as a $400,000 payment to one board member for “firearms training.” Nice work if you can get it.
What is the threshold for self-dealing?
This is the tough question on which I think the NRA case will rest. The IRS has a definition of self-dealing, but in practicality there are really two levels at play here. At “Level One,” the individuals involved can be cited and terminated by order of the court, and any ill-gotten gains might be “clawed back.” The terminated individuals can also be banned from future non-profit work, as Donald Trump and his three eldest children have been. This is the more likely outcome of this case, at best.
“Level Two” is the “death penalty,” where the NRA would be dissolved, and its assets disseminated to other approved charities. This is what happened to the Trump Foundation, but it is a higher hurdle to clear for the NRA. While the Trump Foundation’s self-dealings were a petty embarrassment to be resolved as quietly as possible, the NRA has a huge national support base and has hundreds of congressmen in their pocket. The NRA could not, however, simply reorganize in another state while under investigation for fraud.
As to salaries, the NRA can point to LaPierre’s “peers” in the non-profit space, such as the nearly $700,000 salary paid to the head of the American Red Cross, or the salaries of any number of “non-profit” university football coaches. Christian megachurch preachers like Joel Osteen and Kenneth Copeland are provided multi-million-dollar mansions and private jets tax free from tax-deductible contributor donations.
As I noted earlier, financial excess is so common in a small-but-notorious segment of U.S. non-profits that it will be difficult to pin the National Rifle Association. It is not right, but to quote a certain president, “It is what it is.”
What about those churches?
I wrote a two-part series two years ago about why it would be very difficult to tax churches, which also touched on financial excesses there. In short, most churches and other religious organizations, especially the declining mainstream denominations, do indeed pay well-below-market salaries, even to top leaders, and most have disturbingly negative cashflows these days.
This includes the Catholic Church. I have met many priests and nuns who truly live lives of personal sacrifice and poverty, although there have been many documented excesses on top. And even though there is a lot of land and building wealth remaining, poor management and lawsuits have brought the larger church body such a cash drain that, if treated as a for-profit business, they would have “tax loss carry-forwards” for many years to come.
The Church of Jesus Christ of Latter-day Saints (the Mormon church) has been credibly accused of accumulating a trust fund of $100 billion, which looks suspiciously like a very profitable private equity holding. The outcome of this disclosure is still pending. On the other hand, most of their leaders are “self-sustaining,” earning income from outside employment, and they report some of the highest “tithe” donation percentages from these leaders of any denomination.
Back in 2011, a very public three-year investigation by Iowa Senator Chuck Grassley exposed widespread financial improprieties and self-dealing in several large, independent megachurches. But then, to the surprise of many, and possibly as a precursor to his later Trump toadyism, Senator Grassley suddenly dropped the entire subject and never brought it up again. Fear of angering the “religious right” has been a continuing theme in the Republican Party right up until the present.
Churches, unlike most other non-profits, are usually not required to file a Form 990, although some do anyway. Beyond the cost of pulling together an accurate 990, most churches would probably do well by publishing perhaps a simplified version of this document. Transparency is key here. I have seen a lot of church financials and the best ones have nothing to hide. Indeed, confidence in this sector by the skeptical public could be considerably improved by separating the bad apples from the good actors.
Charity Navigator and public disclosure
The non-profit rating organization Charity Navigator (itself a non-profit) has done excellent work in making public the “good guys ” and “bad guys” in the charitable non-profit space. They rank charities on two criteria from zero to four stars. “Accountability and transparency” is a surprisingly simple hurdle, but many can’t or won’t do the jump. You just need to be, well, transparent. Are your financial statements and board policies easily available to the public? Charity Navigator posts many of these. Can the public see the results of the work that you do?
A four-star rating on the financial side is a lot harder to get. Some very good charities literally live financially from (donor) hand to (hungry) mouth and get low ratings here as a result. Excessive administrative costs or fundraising expenses are, however, also common causes of lowered financial ratings, so you need to look closely. A double-four-star rating like the (not NRA!) sample one below is hard-earned and it would very likely be a charity worth supporting if you agree with their mission. Check your own favorite charity at that site and browse their Form 990 if available (you will have to register to download).
In lieu of a rating for the National Rifle Association, Charity Navigator posts a “Moderate Concern Advisory.” Depending on the outcome of this lawsuit, that advice may well change soon.
Notes:
- When George Harrison wrote his song “Taxman” for the Beatles’ iconic 1966 album Revolver, the Fab Four were facing British personal income tax rates of up to 95% (“There’s one for you, nineteen for me – Taxmaaaaaaan!”). Currently, U.S. corporations average 11.3% of their income in federal income taxes. To quote another Harrison song, complaining of the sniping among the four Beatles, “Wah-Wah!” Here is the late George Harrison live with Eric Clapton on guitar:
- You can download the NRA’s 2017 IRS Form 990, the latest posted on Charity Navigator, from this link. The full text of the New York Attorney General’s action is linked below that.
- National Rifle Association IRS Form 990 for 2017 (pdf)
- New York vs. the National Rifle Association (pdf)
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