IMUS IN THE MORNING: THERE SHOULD BE GREATER COORDINATION BETWEEN STATE AND FEDERAL REGULATION

Dateline, March 25, 2005, Chicago

SEE MARCH 28, 2005 ADDITIONAL COVERAGE OF THE IMUS RANCH CONTROVERSY

SEE MARCH 25, 2005 ADDITIONAL COVERAGE OF THE IMUS RANCH CONTROVERSY

In today's New York Times, Geraldine Fabrikant writes in Radio Host Criticizes Report on Charity:

The New York attorney general, Eliot Spitzer, had questioned some of the Imus family's personal use of the 4,000-acre ranch, which cares for about 100 children who come in groups of 10 to visit during the summer and participate in ranch life.

But late yesterday, Mr. Spitzer's office notified the charity that it had closed the inquiry without any findings of impropriety.

That is obviously good news for Mr. Imus.  But it does provide some food for thought.... 

Our Guide, Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer, discusses the intermediate sanctions and other tax-exemption issues.  Our forthcoming book contains an extensive discussion of the intermediate sanctions.  Don Imus and you should consider buying a copy of our Guide today. Call us at 773-325-2124 for additional information, or visit our website at http://www.charitygovernance.com. We also do on site training. Draft Index for Forthcoming Book: Avoiding Trouble While Doing Good:  A Desktop Guide for Non-Profit Directors, Officers, and Advisor

The intermediate sanctions were an effort to provide a Federal backstop to state regulation of charity.  The assumption underlying Section 4958 was that states weren't adequately enforcing state laws protecting charitable assets (assets that had been accumulated through a Federal government subsidy in the form the charitable contribution deduction and tax exemption).

We now have a state regulator who has cleared Mr. Imus of any wrongdoing when it comes to issues involving benefits provided to insiders.  Mr. Imus may still be open to criticism over his charity's apparent inefficiencies, but that is not a matter subject to state or Federal administrative review.  Yet, as we pointed out yesterday, the Federal intermediate sanctions appear to be at least an issue.  Nobody has said whether the IRS is investigating Mr. Imus, but IRS officials do read the newspapers so they are now likely to be aware of the basic facts as reported by the Wall Street Journal--although the full facts still have to be developed.  While the Wall Street Journal's story should be viewed as allegations for purposes of any legal investigation, based on quotes in the article and the comments we heard Mr. Imus make yesterday, even he doesn't seem to dispute that he and his family lodge at the ranch when they are at the ranch helping kids.

So here we have a potential conflict between state and Federal regulatory regimes.  If the IRS wants to investigate the matter, it certainly appears that they could raise the intermediate sanctions.  If that happens, Mr. Imus will be caught in a gap between the two regimes.  His activities are OK under state law, but possibly problematic under Federal law.  The IRS might reach the same conclusion that the New York Attorney General apparently reached--the value of the lodging received by Mr. Imus is offset by the value of services he provides--meaning there has not been any inappropriate benefit conferred on Mr. Imus.  That is the valuation issue we spoke of yesterday.  The IRS could also conceivably reach a different conclusion, causing it to invoke the sanctions.  Yet, the intermediate sanctions are not really supposed to create new standards, but serve as a backstop to existing state law standards.  But as every lawyer knows, laws and regulations do take on a life of their own.

As the Staff of the Senate Finance Committee pushes it own proposals for further Federal oversight of the charitable sector, everybody should keep in mind the potential inequities and regulatory inefficiencies that can result when two different governmental units regulate the same behavior.  In our view, if the Federal government is going add its weight to charitable regulation, it should be on a very coordinated basis with state regulators.  It sees to us that the first place to start is to coordinate the intermediate sanctions with state law.  The intermediate sanctions contain a number of presumptions and exceptions.  We think they should be modified to provide that if a state regulatory body investigates behavior and finds no problem, that the underlying compensation arrangement is exempt from review under the intermediate sanctions.  That is consistent with a backstop notion.  Just as we demand efficiency from charities, we demand efficiency from our regulators.

THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our Guide/Tutorial for non-profit directors and officers entitled “Avoiding Trouble While Doing Good: A Guide for the Non-Profit Director and Officer.” Copyright 2005, Auto Didactix LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "Avoiding Trouble While Doing Good, A Guide for the Non-Profit Director and Officer" and this web blog.  For additional information call 773-325-2124