Charity Gets Help From IRS in Dealing With Missing Funds

Not all charities are fond of a 1996 law that cracks down on nonprofit officials who receive overly lavish

perquisites, high pay, or other financial benefits through their association with a tax-exempt group. But the Asher Student Foundation, in Los Angeles, says that when its board chairman helped himself to the charity’s assets and later fleeced dozens of people, it learned the potential the law has to help nonprofit groups.

In 1998, the foundation, which provides housing for college students who are Christian Scientists, discovered that its board chairman had skimmed $200,000 from its operating and investment funds for his own use. It removed the board chairman, Eric Resteiner, who admitted he had taken the money and quickly agreed to repay the charity.

It wasn’t until 18 months later, after an audit turned up more missing funds — amounting to $95,000 — that Asher officials became more suspicious about what Mr. Resteiner was up to. He had established a bank account in the Bahamas in the charity’s name, and Asher board members wondered whether he was preparing to flee the country. Mr. Resteiner denied any wrongdoing to Asher officials.

Carolyn Klamp, a lawyer in Washington, advised Asher officials to seek guidance from the Internal Revenue Service and ask for help under the 1996 law.

Ms. Klamp cautioned that reporting the loss of funds to the IRS put the charity at risk: The tax agency could ask it to pay up to a $10,000 penalty if it found that Asher trustees knowingly approved Mr. Resteiner’s transactions, she said, but that was very unlikely.

Still, the potential benefit was greater, she says she told Asher officials: The IRS could help recover the rest of the money Mr. Resteiner took from Asher and force him to pay the charity’s legal and audit fees, as well as lost investment income on the misappropriated funds.

The charity says the IRS was more than willing to help, and agreed to expedite its normal procedures. It also decided not to fine the charity.

Even so, the revenue service was just a little too late. Mr. Resteiner appeared to have left the country by the time the IRS investigators tried to get in touch with him and several months before the Securities and Exchange Commission began investigating what it said was a pyramid investment scheme in which Mr. Resteiner promised that each investor would get annual returns of 50 percent. A federal judge in September found that Mr. Resteiner and a partner were guilty of misleading investors and now owe nearly $26-million in restitution to more than 50 victims and an additional $4.4-million each in penalties.

If the U.S. government can gain control of Mr. Resteiner’s funds, which is not certain since the government has not yet found him, the investors in his plan will be repaid. In addition, the IRS will work with other federal agencies to help return the money to Asher.

If Asher hadn’t asked the IRS to intervene, it would have been on its own in trying to get the money back. Before the 1996 law was passed, however, the option of going to the IRS wouldn’t have been very attractive, says Ms. Klamp, since the service had a stark choice in such situations: It either could have revoked Asher’s tax-exempt status, on the grounds that it had allowed its assets to be misused, or it could have done nothing. The 1996 law gave the service a middle ground — the option of imposing penalties on people found guilty of misdeeds, but allowing a charity to continue its work.

“I can’t think of a better instance of the justice of penalizing the insider, rather than the charity, than a case where a corrupt board chair covertly and independently embezzles money from the organization’s accounts,” Ms. Klamp says. “Most charities aren’t making use of the law in the way that they could. In a wide variety of cases of overpayment or misappropriated funds, the IRS could help the charity recover the money.”

Changing Policies

The Asher foundation has since followed steps outlined in the law’s regulations to establish stricter financial controls and a conflict-of-interest policy, says the foundation’s accountant, Lawrence Reed.

“It really forces organizations to be very careful about entering into transactions with board members and others,” says Mr. Reed. “The reporting requirements are difficult, but there’s a good reason for them.”

As a sign of how difficult the law can be to interpret, not everyone agrees that the Asher case should have been covered by the 1996 law. Instead, they say, Mr. Resteiner should have been pursued on theft charges.

Ms. Klamp disagrees.

“The charity’s board chair reaped a clear personal benefit without providing anything to the charity in return,” she says. “I concluded that the charity provided Mr. Resteiner with a benefit notwithstanding the fact that the board did not know of or approve the underlying transactions. The IRS concurred.”

The IRS refused to comment on its involvement in the Asher case, citing a law that requires it to protect the privacy of those involved in the cases it pursues.