National Heritage Foundation, generous to a fault, goes bankrupt as regulators slumber.
The U.S. has 1.5 million tax-exempt organizations taking in $300 billion a year in donations, for which donors get tax deductions. Who's keeping an eye on them? Not enough people.
With its stately name, the National Heritage Foundation ranks among the country's largest charities. But in January the Falls Church, Va. nonprofit sought Chapter 11 bankruptcy after a Texas family won a $6 million judgment. Getting stiffed: Charitable gift annuity beneficiaries owed a collective $2 million a year.
The charity, which primarily handles 9,000 donor-advised funds, has long been controversial for its running battles with federal tax officials. But assorted filings make for interesting reading. They show a toxic web of one-family rule, institutional conflicts and investment debacles.
Founder John T. (Dock) Houk II is chief executive. On the payroll are his wife (chief operating officer), son (president), daughter (vice president), and daughter-in-law (director). Collectively, they pulled $372,000 in compensation in 2007 from NHF and affiliates plus $12,000 for rent in a building Dock owned. NHF lent $10,000 to Charity Admin, a for-profit Houk family firm flogged on NHF Web pages, and later bought services from another Houk business, To The Point.
While NHF's latest filings showed a 75% contributions drop over four years to $16 million for 2008, they also listed a seemingly healthy $208 million in net assets. But $132 million were "noncash" interests in donated things like family limited partnerships.
Donor-advised fund contributors to NHF get a charitable tax deduction while retaining a big say over where that largesse eventually goes. NHF, which collects fees for its services, has been faulted for being generous in its acceptance and valuation of those noncash gifts. Its own financial statements say NHF some years ago was given two offshore accounts holding mortgage-backed securities valued at $17 million. Surprise! By 2003 one account had gone bankrupt with the other in default. NHF wrote down the two funds to only $800,000--way below the $6.5 million tax benefit the donors likely claimed (if they were in a high tax bracket).
In the Texas lawsuit that bankrupted the NHF, a Brownsville doctor in 1997 set up a split-dollar life insurance deal allowing deductible payments to NHF with eventual insurance payouts going to a trust set up for his brain-damaged son. After Congress outlawed such ploys, the lawsuit charges, NHF secretly switched the beneficiary to itself.
As NHF appeals, one of its financial analysts just testified that a $25 million portfolio of 16 investments made on behalf of NHF has faltered. She said that portfolio was overseen by Ian Scott-Dunne, whom she described as both a software maker and NHF's investment banker, whose own endeavors got NHF money, stopped paying it back and now owe $14 million. Scott-Dunne declined comment. Filings suggest NHF funds ended up in public companies--one put a Houk on its board--with now nearly worthless shares. (NHF had no comment.)
Where were the regulators and watchdogs? On bankruptcy day NHF held a three-star "good" rating from Charity Navigator (pulled six days later). In April 2005 the Better Business Bureau Wise Giving Alliance flunked NHF on 6 of its 20 good-governance standards. But only three months later, after NHF submitted more materials, the bbb took down its withering report and due to an oversight never reposted anything. The Virginia Office of Consumer Affairs said it periodically received complaints. But a search through its online complaint database produced this: "No record found!" Manager J. Michael Wright said the complaints must have been "purged."
