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

HUD’s action follows several HUD Inspector General reports on improprieties at agency-affiliated nonprofits. Report 2004-AT-0001, at 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.