Dateline, March 24, 2005, Chicago
SEE MARCH 28, 2005 ADDITIONAL COVERAGE OF THE IMUS RANCH CONTROVERSY
SEE MARCH 25, 2005 ADDITIONAL COVERAGE OF THE IMUS RANCH CONTROVERSY
As we flipped through the cable channels this morning trying to get our Terry Schiavo fix , we stumbled across Imus in the Morning on MSNBC. What was he ranting about? Then we picked up our Wall Street Journal to read a front page expose by WSJ reporter Robert Frank entitled “Don Imus’s Ranch for Sick Children Draws Scrutiny: Charity Spent $2.6 Million Last Year on Just 100 Kids; His Family’s Holiday Visits.”
Our first reaction after reading the article: What a waste of valuable space on the front page of the Wall Street Journal. Of course, we aren’t entirely objective because...
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we believe many of the posts to this blog deserve front page placement, but let’s set aside those personal beliefs for a moment.
What we find amazing about the story is the apparent inefficiency of Imus Ranch, the charity. No doubt it does help the kids that participate in its program. But only 100 kids at a cost of $2.6 million a year? That works out to somewhere around $26,000 per kid. As the Wall Street Journal pointed out, that translated into a cost of $3,000 per day, per kid. The article notes that the typical kid stays nine days. We took a quick look at Outward Bound’s website. One of their many courses was entitled “New England Sailing, Backpacking, & Climbing – girls” According to the description:
On the sailing portion of this adventure, you'll learn how to read nautical charts, navigate with a compass, and sail your 30-foot boat through the waters of Boston Harbor Islands National Park area. Fall asleep under the stars and wake up to the shining sun while living aboard your pulling boat for a week.
Stop to explore the natural wonders of several islands, including Thompson Island, where you'll go through the ropes courses at our Outward Bound base and challenge yourself to climb the 60-foot Alpine Tower.
You'll also experience the White Mountains where you'll hike along the Appalachian Trail, swim in freshwater streams, and enjoy a day of creative adventure.
But is it all just for fun. No! Like the Imus Ranch, Outward Bound seeks to instill values in the program participants. According to the course description.
This course, called "Connecting with Courage", empowers girls to be strong, to express ideas, speak their minds, be creative, and challenge themselves through physical activities such as backpacking, sailing, and climbing.
The cost: $1,960 for this 14-day adventure--hey, we’re thinking about canceling our vacation to Europe this summer, particularly because there are no unfavorable Euros conversions. If Mr. Imus were to close down his program and use the $2.6 million to purchase Outward Bound adventures for the kids he wants to help, he could send 1,326 girls to the “Connecting with Courage” program. But that is a 14-day program. Pro rating the numbers to reflect the Imus Ranch's 9-day adventure works out a 2,063 kid-equivalent.
One conclusion we draw: Star power can produce vast inefficiencies. If Mr. Imus were willing to lend his fundraising abilities to Outward Bound, he could help 20 times the number of kids that he is currently helping. If Mr. Imus truly believes ranching is a better teaching experience than sailing in Maine, he might consider turning his ranch over to Outward Bound.
Where we take issue with the Wall Street Journal article is its exclusive
focus on Mr. Imus. The story would have been much more meaningful had
it examined the efficiency of celebrity-based charities in general rather than focusing on just one. Say what you
want about our celebrity-driven culture, celebrities can and do raise money,
lots of money. The trouble is that some of them also think they know how to
design and administer social service programs.
The logical question in Mr. Imus's case: Who would pay for such inefficiency? The Wall Street Journal article suggests a lot of people and corporations, including one former titan of Wall Street--who we might add was the head of a company that devotes considerable time and resources to evaluating the efficiency of other companies for purposes of allocating capital. Not with our money. We would not give a nickel to Mr. Imus to finance the level of inefficiency that his efforts have spawned. That is to say, we would not be blinded by his celebrity. But that is us. Had the Wall Street Journal approached the article in a more general fashion, we would have hoped that others might have agreed with us when it comes to what we suspect are a large number of inefficient, ego-driven charities.
But that still leaves one question open: Did Mr. Imus do anything wrong? That is somewhat of a subjective question. We suspect that Mr. Imus was well-intentioned, although a bit naive. But his naitivity does raise the question whether his actions violated the Section 4958 intermediate sanctions found in the back of the Internal Revenue Code. There is no question that Mr. Imus is a disqualified person within the meaning of Treasury Regulation Section 53.4958-3 because he is a Imus Ranch director, at least according to the 2003 Form 990 available from GuideStar. See, Treasury Regulation Section 53.4958-3(c)(3)(1).
The 2003 Form 990 indicates that Mr. Imus received no compensation from Imus Ranch. We have no doubt that Mr. Imus has received no monetary payments from the charity for his services. However, the intermediate sanctions focus on more than monetary payments in determining whether there has been an "excess benefit" within the meaning of Treasury Regulation Section 53.4958-4. Mr. Imus has apparently received meals and lodging from the charity, provided during the time that he is at the ranch. That is an economic benefit that must be taken into account in determining whether Mr. Imus received an excess benefit, unless it is excludible from the determination under one of the exceptions set out in Treasury Regulation Section 53.4958-4(a)(4). The language in that Section and Section 132 can be a bit opaque, but the commentary accompanying the issuance of final regulations under Section 4958 is quite clear, stating:
[39] Several comments were received requesting that lodging furnished for the convenience of the employer (i.e., meeting the requirements of section 119) be disregarded for section 4958 purposes. These comments suggested that benefits excluded from gross income under section 119 should be disregarded for purposes of section 4958 because the policy rationale underlying section 119 is the same as that underlying section 132. However, there are differences between the two sections. In general, section 132 benefits are subject to nondiscrimination rules or are de minimis in amount, which is not the case with section 119 benefits. The value of housing benefits is potentially much larger than many of the section 132 benefits, and therefore a greater potential for abuse exists in the section 119 area. Accordingly, the IRS and the Treasury Department believe it is appropriate to treat section 119 benefits differently from section 132 benefits by requiring an evaluation for reasonableness. Treasury Decision 8978.
In our view, this language means that the value of the lodging provided to Mr. Imus must be included as part of his compensation for purposes of determining whether there has been an excess benefit conferred upon him--if we were involved in the case, we would do more research, but for present purposes, this is pretty clear language. Of course, Mr. Imus can argue that the value of the services he has provided to the Imus Ranch equal or exceed that value, creating a classic valuation issue.
Assuming the lodging benefit qualifies for exclusion under Section 119 of the Internal Revenue Code, Mr. Imus should not have to worry about the contemporaneous substantiation requirement in Treasury Regulation Section 53.4958-4(c) because the amount would be excludible from gross income chapter 1 of Subtitle A of the Internal Revenue Code. See, Treasury Regulation Section 53.4958-4(c)(2). Of course, if the lodging benefit doesn't qualify for exclusion Section 119, Mr. Imus may be looking at an automatic excess benefit if there was not contemporaneous substantiation. We should note that we don't necessarily believe Section 119 exclusion is a slam dunk. We have not researched the issue, but is Mr. Imus considered an employee for purposes of Section 119? If so, is his employer requiring him to accept the meals and lodging as a condition of his employment? The Section 132 regulations do address the question of volunteers. Our quick review of the regulations under Section 119 found no reference to volunteers. Once again, more research is in order by those directly involved in the matter.
Our focus has been on the intermediate sanctions so far. But this may be a case where the IRS raises the question of private inurement. The Wall Street Journal article describes the lavish lodging facilities, apparently the subject of an article in Architectural Digest (or at least it was discussed as part of an interview with Mrs. Imus). The facts are a bit clouded because apparently the kids do stay in the same lodge as the Imus'. But are the kid rooms comparable to the Imus rooms? Furthermore, the Imus' apparently use the facility when the kids are not present.
The Wall Street Journal article also notes that San Miguel County, New Mexico challenged the ranch's property tax exemption, reducing the exemption from 100% to 55%. Although this is an unrelated determination, it clearly raises questions as to whether Imus Ranch is operated exclusively for charitable purposes, within the meaning of Treasury Regulation Section 1.501(c)(3)-1(a)(1).
In short, the IRS is now presented with an interesting set of tax
issues thanks to the Wall Street Journal. Only time will tell if and how the IRS responds. Philosophically,
this situation poses a very interesting one for the IRS. The
courts have essentially told the IRS that it cannot deny Section
501(c)(3) status because a charity is inefficient so long as the money
is used for charitable purposes. See for example, United Cancer Council v. Commissioner (7th Cir. 1999). But this is a case where there may be enough private benefit to permit the IRS to indirectly address some of the apparent inefficiencies through the intermediate sanctions.
We suspect that this is a classic case where the charity's organizer believed that no one would bother someone who was doing good. Mr. Imus could have easily structured around the criticisms and potential problems he now faces by focusing a little bit more on the legal and tax aspects of organizing and operating a charity. The article indicates that Mr. Imus "doesn't see the need to do such accounting"--quoting the reporter's conclusion, not Mr. Imus. If and after the IRS gets done with him, Mr. Imus might change his mind on that score, assuming it correctly reflects his current thinking.
And if Mr. Imus really wants to do good, he should pay more attention to the details than he apparently currently is. A little bit more focus on accounting and finances might greatly aid his efforts to help children in need. This "I have a lot of money and will do what I want attitude" is not becoming, particularly because it is cloaked in doing good for charity.
LESSON FOR OTHERS: The intermediate sanctions are extremely complex, compliance requires effort and formality, and the IRS is increasingly invoking these sanctions. You can't plead ignorance when the IRS questions a transaction or compensation. In many cases, some advanced planning would have permitted you to do what you wanted to do without the sanctions being a problem, but you first have to understand the rules to avoid trouble. And don't forget, the recipient of the compensation is the one who bears the greatest burden when the sanctions are successfully invoked--payback is required.
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