Pickwick raises some interesting questions and answers them:
With hesitation I take on the task of writing a summary with my view on legal and financial issues, because I’d rather do something more pleasant on this public holiday in Germany. I’ll try to be brief, and I won’t bother with lots of links to documents I’ll mention. If you want to see them in the original, and check whether you agree with my assessment, please ask the management to publish them, and not me. They have them all, and most are public information by law.
What does 501(c)(3) mean?
The term 501(c)(3) relates to a clause in US tax law which gives federal tax exemption to certain organisations, both charitable and non-charitable (eg certain types of family trust funds which serve as a tax shelter for private wealth). Having 501(c)(3) status does not automatically mean the organisation is a charity. But if a charity wants federal tax exemption, and especially if it wants the ability to issue tax deductible donation certificates to US tax payers, or if it wants public funds (grants), it needs 501(c)(3) status. That status requires the organisation to file annual reports, including full financial statements on a form called ‘990’, to the US tax authorities (IRS), and to publish those reports and a number of other legal documents (on a web site, or in print, and send a copy on request). The status also imposes a number of rules on how the funds are used. Charity status does not change the private nature of an organisation, but in fact puts its funds under public supervision.
What is Couchsurfing’s legal status?
It was registered under the name “Couchsurfing International Inc” on 02 April 2003 by Casey Fenton, with four hired straw men as fellow incorporators to make up the legally required number, in the form of a Non-Profit corporation in the US state of New Hampshire. He was sole director and officer at least until 28 January 2007. Non-Profit does not automatically equal charity. Primarily it means that the corporation does not distribute any profits as dividends to its owners or share holders. It can, however, make profits and accumulate them, and if one wants money out of it, one has to pay oneself salaries, in addition to expenses. That’s what Casey Fenton started doing in 2005.
Was Couchsurfing a charity from the start?
That remains a little unclear. The original incorporating document, the Articles of Association, dated and signed March 2003, allow “charitable, religious, educational and scientific purposes” or purposes according to 501(c)(3), which is wider than just saying “charitable”.
One concern, however, is that none of those dedications of the corporation’s income or assets are stated with the qualification “irrevocable”. It may therefore be possible in future to change the purpose of the corporation, or indeed change its status from Non-Profit to For-Profit altogether.
Another concern is that Casey Fenton did not register the organisation as charity immediately with the Attorney General, as required by New Hampshire law, thereby avoiding certain filing and reporting duties, similar to those that come with 501(c)(3) status. As a result the organisation succeeded from April 2003 until November 2007 to keep secret from all members such documents that have to be filed with the Attorney General, and are public information by law, especially the corporate bye-laws, and the annual and full financial reports. This breached the law, and an investigation by the Department of Justice in New Hampshire is still pending, which might still result in the organisation and individuals being fined. In other words: Couchsurfing may, or may not, have been designed as a charity from the start, but unfortunately for several years it certainly did not behave like one. The general understanding in the community initially was that it’s Casey Fenton’s private company; he could do with it what he wanted; and it seems that he did for a long time.
How did Couchsurfing finally get on the official list of charities?
Following discussions in the community it seemed clear around September 2007 that Couchsurfing either indeed was a charity, but had breached charity law by not registering, or it was not a charity, in which case soliciting donations might have been fraudulent. As the management remained unresponsive to urgent questions, a complaint was placed before the Attorney General of New Hampshire on 05 November 2007, with a final warning and advice to the management to try and get their act together now.
On 14 November 2007 the Attorney General then received the registration and reports for 2003 to 2006. As a result Couchsurfing was then added to the official list of registered charities in New Hampshire, despite some remaining concerns. This has for instance made it possible for attendees of the Alaska collective to obtain volunteers’ visa or the US, whereas the earlier collective in Thailand still largely relied on volunteers taking the risk of breaking the local law and entering on tourists’ visa.
What are the remaining legal concerns?
At the time of filing on 14 November 2007 Casey Fenton was President (chairing the board of directors) and paid employee at the same time, and there is no indication that the situation has changed since. New Hampshire law expressly forbids that. As a result his employment contract may be nil and void, and the organisation may be entitled to reimbursement for all or part of the salaries paid to him.
From the time of incorporation until at least the middle of 2007 Couchsurfing did not have the legally required minimum of five members on its board of directors, for at least until the end of 2005 Casey Fenton remaining sole director and officer. This may mean that legal decisions and contracts from those years may be invalid, with all sorts of unforeseeable consequences. It may also cast additional doubts on the validity of Casey Fenton’s employment contract, if it was entered into by him as sole director contracting with himself as employee, which may also have violated legal “conflict of interest” rules.
Some of the documents filed on 14 November 2007 (under penalty of perjury) appear to be materially false or backdated, especially the full corporate bye-laws, “conflict of interest policy” documents signed by directors and officers, and the listings of directors for 2003 to 2006. The filed documents may create the wrong impression as if a full, legally composed board of directors had been in office throughout, and may disguise the facts leading to concerns about Casey Fenton’s employment especially. The other current four members of the board of directors have been made aware that they have been listed as serving during years when they were in fact not, and they appear to condone this, which may, if any of the above mentioned constitutes a criminal offence, in itself be a criminal conspiracy in that context.
What is the history of the 501(c)(3) application?
Even before incorporation, from at least 11 February 2003 to at least 15 July 2004, Casey Fenton stated on the web site that Couchsurfing was “a 501(c)3 Non-Profit Company”, when there is no evidence that an application had ever been filed, let alone approved, at that time. The management have never responded to questions about this with an explanation. (Incidentally this also shows that the company’s name was used at least two months before incorporation, which may constitute fraud.)
Amongst all subsequent statements are these: On 27 January 2007 Casey Fenton states: “We are in the process of moving to 501c3 and hope to do so in the next couple months”. On 13 April 2007 he stated: “We are filing for 501c3 status practically tomorrow”.
The management stated on 24 November 2007 that the application was filed. On 28 April 2008 General Manager Matthew Brauer stated he had to “Edit supplemental statements for our 501c3 application”. Today, 03 October 2008, ‘desaparecida’ states in the Brainstorm group: “CouchSurfing has been asked for more information and additional papers … at least twice … This is what I heard in July in an informal talk”.
The above mentioned concerns held on state level may very well adversely affect the result of the application for 501(c)(3) status. Reversely, a failure of the 501(c)(3) application may ultimately affect the organisation’s status in New Hampshire.
Will Couchsurfing always stay a charity?
So far there is no guarantee for that. As already mentioned, the purpose of the corporation, or even its non-profit status could possibly still be changed. The discussion in the community has therefore come forward with the suggestion to introduce the word “irrevocable” into the ‘dedication of assets’ clause in the corporate bye-laws. This would simply require a documented resolution by the board of directors, but unfortunately this has not found any response from the management.
Once the 501(c)(3) status is obtained this may change, but that will depend on the precise nature of the application, and the particular sub-case of 501(c)(3) exemption. It is unfortunate that the management refuse to publish the application, which may lay all doubts to rest, and would enable the community to add their expertise and help. However, the organisation is legally only obliged to publish the application once it has been approved. This means that if the application remains unsuccessful, they will never be legally obliged to publish it, so that it may never become transparent why it was rejected.
If the organisation has applied for genuine charity status according to 501(c)(3), then everything is fine. If it has made use of one of the other options of tax exempt status, that may in theory be given back voluntarily in future, and the organisation could still be changed into a commercial enterprise. However, at that point all tax benefits received so far would have to be repaid. Practically speaking the crucial point after receiving 501(c)(3) status would probably be when they start issuing tax deductible donation certificates to US tax payers; from that time it may well be impractical and too expensive to try and get out of tax exempt status again. This is the reason for some sceptics to fear that the management may not earnestly want the tax exempt status.
What about the financial statements on the web site?
Couchsurfing has published skeleton financial statements on its web site since 2004. Despite promises to have them independently audited, they remain unaudited. No budget forecasts are published, despite Casey Fenton’s statement on 15 June 2007: “we hope to have ready before mid July … our budget forecast for 2008”.
The published statements only show income and expenditure, and omit all assets and liabilities accounts. This raises the concern whether the substantial amounts of accumulated funds have in actual fact been held in corporate bank accounts at all times, or whether irregular personal “loans” have been made, which are expressly forbidden by New Hampshire law. These concerns are aggravated by comparatively low figures for interest income being shown, given the total of funds that should have been in bank accounts over time. It was communicated in May 2008, as an achievement resulting from the General Manager’s presence at the collective in Thailand (sic!), that a higher interest bearing savings account had been set up in the US.
So far the organisation is under no legal obligation to publish financial accounts themselves, although they have to file the information with the charity regulators, and it is public by law (meaning: everybody can ask the Department of Justice in New Hampshire for a copy), so those listings on the web site are voluntary. However, the figures on the web site are incorrect and often don’t match the figures in the official filings. Whilst there are no significant deviations, accountancy is supposed to be an exact science, and any irregularity, however small, is cause for concern.
What information is public by law and how to get it?
Couchsurfing has to file annual reports and full financial statements for the previous calendar year by 15 May of each year. As already mentioned, according to New Hampshire law they have no obligation to publish those themselves, but the information is public by law, and everybody can request a copy from the Department of Justice in New Hampshire. This includes the documents submitted for registration, especially the corporate bye-laws.
Should 501(c)(3) tax exempt be granted, similar reporting duties will apply, and the report to the federal tax authorities can then just be copied to the state agencies. One important difference will be that then the organisation itself will have the duty to publish, and everybody can ask the organisation for a copy. Once the status is given this will, as mentioned above, also include the full initial application.
At the moment Couchsurfing appears to be complying with the legal minimum requirements for disclosure of public information. Publishing skeleton financial statements without being required to may see as if they went above and beyond the minimum requirements, but that is not really the case, as the published figures are wrong. However, in the world of charities, voluntary and non-government organisations it is generally seen as good practice to be forthcoming and cooperative in disclosing information in which there is a justified public interest.
Conclusion
It would be in the interest of building trust and stability in the community if the management changed its policy from doing the minimum required by law to doing the maximum permitted by law. For an organisation with the core purpose of running a web site there really is no excuse for not having all the information on there.
As there seems to be a policy of ignoring discussions in the groups, and insisting on submitting all “questions” through ‘Contact Us Questions’, I will submit a copy of this posting in that way, stating that I would like a response to all issues raised, and I will post here any response I will receive.
And now I need a drink. Sorry for the length. ;-P
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