December 12, 2017; WDRB (Louisville, KY)
On the annual IRS Form 990, the numbers provided are not the only data to be scrutinized. The narrative and answers to questions are just as important; they, too, must represent the 501c3, whether it is an organization doing charitable work, or a private, support, or even family foundation. Then, there are all those little boxes to check, which represent how business is accomplished. Just checking yes/no boxes on at least four pages of questions establishes criteria by which one can judge an organization.
It’s a misrepresentation of facts that here threatens the tax-exempt status of the beleaguered University of Louisville Foundation. Each year, on its annual public 990 tax form, the Foundation noted that the compensation given to U of L’s former president, James Ramsey, along with other management positions, was based on compensation studies. Keith Sherman, the foundation’s interim executive director, testified in October that no such studies were prepared.
“But in fact, for several years, there were not compensation studies done,” Sherman said, according to the transcript. “So that as a result has—at least for now there’s a question about the 501c3—501c3 status of the Foundation with the IRS.”
The statement was made during a hearing to determine if unemployment benefits should be provided to Jason Tomlinson, the foundation’s former chief financial officer. Tomlinson was fired in July after an audit revealed malfeasance. He has filed suit for wrongful discharge, claiming he was a fall guy. NPQ has been following the story, a significant example of misuse of funds by a support foundation. The staff and board has largely been replaced in the aftermath.
The interim executive director issued a response to WDRB News, stating that the foundation is “not aware of any imminent jeopardy” to its tax-exempt recognition. Sherman said that the foundation’s attorneys are working with the IRS and they have engaged a consultant to provide a current compensation study.
Duane Tarnacki, a Detroit lawyer who represents nonprofits, stated that it would be “very unusual” for an organization to lose its tax-exempt status over such a misrepresentation. “Even if it were intentional, I don’t know that that would rise to a level where the IRS would take that drastic an action,” Tarnacki told WDRB News.
Sign up for our free newsletters
Subscribe to NPQ's newsletters to have our top stories delivered directly to your inbox.
There was no comment from the IRS on the matter.
The IRS has options short of revoking the foundation’s tax exemption. Section 4958 of the IRS Code allows for excise taxes, or “intermediate sanctions,” to be levied against a nonprofit and its individual leaders when excessive compensation is determined. Intermediate sanctions can also be levied in cases of “private inurement,” when transactions happen that benefit others (especially a nonprofit’s “insiders”) more than they benefit the nonprofit.
Donors have not been formally advised that foundation’s tax exemption may be at risk, and it was not discussed by the board during the public period of their meetings. The foundation has an endowment of $800 million, and receives contributions for the university, all of which would be disastrously affected by the loss of tax exemption.
The foundation has gone through massive upheaval after the president of the university, Ramsey, who was also president of the foundation for 14 years, was forced to resign after a forensic investigation released in June revealed that the endowment was reduced by minimum of $42 million by “unbudgeted or excessive” spending, which included a “deferred compensation” program that provided $22 million to nine administrators.
The foundation pay helped make Ramsey one of the highest-paid university presidents in the nation. His total pay, including from the university, averaged nearly $1.8 million from 2010–2016—as much as $3 million in a year (2012), according to the forensic investigation.
On the last five tax filings, the box was checked to indicate that a compensation survey was accomplished, as well as repeating in narrative that compensation was set through “data gathering and analysis of compensation at comparably sized organizations along with benchmarking against other qualified officials in similarly situated positions,” according to a review by WDRB News.
It’s easy for nonprofit organizations and their accountants to fill the 990 out by rote, doing the same thing every year. The U of L Foundation case has been a warning on so many levels, such as the use of endowments and how compensation is determined, and it now serves as a caution to all in the sector to pay attention to how those boxes are checked.—Marian Conway