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An Obituary for National Heritage Foundation?

On January 24, 2009, National Heritage Foundation filed for Chapter 11 bankruptcy protection in federal court.  Is this the end for NHF?

Read the Forbes story here

National Heritage Foundation, NHF, was founded by J. T. “Dock” Houk as a 501(c)(3) fiscal agency for nonprofits using a donor-advised funds scheme.  NHF operated under the premise that people shouldn’t have to be burdened by the regulatory compliance headache of running their own 501(c)(3) in order to do good and charitable things.  One could just start an NHF “foundation” and have donors give directly to NHF, but designate the funds to their “foundation”.  “Foundation” is in quotes because that is NHF’s terminology.  NHF “foundations” are not considered true foundations. The idea was that by signing up with NHF, people could have what looks like a charity, but piggy-back on NHF’s tax-exemption.  In theory, the “foundations” were an extension of NHF’s charitable mission.  In return for its efforts, NHF took a small percentage of the donations for operating expenses.

Read New York Times article on NHF from 2000

Like so many theories, NHF’s didn’t work so well in practice.  Early on, NHF aggressively promoted the idea that “foundation” directors should pay themselves well, even if they were the primary donor.  In other words, you could start a “foundation” to do whatever, donate to your own “foundation” tax-deductibly through NFH, then pay yourself for your good deeds.  Needless to say, this generated enormous controversy within charitable circles and drew the ire of the IRS and Congress.  But technically, there was no law directly prohibiting such since these “foundations” were part of NHF and, in theory, NHF controlled the expenditure of funds.

That practice came to a screeching halt with the passage of the Pension Protection Act of 2006.  Senator Grassley (R-IA), a fervent NHF critic, managed to get approximately 140 pages of language into the PPA aimed directly at the activities of organizations operating donor-advised funds.  Many called this part of the legislation the “Anti-NHF Act of 2006”.  Overnight, and without much warning, NHF had to cease these activities.  The PPA did not outlaw donor-advised funds, but it did prohibit the payment of salaries to “foundation” director/donors.  A number of NHF’s roughly 14,000 “foundation” directors pulled out and tried to establish their own 501(c)(3)’s.  Many received a rude reception at the IRS when applying for tax-exempt status and still to this day, some applications of former NHF “foundations” are stuck in review, guilty by association.    Turns out, NHF did a very poor job of educating their “foundation” directors as to what they could and could not do under 501(c)(3) rules and did an even poorer job of monitoring the activities of these “foundations”.  Self-dealing was rampant within the “foundations” and programs were being operated that could never obtain their own 501(c)(3) status…all while being supported by tax-deductible giving.  Many of the “foundation” directors had no clue just how off-base they were.  NHF has continued to operate since the PPA by modifiying its programs to comply with the PPA.

So why the bankruptcy?  Back in the 90’s, Mr. Houk and NHF promoted a scheme called “charitable split-dollar” life insurance.  The idea was to pay premiums to NHF for life insurance carried by NHF.  The insured would be the primary beneficiary and NHF would get a smaller percentage of the payout.  The kicker was that the insured could deduct the entire premium paid to NHF as a charitable contribution.  It was a bizarre and aggressive stance that was directly outlawed by Congress in 1999.  Problem was, NHF failed to inform its insured, who continued to pay premiums to NHF.  Fast forward to the present…NHF was sued in Texas court by a family who paid these premiums and they won a $6 million judgement this past fall.  NHF is appealing, but Texas law requires a bond to cover the judgement amount and NHF couldn’t come up with it.  Chapter 11 bankruptcy was the only option for NHF.

Is this the end of NHF?  According to spokespersons within NHF, they intend to reorganize and emerge from bankruptcy.  I can’t see that happening.  It could…Dock Houk knows how to fight back.  But practically, NHF has been fighting a losing battle for years.  It has few friends in the nonprofit community and no friends in Congress or at the IRS.  Plus, its legal problems continue to mount.  The bankruptcy is likely to cause a veritable “bank run” by “foundations” who still have money with NHF.  Unfortunately, they will not be able to get their money out during the bankruptcy.  This may forstall the cleaning out of NHF’s cash, but expect new donations to evaporate overnight.  I expect most “foundations” will bail out.  It will be interesting to see what happens to NHF’s alias programs operating under the names Congressional District Programs (CDP) and Charity Admin, Inc..  They are technically different organizations, but are both considered part of the National Heritage “family”.

Could this have been avoided?  Sure.  But with its envelope-pushing schemes and penchant for confrontation, this was NHF’s predetermined outcome.  It just took a few years to play out.

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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