Tax & Charities Division

March 4, 2011

Findings

The XYZ Charity was incorporated on September 12, 2008 as a Hawaii public benefit corporation and received an exemption ruling from the IRS under section 501(c)(3), of the Internal Revenue Code.

As a director and president of XYZ Charity, and of the ABC Charity, Jane Doe has a duty to act in good faith and a duty of care to both organizations. Haw. Rev. Stat. § 414D-149. Ms. Doe testified under oath that she was aware that the bylaws of XYZ Charity required two signatures for XYZ Charity checks that exceed $300 . Nevertheless, Jane Doe admitted under oath that there were multiple instances where XYZ Charity checks were made payable to the ABC Charity and other parties in excess of $300 that contained only her signature.

In addition, in situations where the XYZ Charity had transactions with the ABC Charity, these involved conflict transactions as defined by section 414D-150, Hawaii Revised Statutes, due to Jane Does’ status as president and director of both nonprofit organizations. It does not appear to this office that those conflict transactions were approved by an un-conflicted quorum of the XZY Charity board of directors as required by law. These transactions were also not handled in a manner consistent with the Bylaws of the XYZ Charity. See Article VII, section 3.

Furthermore, there were multiple instances where checks drawn on the XYZ Charity checking account were made payable to “cash” for significant sums of money, thus making impossible to determine whether the charitable assets of the XYZ Charity were spent for proper purposes, or in accordance with restrictions placed by donors, or consistent with the tax exempt purposes of the XYZ Charity and whether such expenditures involved private benefit or inurement prohibited by section 501(c)(3) of the Internal Revenue Code. Such a practice arguably violates Jane Doe’s duty of care to the organization.

In addition, as of the date that AG Subpoena No. XXXXX was served on the XYZ Charity, it was not a registered charitable organization as required by section 467B-2.1, Hawaii Revised Statutes, which became effective on January 1, 2009. Although a logon and password to the Attorney General’s Internet based registration system was obtained on behalf of XYZ Charity by Jane Doe 2 on July 31, 2009, the registration was not submitted until December 31, 2010. The failure to register is a unfair trade practice under chapter 480, Hawaii Revised Statutes. See Haw. Rev. Stat. § 467B-10.5. A knowing failure to register is punishable as a criminal offense. Haw. Rev. Stat. § 467B-10.

Although there are far more severe remedies that the Attorney General could seek to impose, we propose to conclude this investigation as follows:

1. Payment of a $500 civil penalty for the XYZ Charity’s failure to register within 30 days of acceptance of this proposal.
2. Payment of the costs of the investigation ($569.21 for court reporter—the invoice is attached) within 30 days of the acceptance of this proposal.
3. XZY Charity shall submit its IRS Form 990/990EZ for its 2009 and 2010 fiscal years through the Attorney General’s registration site, www.efile.form990.org and pay the annual fees require by section 467B-6.5, HRS
4. The Board shall adopt a conflicts of interest policy to ensure compliance with section 414D-150, HRS.
5. The Board shall undergo training from an appropriate source, such as the Hawaii Alliance of Nonprofit Organizations, or other trainer, on compliance with fiduciary duties.
6. The Board of the XYZ Charity shall undergo remedial education in the requirements of its own bylaws and comply with the bylaws hereinafter.
8. The XYZ Charity board shall adopt reasonable internal financial controls to ensure that XYZ Charity funds are not improperly expended or diverted.
7. The XYZ Charity president shall certify compliance with these conditions no later than July 30, 2011.