By Amy Silverman
By Olivia LaVecchia
By Monica Alonzo and Stephen Lemons
By Chris Parker
By Michael Lacey
By Weston Phippen
What is government doing to protect the public from unscrupulous corporations or religious institutions?
The federal government is unlikely to do anything to protect the public from shady religious institutions or guarantee that such organizations deserve the tax-exempt status they enjoy. "No one wants to be anti-church," says a spokesman for one tax-reform group.
The State of Arizona is going the wrong direction when it comes to corporate disclosure: It no longer requires businesses to file annual financial reports, which can be useful in determining the stability of a corporation.
Maricopa County, on the other hand, plans to expand its oversight of real estate transactions in an attempt to assure that everyone who should pay taxes does pay taxes.
The Affidavit Scam
When BFA insider Jalma Hunsinger conducted land flips to decrease the value of four parcels of land by $2.3 million on a single day--September 22, 1992--he was engaging in a storied Arizona real estate practice that often violates or skirts the law.
Nobody questioned the land flips because no regulators routinely check the veracity of buyers' and sellers' claims of sales figures. That's about to change in Maricopa County, where officials are establishing a special unit to monitor the accuracy of property values.
To assure that properties are taxed at a fair rate, the Arizona Department of Revenue and the Maricopa County Assessor's Office require the seller and buyer in most property transactions to file an "affidavit of value" at the Maricopa County Recorder's Office. Sellers and buyers are asked to fill out the same document. It includes a legal description of the land, terms of the sale and the total sale price.
The language on the affidavit is unambiguous: "The undersigned, being duly sworn on oath, says that the foregoing information is a true and correct statement of the facts pertaining to the transfer of the above described property."
The whole point of the affidavits is to give the county and the state an idea of the accurate values of property; this helps determine accurate taxes in their computer models.
Both the seller and the buyer must affix their notarized signatures to the affidavit, swearing that what they say is true. To lie on affidavits violates Arizona law, and carries penalties ranging from misdemeanors to more serious felony charges in cases where a lie or lies are part of a larger fraudulent scheme. For example, buyers and sellers might lie on an affidavit to gain a fake tax advantage, to deceive investors or lenders, or to enable bogus appraisals. And since the buyer and seller fill out the same affidavit, both have to lie to make the scam work.
"It's a very sophisticated way of limiting your tax liability by moving resources between corporate entities," says Fred Kelly, chief deputy assessor for the Maricopa County Assessor's Office. "Unfortunately, tax reporting depends on people being honest. When people use loopholes, the rest of us have to pick up the bill. If someone doesn't pay their share, people who are honest make up the difference."
Maricopa County currently has no system for making sure affidavits are accurate and true--other than to dispatch appraisers to check out suspicious land values on affidavits. But this system has problems--not every fraudulent affidavit is caught, and county appraisers are taken away from their routine but busy tax assessment duties.
The affidavit scam has taken on such proportions that the Assessor's Office is setting up a team this fall just to make sure affidavits are reliable. Kelly says the team will consist of five to seven employees whose salaries will cost county taxpayers up to $250,000 each year. The team will be able to take the workload off of county appraisers.
Currently the only way for a member of the public to determine if someone lies on an affidavit is through the laborious process of cross-checking the questionable affidavit with other public records.
The Maricopa County team will try to make sure the affidavits available to the public are honest in the first place.
Springer's Law and Limited Liability
Arizona corporations no longer have to file telltale financial records.
In the past decade, Arizona Legislators have passed laws that have had the effect of protecting corporations--and white-collar criminals--while sealing up records that allow citizens to get information to protect themselves.
The biggest blow to the public's right to know was a bill sponsored by Republican state Senator Carol Springer of Prescott. The law, which went into effect January 1, 1998, relieves Arizona for-profit corporations from filing annual financial statements with the Arizona Corporation Commission.
"We fought it for three years in a row. . . . It's a horrible piece of legislation for consumers, for newspapers trying to cover things for the public, as well as businesses who want to know basic assets and liabilities for business," says state Senator Chris Cummiskey, a member of the Senate finance, commerce and banking and insurance committees.
Cummiskey, a Phoenix Democrat, described the old disclosure requirements as "the easiest way for the public to get a snapshot of how businesses were working."
"You can't get a sense of how corporate webs are constructed without baseline information," he says.
The old law requiring corporate financial disclosure was put into place in the 1970s, Cummiskey says, to battle rampant real-estate fraud.
"There was a feeling then that open government was an important thing for public," he says.
But business lobbyists, most notably the Arizona Chamber of Commerce and the National Federation of Independent Businesses, found an ally in Springer by complaining that the simple form caused too much paperwork and revealed confidential information to competitors.
"It's a one-page form, and this notion that this was a bureaucracy gone mad was overstated," say Cummiskey.
Since the law took effect this year and the Corporation Commission is now accepting year-end statements for 1997, the last year that financial records will be available for public inspection is 1996.
Anyone interested in learning about the for-profit subsidiaries owned by Jalma Hunsinger or the dozens of for-profit subsidiaries controlled by the Baptist Foundation of Arizona, for instance, won't find any annual financial statements records beyond the year 1996.
They simply won't exist.
Springer says she sponsored the law to protect Arizona businesses from having to expose financial information that could be accessible to competitors in states that did not require financial disclosure.
What about citizens?
"They can always ask the Better Business Bureau for help," she says.
But unsavory corporations don't usually register with the Better Business Bureau--and by the time a citizen seeks the help of the BBB, which has no regulatory authority, money may have already been lost.
Springer's law, coupled with a seven-year-old law that legalized "Limited Liability Corporations" (LLCs), leaves citizens with little hope glimpsing inside corporations in Arizona.
By the end of 1997, there were 25,000 LLCs registered with the Arizona Corporation Commission. LLCs are popular with business people because LLCs don't have to disclose anything--owners, officers, members, finances, not even the nature of the business. Yet they are still registered with the Corporation Commission and can do business in Arizona.
"Convicted felons can hide behind LLCs, and the Corporation Commission has no way of knowing," says Joann MacDonnell, director of the corporations division of the Arizona Corporation Commission. "If they admit they're Al Capone, that's fine, but if they refuse to disclose it and we have no proof, then we are not empowered to revoke their corporate status."
"We should put laws [requiring disclosure] like this back into place and strengthen them," says Cummiskey. "For the public's benefit."
In October 1989, televangelist Jim Bakker was sentenced to 45 years in prison for defrauding his flock out of $154 million through his PTL organization. In exchange for $1,000 payments, the faithful were promised vacation lodgings at a Christian theme park in South Carolina. Instead of investing the money in the vacation park, Bakker bought luxuries for himself and his family--a private jet, homes, limousines and an air-conditioned tree house for his children.
The faithful didn't get their vacations, and they didn't get their money back.
"He had no thought whatever of his victims," a judge said during Bakker's 1989 conviction, "and those of us who do have a religion are ridiculed as being saps for money-grubbing preachers or priests."
Bakker's sentence was reduced by an appellate court, and he served only four years in prison before being released.
The Bakker case sent shock waves through the Christian community, yet even today the IRS--and citizens--are usually unable to discern how religious foundations spend their money.
And even though religious charities get the bulk of gifts donated in the United States, antiquated tax laws make it nearly impossible for the IRS to monitor the approximately 90,050 church-related tax-exempt organizations in the nation.
All church-related organizations are required to follow the law, but it is more difficult for the IRS to catch them breaking it. Unlike other organizations that are exempt from paying income tax under rule 501-C-3, church-related non-profits needn't tell the IRS how they spend their money. Other, non-religious tax-exempt organizations, such as the Arizona Community Foundation, are required to file an annual Form 990, which discloses how money is spent and how much officers are paid.
The Form 990 is open to public inspection, so that people donating to charities will know how those dollars are spent--or misspent.
But with church-related organizations, the public--and the IRS--remain in the dark.
Federal tax regulations prohibit the IRS from routinely auditing the books of church-related organizations unless an IRS regional commissioner allows it.
The catch--before the commissioner can grant permission for an audit, he already has to know damning information exists in the very books that haven't been audited.
"Our ability to review their finances is very limited," says Marcus Owens, director of the exempt organizations division of the IRS. Owens says the IRS usually learns about possible tax violations in religious organizations from disgruntled former employees or from newspaper articles.
But few tax-policy reformers or politicos even know about the obscure law--or, if they do, want to reform it and make religious organizations more accountable.
There are no movements alive in Congress to change the way the IRS must deal with religious foundations.
Pete Sepp, vice-president for communications for the National Taxpayers Union, a 300-member Washington, D.C.-based tax research and lobbying group, says he wasn't aware that the IRS was restricted from investigating religious foundations.
"This is where social aspects of the tax code intrude on the political," he says. "For a number of years, policy makers believed religious organizations deserved special considerations with the tax code."
"I've heard talk about this, but no one wants to be anti-church. It's bad politics," says Bob McIntyre, director for Citizens for Tax Justice, a Washington, D.C.-based tax reform group that calls itself a "middle of the road" group in favor of progressive taxation. The group is funded in part by labor unions.
"I think it would think it would take quite a scandal [to reform the law]," McIntyre says.
"This doesn't hit the radar screen in Congress."
"Officially we really don't take too much position on that kind of fraud issue," says Peter Cleary, communications manager for Americans for Tax Reform, a conservative group, and one of about 70,000 taxpayer groups that oppose increases in taxes and are active in lobbying for tax-code reform.
He says the IRS should treat all taxpayers as leniently as it treats religious foundations.
"We would love it if all taxpayers were treated that well," he says. "Auditing is a horrible experience in this country."
"There is a distinct separation of church and state," says Cleary.
Paul Nelson, director of the Evangelical Council for Financial Accountability, a voluntary self-policing group of 750 religious foundations and organizations based in Washington, D.C., is also against reforming tax law so that the IRS can more closely monitor religious organizations.
But he doesn't deny such light monitoring creates opportunities for fraud.
"There are constitutional protections that have been put in to protect freedoms that we all cherish," says Nelson.
"We don't want to ever let those freedoms go. But what that does, especially as it relates to the separation of church and state, is that constitutional protections make religious entities a rather lightly regulated industry."
A generous public and a lightly regulated industry provide the "opportunity for fraud in religious areas," he says.
He believes organizations like his are preferable to more IRS enforcement, but he allows that voluntary organizations don't usually include religious foundations out to defraud the public.
"Not everybody has to join," he says. "And so you can run into circumstances where people aren't really accountable.
"When people aren't accountable, that doesn't make them bad, but it does make them prone to all sorts of temptations."
--Terry Greene Sterling