The Tenderloin Housing Clinic is a tax-exempt non-for-profit which is prohibited by the IRS from engaging in political activities. San Francisco gets around this by stating in its contracts that "No funds appropriated by the City and County of San Francisco FOR THIS AGREEMENT may be expended..." on political activities.
The Controller's Office recently did a financial analysis of the THC in response to the embezzlement conviction of its former employee. The Controller's Office has somehow determined that no funds appropriated by the City and County of San Francisco are used to support BeyondChron, which is an LLC of the THC, published by the THC, and is edited by two full-time employees of the THC. Basically, Shaw's salary does not contain any provisions for his work on BeyondChron and Paul Hogarth's salary only contains a small provision to work on BeyondChron. The THC claims it used profits from its legal division and the Galvin Apartments to fund BeyondChron and the portion of Hogarth's salary for his BeyondChron activities.
The problem with this is that the legal services division is primarily funded by CCSF and there are contractual provisions regarding the use of profits from CCSF-funded programs (AKA: Program Income). These provisions are restrictive in terms of how program income can be used. Specifically, the contracts state, "...provisions of this agreement shall apply to expenditures of program income". The grants from MOH and the HSA for legal services have no provisions for the use of any profits to fund BeyondChron and the most recent version of the THC's audited financial report (FY 2010) the THC indicates that rental revenue, including that from the Galvin Apartments are used to pay for management and operating the property" without ever mentioning allocations for BeyondChron.
If you read Beyondchron today, you will see that Shaw spent a bit of time at the Planning Commission yesterday. It was his intention to speak in favor of CPMC's proposed facility on Van Ness but apparently he had to leave before he could do so because the meeting ran from 10 AM to 8 PM. While the contracts with the City require the THC to keep appropriate records to document compliance with the political activities restrictions, these don't seem to be disclosable under the public records act and the City Attorney assigned to SOTF has fought such disclosure on behalf of the Controller's Office in front of the SOTF. The public is forced to rely on the findings of the Controller's Office without knowing what these findings are actually based on. There is no clear, non-influenced, independent way of knowing how Shaw's activities yesterday (or at any other time) were actually funded.
The City's current contracts with non-for-profits leave the door wide open for conflict of interest and raise serious ethical issues regarding the elected Board of Supervisor approval of grants and budgets, including line item restoration, for non-for-profits that engage in political activities. Quite simply, the City should not provide any funding to any non-for-profit that engages in political activities regardless of the non-for-profit's source of funding for its political activities.
The prohibition on political activities by non profits is documented in the THC grant agreement here. The IRS in 2007 issued this reminder to non profits not to engage in political activity and further IRS clarification on political activity for non profits (PDF). Numerous examples are cited on what is OK and what is not for a non profit, including running websites. The IRS also points out that even personal opinions are subject to the rules if they are published under the umbrella of the tax exempt organization. The IRS also doesn't make a distinction of a subsidiary like Beyondchron that the city of San Francisco has apparently been doing and considers it to be one and the same. It is the IRS that grants the non profit status in the first place, not the city
The Tenderloin Housing Clinic 2010 federal 990 tax form lists Beyondchron as a disregarded entity
A disregarded entity is a business entity that is separate from its owner but which chooses to be disregarded as separate from the business owner for federal tax purposes. The IRS says,
"If a “disregarded entity” is owned by an individual, it is treated as a sole proprietor. If the “disregarded entity” is owned any any other entity, it is treated as a branch or division of its owner."
A sole proprietorship is not a disregarded entity, because the business is not separate from the owner.
Liability Issues for a Disregarded Entity
A disregarded entity is considered the same entity as the owner for tax purposes, but not for liability purposes. For more information on this subject, read this article in which attorney Robert Warwick discusses disregarded entity tax and liability issues
Tenderloin Housing Clinic Review 3-23-12
Tenderloin Housing Clinic 2010 Audited Financials1