Senator Sokola & Newark Charter School’s Smoking Gun With The IRS

All charter schools in Delaware except Newark Charter School file 990 tax forms to the Internal Revenue Service.  Charters are considered 501c3 corporations.  501c3 corporations are tax-exempt companies.  Most non-profits, like Rodel, fall under this category.  Unless they meet very certain criteria, they are required to file Form 990 with the IRS.  Could this be why Delaware Senator David Sokola, who lives in a district which also contains much of Newark Charter School’s five mile radius, is so opposed to House Bill 186?  It wouldn’t be the first time Senator Sokola has gone to bat for NCS.

In 1995, before any charter schools even opened in Delaware, the IRS issued new regulations concerning 501c3 corporations.   It allowed very specific exemptions from 501c3 organizations from filing their 990 form.  The IRS ruling was straight forward: if you were a governmental unit and a 501 company, you didn’t have to file.  There were very strict guidelines for what constitutes a “governmental unit”:

The term “political subdivision”, for purposes of this section denotes any division of any State or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit. As thus defined, a political subdivision of any State or local governmental unit may or may not, for purposes of this section, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of any such unit.

Does Newark Charter School fit in this category? No, they are a school.

(c) Charitable contribution defined.  For purposes of this section, the term “charitable contribution” means a contribution or gift to or for the use of—

(1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes.

Newark Charter School is not considered a corporation that deals with charitable contributions, so that rules the above out!

It is an Indian tribal government, or a political subdivision thereof, under sections 7701(a)(40) and 7871 of the Code.

Nope, NCS definitely isn’t an Indian tribal government.

Are these schools an “affiliate of a governmental unit”?  This can get real complicated, so I looked further into this matter.

First, the organization is “operated, supervised, or controlled by” governmental units, or by organizations that are affiliates of governmental units, within the meaning of Treas. Reg. 1.509(a)-4(g)(1)(i). This means that a governmental unit, an organization that is an affiliate of a governmental unit, or a public official acting in an official capacity, must appoint the majority of the members of the organization’s governing body. A governing body elected by the public pursuant to local statute or ordinance also satisfies this requirement.

This is where things get very hazy.  Since a school cannot be a political subdivision, it would be very hard to classify NCS as a “governmental unit”.  Neither is “operated, supervised, or controlled” by a governmental unit.  A charter school is run by their Board of Directors and their Head of School.  While a public official could be on a charter school board, they don’t have controlling interest of the school.  A charter’s board votes on new members.  The IRS actually had specific guidance on the issues of charter schools and their filing status:

4.76.8.8.4  (07-01-2003)
Charter Schools Filing Requirements

1. Charter schools must file Form 990, Return of Organization Exempt From Income Tax, or Form 990EZ, Short Form Return of Organization Exempt From Income Tax. Their annual gross receipts are generally more than $25,000, and they rarely meet the filing exception contained in Rev. Proc. 95-48, 1995-2 C.B. 418. Ordinarily charter schools are not treated as governmental units or affiliates of governmental units because they are not “operated, supervised, or controlled by” a governmental unit. Most charter schools operate under a contract with the governmental unit and the governmental unit does not elect or appoint the school’s board of directors.

So what in the world could NCS have done to warrant an exemption from not filing a Form 990?

For Newark Charter School, they could qualify under a remote loophole from the 1995 regulations:

a) The organization was created by one or more governmental units, organizations that are affiliates of governmental units, or public officials acting in their official capacity.

To dig deeper into this, you have to look at Newark Charter School’s original application.  The founding board had five members.  Three of them were public officials at the time: State Senator Steven Amick, State Representative Timothy Boulden, and Mayor of Newark Harold Godwin.  The other two members were educators.  The key to the 1995 loophole is “public officials acting in their official capacity”.  On their application, it specifically asks:

Describe how the group came together and if there are any partnership arrangements with existing schools, educational programs, business, non-profit organizations, or any other entities or groups.

The founding board replied:

The group spontaneously emerged out of a group of parents actively involved with current educational practices and programs in the local school district (Christina).  Many of us have been active in the PTA and site councils, and addressed the school Board regarding our concerns.

In the bylaws of their charter, the NCS founding board indicated the make-up of the board, once the school is opened, will consist of the following:

Once the Newark Charter School is open, three members of the Board shall be parents or legal guardians of students enrolled at the School (“Parent Directors”) and two members of the Board shall be teachers at the School (“Teacher Directors”).

For the three elected officials on the board, in the Written Action of Incorporator of Newark Charter School, Inc., Senator Amick, State Rep. Boulden, and Mayor Godwin are listed, but not with their publicly elected titles, just their names: Steven Amick, Timothy Boulden, and Harold Godwin.  Thus, they are not acting in their “official capacity” as publicly elected officials.

Curiosity got the best of me, so I sent a FOIA to Newark Charter School’s Business Director, Head of School, and the President of their Board of Directors.  I sent this on March 1st.  NCS Head of School Greg Meece replied the very next day with the exact information I was looking for.

From: Kevin Ohlandt <kevino3670@yahoo.com>
Sent: Tuesday, March 1, 2016 12:02 PM
To: Schlosberg Joanne
Cc: Meece Gregory; Dressel Stephen
Subject: FOIA: IRS Determination Letter

Dear Ms. Schlosberg,

Please consider this email an official FOIA request for Newark Charter School.  I would like to see the application from Newark Charter School and the accompanying IRS determination letter regarding Newark Charter School’s exemption from filing a Form 990, Return of Organization Exempt From Income Tax.  This is based on the criteria and regulations set forth by the Internal Revenue Service from Rev. Proc. 95-48, 1995-2 C.B. 418.  I would like to know which of the many requirements listed in that ruling allows for Newark Charter School to not file Form 990 as a 501c3 corporation.

I would like this information in PDF format.  I sincerely hope this is the correct party as I was unable to find a designated FOIA coordinator for this public agency as required by Delaware State Law under Title 29, Chapter 100.  Thank you,

Kevin Ohlandt

The next day, Greg Meece sent me the following:

From: Meece Gregory <gregory.Meece@ncs.k12.de.us> To: Kevin Ohlandt <kevino3670@yahoo.com> Sent: Wednesday, March 2, 2016 9:56 AM Subject: Re: FOIA: IRS Determination LetterDear Mr. Ohlandt,

In response to your request I have attached Newark Charter School’s application and the accompanying IRS determination letter regarding our tax-exempt status.  The IRS determination is the guidance we have followed regarding Form 990.

Sincerely,

Greg Meece

Gregory R. Meece, Sr.

School Director

Newark Charter School

200 McIntire Drive

Newark, Delaware  19711

(302) 369-2001

Meece did provide the documents, as shown here:

As shown, Newark Charter School checked off three areas in their application in order to be exempt from filing their IRS Form 990: They used the “elected officials acting in their official capacity” clause, they are financially accountable to another organization (the state), and classified their Board of Directors as a “membership organization”.  The IRS granted Newark Charter School a classification of “instrumentality of state” in April of 2000:

As indicated in the above documents, Newark Charter School applied for the 1995 waiver and the IRS granted the request.  Newark Charter School has never filed IRS 990 tax forms.  But here is the kicker: at least two of the requirements NCS gave to the IRS don’t even apply to them.  And the third is highly suspicious as the three elected officials did not act in their official capacity.

NCS isn’t the only charter school in America who did this.  In 2012, the Department of Treasury issued a ruling against a charter school for some of the same things NCS claimed in their IRS waiver.  The IRS ruled this charter school did not qualify as an instrumentality of state.

In this ruling, the charter school did not meet the definition of “financially accountable to another organization” because it received funds from a school district (their authorizer) as a “contractual obligation”, not a “statutory reason”.  By default, the annual reports (audits) they provided to the school district were based on their authorized charter (their contract) not a statute.  Like this school, Newark Charter School’s authorizer (the Delaware Department of Education) does not have unlimited discretion to control their expenditures.  In essence, all charters in Delaware must submit audits to the Delaware Department of Education because it is in their contract to do so.  Therefore, NCS cannot use this as a reason for exemption from filing an IRS 990 form.

The ruling also indicated the charter school did not have their Board elected by the public at large.  Yes, NCS may have their teacher and parent representatives on their Board of Directors elected by the parent and teacher members of the school, but that is not considered the public at large.  Traditional school district board elections are considered the public at large.  They are required to go through the Department of Elections in Delaware.  I have never seen any type of announcement from Newark Charter School on the New Castle County Department of Elections website regarding these kinds of elections.  Therefore, NCS cannot used this as a reason for exemption from filing an IRS 990 form.

The fact that three elected officials were on the founding board of NCS does not give a clear understanding they did so to control the organization.  Furthermore, those three officials promptly left the board after the school opened and the current board has no public elected officials among their membership.  This one is a bit hazy, so I can’t completely rule it out, but my inclination would be no.

Therefore, since the IRS determined in their 1995 ruling that an organization must meet two of the listed reasons for exemption from filing an IRS 990 tax form, and Newark Charter School may meet only one of those requirements, Newark Charter School must file an IRS 990 tax form.

In an article on Lexology from last year, the subject of charter schools as “instrumentalities of state” came up in regards to pension plans for charter school teachers.  It also touched on charters who don’t file 990 forms with this designation.

The IRS has taken the position that because they do not qualify as instrumentalities, charter schools and their supporting organizations (such as building corporations and management entities) must file annual information returns with the IRS (Form 990).

The article also gave some stern advice to charter schools who don’t file 990s with the IRS:

Charter schools who are not filing Form 990 should evaluate whether they are exempt from filing requirements. Charter schools who are considering tax exempt financing should carefully review their own “instrumentality” status and the instrumentality status of any related borrowers (such as building corporations) with counsel.

The IRS ruled charter schools are not instrumentalities of state in 2003, two years after the IRS sent their determination letter to Newark Charter School:

4.76.8.8.4  (07-01-2003)
Charter Schools Filing Requirements

1. Charter schools must file Form 990, Return of Organization Exempt From Income Tax, or Form 990EZ, Short Form Return of Organization Exempt From Income Tax. Their annual gross receipts are generally more than $25,000, and they rarely meet the filing exception contained in Rev. Proc. 95-48, 1995-2 C.B. 418. Ordinarily charter schools are not treated as governmental units or affiliates of governmental units because they are not “operated, supervised, or controlled by” a governmental unit. Most charter schools operate under a contract with the governmental unit and the governmental unit does not elect or appoint the school’s board of directors.

What would be the benefit of Newark Charter School not filing annual 990s with the IRS?  One, they don’t have to file!  But more important, they don’t have to report to the federal government any donations they received, any lobbying efforts and how much they spent for it, and there is no disclosure about their finances to the IRS.  To be able to get this “waiver”, they obviously knew exactly what they were doing when they originally applied.  I have heard from many people, including Senator David Sokola himself, that he was involved with the initial planning of the school.  This makes sense since he lives in most of their demographic area.  As well, Senator Sokola wrote the original charter school legislation in 1995.

I suspect Senator Sokola’s highly involved dealings with Newark Charter School benefit him somehow.  Aside from the five mile radius and the fact Senator Sokola has been re-elected for the past 26 years, Sokola defends charter schools as if his life depended on it.  While that obviously isn’t the case, I can’t help but wonder if his political life does.

During Newark Charter School’s highly controversial modification request during the 2012-2013 school year to expand their enrollment to allow high school students, Delaware Liberal posted an email Senator Sokola sent to other legislators in response to a constituents concerns about  their new high school and their enrollment patterns.

From: Shipley Glenn (LegHall) on behalf of Sokola David (LegHall)

Sent: Thursday, March 01, 2012 2:05 PM
To: Kowalko John (LegHall); Schooley Terry (LegHall); Peterson Karen (LegHall); Osienski Edward(LegHall); Hall-Long Bethany (LegHall)
Cc: Sokola David (LegHall); Shipley Glenn (LegHall)
Subject: RE: Proposed Newark Charter High School

Good afternoon: We were all copied on the below email and attached letter from Mrs. Lois Hoffman, who has expressed her sincere concerns about the proposed Newark Charter High School.  Years ago, when I served on the Newark Charter Board, I always held the belief that the student population accurately reflected the area demographics rather well. To make sure that I had the latest factual information available, I asked Greg Meece to respond to Mrs. Hoffman’s letter. For your records and information, I am attaching a copy of his response to this email. I have just shared Greg’s response with Mrs. Hoffman, and I am hopeful that the information will help to alleviate some of her concerns and provide her with additional background on this matter. I think it is very important that we not discourage a successful and committed program, such as Newark Charter, and wanted to take this opportunity to share my thoughts and sentiments with you.

Thanks,

Dave Sokola

Delaware Liberal reacted to Senator Sokola’s email with the following:

Let’s stop here for a moment and discuss several points.

First, why would Senator Sokola go to the head of the Newark Charter School for info readily available on line?  After all, I produced all the Red Clay numbers easily enough.

Second, it’s obvious that Senator Sokola is a supporter, and former board member, of Newark Charter School, which is fine, but… asking Mr. Meece, head of Newark Charter School, to provide evidence on whether Mrs. Hoffman’s concerns are valid is… well… hardly reliable.  Unless, anyone thinks Mr. Meece would say that Mrs. Hoffman is correct and NCS’s poverty rate doesn’t reflect the surrounding community.  Um… I’m not seeing that happen.

*

Newark Charter School did get their modification approved by the Delaware DOE.

Last year, State Rep. Kim Williams brought forth potential legislation to have charter school audits done in a different way.  Like they did up until 2007, the State Auditor would pick the auditor to perform the charter school audits in Delaware.  The Delaware Charter Schools Network fought the bill tooth and nail.  On the last day of the legislative session last year, the Delaware House of Representatives passed House Bill 186.  When it went to the Senate, Senator David Sokola refused to suspend the rules and allow for a full Senate vote.  Instead, he demanded the bill be heard in the Delaware Senate Education Committee.  Since he is the Chair of the committee, he was able to stop the bill from getting a vote.

Prior to the second half of the 148th General Assembly returning from their six month hiatus, Senator Sokola, State Rep. Earl Jaques, and several Republican Senators brought forth Senate Bill 171.  This “counter” to Rep. Williams legislation still gave charter schools the authority to pick their own auditors.  The auditors themselves would have to go through a more “rigorous” approval method, but most of them already fit with Sokola’s criteria.  The Delaware Charter Schools Network helped Sokola write the bill, even appearing at a Senate Education Committee meeting in full support of Sokola’s new bill.  Did I mention Newark Charter School Head of School Greg Meece once sat as the President of the Delaware Charter Schools Network?

Senator Sokola was lambasted by Rep. Williams and her many supporters, including the Delaware Auditor of Accounts.  There is, in my opinion, something Sokola does not want the auditors to find.  Perhaps it is this very article, showing how Newark Charter School used very flimsy IRS regulations before they even opened, to make themselves exempt from filing with the IRS.  This is very destructive and financially irresponsible for any charter school to practice.  Not only would Sokola have them stay the course with their same auditor, but he knows this school doesn’t file with the IRS.  Is their money really as transparent as they would make us believe?  Without any method to accurately determine how their funds are coming and going, how can we be sure they aren’t hiding anything?

I made the State Auditor’s office aware of this last week, along with Academy of Dover’s IRS revocation of their 501c3 tax-exemption status.  These are official tips to the auditor’s office.  I wasn’t sure about the “public election” piece of the puzzle, but the IRS ruling against a charter school in 2012 determined that one for me.  Newark Charter School and Academy of Dover both use the same auditor for their annual audits, Barbacane, Thornton & Company.  The same auditor that couldn’t find Academy of Dover’s Noel Rodriguez embezzling state funds for three years.

Leading the charge to protect the charters: Senator David Sokola.  When you create legislation to protect a charter school from their potentially fraudulent IRS application, while wasting the public’s time, that’s called a conflict of interest Senator Sokola.  Delaware really deserves better than yourself and your one-sided education bills that give great weight to charter schools and cause havoc in traditional school districts.  I really hope you get a primary and someone knocks you right off the ballot next November.  Or a Republican takes your Senate seat that you have abused for far too long.  Either way, I would be happy.  Governor Markell, you should be proud…

Updated: I did file the same FOIA request with Academy of Dover based on a belief that they too were exempt from filing the IRS Form 990.  I found out the next day the IRS revoked their 501c3 status due to not filing tax returns three years in a row.

 

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