San Diego County Supervisor Bill Horn said he bought a charity decades ago for $25, called it the Basic Faith Foundation and used it to hold money from real estate deals.
Horn said he gave the interest to Christian missionaries in Mexico and South America.
“That’s a way that I was able to direct the money to where I wanted it to go,” Horn explained, “and I wouldn’t have to pay taxes on the money earned, and I could finish my transaction.”
inewsource dug into the Basic Faith Foundation and into Horn’s own description of how he used it. Five experts with national reputations in tax law and nonprofit management reviewed the transcript of inewsource’s interview with the supervisor, as well as the supporting documentation from state and federal agencies.
All reached the same conclusion: the way Horn used Basic Faith violated both state and federal laws, civilly and possibly criminally.
From Horn’s initial “purchase” of the charity, to using the organization for real estate transactions, to not filing annual disclosures with the Internal Revenue Service, the entire operation did not resemble a public benefit corporation, the experts said.
Marcus Owens, a Washington, D.C. lawyer who headed the nonprofit division of the IRS for 10 years, was particularly pointed in his assessment of Basic Faith:
“There is virtually nothing that I would describe as ‘legal’ about the way the supervisor appears to have managed the charity,” he said.
Frances Hill, who has helped shape U.S. nonprofit tax policy and serves as a professor at the University of Miami School of Law, studied the documents as well.
“I’ve never seen anything like this before,” she told inewsource, “and anything quite so blatant as you make up your own rules and do what you see fit.”
She said, “… the IRS, if it wants to do something about this, can. The state authorities might want to look into this.”
inewsource requested a follow-up interview with Horn this week. Instead, Jim Sutton, a high-profile political campaign lawyer from San Francisco, responded. He took issue with the conclusions of the experts inewsource consulted, and said Horn’s description of activities with Basic Faith were based on his “recollection … going back 20 or 30 years.”
A ghost trail
Today, there is almost no trace that the Basic Faith Foundation ever existed.
It has no website, no land, no assets and no known donors. A thorough web search yields no evidence any organizations ever publicly acknowledged having received donations or assistance from Basic Faith. inewsource couldn’t find any trace in the media of Horn acknowledging his organization — or his role as its chief financial officer — until interviewed about it in May.
inewsource made the connection between Horn and his charity during a due-diligence public records search in advance of the June 3 primary election. Horn is running for a sixth term, challenged by Oceanside mayor Jim Wood.
A $1,372 tax lien filed against Basic Faith by the state of California in November 2012 stood out.
Why would a charity, which doesn’t pay taxes, have a tax lien?
The question led to an even deeper, weeks-long inquiry unearthing a patchwork of paperwork filed with the IRS, the California Attorney General, the California State Franchise Tax Board, the California Secretary of State and San Diego County.
It all started back in the 1960s with a call to spread the gospel.
Religion, land and missionaries
Basic Faith was originally called the Sojourners Foundation — registered in 1962 under the Greenwald family of Orange County.
Its mission was to serve as a “philanthropic tool to help Christian Ministries in the areas of charity, education and the spreading of the gospel of Jesus Christ.” It had roots in a church called Faith Fellowship Foundation in Valley Center.
In the early 1980s, according to Horn, he bought Sojourners from the Greenwalds for $25. inewsource could find no paperwork for that transaction, but all documents filed with the state after 1979 show Horn’s name and address as the primary contact.
The name was changed from Sojourners to Basic Faith Foundation in 1979, but its primary mission remained “Christian Education, Christian Charity, and opportunities of outreach and service.”
For decades following, real estate records at the San Diego Recorder’s office show Horn and the Greenwalds bought and sold land together in locations throughout the county, including Valley Center, San Marcos and Escondido. There’s no paperwork to show that these transactions involved Basic Faith.
Horn, a licensed real estate broker, said he sold “millions of dollars” worth of buildings in the 1980s and early ‘90s — he still owns and operates many of them as apartment complexes.
During an interview with inewsource, Horn spoke openly and gave specifics about Basic Faith, for which he was chief financial officer.
He said he used the charity as a “facilitator” when he sold buildings through a special IRS Code called a 1031 tax-free exchange.
Here is how he explained the process:
“I would move $2 million into Basic Faith instead of going into escrow. I’d open an escrow but I’d just put in a small deposit. The money would sit in Basic Faith and earn interest — in some cases up to $50,000. The money would then go in to finish the transaction, but the residue — the amount of money that the principle earned in four months — would go to Christian missionaries in South America.”
Horn didn’t identify any of the organizations who received money from Basic Faith. He wrote them checks, he said, but he no longer had the checkbook.
Nonprofits are allowed to operate tax-free by the IRS, and religious organizations especially are afforded great freedom in keeping certain elements, such as donations, free from public disclosure.
Asked how charities could find Basic Faith to solicit funds, Horn said, “We don’t want them to find us!”
“It was a personal thing I used to save the money,” he said. “Rather than it going to an escrow company I could send it to Christian missionaries.”
The charity never filed tax returns, called Form 990s, because, he said, it “didn’t have to.”
To be required to file a tax return, “you have to make money,” Horn said. “We never made any money. All the big money that was in there was put in there in the ’80s [and] the first part of the ’90s.”
Horn dissolved Basic Faith on April 30, 2012, two years after the IRS revoked its tax-exempt status for failing to file tax returns. He contests the date of dissolution, although paperwork with his signature clearly states the time period.
The state tax lien, which inewsource initially questioned, was for unpaid corporate taxes. Because Basic Faith had lost its nonprofit status, California then treated it as a taxable corporation.
Horn’s children, Geoff Horn and Julie Romero, are the only people listed as officers for the organization. Geoff Horn, the CEO of Basic Faith, told inewsource he knew almost nothing about the charity.
“It’s mainly my dad’s thing,” he said.
When inewsource asked Bill Horn if he understood why Basic Faith was of interest to the public, he answered, emphatically, “No.”
“It’s a private part of my private life,” he said.
“It was mine. I owned it. I bought it.”
Horn’s history with taxes
Horn’s disdain for paying taxes is no secret. He told the Los Angeles Times in 2000 he would like to “abolish the Internal Revenue Service.” In the past, the politician has declined to release his tax returns, saying that no law requires it.
“I do pay some income tax,” he said, but “I could pay a whole lot more if I wasn’t real careful and knew what the code was.”
In the same interview from 2000, Horn said he estimated his net worth at $10 to $15 million.
Owens — who spent 25 years at the IRS monitoring exempt organizations — told inewsource the Basic Faith situation sounds familiar.
“It sounds like it turned into this guy’s wallet,” he said.
Horn said he hasn’t used the foundation since before he was elected as supervisor in 1994.
But in May of 2000, he held an event at San Diego’s Town and Country hotel called “San Diego County Supervisor Bill Horn Proudly Presents Basic Faith Foundation’s National Day of Prayer Luncheon.” The keynote speaker was Republican presidential candidate Alan Keyes.
“I sponsored a luncheon,” Horn said, “and we used the 501(c)(3) for that. And basically I supported Alan Keyes for president.”
Guests were asked to make checks out to Basic Faith Foundation — $45 per person, $450 for a table.
Tax experts weigh in
After interviewing Horn, inewsource consulted experts — from San Diego, Miami, and D.C. — with well-established backgrounds in nonprofit management and tax law. (Their full bios are available here)
All five expressed surprise at how Horn described his management of Basic Faith. They took issue with his “purchase” of the charity, his using it for real estate purposes, his failure to file tax returns for Basic Faith, his lack of record-keeping, and his using it to sponsor the appearance of a political candidate.
First, they said, you can’t buy a charity.
“You can’t buy and sell nonprofits. They are not stock corporations, so they’re not for sale,” said Victoria Bjorklund, who was recently named the “2014 Nonprofit lawyer of the year” in Best Lawyers magazine and is a lecturer on nonprofits at Harvard law school.
Paul Dostart, a professor at the USD School of Law and private practitioner with 35 years experience in nonprofit organizations, explained that California law and the federal law both prohibit the buying and selling of a nonprofit.
He said simply, “It’s not possible to buy a charity for $25 — or for any price.”
The experts also zeroed in on Horn’s using Basic Faith to facilitate real estate transactions.
“Facilitators in these deals are typically a real estate broker, licensed and regulated, perhaps an attorney,” Owens said, “but nonprofits can’t engage in a commercial trader business as their activity.”
Dostart asked, “Can the operation of a real estate facilitator business be charitable? The answer is no, that’s not a charitable purpose.”
Both Owens and Dostart said facilitators must be independent.
Bjorklund said, “It is unusual to see charities that aren’t organized and operated exclusively for charitable purposes — because it’s wrong. And I would put this situation in that category.”
Using a charity primarily for real estate transactions, Bjorklund and others pointed out, is not a charitable purpose, because it’s not primarily in the public’s interest.
Suzanne McDowell, who focuses on tax-exempt organizations as a partner with the D.C.-based law firm of Steptoe & Johnson, said, “I’m not sure I’ve seen anything like this in my practice.”
What “stood out,” McDowell said, “is that he was really just using this … for his private purposes to facilitate his real estate transactions. It is good that the interest that was earned on the funds did eventually go to charity, if that’s what happened, I mean, that’s one saving grace — but not much of one in this case.”
Bjorklund, who with McDowell was in San Diego recently to lecture at a tax seminar, said charities have to have a distinct purpose.
“Charities have to be operated for the public good,” she said. “The public, really, are the beneficiaries of these organizations, which is why regulators like the state attorney general and the IRS have the authority to go in and examine these entities.”
Hill, from Miami, echoed the opinions of her colleagues in saying, “This is just an unusual concept of how one relates to a foundation, and none of it has any support in the law at all.”
All of the tax law experts disagreed with Horn’s contention that he didn’t have to file Form 990s for Basic Faith with the IRS.
Owens said charities that received less than $25,000 in annual income were exempted from the requirement to file the form back in the 1980s and 1990s, but, using Horn’s own example, Owens said, that $25,000 threshold “seems likely to have been exceeded in his case if he is referring to distributing $50,000 in interest proceeds.” [pullquote]If the 990s aren’t being filed, how is the IRS supposed to know that the organization exists or what it’s doing?” —Victoria Bjorklund[/pullquote]
Some of the experts said Basic Faith might have fallen into the category of a private foundation, which is a different kind of charity and subject to different rules.
McDowell explained it this way: “The idea behind a public charity as opposed to a private foundation is that is has broad public support, that the public knows about it, and that the public serves an oversight function, which you don’t have with private foundations, where most of the funding comes from a family or a single company.”
If Basic Faith was or had become a private foundation, the experts said, it would have been required to file tax returns annually even 30 years ago.
“If the 990s aren’t being filed,” Bjorklund said, “how is the IRS supposed to know that the organization exists or what it’s doing?”
Finally, the experts agreed the Alan Keyes event at the Town and Country Hotel in 2000 was troubling if, in fact, it was for political purpose as opposed to charitable purpose.
Nonprofits are “prohibited from either supporting or opposing any candidate for public office,” explained Dostart. “It’s a cause of automatic and immediate revocation of tax-exempt status.”
Because inewsource could find no records describing the event in detail, it is unclear whether Keyes attended the event to speak generally or about his candidacy.
When asked if that event might pose a conflict of interest, Horn told inewsource, “I don’t see it as a conflict of interest. I paid the bill.”
For his response to inewsource this week, Horn turned to Sutton, who was described in a 2004 profile as “one of a small handful of very influential political law attorneys who typically represent moneyed, influential candidates.” Sutton counts now-Attorney General Kamala Harris, Lt. Gov. Gavin Newsom, and former Senator Leland Yee as current or former clients.
After consulting with Horn, Sutton said inewsource and the experts it consulted may have drawn incorrect conclusions from some of Horn’s initial statements. The experts, he said, might be basing their opinions on laws today, not those decades ago.
In summary, he said, “there is no legal or factual basis” to claim the Basic Faith operation was illegal.
In a three-page letter, Sutton said Horn’s recollections are “20 or 30 years” old, and he said it was important to note that “Basic Faith has not been in operation for at least 12 years, was very inactive for several years before that, and its files have long since been discarded.”
Sutton attempted to clarify Horn’s statements. For example, he said, when Horn talked about buying the charity for $25, he was referring “to the fee he paid to the Secretary of State or Attorney General to change the organization’s name.” (State documents show the name change fee was $15.)
Sutton also said that according “to Supervisor Horn’s recollection,” Basic Faith did not raise or spend more than $25,000 in any year. Because of that, Basic Faith was not required to file 990s, he said.
The attorney said Horn spoke generally to inewsource about the real estate transactions and “did not intend to convey that $50,000 in interest was ever actually generated by a particular transaction.”
In addition, when Horn “said that ‘millions were put in to’ the organization,” Sutton wrote, “he simply meant that millions of dollars of proceeds from different real estate transactions over several years went into the bank account administered by Basic Faith though only the small amount of interest generated by these funds ever went into the organization’s own coffers.”
Basic Faith qualified as a public, rather than a private charity because “it raised funds from a wide range of sources,” Sutton said. He did not specify the sources.
The attorney said “Horn confirmed with the IRS at the time that it was appropriate for a nonprofit organization to act as the ‘facilitator’” for his real estate transactions. Because it was so long ago, Sutton said, “tracking down details about any of these transactions would be difficult if not impossible.”
If the charity was not handled in compliance with the law, could there be consequences?
“That would make a beautiful law school examination question,” Owens said.
“They could range from criminal sanctions, that is criminal fines, jail time, on through civil penalties for failing to keep books and records, failing to file the tax returns, income tax plus interest in penalties — if indeed as I suspect… somebody’s taxable income was being sheltered,” he said.
Owens and the others said these situations are handled on a case-by-case basis, and it’s up to each federal or state agency to decide if they would look into the Basic Faith situation, and how far they’d be willing to go.
There is the issue of the statute of limitations — whether the time has run out to seek action, they said. And what level of priority the agencies would assign to a case.
They’d also have to decide whether Horn’s actions were criminal or civil.
“Criminal actions generally have to be willful,” said McDowell from Steptoe & Johnson. “In order to be willfully breaking the law you have to understand the law, and intend to break it — so that’s a high bar.”
“Supervisor Horn clearly believed he was acting appropriately under law,” Dostart said. “Most of these politicians who get into problems end up getting indicted because of a coverup … of things that were wrong in the past. He’s not hiding anything; it’s evident that he believes that these events of 20 years ago were legal.”
Owens said the IRS would be concerned with unpaid taxes from the real estate transactions that took place during the decades Basic Faith operated as a tax-exempt organization, plus the related money Horn may not have disclosed on his own personal tax returns.
Other potential penalties and taxes include: private foundation excise taxes (if Basic Faith was determined to be a private foundation), self-dealing taxes, mandatory distribution taxes, taxable expenditures, and certain IRS penalties which “can be up to 200 percent of the amount at issue,” according to Bjorklund.
In the realm of politics, Horn didn’t list Basic Faith on any of his statements of economic interest, called Form 700s, for the more than 15 boards he’s chaired or been a part of during his 20-year tenure. Horn reasoned he didn’t have to — and his lawyer agreed — because, according to Horn, he didn’t use Basic Faith while in office.
Form 700s detail stocks, real estate, gifts and other potential conflicts of interest held by politicians — such as county supervisors, mayors and city council members — who oversee budgets, spending and contracts.
California’s Fair Political Practices Commission (FPPC) serves as the watchdog and enforcement committee for public officials’ financial disclosure statements. It has the power to levy fines for violations.
Jay Wierenga, communications director for the FPPC, said, “In general, one would not necessarily have to disclose their position in a nonprofit if there is no income, gifts or travel payments.” But he said, “if there are gifts or travel payments, then there could be disclosure requirements.”
Horn maintains he never derived income from Basic Faith.
inewsource researchers Leo Castaneda and Emily Burns contributed to this report.