Taxation of Nonprofit organizations

Your local government created an agency to serve the local community in providing low income housing. That housing agency, called the Local Housing Board, is a tax exempt agency of local government and was created to receive federal funds for housing and was intended to use those federal funds to provide housing for low income residents of the community.

The Local Housing Board carries out a number of projects related to low income housing including providing services to low income citizens and constructing new housing projects and renovating existing housing units. These activities involve a number of construction and development-related activities. Some of the construction activities are carried out by crews employed by the Local Housing Board, but many of the Board's activities are carried out by subcontractors.

In 2001, the Local Housing Board created a non-profit corporation, called the Local Housing Development Corporation (LHDC), wholly owned by the Local Housing Board, to oversee and manage its construction and renovation projects. When the LHDC was formed, it applied for and received federal tax exempt status.

Over the last ten years, the LHDC has received between $10 million and $30 million each year from the Local Housing Board for overseeing and managing the Local Housing Board's construction and renovation projects. Also, in several of the last ten years, the LHDC has received as much as $1 million a year from performing construction and renovation management services for other entities and from various grants.

Since, it was formed in 2001, the LHDC has maintained a paid staff and has paid various expenses that it incurred in managing construction and renovation projects. The books and records of the LHDC have not segregated the work that it has done for the Local Housing Board from the work it has done for other entities or from the grants that it received..

If the proper forms had been filed by the LHDC, they would have been disclosed that the directors of the Local Housing Board are also directors of the LHDC and that all decisions for the LHDC made by directors of LHDC have been made at the meetings of the directors of the Local Housing Board - the LHDC has never held a director's meeting separate from a director's meeting of the Local Housing Board.

Now, ten years after the LHDC was formed and received its tax-exempt status, it has been discovered that the LHDC has never filed a Form 990 or 990EZ or 990. It has also been discovered that the tax-exempt status of the LHDC was revoked in 2009 for failure to file required tax forms.

What are the implications for LHDC and the Local Housing Authority in this situation?

What can the LHDC and the Local Housing Board do now to remedy the situation or, at least to lessen the harm that has been done?

All issues raised in this scenario should be considered and addressed. Citations of authority for your solutions and recommendations should be provided.