Before publishing our recent story on Supervisor Bill Horn’s Basic Faith Foundation, Horn’s lawyer sent us a three-page letter attempting to explain various ways in which the charity was operated in compliance with state and federal laws.

We are posting the lawyer’s letter here, along with short interviews we conducted with nonprofit experts inserted into each relevant section.

Horn’s lawyer sent us a second letter after publication, which is available here.

Visit the Basic Faith project page to see everything related to this evolving story.


TO: Brad Racino
FROM: Jim Sutton
RE: Response to Questions About Supervisor Horn and Basic Faith

This memorandum responds to the questions raised in your May 19, 2014 email to the office of our client, San Diego County Supervisor Bill Horn.

Before responding to your specific questions, we feel that it is important to point out two preliminary matters. First, 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. In addition, Supervisor Horn does not recall the organization being involved in any section 1031 exchanges since 1990, almost 25 years ago. Therefore, the following responses are only as good as the recollection of the decades-old events at issue.

In addition, the legal conclusions expressed by the “experts” you contacted might have been based on nonprofit, tax or disclosure laws in place today, even though the transactions and reports at issue of course took place decades ago. (these opinions may have also been based on an incomplete understanding of all relevant facts).

Second, it appears that you have incorrectly drawn the conclusion that several general comments made by Supervisor Horn during the interview about section 1031 exchanges were in reference to specific transactions. For example, both Supervisor Horn and the staffer who attended the interview recall Supervisor Horn mentioning that “the interest generated could be $50,000” as an example of how section 1031 exchanges work as a general matter; the Supervisor did not intend to convey the $50,000 in interest was ever actually generated by a particular transaction. Also, when Supervisor Horn said that “millions were put in to” the organization, he simply meant that millions of dollars of proceeds from different real estate transactions over several years went in to the bank account administered by Basic Faith, though only the small amount of interest generated by these funds ever went in to the organization’s own coffers.

Finally, regardless of what Supervisor Horn said or did not say during the interview, you are now on notice of other relevant facts and law.

With respect to your specific questions:

1. Form 990s. Basic Faith did not, to Supervisor Horn’s recollection, raise or spend more than $25,000 in any year, and therefore would not have been required to file IRS Form 990s. (Treas. Reg. section 1.6033-2(g)(1)(iii) [filing threshold prior to 2010 was $25,000; threshold increased to $50,000 in 2010]; IRS Rev. Proc. 2011-15.) In addition, because it raised funds from a wide range of sources, the organization was not a “private foundation,” but rather was a “public charity.” (Int. Rev. Code section 170(b)(1)(A)(iv).)

YouTube video

[toggle title=”Video transcription” state=”close”]
MCDOWELL …The other thing that jumped out at me was the representations made about how the organization would be fundraising from individuals, and I think, if I recall this correctly, would be fundraising from individuals and yet, in the transcript, Mr. Horn says they never raised funds from individuals and that in fact he didn’t want to, that he didn’t want people to know about the organization.

MCDOWELL: The idea behind a public charity as opposed to a private foundation is that it has broad public support, that the public knows about it, and the public serves an oversight function, which you don’t have with private foundations where most of the funding comes from a family or from a single company.

BJORKLUND: Churches don’t have to file 990s, so they would be an exception to a rule. But I don’t think this organization took the position that even though they were supporting Christian ministries, it was itself a church, and therefore, since 2006, as Suzie said, it had a filing obligation, but I would submit to you that there’s no way it could have met the public support test prior to that, so it must have been a private foundation, which has no exception from filing.[/toggle]

2. Candidate appearance. 501(c)(3) charities may (and often do) invite candidates for public office to speak at their fundraising events, as long as the charity does not urge attendees to vote for the candidate, distribute the candidate’s campaign literature, or otherwise intervene in the candidate’s campaign. (Int. Rev. Code section 501(c)(3); CEB, “Advising California Nonprofits” (2012) section 19.61 [“[C]harities often use politicians as fundraisers for charitable causes, which is acceptable as long as it is clear that any contribution is strictly dedicated to the charity’s purposes.”].) Allen (sic) Keyes was a diplomat and sought-after public speaker, and, to the best of everyone’s recollection, Basic Faith did not affirmatively support Keyes’ candidacy at the May 2000 event.

YouTube video

[toggle title=”Video transcription” state=”close”]
DOSTART: A 501(c)3 is prohibited from either supporting or opposing the, any candidate for public office. So it’s a cause of automatic and immediate revocation of tax exempt status if a 501(c)3 is in the context being seen as supporting or opposing a candidate for public office. In the Alan Keyes matter that you, I think it was a breakfast or lunch that you raised in your interview of Supervisor Horn, it was unclear to me if this was in some way an endorsement or an implied endorsement by Basic Faith Foundation, or if it was something more generic.

The question always comes up, if you have a person who is coincidentally a public candidate, your rotary club, whatever it may be. Now that’s a 501(c)4 not a c3, but they bring in a candidate who wants to speak to the rotary club, for example. What if it’s the district attorney wants to talk about law enforcement in San Diego County?

Well, during an election cycle that may be something you don’t do. If it’s immediately after the election they may have no interest in showing up, that’s the problem you have with life, they’re most interested in coming right ahead of an election.

So one has to look at the context of the advertising for the Alan Keyes thing and so on. But if in context it would look like an endorsement, then it was itself a cause for immediate revocation of tax exempt status. But this entity has been operating outside the law for so long that that’s almost a pimple on the elephants behind. [/toggle]

3. Form 700. Public officials are only required to list board membership on for-profit entities on their Form 700s, and are explicitly not required to disclose involvement in nonprofit organizations, unless they receive some type of compensation from the nonprofit. (Cal. Govt. Code section 87209; FPPC Advice Letter to Danian Hopp (7/26/10) No. A-10-121 [FPPC advises that volunteer members of nonprofit boards are not required to list nonprofit on their Form 700s].) Supervisor Horn sat on Basic Faith’s Board of Directors, but never received any per diem or other payments from the organization, and therefore was not required to list Basic Faith on his Form 700.

We have confirmed with the FPPC that if Supervisor Horn did not receive any per diem or other payments from Basic Faith, he did not have to disclose his role as CFO of the organization.

4. Charitable purpose. Supervisor Horn has indicated that Basic Faith supported several programs and charities, including distributing Bibles and building houses for the poor in Mexico and South America. The reference which Supervisor Horn made to “paying $25” when he first became involved with the organization simply related to the fee he paid to the Secretary of State or Attorney General to change the organization’s name.

YouTube video

[toggle title=”Video transcription” state=”close”]
BJORKLUND: Nonprofits have to be organized and operated exclusively for exempt purposes. It is unusual to see charities that are not organized and operated for exclusively charitable purposes because it’s wrong. And I would put this situation in that category.

You can’t leave one on the shelf and have it be operated for exempt purposes. In fact, the IRS has recently revoked the exemptions of a number of organizations that were inactive because they weren’t being operated for exempt purposes.

MCDOWELL: And really the very essence of a charitable organization is first, that it has the nonprofit corporate form, so it doesn’t have shareholders. And there’s a nondistribution constraint. Contributions to charitable organizations, once they’re made, they are made to charity forever, and if an organization is dissolved, the assets of that organization need to go to another charity. They can never be used for private purposes.[/toggle]

5. Section 1031 exchange. Supervisor Horn confirmed with the IRS at the time that it was appropriate for a nonprofit organization to act as the “facilitator” or “qualified intermediary” for 1031 exchanges, and there is no legal reason why a nonprofit organization can not serve in such capacity. (26 Code Fed. Regs. section 1.1031(k)-1(g)(4)(iii).) As required by the rules on 1031 exchanges, the funds from the sale of Supervisor Horn’s investment properties were held in a separate account and not commingled with any of his personal accounts. Again, the organization evidently did not administer the funds in any 1031 exchange since 1990, so tracking down details about any of these transactions would be difficult if not impossible.

YouTube video

[toggle title=”Video transcription” state=”close”]
DOSTART: May I explain it, Brad, so you’ll know as you consider what happened here? In order for this four-party transaction that I described — the starker, deferred, like-kind, non-simultaneous exchange to work, the accommodating party must be independent. And the regulations and, I have brought these for you to take with you, the regulations are very clear that the accommodating party must be independent.

For example it’s very clear it says if you have an ongoing relationship with an accountant, with an attorney, with an investment bank, with some other entity, other than serving as an accommodating party, then they’re not independent of you, so you could not use your family lawyer — who is no relative at all as the accommodating party — because you employ that family lawyer to do your will or to handle other things, within the last two years. So there’s a two-year look back rule, to see if that accommodating party, is the trade name for the entity that facilitates these things, is independent.

If it’s not independent of you, it’s deemed to be your agent. If it’s your agent, then for purposes of the law when you give the real estate to your agent you have not parted with it.

Now here’s the problem:

If you have not parted with it and you then through your agent sell it to the cash buyer, receive cash, later take that cash and buy the replacement property, you have a taxable transaction because you didn’t use an accommodating party. It has to be set up correctly with an independent entity as an accommodating party.

So in this transaction, even though it’s very clear to me that Mr. Horn in good faith believed he had an independent entity, he did not. He had an entity that he controlled and because he controlled it, it’s not independent. And so at the time of sale by this controlled entity, for cash, there was a taxable transaction.

To put that into an example, that follows on the transcript, if it was a $3 million building, that’s what I think he gave an example, he said $6 million but lets just say I sold one for three, put in $1 million, took the three million of resale proceeds and bought a new one for four, that works if you have an independent entity as the accommodating party, if you meet the other requirements — this all must close within 180 days and other requirements under law. But if you have an agent then it does not work and at the moment of sale to the cash buyer you have a taxable transaction. $3 million of cash came in, with depreciation and such you may have only a $1 million basis left. You’ve got two million of taxable gain. Presumably that wasn’t reported on Mr. Horn’s tax return because he believed it was not reportable.[/toggle]

In sum, based on Supervisor Horn’s recollection of his involvement with Basic Faith going back 20 or 30 years, and applicable laws and regulations, there is no legal or factual basis for your claim that the “operation” was “illegal.” Any representations to the contrary, particularly in light of the number of years which have passed since the time frame at issue, would be in complete disregard of the available facts, and would therefore not be in compliance with legal requirements, as well as, in our opinion, running counter to accepted notions of journalistic ethics.

Feel free to contact us with any follow-up questions.

Brad Racino was the assistant editor and senior investigative reporter at inewsource. He's a big fan of transparency, whistleblowers and government agencies forgetting to redact key information from FOIA requests. Brad received his master’s degree in journalism from the University of Missouri in...