TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, September 29, 2005

Embattled American University President Blames Tax Code for Controversy Over His Spending

On Sunday, we blogged the New York Times story on American University President Benjamin Ladner, suspended by his board for his lavish spending habits.  Ladner defends himself in today's Chronicle of Higher Education by blaming the Tax Code for his troubles:

Even as the embattled president of American University tries to save his own job amid a growing controversy over his spending habits, Benjamin Ladner has a warning for other college leaders: This could happen to you. The investigation by American's Board of Trustees, the suspended president said, is being driven partly by two federal laws that have changed the culture of accountability at nonprofit organizations.

Those laws are the Sarbanes-Oxley Act, which applies to publicly held corporations, and a section of the Internal Revenue Code that deals with compensation for officials of tax-exempt organizations.

Mr. Ladner has been suspended by the university, which is investigating accusations that he spent university money inappropriately. A preliminary audit questioned more than $600,000 in Mr. Ladner's expenditures, including travel and entertainment costs. Mr. Ladner has defended his actions, saying the few mistakes he made with expenditures were inadvertent.

In an interview with The Chronicle of Higher Education and The Chronicle of Philanthropy on Tuesday, Mr. Ladner said he was dismayed because, in his view, the university's Board of Trustees had not properly followed guidelines from the Internal Revenue Service designed to help tax-exempt organizations head off trouble over the compensation they pay. What's more, he said, the board also felt "legal pressure" from the Sarbanes-Oxley Act, a federal law designed to rein in rogue corporations.

American University and its trustees do have reason to be concerned about federal regulators, says a former top official of the Internal Revenue Service.

"The IRS has been explicit in its desire to re-establish itself as a policeman of the boundaries of charitable behavior," said Marc Owens, who formerly ran the IRS division that oversees private colleges and other nonprofit groups. And I think that is one of the factors that is leading the IRS to be more aggressive in following up on media reports in this area."

Mr. Owens noted that a federal law enacted in 1996 gives the IRS the authority to fine officials of nonprofit groups who receive salaries and other benefits that the agency considers excessive, as well as to penalize trustees who approve the compensation. That section of the tax code is known as the "intermediate sanctions" law because it gave officials a way to avoid the extreme case of revoking a charity's tax-exempt status.

Mr. Owens said he believes that the IRS is likely to review the compensation Mr. Ladner received and might look at a provision in his contract that guaranteed him a high-paid job for life unless he was dismissed as president for drastic reasons. Mr. Owens said that officials of American University need to be aware of proposed regulations that the IRS issued this month that explain when the agency should revoke the tax-exempt status of a nonprofit group whose officials were already in trouble for receiving excessive benefits from the organization. The IRS said it might consider "whether the organization has been involved in repeated excess-benefit transactions" and "whether the organization has implemented safeguards that are reasonably calculated to prevent future violations."

"I don't think revocation is really a threat here: AU is a very large institution and quite clearly conducting educational activities," said Mr. Owens.

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