May 21, 1998 | Read Time: 2 minutes
The I.R.S. has revoked the tax exemption of a charity because of the organization’s contract with a controversial fund-raising consultant, the Watson and Hughey Company.
According to court documents filed by the charity, Adopt-A-Pet in Tulsa, Okla., the I.R.S. concluded that the organization’s fund-raising operation “inured to the benefit” of the Virginia company, which is now called Direct Response Consulting Services. The charity and the company have denied the charges.
The I.R.S. action is significant because it follows a recent U.S. Tax Court opinion that the service was right to revoke the tax-exempt status of an Indianapolis charity, the United Cancer Council, which had a similar contract with Watson and Hughey. In that case, the court ruled that part of the net earnings of the charity had improperly inured to the benefit of the company. The court said the company was a charity “insider” because its contract gave it so much control over the charity’s finances and fund raising.
In its decision on Adopt-A-Pet, the I.R.S. cited the Tax Court’s opinion in the United Cancer Council case and said that the basic facts in the two cases were “virtually identical.” The service also said that Adopt-A-Pet was operated indirectly for the “private benefit” of Watson and Hughey because of the mailing lists that were the product of the fund-raising agreement.
The contract, signed in 1985, provided that the mailing lists developed for Adopt-A-Pet by Watson and Hughey were the joint property of both organizations. The charity was not allowed to rent, exchange, lease, or give away donor names and other information generated during the contract period. After the contract expired, the charity was permitted to use the mailing lists only for its own solicitations but could not rent the lists to other groups. Watson and Hughey, however, was allowed to make full use of the lists.
“Watson and Hughey received the lion’s share of the benefits to be derived from the joint venture,” the I.R.S. said in its decision.
Details of the I.R.S. action became public when Adopt-A-Pet sued the revenue service in Tax Court to regain its exemption and to fight a decision by the service that it owes $186,844 in back income taxes. “Adopt-A-Pet has never operated to benefit anyone but the animals,” said the suit filed by the charity, which picks up stray dogs and cats.
Richard Wolf, general counsel for Direct Response Consulting Services, said that the I.R.S. action against Adopt-A-Pet amounted to “a retroactive witch hunt” because the revenue service took so long to find fault. At the time of the Adopt-A-Pet contract, Watson and Hughey and other fund-raising consultants had similar deals with other charities, Mr. Wolf said, and had no clue that the I.R.S. would much later object.
