December 2, 1999 | Read Time: 3 minutes
The Internal Revenue Service has assessed more than $83-million in fines on companies and people with close ties to non-profit organizations because they received what the I.R.S. calls excessive compensation. What’s more, the revenue service has revoked the tax exemptions of three charities involved in the transactions, said Marc Owens, director of the I.R.S.’s Exempt Organizations Division. “You might conclude that’s indicative of a looting of the charities by the individuals with substantial influence over them,” Mr. Owens told a Washington seminar held by the American Bar Association and the American Law Institute.
The fines — the first levied by the tax agency under a law passed by Congress in 1996 — were slapped on three for-profit corporations and five people with substantial influence over the affairs of charities, Mr. Owens said in an interview. He did not identify those receiving fines.
Under the statute, influential “insiders” who get inappropriately high salaries or other compensation can be forced to pay fines, called excise taxes, as can trustees who approve the arrangements. Companies that do business with charities and have significant influence with them can also be deemed to be insiders. The penalties can equal 25 per cent of the portion of the compensation or other benefits considered excessive. Insiders who fail to pay the penalties or return the portion of the compensation considered excessive can face fines of up to 200 per cent of the money they received improperly.
Mr. Owens said that the I.R.S. will also revoke a charity’s tax exemption if the service finds egregious problems. The intent of the law is “not simply about paying a 25-per-cent excise tax and then cutting another check back to the charity,” said Mr. Owens.
“We will want to be assured that there will not be a continuation of the behavior that raised the excise-tax issue in the first place. We want to know how the organization is going to insure that compensation is reasonable,” he said. “If we don’t have that assurance, exemption is probably going to be on the table.”
On another topic, Mr. Owens said that the I.R.S. has encouraged its field offices to ask state charity regulators to identify groups that consistently fail to properly register and to file reports on their fund-raising efforts so that the tax agency can take a look at them.
“If you have a pattern, if you have consistent problems with state registration, why isn’t that a violation of public policy?” he asked. “Why isn’t it potentially reflecting some level of private benefit that’s being obscured by the reluctance to report to the state? Those issues do have ramifications for federal income-tax exemption.”
Mr. Owens said that the I.R.S. will continue to watch out for problems that involve donations of used cars to charities. One concern, he said, is the hyperbole of some advertising that promises donors charitable deductions for full “Blue Book” value when used cars are in poor or inoperable condition.
Mr. Owens said that he recently sought to donate an automobile that had little market value because “one of my sons had driven rather briskly over a curb and moved one of the wheels back out of true [alignment].”
“The organization I contacted, though, was willing to give me a receipt that would substantiate the full Blue Book value of that automobile,” said Mr. Owens. “I don’t know where they found a Blue Book for non-functioning automobiles, but maybe one exists, I don’t know. It’s a big world out there.”
