A vocal proponent of the Honolulu rail project has asked the IRS to look into alleged tax violations by a nonprofit suing to stop the train.

The head of the charity, Republican Hawaii Sen. Sam Slom, says the complaint is just the latest attempt to discredit rail opponents and that the lawsuit fits into his nonprofit organization’s stated mission.

So, who’s right? Civil Beat talked to a former IRS official who oversaw nonprofits. The bottom line: It’ll be a good long time before we know for sure whether laws were broken, and the question ultimately hinges on whether Slom can draw a link between the lawsuit and his organization’s charitable purpose.

How important is the lawsuit? Critical. Along with uncertainty about federal funding, it is the biggest hurdle for the $5.2 billion project. And the legal challenge can’t proceed without funding.

In an online column last week, anti-rail mayoral candidate Panos Prevedouros criticized the project and suggested donations would make a great Christmas gift. He promised: “The lawsuit will stop the rail.”

The Allegations

The complaint, filed by Hannah Miyamoto two weeks ago, makes a number of allegations against the Small Business Hawaii Entrepreneurial Education Foundation. “SBH” is one of eight named plaintiffs in the environmental lawsuit against rail that had its first in-court hearing last month.

In the 111-page document she posted to her website, Miyamoto made three main allegations: SBH is using its income for personal gain; it’s involved in a political campaign; and it’s operating contrary to its stated exempt purpose.

“The clearest violation is that the Foundation’s funds are helping to pay the legal expenses of ex-Governor Cayetano, local non-tax-deductible groups, and other people,” Miyamoto wrote in an email announcing the filing to the media.

Let’s take the “clearest” violation first. That one includes the suggestion that charitable, tax-exempt donations received by the nonprofit are being used to benefit other individuals — “personal gain.”

Honolulutraffic.com encourages rail opponents to make tax-deductible donations to
either SBH or the Grassroot Institute of Hawaii. The Grassroot Institute describes itself as a “free market think tank.” Though neither he nor his organization is a party to the rail lawsuit, Grassroot Institute founder, president and board chairman Richard Rowland is also treasurer of SBH.

Marcus Owens, director of the IRS Exempt Organizations Division from 1990 until 2000, said the intermingling of funds is by itself “immaterial” and “insignificant” — as long as the charity’s funds are being used to further its stated tax-exempt purpose.

“If the decision is the litigation furthers their charitable goal, then any expenses related to that litigation further the charitable goal,” Owens told Civil Beat in a phone interview last week. “Is having additional plaintiffs helpful in the lawsuit? Most times, the answer to that is yes. The more people you have on your side, the more likely the court is going to sit up and take notice, and the more likely you are to prevail.”

The plaintiffs have together hired three attorneys to represent them: nationally renowned Nicholas Yost and Matthew Adams from California and local lawyer Michael Green. The list of the eight plaintiffs includes some heavy hitters from various sectors of Hawaii’s political spectrum: SBH; former Hawaii Gov. Ben Cayetano; environmental group Hawaii’s Thousand Friends; retired Judge Walter Heen; Honolulutraffic.com; University of Hawaii law professor Randy Roth; Cliff Slater; and Honolulu urologist Michael Uechi.

“Almost by definition, if you’re going to have private plaintiffs in your lawsuit, if you prevail, they’re going to receive a private benefit,” Owens said. “There’s no need to wring out all the personal gain.”

In her complaint, Miyamoto cites legal precedent that she says requires that charities be operated “exclusively for an exempt purpose.” But the case she cites deals with attempts to influence legislation — “lobbying” — and not litigation.

The IRS rule covering environmental lawsuits by nonprofit organizations explains what “exclusively” means in that context:

“In determining whether an organization meets the operational test, the issue is whether the particular activity undertaken by
the organization is appropriately in furtherance of the organization’s exempt purpose, not whether that particular activity in and of itself would be considered charitable,” Revenue Ruling 80-278 states. “Moreover, the fact that the activity reflects a particular viewpoint or opinion on a controversial issue does not preclude the organization from qualifying for exemption under section 501(c)(3) of the Code.”

That last piece nixes the second of Miyamoto’s three main allegations: that SBH is involved in a “political campaign” and is violating the law because it’s funding “propaganda” rather than scientific, nonpartisan, unbiased analysis, study or research. She writes in her complaint that HonoluluTraffic.com, the website SBH points to as an educational resource, is slanted against the rail project and wouldn’t enable a reader to reach an independent conclusion.

But, again, Miyamoto’s citation to U.S. Treasury regulations covers “propaganda influencing legislation,” not litigation. Owens, the former IRS division chief, said it’s up to Small Business Hawaii to decide whether the rail lawsuit fits into its mission.

“If a board decides that an action furthers the purpose of an organization, that’s pretty much all that has to occur,” he said. “It is a question for the board of the nonprofit to decide, and decisions of the board that are not facially unreasonable are generally protected by what’s known as the business judgment rule.

“The key issue is how does it view the relationship between the lawsuit and its nonprofit mission. That’s a factual question,” he said. “There’s no particular threshold that has to be met in the sense of measuring relationships. It’s a judgment call by the board of the nonprofit. … It’s not an immense hurdle to overcome if there is some nexus.”

The Mission

So what exactly is SBH’s stated mission and purpose, and is there a reasonable nexus between it and the rail lawsuit? That’s the nature of Miyamoto’s third major allegation, and is the key test that Owens points to as well.

In its most recent 990 form, this is the described mission:

“The mission of the Foundation is to provide entrepreneurial information, training, and education through publications, radio and television, public meetings, conferences, seminars, and an interactive website in Hawaii.”

On its website, SBH includes a more detailed description:

Our mission is to promote and provide free market entrepreneurial information, business education, legislative transparency and education reform through research studies, periodic publications, radio and television, public meetings, conferences, seminars, awards recognition functions, and a business-education website in Hawaii.

SBH Foundation looks for ways to ensure that Hawaii’s youth have the opportunity to learn about benefits of the free market and entrepreneurship through mentorships, training, internships and other opportunities.

Building bridges between the academic and business worlds through partnerships in an effort to improve the quality of education in Hawaii is one focus of the SBH Foundation.

Some of the SBH Foundation projects include a transparency web site offering parents and students information on the Hawaii public school system, partnerships with business owners and public school administrators so they have a resource to help one another; free market and educational events, as well as books, other publications and workshops.

Slom, Hawaii’s only Republican state senator and president of SBH’s board, acknowledged that advocacy and litigation are not expressly included in the charity’s stated mission.

“Obviously the mission statement itself which was written back in 2008 when the foundation was organized seems to be more limited,” he said.

But he said his understanding, based on consultations with an attorney and accountant before jumping into the lawsuit, is that even an indirect connection between the lawsuit and the mission would be “perfectly OK.” Civil Beat did not ask who Slom got his advice from, but one of SBH’s co-plaintiffs, Roth, is an expert in federal taxation and nonprofit organizations, according to his William S. Richardson School of Law biography.

“If something is going to affect or impact the business climate specifically, then we see that as our role to be involved,” Slom said.

He said Miyamoto has a long history of threatening organizations she disagrees with, and said the complaint is part of a political agenda to marginalize rail opponents.

“This is just one more attempt by the people who support the use of government money for a rail system to try to make sure that there is no credible opposition,” he said. “But the opposition remains and will remain because we absolutely believe that the facts are on our side.

“The seven plaintiffs really represent different aspects of the community, and we are the ones that represent basically the business and entrepreneurial community,” Slom said. “We’re not giving up, we’re not going to roll over, and we don’t care about threats.”

The Audit

Slom said he’s confident that SBH is in the clear, but said the complaint isn’t frivolous and that he takes the allegations seriously.

“Basically, the prudent thing to do is what we did. To seek advice first, and we did that. The advice that we got, the information we got and the IRS ruling seem to be very clear to us,” he said. “However, you can never assume what the IRS can do.”

The IRS can do a lot of things, but the first major indication that Miyamoto’s allegations have some merit would be an audit of SBH. That could take up to a year, potentially enough time to adjudicate the lawsuit, which is on its own slowly-moving timeline.

Owens said the complaint will be forwarded to the IRS’ Dallas office of the Exempt Organization Division, though it might take three weeks or longer to make its way through the bureaucracy.

The evaluation process might take another four or five weeks, Owens said, and then the file will be shipped to Los Angeles. Depending on workload, it might be anywhere from two or three months to six or eight months before it rises to the top of the pile.

A considerable amount of time could pass — as much as a year — until an audit even begins. At some stage, the IRS might ask Slom to explain how the lawsuit furthers SBH’s stated tax-exempt mission.

The IRS will make no public announcement when it decides to perform an audit, Owens said, nor will it make an announcement if it decides an audit is unnecessary.

In the end, whether the IRS investigates or takes action might be secondary. The complaint could have a chilling effect on donors, who might be concerned that their contributions would not be tax deductible.

Without those donations, it will be difficult for rail opponents to sustain a costly and lengthy lawsuit against deep-pocketed defendants, the city of Honolulu and the federal government.

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