Should Private Inurement And/Or Excess Benefit Transactions Be Viewed As Prima Facie Evidence of Criminal Behavior?

In yesterday’s Houston Chronicle, there was another story about insiders improperly using charitable funds for allegedly personal purposes.  According to the report, two former leaders of the Sickle Cell Association of the Texas Gulf Coast are being tried for felony theft.  They allegedly misused $400,000 of the 501(c)(3) organization’s funds over four years.  A few weeks ago, we blogged the story of a New York nonprofit that had engaged in apparent private inurement and excess benefit transactions.  In that case, too, the report noted that the District Attorney’s office was looking into bringing criminal charges.  And then way back in December, we blogged the story of the former IRS Commissioner and former CEO of the American Red Cross allegedly using his corporate credit card to engage in some Elliott Spitzer-like meetings.  We wondered then whether doing so constituted private inurement or excess benefit.  These cases caught my particular attention because in my Tax Exempt Organization’s class yesterday, one student noted that no insider, disqualified person or organization manager would be stupid enough to just pay themselves exorbitant salaries outright.  The student suggested instead that it would be more likely that private inurement or excess benefit transactions require some sort of “mens rea.”  In other words, some sort of prior planning or premeditation, a knowing, intentional, disguised or hidden conspiracy perhaps.  That comment lead to a discussion of whether private inurement or excess benefit transactions very nearly constitute, in each instance, the prima facie case for criminal prosecution, whether for theft, embezzlement or fraud.  I’m not so sure that the statement is too broad.  The insider deals leading to Sarbanes Oxley, after all, were similar to the sort of fiduciary breach Justice Posner implied was necessary to prove private inurement in United Cancer Council v. Commissioner.  Those behaviors all involved lying about the use of “invested funds” (i.e., donations in the case of nonprofits)and siphoning off the top.  And many of those cases were prosecuted under severe criminal statutes most likely because the market harm justified more severe sanctions than excise penalties such as those imposed under relevant securities laws (or IRC 4958).  Perhaps it would be in the best interest of the independent sector, too, if private inurement and/or excess benefit transactions were more often viewed as prima facie evidence of a crime.  Take the Sickle Cell Association predicament for example.  The Houston Chronicle article notes that because of the siphoning of a few leaders, the organization has lost its United Way Funding and the new executive director is spending much of her time rebuilding  the community’s trust in the organization.  In the meantime, those suffering from the debilitating disease suffer:

With a criminal case against a predecessor looming, Lorna Hankins spends her days assuring the public the Sickle Cell Association of the Texas Gulf Coast is legitimate.  Since she took over the association in May, she’s been trying to repair the damage linked to accusations that two former leaders took nearly $400,000 from the nonprofit over four years. Some of that damage has been financial — the association has already lost funding from its primary source, the United Way of Greater Houston.

It is probably the case that donor support decreases and charitable beneficiaries’ suffering increases every time an insider or disqualified person is caught with his hand in the cookie jar.  Maybe private inurement and excess benefit ought to be view as a prima facie criminal law matter (in addition to reason for excise taxes under IRC 4958 and in some cases revocation).  Treating such matters as prima facie evidence of criminal behavior does not mean conviction is certain.  It just suggests that that the punishment ought to be commensurate with the harm to the individual charity and the sector as a whole if the insider, disqualified person or organization manager is unable to show that the problem arose out of plain negligence (as, for example, the misvaluation of an asset or service because of a failure to know — or should have known –certain facts).  A rebuttable presumption of sorts with more severe consequences when the presumption is not disproven.  As my student points out, and as recent events show, private inurement and excess benefit transactions increasingly rely on mens rea and conspiratorial behavior.  Certainly, the damage done to the individual charity, donors, and the whole independent sector is a crime.

dkj