By: A.J. Cook


Many citizens render an important service by contributing their time on boards of various charities. They vote on mundane motions and listen to boring discussions that drone on into late evening hours. But now, newly issued Internal Revenue Service regulations gave these volunteers a wake-up call.

These regulations, which apply to major contributors and officials as well as board members explain about penalties on insiders who improperly benefit or allow others to benefit from dealing with charities. Charities include those organizations limited to specific benevolent services as well as churches, synagogues, colleges, museums.

The penalties apply to transactions benefitting an insider or a major contributor to the detriment of the charity. They apply when the person receives more in money or assets than the value of the services or assets the charity receives. For example, the law applies to a fat salary for the manager or a sweetheart contract benefitting the charity's biggest contributor. In the past, the IRS could only penalize the organization by taking away its exempt status–a devastating move that punished the charity more than the miscreants. Frequently, the IRS was not willing to take this step.

Congress enacted a penalty of 25 percent of the excess benefits. This is assessed against the person who received the advantage if that person exercised managerial control. This includes the founder, major contributor, voting board member, president, treasurer. The offender must also repay the excess benefit.

The law also punishes the organization's custodians. This means officers, directors and trustees can't stand idly by and let the charity be used. They would be required to pay a penalty of 10 percent of the excess benefit.

Today, sitting on a charity's board means paying close attention. Board membership is not just an honor, it's a responsibility with personal financial consequences.

The Moral: Sitting carelessly on a board can put a splinter in your back pocket.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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This information is not intended for use without professional advise.
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Released 1-11-99