Dateline, March 28, 2005, Chicago
SEE MARCH 25, 2005 ADDITIONAL COVERAGE OF THE IMUS RANCH CONTROVERSY
This morning when we left the house, Don Imus was talking with Ron Insana, the CNBC host of Street Signs and well known financial personality. Insana was joking with Imus, commiserating with him about the Wall Street Journal’s supposedly unfair coverage. Once again, we assume the noblest motivations...
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on Mr. Imus’s part. We really don’t even need to make that assumption because Mr. Imus is clearly sincere and well-intentioned about his charitable activities. Having said that, the entire Wall Street Journal incident offers a few important lessons that go well beyond Mr. Imus and Imus Ranch.
In researching the Imus Ranch, we found a February 10, 2003 article by Thomas J. Cole in the Albuquerque Journal entitled Sick Kids' Ranch Has Hefty Costs (DON IMUS) which raises many of the same points as the Wall Street Journal’s article. Readers were able to post comments. Although more than two years old, these comments are surprisingly relevant for present purposes so we will quote from them as appropriate.
With Subsidy Comes Compliance. One Albuquerque Journal reader wrote:
All the donations are voluntary, so who's business is it how much it costs?
Well, actually it is the public’s business. If Mr. Imus purchased a ranch, bought insurance, and invited kids with cancer to visit him, it would be nobody’s business. But when somebody creates a charity and solicits tax-deductible contributions, it becomes the public’s business because the public is subsidizing the venture. Tax-exemption and the ability to solicit tax-deductible contributions are very valuable benefits conferred on charities, as are potential property tax exemptions. In exchange for those benefits, Federal law and many state laws require disclosure.
Neither the IRS, nor state regulators evaluate the efficiency of charitable entities. They leave that analysis to the marketplace as it makes funding decisions. But both the IRS and the states require disclosure. Someone who doesn’t want to be subject to disclosure can still do good deeds, just not on a subsidized basis.
Another Albuquerque Journal reader writes:
I am no fan of Don Imus. But I want to know how a local rag get's a hold of private tax return information?
Quite simple, the Internal Revenue Code requires that charities make their tax returns public. Many state regulators require additional disclosures. That is the price of public subsidy.
The Imus Ranch is Not Don Imus. One Albuquerque Journal writes:
You're nitpicking a very generous effort, IMO. Imus is not everybody's cup of tea, but he doesn't have to do this. From all indications, he's losing money on it.
Mr. Imus isn’t losing any money on Imus Ranch, the charity. The charity may be running a deficit, but any deficit is not Mr. Imus’s loss. Even if Mr. Imus decides to cover any deficit with additional contribution, he is not suffering a loss. He is making a charitable contribution.
The Imus Ranch may have been Mr. Imus’s idea. He may have contributed personal funds to it. He may have designed it. He may have used his name to raise funds for it from others. But Imus Ranch, as are all charities, is a separate legal entity in terms of its relationship with its founder. Its assets don’t belong to Mr. Imus. As a director, Mr. Imus has certain duties with respect to those assets. These duties require Mr. Imus to see that those assets are used in furtherance of Imus Ranch’s charitable purposes. Given those facts, nobody should be surprised that regulators ask questions about the use of assets. Nor should anyone be troubled when an investigative reporter decides to perform a watchdog function. None of this means that Mr. Imus has done anything wrong or inappropriate. This activity only highlights the separation that takes place when people decide to start and fund a charity.
Charities are Organized as Non-Profits, but They are Businesses. We find it somewhat disingenuous for Mr. Insona to be defending Mr. Imus to the degree that he was this morning on MSNBC--although we did not hear the entire interview. Nobody, including Mr. Imus, seems to dispute the high cost of operating the ranch.
In the Albuquerque Journal article, Mr. Imus is quoted as having said:
One of the things, of course, we didn't think about when we came up with the idea of this place was that you can only have kids there when they're out of school, but you have to run the place year-round because you got animals and horses and 17 buildings and the land and all that.
Imagine this scenario: XYZ Company, an S&P 500 company reports a $10 per share quarterly loss. Last year, XYZ doubled its capacity by building a new plant to process orange juice in Alaska, selecting the Alaska location because land was very cheap in Alaska. What the XYZ logistics planning department forgot to take into account was that oranges could only be processed in Alaska three months a year because of the cold weather: The plant sits idle nine months per year. Transportation costs are also very high. In interviewing XYZ's CEO, would Mr. Insona say “Oh?” Absolutely not. He would point out that the market is not very happy with the decision and ask the CEO to justify the decision. So why is Mr. Insona apparently so willing to give a charity a pass? While charities certainly shouldn’t be expected to turn a profit, they should be run efficiently, using many of the same methods that business corporations use to control costs. This is where we do find fault with Mr. Imus. He had the ability to raise a lot of money, but he doesn't seem to have thought through the economics of what he was doing. He built tremendous overhead costs into his operation.
Beware of Founder’s Syndrome. Nothing we have read suggests that the Mr. Imus or the charity's board have undertaken any succession planning. In summarizing Mr. Imus’s apparent views, the Wall Street Journal article notes:
Mr. Imus says he prefers to oversee the ranch and kids himself, rather than hiring a manager to run it.
Nothing we have heard Mr. Imus say is inconsistent with this summation. Obviously, Mr. Imus takes a great deal of satisfaction from his work. And he should. He clearly has build a substantial operation. But what will happen to it once he leaves the scene? Mr. Imus apparently relies heavily on his contacts and media access to raise money. Who will do the fundraising?
Boards need to think about what will happen when the founders leave the scene, something that many Sixties activists who started social service organizations are now facing. One can certainly envision Imus Ranch putting the ranch up for sale in ten or fifteen years because of lack of funding and the absence of a driving force. Going back to business practices, just as every successful business should have a succession plan, so should every charity. This also goes back to our point that the founders and the charity are different entities. Everybody's objective should be to have the charity outlive the founder.
Before Starting a Charity. We have suggested before that people should spend a lot of time developing a business plan before starting a charity. As part of that process, we have also suggested that people first determine whether there are charities that are already serving the market in question. If Mr. Imus didn't take that approach, he should have. There are too many charities chasing too few charitable dollars. Everyone should want to see those charitable dollars used as efficiently as possible. In part, that means people should avoid reinventing the wheel. Mr. Imus clearly had fundraising capabilities and energy to devote to the children he wants to serve. Would he have been able to serve many more children had be partnered with an experienced organization that already had operational, administrative and logistical abilities that Mr.Imus might lack? Everyone who considers starting a charity should first examine their strengths and weaknesses. Partnering will often make more sense than going it alone.
A More Constructive Response. We are not regular listeners to "Imus in the Morning." Apparently, Mr. Imus is famous for his rants. Fine, but he should drop the rants when it comes to the Wall Street Journal article. The more constructive approach would be to acknowledge that the accounting may have been a little lax, agree to clean it up, and to take a hard look at increasing Imus Ranch’s level of efficiency. He might consider teaming up with Make-A-Wish Foundation or Outward Bound (or other appropriate organization)to utilize some of their organizational and operational skills and experience. Everyone would benefit and there is no question that Mr. Imus could still clean stalls and teach the kids to ride horses.
While the Section 4958 intermediate sanctions may be an issue, dealing with them could be relatively painless. To eliminate both tax and "appearances" concerns, Mr. Imus could simply value his use of the ranch using a comparable time share arrangement to arrive at a value--just one approach to obtaining a valuation. Let’s assume the "personal use" value is $50,000 and that Section 119 doesn’t provide an exclusion. Mr. Imus could pay the ranch $50,000 for his "personal use" and then charge the ranch $50,000 for his work--assuming his work is worth $50,000. The bottomline: Mr. Imus has taxable income, but the personal use issue drops by the wayside from both the standpoint of appearances and taxes. Obviously this is just a rough sketch of a possible solution. There may be other options. But when all is said and done, Mr. Imus appears to us to have much more of an "appearances" problem than a real problem.
At that point, Mr. Imus might still be open to criticism over inefficiencies, but the personal use issue would no longer be an issue. Finally, if it hasn't, the board should focus on succession planning. That is where a finding an established organization to partner with might make sense.
More importantly, Mr. Imus could turn what he views as unfair publicity into something positive for Imus Charities.
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