April 17, 2000 | Read Time: 2 minutes
A high-profile, nine-year battle between the Internal Revenue Service and the United Cancer Council — a small Indianapolis charity with ties to a controversial fund-raising company — has ended with an out-of-court settlement.
The agreement requires the organization to donate its assets only to charities that have never had a relationship with the fund-raising company, Direct Response Consulting Services, in McLean, Va., which was originally called the Watson and Hughey Company.
The settlement was announced by a lawyer for the charity, Leonard J. Henzke, Jr.
The case was watched closely by charities in part to see how far the I.R.S. could go in finding fault with the relationship between a charity and its fund-raising consultant.
The I.R.S. pulled the United Cancer Council’s tax exemption in November 1990, a few months after the charity declared bankruptcy, and made the action retroactive to 1984. Last year, the U.S. Court of Appeals for the Seventh Circuit ruled that the government was wrong to revoke the exemption (The Chronicle, February 25, 1999). The service had argued that Watson and Hughey was an “insider” that had improperly seized control of the charity. The company’s contract with the charity ran from 1984 to 1989.
The appeals court said that that part of the I.R.S.’s rationale didn’t pass legal muster, but that the U.S. Tax Court should assess the validity of a second reason the I.R.S. gave for revoking the charity’s exemption: that the terms of the fund-raising contract meant, in effect, that the charity’s board of directors ran the organization for “the private benefit” of Watson and Hughey.
The settlement means that the Tax Court will not rule on whether the I.R.S. was right in arguing that the charity was operated largely for Watson and Hughey’s benefit.
Under the agreement, the United Cancer Council lost its tax exemption from 1986 through 1989 but got it back as of January 1, 1990.
The settlement requires that any assets remaining in the United Cancer Council’s bankruptcy estate — after the charity pays a sum of money to the I.R.S. and to settle other claims — and any bequests received in the future be used “solely for payment of expenses of direct care of cancer patients.” The cancer council must donate the money to health charities that “have never been associated with Watson and Hughey or its successors, agents, or related entities.”
United Cancer Council agreed that from now on it would not solicit contributions from the general public.
