Tax status leads to scrutiny of leather nonprofit
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The San Francisco Bay Area Leather Alliance, serving as fiscal sponsor for the massively successful Queer Nightlife Fund that raised nearly $400,000 over 2020 and 2021 for LGBTQ folks thrown out of work by the COVID pandemic, may not have had its financial house in order when it told would-be donors their financial gifts were tax deductible.
In March, 2020, following the collapse of the hospitality and nightlife industry because of the outbreak of COVID-19, several LGBTQ community leaders in San Francisco agreed to launch what would become the Queer Nightlight Fund, or QNF, in an effort to get money to hundreds of queer nightlife workers who were suddenly without jobs. The endeavor was incredibly successful, raising $399,641, which was dispersed in 511 grants through eight rounds of giving.
Like COVID, the fundraising project went on much longer than originally anticipated.
"When Phil Hammack [also known as Pup Turbo] first reached out to fellow community leaders in March 2020 concerned about the future of local queer nightlife workers, the steering committee and QNF nonprofit that resulted had no idea we'd still need to be around for so long," according to QNF's website. "QNF thought perhaps after a few months passed things would return to normal. But the pandemic had other plans, and QNF remained committed to sustaining local queer nightlife by supporting its workers for 17 months."
Initially, the money raised was collected by San Francisco-based Center for LGBTQ Economic Advancement & Research, or CLEAR, a nonprofit social welfare organization that assists LGBTQ households, organizations, and communities with financial education and services. A 501(c)4, CLEAR was in a position to accept the funds, which it then transferred to the QNF through a common practice called fiscal sponsorship.
"CLEAR's role in supporting the QNF using our systems was always meant to be temporary until a 501(c)3 fiscal sponsor could be identified," Spencer Watson, president and executive director of CLEAR, wrote in an email to the Bay Area Reporter.
The next group to align with QNF was Q Foundation, an organization that helps people with HIV/AIDS with housing, also served as an unofficial, temporary sponsor until the leather alliance took over.
"They were very kind to be doing this for us but it was an overload for them," said Hammack. Shortly afterward, the leather alliance picked up the reins and assumed fiscal sponsorship.
Since QNF did not have tax-exempt status itself, fiscal sponsorship allowed Q Foundation to collect donations for it all while allowing donors to, essentially, make a tax-exempt donation to QNF. In June 2020, QNF found a new fiscal sponsor in the San Francisco Bay Area Leather Alliance.
"We just wanted to help them get going," said Brian Basinger, Q Foundation executive director, adding that his nonprofit had no other ties with the effort.
The B.A.R. reached out to members of the QNF board but only received one response. Very few people, even those who had only a tangential connection to the leather alliance, would go on the record for this story. The B.A.R. did view copies of various letters sent to the leather alliance.
Most of the information for this story came from phone interviews with sources willing to only speak on background in order to protect their identity. In a small group of people in a comparatively small population such as the leather community, few wanted to risk the potential retaliation they feared might arise from speaking publicly to the B.A.R.
By the time the leather alliance assumed sponsorship, QNF had raised $214,000, said Angel Garfold, president of the leather alliance and a professional accountant. She is also interim treasurer at Folsom Street Events, which produces the annual leather and kink street fair and other events. The balance, $221,000, was raised under the leather alliance's auspices.
In late April Garfold told the B.A.R. she had been working on bringing the leather alliance's tax filings up to date and expected to have them completed by mid-May.
One of the challenges of operating any small nonprofit organization is that those groups are typically run by all- or mostly-volunteer staff. In this case, there were complicated paperwork requirements due to it being tax-exempt.
For example, when an organization clears all the requirements for federal tax-exempt status, it must still meet state guidelines, which, while based on federal rules, require yet more paperwork and time. So, while an organization may be tax-exempt federally, unless they meet those local requirements, they're not tax-exempt when it comes to dealing with state taxes.
That is just one of the issues faced by the leather alliance, said Garfold. The organization was forced to be without a treasurer for a couple of years and, as president, it wasn't a role she could step into herself, she said. Eventually, she was able to bring in a treasurer, Angel Adeyoha, the executive director of Folsom Street Events. Adeyoha, who identifies as queer and nonbinary, did not immediately return a call from the B.A.R. at deadline.
COVID also presented problems, she said. Dealings with tax agencies slowed to a crawl as employees found themselves working remotely.
Prior financial concerns
But there were concerns already about the finances of the leather alliance. Beth Bartlett-Downey, a member of Leather Quest, one of the leather alliance's former member organizations, said the group became concerned when requests for financial information from the leather alliance weren't being answered.
Leather Quest, a BD/SM educational group with chapters across the country, had been a member organization since 2008 but withdrew from the leather alliance in September 2020.
"I found out at the time that the organization had received a delinquency notice from the California attorney general," said Bartlett-Downey in a phone interview with the B.A.R. Barlett-Downey is a former Ms. Golden Gate Leather and has been watching the goings-on at the leather alliance because, she said, she was disturbed by the "appearance of a lack of transparency" in the alliance for the past two years.
That letter stated that individual directors are personally responsible for any fees or penalties incurred as a result of delinquencies, she said.
Late in the summer of 2020, "our representative [to the leather alliance board] did ask them at the time to invest in a bookkeeper, and was turned down," Bartlett-Downey said. "She was told no, they could not afford it."
But because Garfold wouldn't put out financial statements, "we have no way of knowing," she said. By that point, of course, the leather alliance had already begun with the SF Bay Area Leather Lifeline — "a fund to help kinksters and leather folk in the SF Bay Area who need immediate help during the COVID-19 crisis," as the fund describes itself on Facebook — and the Queer Nightlife Fund.
The leather lifeline gave out $12,900 in April 20, 2020, according to its Facebook page.
"So somebody was doing transactions," said Bartlett-Downey. "I don't know how they kept up with those transactions."
At some point, she said, the Leather Quest rep was told there was supposedly a volunteer CPA who was set to help the leather alliance with its tax filings for 2018 and 2019. A name was never provided as the rep was told "the CPA who was helping, their help was contingent on remaining anonymous," recalled Bartlett-Downey.
By the fall of 2020, leather alliance leaders were aware of members' concerns. On September 19, 2020, they posted a statement on Facebook concerning the group's tax-exempt status.
"The SF Bay Area Leather Alliance seeks to correct misinformation regarding our tax-exempt status which recently circulated on social media," the post began. "Foremost, an IRS employee confirmed that all 2020 donations are tax-deductible."
It noted that, as a 501(c)3, the leather alliance is required to file annual tax reports.
"If three consecutive years are not filed, an automatic revocation of tax-exempt status is triggered," the statement read. "The deadline this year was 5/15/2020. The Alliance filed its 2017 return on that date yet an automatic revocation still triggered. The IRS website clearly states the automatic revocation list does 'not necessarily [reflect] its current tax-exempt status.' We believe this is the case for the Alliance."
Leather Quest leaders, however, still did not receive the information they were looking for, said Bartlett-Downey. After receiving no answers, much less financial statements, Leather Quest left the leather alliance.
They were not the only groups to leave. Other organizations, such as Leathermen's Discussion Group, The 15 Association, and the Golden Gate Guards were leaving, or had left, as well. From a one-time high of 15 member organizations, the leather alliance is now down to four.
The leather alliance was also questioned over some money it owed the Leather Pride Contingent that takes part in the San Francisco Pride parade. But during a recent virtual meeting, the leather alliance members voted to release the funds to the contingent.
There seem to be oversight issues with the leather alliance, sources said. Garfold told the B.A.R. she is trying to address the concerns.
"I don't want to be the only one in charge of the money," said Garfold. "I try to be as hands off or as transparent as possible."
A Bay Area-based certified public accountant who asked not to be identified because of their familiarity with the leather alliance, noted that it's not unusual for all-volunteer organizations to miss regular required paperwork filings. In fact, they said, tax agencies are quite aware of that problem as well, and will typically give the groups time to get their paperwork in order. But, as a rule, organizations will only get a couple of chances. If they fail to meet their deadlines, they run the very real risk of losing their tax-exempt or charitable status, the accountant said. The California Department of Justice maintains a list of tens of thousands of organizations that have, for any number of reasons, lost their status.
When the leather alliance began to take in the donations meant for QNF, it was classified as a tax-exempt organization by both the IRS and California's Franchise Tax Board. In either case, organizations can only maintain that status as long as they file regularly with both entities. However, in December 2020, the leather alliance lost its charitable trust status with the state after it had failed to respond to a series of letters from the California Department of Justice.
The first letter, dated March 17, 2020, warned the group that "[t]he organization is delinquent in filing required reports for prior fiscal years" referring specifically to the leather alliance's failure to file reports for the fiscal year ending December 31, 2018. The second letter, dated July 17, 2020, again warned the leather alliance about its failure to file noting, "An organization that is delinquent, suspended or revoked is not in good standing and is prohibited from engaging in conduct for which registration is required, including soliciting or disbursing charitable funds."
By this point, the delinquency notice included the additional fiscal year 2019 with the added proviso "The California Franchise Tax Board will be notified to disallow the tax exemption of the above named entity. The Franchise Tax Board may revoke the organization's tax exempt status at which point the organization will be treated as a taxable corporation... and may be subject to the minimum tax penalty."
On December 15, 2022, the state Department of Justice sent out its third, final reminder stating, "If the organization has not cured its delinquency with our office, or submitted a signed Appeal and Request for Hearing within 30 days, your registration will be suspended or revoked, and you will no longer be permitted to conduct business in the State of California."
Garfold denied knowing that the notices had even gone out even though at least one copy of the notices had been sent to her address, according to copies of the documents viewed by the B.A.R. Another copy went to former President Dahn Van Larz's address, as well. Van Larz did not respond to a request for comment from the B.A.R.
"In 2020, I could have received one and I would have addressed it," Garfold said. "That sounds familiar to me. The state doesn't really know that we were behind on our 990s."
The IRS describes Form 990 as its "primary tool for gathering information about tax-exempt organizations, educating organizations about tax law requirements and promoting compliance."
The leather alliance failed to respond and lost its tax exempt status the following month. However, it continued to receive money intended for the nightlife fund which, in turn, continued to solicit donations with the understanding that those donations were tax-deductible in California as well as at the federal level. It's important to note that, during this time, the leather alliance still enjoyed tax exempt status with the IRS. In fact, at the time of writing this story, it still does. The nightlife fund continued to solicit gifts, notifying would-be donors on its website that "[d]onations to QNF are tax-deductible contributions. The San Francisco Queer Nightlife fund is a fiscally sponsored project of the San Francisco Bay Area Leather Alliance, a 501(c)3 nonprofit."
What to do
There was no reason for potential donors to assume their gifts weren't tax deductible when they filed their state tax returns. In cases like this, said the CPA, their advice would be for donors to contact the Franchise Tax Board and to contact the organization in question directly.
"Let them know 1) that you know and 2) that you have contacted the FTB. And I use FTB but it could also be the IRS. Depending, of course, on what was screwed up," the accountant said.
Garfold said she had spoken with the IRS about the matter.
"The IRS confirmed there is no negative impact on the donor if they made a donation in good faith," she said. "There is no negative repercussion to the donor at all."
Agreeing with Garfold, Hammock — who initiated the QNF fundraising efforts — said, "Because there's still federal status, it's nothing for our contributors to be concerned about."
The QNF steering committee, however, knew nothing of the leather alliance's tax issues, nor would it have had any reason to, he added. The leather alliance was a good fit for QNF's efforts and the relationship between the two organizations went very well, he said.
Despite the apparent lack of transparency around the leather alliance's tax-exempt status, Bartlett-Downey said she doesn't believe the group's problems are a result of intentional wrongdoing.
"Honestly, I think that the lapse was them making their best effort to help the most people during the pandemic," she said. "I think they had honest intentions. But there's a right way and a wrong way to do things."
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