February 15, 2014

IRS whistle-blower complaint focuses on Myrtle Beach chamber’s for-profit subsidiary

A whistle-blower complaint filed against the nonprofit Myrtle Beach Area Chamber of Commerce claims the chamber is using a for-profit corporation it created – called the Myrtle Beach Area Commerce Center Inc. – to circumvent Internal Revenue Service laws and avoid paying taxes, according to documents and information provided to The Sun News by the accounting firm that helped prepare the complaint.

A whistle-blower complaint filed against the nonprofit Myrtle Beach Area Chamber of Commerce claims the chamber is using a for-profit corporation it created – called the Myrtle Beach Area Commerce Center Inc. – to circumvent Internal Revenue Service laws and avoid paying taxes, according to documents and information provided to The Sun News by the accounting firm that helped prepare the complaint.

Robert Martin, an accountant with Sadowski & Co. in Savannah, Ga., said the complaint also alleges the chamber is using its hybrid tax structure to avoid transparency and public accountability.

Hilton Head Island marketing executive Skip Hoagland announced this month that he had filed the whistle-blower complaint, but details of the allegations are just being made public.

Lev Glikman, the IRS analyst in charge of investigating the complaint, could not be reached for comment.

Chamber spokesman David Slough said the chamber is doing nothing wrong and that it makes “a comprehensive effort to comply with the Internal Revenue Code and related regulations, and most importantly in the spirit of those regulations.”

Slough said the methodology used to prepare the chamber’s tax returns and financial statements “has been reviewed and approved by other accountants and legal counsel.”

Hoagland – who owned a brochure distribution business before investing in domain names and starting Domain New Media LLC – also is suing the Hilton Head Island-Bluffton Chamber of Commerce over access to that group’s financial information. Hoagland claims that chamber, which also receives tax dollars, unfairly competes with its own members and wastes taxpayer money by paying exorbitant salaries. Hoagland has filed similar whistle-blower actions against chambers of commerce in Hilton Head, Charleston and Savannah.

Hoagland’s Myrtle Beach complaint focuses on yearly financial transactions between the chamber and the commerce center, as reflected on the chamber’s tax returns and audited financial statements. The chamber formed the commerce center in 1999 after nonprofit groups nationwide came under greater scrutiny for using their tax-exempt status to conduct for-profit activities, thus giving the nonprofits an advantage over their tax-paying competition.

The commerce center is supposed to account for all of the revenue and expenses stemming from the chamber’s for-profit sales of advertising in its vacation guides and on the chamber’s visitmyrtlebeach.com web site. The commerce center is supposed to pay taxes on income generated by those ad sales. However, the commerce center has regularly reported net operating losses, according to financial statements.

The chamber has been carrying those losses forward on its balance sheet as a deferred tax asset, which can be used to reduce any future tax expenses. Through 2012, the chamber has carried forward more than $1.5 million in losses attributed to the commerce center, according to its financial statements.

Martin said the financial statements show “large and recurring accounting adjustments . . . which could indicate inappropriate expense or loss shifting between the for-profit [commerce center] and the nonprofit [chamber].”

Martin said the chamber apparently is using public funds or member fees to prop up the commerce center’s money-losing operations.

The commerce center’s primary source of funds, according to financial statements, are large, unsecured and interest-free cash advances from the chamber, according to the financial statements. At the end of 2012, financial statements show the commerce center had yet to repay more than $1 million of those advances.

“How can it be argued that this is good stewardship of member contributions and taxpayer subsidies to advance more than $1 million in unsecured, non-interest bearing loans to a corporation [commerce center] which has then used these funds and others to incur losses of more than $1.5 million,” Martin said. “Who is approving this apparent abuse of chamber resources and why would they continue to do that?”

Martin said the financial arrangement “appears inconsistent with the idea that these for-profit activities are intended to generate income to support the nonprofit mission.”

The chamber’s stated nonprofit mission is to “promote, protect and positively impact Grand Strand businesses and [the] economy,” according to the chamber’s tax return. Hoagland said the chamber is doing the opposite for many area businesses.

Hoagland said the chamber is using tax dollars to promote its visitmyrtlebeach.com web site through Google and television and print ads nationwide. The chamber – through its commerce center – then sells for-profit ads on the taxpayer-subsidized web site. Hoagland said that hurts private marketing groups that don’t rely on public money to build their web presence. It also depletes the advertising budgets of businesses that normally would use private marketing groups but instead give their money to the chamber, Hoagland said.

The chamber received the bulk of its $36.6 million in revenues in 2012 from public funds, including a Myrtle Beach tourism tax, according to the chamber’s most recent tax return.

The hybrid corporate tax structure between the chamber and its commerce center also creates opportunities for conflicts of interest, Martin said, such as inappropriate comingling of nonprofit and for-profit resources.

The commerce center is a 100 percent wholly owned subsidiary of the chamber and it uses the chamber’s staff and resources. The chamber’s board of directors also has oversight of the commerce center.

All revenues and expenses – including those for the commerce center – are run through the chamber’s financial system. The chamber’s accounting department then tabulates what it considers to be the value of services and labor that are outside of the chamber’s nonprofit scope. The chamber then bills itself on behalf of the commerce center. The chamber then pays the commerce center by transferring money between the two groups’ bank accounts.

The chamber, on its tax returns, states that the tax benefits it receives from the commerce center is an “uncertain tax position,” which means the IRS could challenge and disallow the benefits upon an audit. The IRS has not yet audited the chamber’s tax returns and financial statements. The chamber takes the position that it would “more likely than not” win any challenge by the IRS.

Gary Sadowski, whose accounting firm is assisting with Hoagland’s complaint, said he believes creation of the commerce center bypasses IRS regulations that prohibit nonprofit chambers from “engaging in a regular business of a kind ordinarily carried on for profit.”

“The problem is, with the chamber owning the for-profit, they are still in violation of the law,” Sadowski said. “The regulations are quite clear. What is not clear is what happens when you cross the line. They [the chamber] want to say they will pay tax on the unrelated income [if successfully challenged by the IRS]. We are trying to get the IRS to revoke their tax-exempt status or get the chamber to quit performing services normally carried on for profit in violation of the regulations.”

In addition to the whistle-blower complaint, Hoagland is helping to organize a rally, now scheduled for Aug. 8-9 in Myrtle Beach, to draw attention to what he claims are abuses by the chamber. Hoagland said he expects regional Tea Party groups and the national sumofus.org group – a self-described movement of consumers and workers seeking to counterbalance the growing power of large corporations – will participate, along with concerned citizens.

Hoagland has fought with Myrtle Beach officials in the past. In December 2001, the city filed a complaint over Hoagland’s ownership of the myrtlebeach.com Internet domain name. Myrtle Beach officials claimed the city was the rightful owner of that name and wanted the domain transferred to the city. Hoagland, who purchased the domain name for $10,000 in 1997, won the case and eventually sold the name to a Myrtle Beach marketing group for $6.5 million.

If Hoagland is successful in his lawsuit against the Hilton Head Island chamber, it would open the door for greater access to financial records at chambers statewide, including Myrtle Beach.

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