THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: SUNDAY, June 19, 1994 TAG: 9406180243
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY MARK O'KEEFE, STAFF WRITER
DATELINE: 940619 LENGTH: Long
A total of 20 media evangelists are under scrutiny by the IRS, according to a congressional report.
{REST} If the IRS finds any misuse of money in these cases, it has only one penalty at its disposal: removing the organization's tax-exempt status. The government is reluctant to do that because it cripples a charity's good works and causes a public uproar.
Arming the IRS with additional enforcement powers is the goal of a California congressman, Fortney ``Pete'' Stark, a Democrat.
``This bill is necessary because assets accumulated by organizations enjoying tax-exempt status are being raided through certain business transactions and the IRS does not have appropriate sanctions to address the problem,'' Stark said in remarks found in the Congressional Record.
In this speech, Stark cited three transactions, including the Family Channel sale, as examples to ``illustrate transactions in which individuals have enriched themselves at the public's expense while non-profit organizations have been looted.''
Stark said Robertson and his son, Timothy, turned a $150,000 investment into $90 million in two years. He offered no evidence showing how CBN was hurt in the deal.
``This story is complicated with twists and turns that often exist in self-dealing and private inurement cases,'' he is quoted in the record as saying.
Robertson and CBN officials have not publicly responded to Stark's allegations. But they have said the Family Channel transaction was in the best interest of CBN and that Robertson has donated most of his gains to the charity.
As Stark's comment suggests, Robertson and CBN aren't the only ones under scrutiny on Capitol Hill. Religious organizations, hospitals, universities and other tax-exempt organizations are being criticized for overpaying their managers and giving them sweetheart business deals.
A House Ways and Means Committee oversight subcommittee - Stark is on the full committee but is not a member of its panel - has been reviewing IRS reports on media evangelists for more than five years. In April, without mentioning names, it said 20 media evangelists were under investigation.
Last month, the subcommittee unveiled its own proposal, similar to action recommended in March by the Clinton administration.
The proposal would tax insiders 25 percent of any ``excess benefit'' they receive from deals with non-profit organizations. In addition, board members and others in power who went along with the transaction would be taxed 10 percent or $10,000, whichever is higher.
Insiders also would have to return ill-gotten gains to the charity. If not returned, the tax would increase to 200 percent.
This is how it would work: If an insider paid $1 million for a business bought from his charity instead of the $2 million it was worth, he would be taxed 25 percent on the difference, or $250,000. He would also have to return $1 million to the charity. Board members who approved the transaction would be taxed $10,000 each.
Essentially, the subcommittee proposal would make non-profit managers personally liable for sweetheart deals they give insiders. What is and isn't a sweetheart deal would still be a matter of interpretation.
The Stark legislation would altogether prohibit most ``self-dealing'' between charities and insiders, such as the lending of money and selling of businesses. Those who made such deals would be taxed on the transaction, no matter what the terms. The IRS would not have to make an interpretation.
When Congress, busy with health care reform, takes up the proposals is uncertain. Neither law would apply to past transactions, such as the Family Channel sale.
Robert M. Prigmore, CBN's chief financial officer from October 1992 to March 1994, said the focus on Robertson can be explained with one word: politics.
``They're out to get Pat Robertson for his political beliefs,'' Prigmore said.
The IRS has been examining CBN for seven years, he said. U.S. District Court papers show the inquiry dates at least back to the Freedom Council, a CBN organization that allegedly used tax-exempt funds for Robertson's 1988 Republican presidential campaign.
According to CBN's latest annual report, ``CBN's tax returns from previous years are currently under examination by the Internal Revenue Service.''
Under CBN, the Family Channel thrived as the nation's first satellite-based basic cable network. But it became so large and lucrative it risked the wrath of the IRS, which prohibits businesses from becoming bigger than their non-profit parents.
So in 1990, CBN sold the network to International Family Entertainment, a company headed by Pat Robertson and his son, Timothy. The price was $250 million, the higher of two appraisals.
In his speech, Stark called attention to the wealth created for Pat Robertson and his son, Tim, through the sale.
``The Robertsons put up $150,000 - 2.22 cents a share - and the minority shareholder put up $22 million. IFE/Family Channel went public at $15 a share in 1992, and the Robertson's $150,000 investment became worth $90 million. They retain 69 percent control of IFE/Family Channel. The Family Channel continues to be a cash cow. . . . All the while, Robertson remains chairman of the nonprofit CBN that created the lucrative Family Channel.''
Pat Robertson says most of his gain from the IFE deal went to CBN.
``The stock that I purchased in International Family Entertainment has been placed in trust for CBN, which will receive the total amount in 16 years,'' Robertson said in a written statement last year, referring to the 3 million shares of IFE Class A stock that he owned. ``I receive no dividends or benefit of any nature from that trust.''
Robertson does, however, still own outright or have options for 635,100 more shares of Class B stock in IFE - valued at about $10.2 million, according to an IFE filing with the Securities and Exchange Commission. In addition, he sold 250,000 shares of IFE Class B stock last year for $4.7 million, according to SEC filings.
Whatever Robertson gained, CBN says the deal was a bonanza for the charity, giving it $600 million in cash, notes, stock, debt assumption and air time for ``The 700 Club.''
Stephen D. Halliday, managing partner of Coopers & Lybrand, the Norfolk public accountants who audit CBN's annual report, defends the transaction.
It was as if one of the major networks had allocated to CBN, in perpetuity and at a nominal cost, a major block of air time for religious programming,'' Halliday said in a recent written statement. ``From CBN's standpoint, it kept its tax exemption, retained control of the religious broadcasting on the Family Channel, retained 10 percent of IFE, saw its initial sale/investment grow to $600 million and is the beneficiary of a trust to hold 3 million shares of IFE following Robertson's death. These shares control IFE.
``A look at these facts yields the following conclusions: 1) nothing in these transactions is contrary to the federal tax laws 2) CBN had to do something with the Family Channel or lose it's tax-exempt status 3) the transactions were structured at fair market value or higher and 4) CBN was hardly `looted.' ''
David Hyman, a Chicago tax attorney who worked five years for the IRS, said the government will have a difficult time making a case against Robertson. Such cases usually come down to whether the selling price was at a fair market value.
``I can tell you from litigating these cases that appraisals are a very inexact thing,'' said Hyman.
As president and chief executive of International Family Entertainment, Timothy Robertson made a $281,000 salary and $300,000 bonus in 1993. As chairman of the board, Pat Robertson made a $281,000 salary and a $152,000 bonus.
Pat Robertson donates 75 percent of his IFE compensation to CBN, Prigmore said. CBN says that in 1993, Pat Robertson and his wife, Dede, gave a total of $650,000 to religious, charitable and educational causes, including CBN.
``I don't think he's ever done anything wrong,'' said Prigmore. ``And I don't think the IRS or anyone else will catch him doing anything wrong because he's got the highest integrity of any man I know.'' by CNB