How to Follow Federal Law That Forbids Charity Officials From Getting Excessive Financial Benefits

The Law of Intermediate Sanctions: a Guide for Nonprofits
by Bruce R. Hopkins

Bruce R. Hopkins, a lawyer in Kansas City, Mo., describes the Internal Revenue Service’s regulations requiring the assessment of penalties against employees, trustees, and others who receive undue financial benefits from their association with a charity.

When Congress passed a law in 1996 to curb abuses by charity officials, writes Mr. Hopkins, it gave the IRS an intermediate option for sanctioning wrongdoing. Until that time, the federal agency could only revoke the tax-exempt status of a nonprofit organization that was overcompensating its employees, or otherwise providing lavish benefits to officials. Since the IRS usually didn’t want to take such harsh action, its only option was to turn a blind eye.

This book defines the legal terms involved in enforcement of the law, often known as “intermediate sanctions,” and describes the criteria typically used to determine whether a transaction exceeds a “reasonable” amount. Mr. Hopkins details the three types of penalties that could be imposed against a charity employee who was paid too much, as well as the tax that could be levied on a charity’s trustees or directors for knowingly overcompensating an employee.

Mr. Hopkins finds parts of the tax law pertaining to intermediate sanctions problematic. The language offers too little assistance, he says, in determining the “reasonableness” of a charity employee’s salary, which means that an individual who acted in good faith could be penalized. Additionally, Mr. Hopkins expresses concern that charities will lose out as highly talented employees choose to work at for-profit companies, where they can receive greater financial benefits without fear of penalty.

Publisher: John Wiley & Sons, 1 Wiley Drive, Somerset, N.J. 08875; (800) 225-5945; fax (800) 597-3299; http://www.wiley.com; 362 pages; $45.