Using Nonprofits For Illegal Purposes

Last week, Reuters reported that two nonprofits agreed to pay $6 million to resolve allegations that they had helped pharmaceutical companies in a way that violated the False Claims Act.

Chronic Disease Fund and Patient Access Network Foundation, the two nonprofits that paid the fine, are pubic charities, exempt under section 501(c)(3). Their charitable mission? To help poor individuals with chronic diseases get the medication they need by paying their out-of-pocket costs for the medication. The allegations that they settled claim that seven pharma companies used the nonprofits as flow-throughs, essentially donating money to the nonprofits, which would then help patients pay for those drug companies’ medicines.

The problem? The Anti-Kickback Statute prohibits drug companies from subsidizing copayments from patients on Medicare. Drug companies can donate to nonprofits that subsidize these out-of-pocket expenses, but the nonprofits must operate independently from their donors; here, the allegation was that CDF and PANF didn’t act independently. And, while neither admitted wrongdoing, they did settle.

The reports leave me curious about two things. First, I’m curious what the consequences to the nonprofits will be. While both essentially say they settled so that they can get on with their operations, if they actually broke the law, can they keep their exemptions? The Supreme Court has blessed the IRS’s adoption of a rule that holding that organizations don’t qualify for tax exemption if they act illegally. (Perhaps, in fact, that’s part of the reason that neither admitted wrongdoing.)

The second thing I’m curious about is the status of the drug companies’ payments to the nonprofits. Because they were 501(c)(3) organizations, I assume that the drug companies deducted the payments. But it looks like those payments were essentially quid pro quo payments (and may well violate that anti-inurement rule), which would disqualify their deductibility. And they would only be deductible as charitable donations; while section 162 allows the deduction of ordinary and necessary trade or business expenses, it explicitly disallows payments that subject a payor to criminal penalties. And the Anti-Kickback Statute, which the drug companies were attempting to circumvent, is definitely a criminal statute. 

Samuel D. Brunson