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Nonprofit experts question Five Rivers' tax filings

Five Rivers Community Development Corp. might be filling out its federal tax forms improperly, nonprofit experts say, causing the agency to get undeserved praise from consumer groups.

Five Rivers has spent more than $1.5 million on salaries, travel and employee-related benefits since 1996. Its top two employees - executive director Beulah White and chief financial officer Dayo Smith - have nearly doubled their pay since 2000.

In recent years, White and Smith have been putting more of their salaries in a tax category that makes it appear as if Five Rivers is spending most of its money on programs that benefit clients instead of administrative or operating costs.

Nonprofits are considered good stewards of the tax dollars they receive if at least 65 percent of their expenses are for programs that benefit their clients, according to consumer groups such as the S.C. Secretary of State.

Management and operating costs should account for 35 percent or less of a nonprofit's expenses.

On its 2004 tax return, the most recent one available, Five Rivers said 80.6 percent of its expenses that year went toward program costs.

"Sixty-five percent is acceptable," said Carolyn Hatcher, a spokeswoman for the secretary of state's office, which compiles financial information on nonprofit groups. "If you're up around 80 percent, you're doing good."

Other nonprofit experts, however, say the Five Rivers information is misleading because wages that should be included in the "management and operating expenses" category are being put in the "program expenses" ledger on tax forms.

That is inflating the percentage of expenses going toward programs that help the agency's low-income clients, said Daniel Borochoff, president of the American Institute of Philanthropy. The institute is a national watchdog group that rates charities and provides information to consumers so they can make wise decisions when donating money.

Five Rivers' biggest expense in 2004 was $203,565 in wages for White, Smith and three other employees.

All but $10,485 of that amount - or 5.2 percent - was put in the "program services" column of the expense ledger on Five Rivers' federal tax return.

That means Five Rivers is saying its staff spent 5.2 percent of its time - or about two hours in a 40-hour work week for all five staff members that year - raising money, writing grants and doing other office and managerial work.

All of the wages paid to White and Smith are categorized as program expenses, which indicates White and Smith did not do any management work for the year.

Smith said salaries are paid from money Five Rivers gets from state and federal grants. Those grants are supposed to fund the nonprofit's programs, so Five Rivers includes the salaries under program expenses.

Borochoff said the salaries should be split between program and management expenses on the agency's tax forms regardless of the source.

"They are not taking the expense categories seriously," said Borochoff. "If they say they're spending that much time running programs, they are admitting no one is overseeing the organization. That is irresponsible."

Borochoff said raising money and filling out grant applications, a task White and Smith said in interviews takes up most of their time, should be reported as a management or operating expense.

"Government money doesn't just fall from trees," he said. "They have to spend a lot of time working to get that money, and those are administrative duties."

The same is true, Borochoff said, for time spent lobbying Congress for federal money, as White did in 2004 for a community and training facility Five Rivers wants to build.

Five Rivers did not include any wages under "management and operating expenses" on its 2002 or 2003 tax forms, making it appear as if the agency was allocating as much as 90 percent of its costs toward programs.

Stephen Evans, Five Rivers' accountant, said "it would seem odd that there were no salary amounts under the category 'management and general'" in 2002 and 2003.

Evans said he does not make recommendations to the agency about how to classify expenses.

"Five Rivers CDC supplies us with the information to prepare the statement of functional expenses [on tax forms] and also tells us which categories to put the income and expenses in," Evans said.

Five Rivers started putting more wages under the programs side of the expense ledger in 2001, tax records show, when 65.2 percent of the agency's wages went under that category.

That is the same year White received the first of four pay raises in as many years. Those pay increases, including a $17,203 boost in 2003, nearly doubled her annual salary - from $43,500 in 2000 to $83,039 in 2004.

White also started signing the agency's federal tax returns in 2001. Members of the agency's board of directors had signed the returns in previous years. The tax return White signed in 2001 was for the 2000 tax year, and White and Smith have signed each return since then.

Smith, White's daughter, has had an 87.5 percent increase in her salary since she joined the agency - to $48,755 this year from $26,000 in 2000.

Smith told The Sun News last week that her salary is $23.44 an hour, which equals $48,755 for 52 40-hour work weeks.

In the three years before 2001, Five Rivers put most of its wages - between 74 percent and 80 percent - in the "management and operations" category on tax forms.

Program expenses, the category that consumer groups focus on, accounted for 20 percent to 26 percent of the agency's costs during those years.

Five Rivers did not meet the 65 percent/35 percent ratio that consumer groups look for until 2001, when the agency started categorizing more of its wages as "program expenses."