HOUSING POLICY
WASHINGTON BRIEFS
Regulators Get Stricter With Affiliated Nonprofits
By Martha Briegam
AFFORDABLE HOUSING FINANCE • JULY 2007
After several Inspector General
reports criticizing the dealings
of public housing agencies
(PHAs) with their nonprofit
affiliates, the
Department of Housing and Urban
Development (HUD) was about to
announce a new rule splitting the ambiguous
middle ground it has occupied.
Drafts of a new rule have proposed
distinguishing between a closely controlled
“instrumentality” acting as an extension of
the public housing agency, and an “affiliate”
that has agency connections but more
independence. At press time, a final version
was expected imminently.
A September draft suggested an
“instrumentality” would count as part of
the PHA for conflict of interest and procurement
purposes, but it would have to
follow the same procurement rules as the
agency when selecting contractors or suppliers.
An “affiliate” would be subject to the
PHA’s conflict of interest and procurement
rules but would not have to act like a public
entity when selecting its own contractors
or suppliers. (See the Reno Cavanaugh
law firm’s Web site at www.renocavanaugh.com/Publications.htm.)
HUD’s action follows several HUD
Inspector General reports on improprieties
at agency-affiliated nonprofits.
Report 2004-AT-0001, at www.hud.gov/
offices/oig, summarized earlier such
reports and concluded that “development
efforts focused as much on enriching
PHA officials and private investors
as on serving the public good.” An affiliated
nonprofit, the MDHA
Development Corp., was also criticized
in The Miami Herald’s award-winning
“House of Lies” series alleging corruption
at the Miami-Dade Housing
Agency.
In a separate and possibly unrelated
move, the Internal Revenue Service (IRS)
may be changing its position on tax exemptions
for agency-affiliated nonprofits.
Attorney Christopher Hornig, with
the Washington firm of Klein Hornig LLP,
has been warning colleagues since March
about a startling response he got from IRS
officials who refused 501(c)(3) status to a
nonprofit affiliated with a PHA. He noted
IRS doctrine has always denied taxexempt
status to entities that are part of
government agencies, but he said the officials
appeared to have “adopted a newly
aggressive implementation of this doctrine”—
a view that even incomplete
agency control might preclude 501(c)(3)
tax exemption. For example, 501(c)(3) status
might be refused if a minority of
agency-appointed members could “under
some circumstances” control decisions of
the board of directors.
Megan Glasheen of Reno &
Cavanaugh recently appeared with IRS
attorney Richard A. McCray Sr. on an
American Bar Association conference
panel on nonprofits and government entities.
By her account of McCray’s comments,
he emphasized the individual,
appealable nature of 501(c)(3) application
reviews and guessed officials might have
rejected an application because of the difference
between the HUD and IRS uses of
the word “instrumentality.” Under IRS
rules, an “instrumentality” acts for an
agency very directly. The HUD use of the
word appears broader.
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