How Much Can Executives Profit from Nonprofits? Landmark New Law to Punish Nonprofit Abusers May Be Used Against

Article excerpt

As trustees of Hawaii's Bishop Estate, Henry Peters and his four colleagues were the highest paid charity employees in the United States.

Each made roughly $1 million a year, and the estate says their salaries were just compensation for the trustees' work educating Hawaiian children and the complicated job of managing trust assets, such as its vast landholdings and millions of shares in Goldman Sachs.

The Internal Revenue Service, however, doesn't see it that way. Last week, it forced a Hawaii court to remove the trustees from their posts, threatening to revoke the trust's tax-exempt status if the trustees remained. But perhaps more important, the IRS is deciding whether to use a new law aimed at punishing executives who abuse charities for personal gain. If it does, the law - and its first-ever application - could radically change the nonprofit landscape. "Experts are watching closely to see how the new law is used in the Bishop Estate situation, as that will likely indicate how the IRS will use these new weapons in other, less extreme situations," says Randall Roth, a law professor and trust-law expert at the University of Hawaii. Passed in 1996 and finalized last August, the Intermediate Sanctions Act allows the IRS to levy personal fines on board members and executives of tax-exempt organizations who receive excessive compensation. Previously, the IRS could penalize leaders of charities only by revoking an organization's tax status, a drastic measure that generally killed the charity and harmed the beneficiaries. "The Intermediate Sanctions Act was designed to directly penalize wrongdoers when a charity has been misused," says Robert Allen, a Boston attorney who previously headed the Massachusetts attorney general's public charities division. Until now, charities have largely received light treatment from Uncle Sam. Yet the sheer size of the sector, which employs more than 10 million people and generates more than $500 billion each year, is forcing the IRS to take more notice. "The charitable sector is tremendous," says Mr. Allen. "It fundamentally has organizations that are totally well run and performing heroic work. At the same time, there is enough negligence or misuse of charity to warrant both state enforcement action {and} this stronger federal enforcement. …