Possible Breach of Fiduciary Duty at Black Box Voting?--

I. Introduction.

I was cruising the diaries of AnonymousArmy at DailyKos and came across a late June 2006 discussion of a disturbing set of documents, the IRS Form 990 and Schedule A for the 2004-2005 fiscal year for the charity, Black Box Voting, Inc. (

For those who are unaware, Black Box Voting is one of the organizations that has alleged voting irregularities in the 2004 election, especially associated with the Diebold voting machines. I know very little about the merits of these claims or about the incredibly nasty internecine warfare between BBV and other voting reform groups. Kos diarist AnonymousArmy has often been harshly critical of BBV and its most prominent officers and employees, as have many others in that movement. I have no idea who is right or wrong on these voting machine issues; my concern here is over serious questions with BBV's Form 990.

My analysis is based on BBV's IRS tax returns (Form 990 and its Schedule A), which are posted on BBV's website (and apparently have been posted there for about 6 weeks).

II. All of BBV's Financial Assets Were Held in Non-Interest Bearing Accounts.

Leaving aside some small math errors in the return noted by posters at DailyKos, the thing that really jumps out on Black Box Voting's Form 990 is something that Kos commenters notice, but don't seem to understand the full import of: Black Box Voting shows $972,304 in "Gifts, grants, and contributions received" (990 Schedule A, p.3, ln.15) and the return shows $613,309 as "Cash--non-interest-bearing" at the end of the year (990, p.4, ln.45). Despite this huge cash account, the return shows no "interest or dividends" from investments (990 Schedule A, p.3, ln.18) for the entire year!

I find it hard (but not impossible) to come up with a scenario under which this charity is operating legally with nearly a million dollars in receipts and over $600,000 in cash-on-hand at the end of the year with no interest or investment income for the year.

The duty of prudence that charities must follow generally requires that managers or trustees invest any substantial cash on hand for the benefit of the charity, if only in a money-market account. They are not required to obtain a current return (e.g., they could invest in stocks that appreciate but pay no current dividends), but they are required to invest to get a return. Because of the time value of money, not investing means that the portfolio is essentially guaranteed to depreciate in real value by the end of a year. These days, one can set up money-market accounts that the charity can write checks on, so that even if the charity had been planning to spend most of its money in a week or two, it could still have earned interest until it wrote large checks.

Dustin (mail):
I'm out of my depth, but I wanted to comment that this was an interesting read. I had no idea that charities had fiduciary responsibilities. I've never been involved with one that had more than $5,000. Maybe that's a good thing.
8.14.2006 2:31am
James Lindgren (mail):

Thanks, I thought it was a fairly dry read myself.

Jim Lindgren
8.14.2006 2:49am
On the BBV website, BBV Director Bev Harris indicates that BBV's accounting firm obtained a 6-month extension of time to file BBV's return (without asking her first). Yet, as Kos commenters noted, no accountants signed the returns as preparers. That is odd. If the preparer were a lawyer and refused to sign the return for the reasons I would probably have refused to sign, I believe that the lawyer would have a duty to inform the Board of the possibility of improper behavior that the Form 990 seems to raise.

I'm confused about a tax return preparer signing the return. When a return preparer signs the return, isn't the preparer just indicating that he is not aware of any errors on the return? Is the preparer also asserting that the charity has operated legally in ways that do not affect tax reporting? In other words, if the return preparer knows that the charity has failed to invest its funds as required by law, why would that keep the preparer from signing the return?
8.14.2006 9:55am
James Lindgren (mail):

I was referring back to this sentence:

If I were a lawyer for BBV and had been asked to sign this tax return, I probably would not have been able to do it ethically, at least not without trying to figure out what is going on and correct it (e.g., by going to the Board of Directors).

What I was trying to say is that one shouldn't just sign the return without first getting to the bottom of what is happening. Once one knew what had happened, one could ethically sign the return and inform the Board of any breach of duty that may have occurred. (If no interest income was earned, then, of course, none should be reported on the return.) If things are as they appear to be, one couldn't just sign the return and pretend that nothing was wrong.
8.14.2006 10:36am
Allen Asch (mail) (www):

I have no idea who is right or wrong on these voting machine issues; my concern here is over serious questions with BBV's Form 990

On the greater topic of "who is right or wrong on these voting machine issues," I've generally seen the whole Diebold/ voting machine thing as a conspiracy theory for those on the fringes. I did see one story on Fox News News that started me wondering, though. That Fox News story is on YouTube at: Fox News Scary Diebold Voting Clip
8.14.2006 10:46am
Dick Kusleika (mail) (www):
Is BBV required to disclose their 990? If they do disclose it, are they required to disclose it accurately? The 990 is a fillable pdf, not a scanned copy of the filed return. And the signature page, which is scanned, is signed by Vickie Karp, but Bev Harris is the printed name underneath it. I don't think anyone can say anything definitive about this return until they see the copy filed with the IRS.
8.14.2006 10:47am
CS (mail):
Let me echo SteveW's "confusion." A paid preparer's signature only attests to the return's accuracy, right? If the preparer also is counsel to the EO, he'd of course have a duty to disclose the possible fiduciary breach to the board, but that duty neither bars nor excuses him from signing the return if he in fact prepared it or supervised its preparation for compensation. A preparer or counsel reasonably suspecting ongoing tax fraud has a disclosure duty. However, failing to put cash in interest accounts by itself doesn't indicate fraud.

There may well be a fiduciary breach here under Washington law, although not a huge one in quantitative terms. Staying with the traditional restitution remedy, and given the likely timing of the contributions and the arguable need for liquidity, the D&Os' aggregate liability might very well be limited to four figures. Counsel's letter to the board would be of the "write some small checks, change accounts and look at time deposits, go forth and sin no more" type.

Tax issues as such are nebulous, barring a state-law loss of charter scenario, which I'm taking as pretty unlikely. I suppose there might be an argument that the retention of cash so far in excess of program uses somehow shows a lack of exempt purpose, thus affecting exempt status. However, the taxpayer doubtless would say they're just accumulating cash for the next election cycle's program work. Hard to see any inurement possibilities, as the cash is just sitting there like a rock. Unless, and this is purely speculative and a completely general musing, cash accounts were effectively non-interest-bearing because they secured loans or credit lines the benefit of which somehow inured to the wrong people...Nah.

It's pretty hard to see how anyone could open and maintain accounts at FDIC banks without almost accidentally signing up for a little interest. I can find no explanation at the EO's website of any why the cash is held without interest (puritanical opposition to moneylending?)

JL and those Kossacks are right to suggest that the really interesting question is why presumably independent accountants undertook to prepare the return and then apparently didn't. One seldom sees that absent a real return problem. The possible state-law fiduciary issue seems unlikely to have sufficed. As noted above, return preparation doesn't impose on the preparer a duty to redress issues outside the return's corners. Absent ongoing tax fraud, that is, and resigning doesn't obviate that disclosure duty. Heck, maybe there were just personality clashes or something.
8.14.2006 10:50am
CS (mail):
I thought of the bogus return thing, too. But to what end? If interest were plowed back into program work, who'd care?
8.14.2006 10:52am
This is OT, but a minor quibble.

1. There is no Depreciation expense on 990, part II, line 42.

2. On 990, part IV, line 58 (Other Assets), it shows "Office Furniture and Computer System." This should be on line 57a, Land, Buildings and Equipment.

3. They have "Office Furniture" and a "Computer System," so they must have some sort of office location to keep $30K worth of Equipment. I didn't see any Rent Expense (it's been awhile since I looked at a 990 though) and it doesn't look like they own their own building.
8.14.2006 11:21am
Byomtov (mail):
The form shows "functional expenses" of $384K. Subtract that from the $972K and you get $588K. The difference between that and the $613K on hand at year-end is a plausible amount for interest earned. The form is not altogether clear to me, I admit.

Another point is that in listing income the organization is instructed (line 22 of Part IV-A) not to include capital gains. It's conceivable (though it seems pretty unlikely) that BBV invested in stocks or something.

Best bet, in my opinion, is that the form was filled out carelessly, with no one paying attention to whatever interest was credited to the bank account.
8.14.2006 11:49am
James Lindgren (mail):

I noticed the depreciation issue as well, but (to me) it seemed to be more a reflection that the return wasn't professionally repaired than a major cause for concern.

Jim Lindgren
8.14.2006 1:00pm
Anderson (mail) (www):
professionally repaired

A slip that speaks truth!
8.14.2006 1:38pm
_Jon (mail) (www):

I am a co-author of the most widely used law school textbook on Estates and Trusts,

The fact that I can read the personal opinion of the person with this much educational influence is worth more than the contents of the article itself.
8.14.2006 2:42pm
cthulhu (mail):
I don't know how it is today, but in the olden days of accountancy a firm would keep a list of all the returns prepared the previous year and send extensions in for anyone whose return hadn't been prepared at the firm by the due date. That way, if a client were travelling or just forgetful, the return wouldn't necessarily be late. Of course, if the client had actually intended to change accounting firms, then there'd be an extra extension floating around, harm, no foul.

On the flip side, a possible reason for all that non-interest bearing cash would be to disguise payments. After all, if I loan Joe Schmo $100,000 to further our shared agenda, why would I bother with the paperwork for interest payments -- and if he happens to "lose" the money, I can always write it off as a bad debt.
8.14.2006 2:46pm
Is there something like sec 179 for depreciation for charities? So if the $30K in office furniture &computers was acquired in a previous tax year (or years) then would it have been completely depreciated by now? (The whole idea of "depreciation" and not-for-profits makes my head hurt, so I'm probably just babbling incoherently...)

I spent a decade as a sole proprieter (schedule C) computer programmer. I always had to have pretty expensive computers, and, yeah, office furniture ain't cheap, but $30K is a LOT of money to spend on computers and furniture.

cathy :-)
8.14.2006 3:01pm
Is there something like sec 179 for depreciation for charities? So if the $30K in office furniture &computers was acquired in a previous tax year (or years) then would it have been completely depreciated by now?

It appears that this is the first year for the non-profit because there is no "Beginning Balance" for any of the assets/liabilities listed on the Balance Sheet.
8.14.2006 3:31pm
Andy (mail):
Some items I noticed.

1. The payroll tax liabilities at year end are high, but that is may be because they are a monthly depositer. (Looking at the income statement amount of $24,268 of payroll taxes -- that matches the payroll tax liability at year end. Huh? Perhaps the payroll tax liability at year end is overstated?)
2. The wrong form was used. They should have used a 2004 form (but the 2005 form gives us more information). BBV may get an IRS notice asking them to redo the return on the correct forms.
3. On page 4, they do not check either box stating whether they follow SFAS 117 or not.
4. I calculate the equity on page 4 to be $576,079. The equity on page one is $588,210. What is the reason for the $11,000 difference?
5. They state no schedule B is attached, but their schedule A indicates that there was at least one $5,000 contribution.
6. Charitible organizations do not have section 179. There should be a depreciation schedule or a form 4562 attached.
My verdict -- the 990 is poorly prepared, probably self prepared. There are lots of questions that the return raises, but we would have to look at the accounting records directly to answer them. The issues raised by my review are probably due to inexperience with the form or incompetent preparers.

To defend my brother and sister accountants -- if the records were a disaster, they would pull out. If the client and the preparer had a disagreement regarding presentation or disclosure, the CPAs would pull out (especially since this client would be a high profile client, with lots of scrutiny). Note also that CPAs commonly extend returns -- if you can't get them done, extend them. Note that 990s are extended for 3 months at a time, and you can get a second extension.
8.14.2006 6:09pm
CS (mail):
I emailed the EO to inquire. The reply was that the original board was naive if earnest. They discussed an interest account but somehow never implemented it. There's a new board, it seems, and a new bank. Everything's said to be in interest accounts now. I think we can turn off the siren on this one.
8.15.2006 9:47am
James Lindgren (mail):

Thanks for the close reading. And your speculation at the end of your comment seems plausible as well:

To defend my brother and sister accountants -- if the records were a disaster, they would pull out. If the client and the preparer had a disagreement regarding presentation or disclosure, the CPAs would pull out (especially since this client would be a high profile client, with lots of scrutiny).


So if what you say is true, I guess my analysis was correct that the money was not invested. I'm glad that now it is.

That would seem to leave the managers liable to reimburse the charity only for interest from the time they should have invested through whenever they actually started investing. If what you report is true, that would probably be between $15,000 and $60,000 in damages that they now owe to the charity.

Jim Lindgren
8.16.2006 11:59pm