The evolving circumstances involving the University of Louisville Foundation continue to provide valuable legal compliance lessons to nonprofit, tax-exempt organizations.
The most recent development is news reports that the Internal Revenue Service (IRS) notified the foundation on August 24, 2018, that it has been selected for an audit. According to the reports, the audit will focus on allegations relating to mismanagement and excessive executive compensation. The foundation had previously notified the IRS of the findings of its internal investigation into executive compensation, and promised to submit forms that reflect previously unreported excess benefit transactions involving its former CEO and other officials, according to prior media reports.This is occurring against the backdrop of civil litigation filed by the foundation against certain former officers seeking repayment for what the foundation alleges to be excessive compensation paid to them while under the foundation’s employment. The ongoing saga involving the foundation is generally considered to be one of the most prominent national controversies in recent years involving the business and operations of nonprofit corporations.
The scope of the audit is unlikely to be made part of the public record. However, it is fair to assume that the scope will include the possible application of penalty excise taxes under the Intermediate Sanctions rules of the Internal Revenue Code. Revocation of exempt status—while theoretically an available remedy—would be surprising given the foundation’s extensive, publicly reported efforts over the last year to restructure its governance, executive leadership and financial/compensation practices to address past perceived abuses. However, nonprofit health systems should note the existence of the audit as evidence that the IRS remains attentive to compliance issues arising within tax-exempt not-for-profit corporations.