Rep. Johnson: Scholarship funds 'repaid in full'

Rep. Eddie Bernice Johnson

Credit: WFAA

Rep. Eddie Bernice Johnson appeared on a recent edition of "Inside Texas Politics."

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by TODD J. GILLMAN

The Dallas Morning News

Posted on September 1, 2010 at 8:44 PM

WASHINGTON — Rep. Eddie Bernice Johnson dipped into personal funds to repay the Congressional Black Caucus Foundation about $31,000 for scholarships she awarded to four relatives and two children of an aide, her office said Wednesday.

The foundation’s attorney, Amy Goldson, confirmed that the payment was received.

The restitution went some distance toward damage control, after days of embarrassing revelations about nepotism and rules violations. But tax experts said the veteran Dallas Democrat probably faces some headaches, including a likely 25 percent penalty on the value of the scholarships.

Records from the foundation show that Johnson awarded 23 scholarships to the six ineligible students from 2005 and 2009, including two grandsons and two great-nephews.

She told The Dallas Morning News last week that each award was worth $1,000 to $1,200.

“The debt has been repaid in full,” Johnson said in a statement submitted as a letter to the editor of The News, which aides then disseminated as a news release.

The scholarships violated the foundation’s nepotism rules, and foundation officials say certifications that the recipients were eligible had been falsified. The six students involved also were ineligible because they didn’t reside or go to school in a district represented by Johnson or any of the other 41 members of the Congressional Black Caucus.

Johnson has been the center of a national storm since The News first reported on the scholarships Sunday.

The foundation’s chairman, Rep. Donald Payne, D-N.J., excoriated her this week for “self-dealing” and “unethical behavior” in announcing a review of the scholarship program.

Pending that review, promotion for the 2011 scholarship competition — which typically would begin in November — will be delayed until at least January, Goldson said Wednesday. The foundation has not yet released its list of 2010 scholarship winners.

Johnson said she hopes the repayment puts the episode to rest. But tax experts said she has a few more details to deal with.

Marc Owens, a tax attorney who spent a decade as director of the IRS division that oversees tax-exempt entities, said she probably owes a penalty worth 25 percent of the scholarships, or about $7,750.

“Causing scholarships to be awarded to relatives or perhaps even business associates … would likely be viewed by the IRS as an excess benefit,” Owens said. “The individual who receives the benefit would be subject to an excise tax of 25 percent.”

The arcane provision is meant to deter charities from lining the pockets of insiders.

Congress created the penalty in 1996 to give the IRS an intermediate stick to use when a charity violates the tax code — something short of trying to revoke its tax-exempt status.

The provision, now found in Section 4958 of the tax code, was tucked into the Taxpayer Bill of Rights Act, which sailed through the House without a single no vote. Johnson was among the 425 lawmakers voting “aye” that day.

From 2002 to 2005, Johnson served on the Black Caucus Foundation’s board. Under IRS rules, for five years after she left, she is viewed as a “disqualified person,” who cannot be paid anything beyond compensation for services rendered, or expense reimbursements.

The foundation will have to report the $31,000 to the IRS as an excess benefit, Owens said, though he added that “the IRS hasn’t processed a lot of cases under this excise tax.”

The IRS is unlikely to try to revoke the foundation’s tax-exempt status. The tainted scholarships amount to a paltry sum compared to the foundation’s budget, and foundation officials have made clear they didn’t know about or condone the infractions.

It’s also doubtful the IRS would view the scholarships as taxable income for Johnson.

None of the recipients was a dependent of hers, and “she didn’t have benefit or use or control of the money,” said Dallas CPA Jim Smith, a former chairman of the Texas Society of CPAs. “It never passed through her hands. … I just don’t think the [IRS] could ever make the case that she had taxable income.”

But he agreed that “the excise tax is a possibility. ... Don’t tell me you didn’t know these were your grandchildren.”

Johnson told The News last week she realized she was awarding scholarships to relatives, though she doesn’t consider grandchildren to be immediate family.

An IRS spokesman said he couldn’t comment on any individual taxpayer.

Fred Stokeld, editor of The Exempt Organization Tax Review, a publication of Tax Analysts, agreed that the excise tax could come into play.

“The IRS can impose penalty excise taxes on charity insiders … who benefit from excess benefit transactions or private inurement,” he said. Without passing judgment specifically on Johnson’s actions, he added, “scholarships going to the relatives of a charity’s officials could be considered inurement.”

The foundation awarded more than $700,000 to more than 500 college students last year. For some of the scholarship projects, Johnson and other caucus members each got $10,000 to divvy up among applicants to their offices.

Johnson awarded more than a third of her scholarships since 2005 to the six ineligible relatives: two grandsons from Austin, two great-nephews from Plano, and the son and daughter of her top Dallas-based aide, Rod Givens, from Mesquite.

Johnson has represented much of South Dallas for nearly 18 years.

She initially defended her selections, saying she wasn’t aware of any rules she might have violated. She later acknowledged violations but said she had only “unknowingly” broken the rules.

In her statement Wednesday, she accused The News of trying “to cast me in an unfair light that was intended to distort my image before my constituents and those who know of my personal commitment to public service…. This article gave the appearance that I over-looked the needs of a segment of my constituency to benefit my family; this was not the case.”

Since The News began inquiring about the scholarships, she added, “I am more completely aware of the current CBCF Scholarship Guidelines.”

“This unfortunate incident is one spec [sic] in my commitment to a career in public service that spans more than three decades. While I have unknowingly made a mistake, and am too disappointed by this, I will continue my fight towards making opportunities for eligible young people and under-represented populations,” she said.

She reiterated a vow from Monday to delegate scholarships selection to an independent committee to avoid conflicts of interest in the future, and to take steps to ensure that her staff is aware of and complies with foundation rules.

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