Five Rivers Community Development Corp.'s board of directors walked away from the troubled nonprofit agency with their resignations in October, but experts say their legal and financial responsibilities might not be over.
Those board members could face fines by the Internal Revenue Service if the tax agency holds them responsible for excessive salaries and misspent money at Five Rivers, a nonprofit agency that was supposed to provide job training and affordable housing for Georgetown County's low- to moderate-income residents.
"While there are statutory protections for volunteer board members, there are times when they may be subject to intermediate sanctions by the IRS," said Vernetta Walker, director of consulting at Washington-based BoardSource Inc., which provides legal training for nonprofits.
Five Rivers might be one of those cases, nonprofit experts say. The nonprofit's executives misappropriated public money, according to the federal government, and are accused of diverting money away from programs that could have helped the poor so they could pay for salaries, travel and other benefits.
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Interviews and minutes of board meetings show the board of directors provided little oversight of those executives, allowing them to misappropriate money until an investigation by The Sun News raised questions about the nonprofit's spending and management practices.
"You have to ask yourself if those people were on the board of a for-profit business, would they have allowed the same practices to occur?" Walker said. "Or would they have just checked their brains at the door?"
Five Rivers' former board members did not respond to telephone calls and e-mails from The Sun News during the past two weeks.
Beulah White, the nonprofit's executive director, could not be reached for comment.
The IRS does not comment on specific cases, said spokeswoman Dianne Besunder.
The IRS can fine board members, Walker said, if they accept excess benefits or provide excess benefits to certain nonprofit executives they supervise, such as the executive director.
An excess benefit is one that exceeds the fair market value or is not comparable to similar benefits paid by similar nonprofits, according to the Nonprofit Financial Center, a Chicago-based group that provides management support to nonprofit agencies.
One example of an excess benefit, according to the IRS, would be a salary that far exceeds the average for comparable positions in the same geographic area.
That might be the case for White, whose 2005 salary of $84,223 was 54.2 percent higher than the state average for directors of similar-sized nonprofits, according to Guidestar, which tracks financial information for nonprofits nationwide.
Five Rivers' board let White set her own salary, and board members told The Sun News they did not know how much she made before the newspaper first published her salary in August.
"This all comes back to board members not exercising reasonable care," Walker said. "It sounds like that board was completely asleep at the wheel."
Five Rivers' board included President Sam Livingston, Treasurer David Hamilton, Darren Holmes and Marjorie Hemingway. They resigned in October, saying White and her daughter, Chief Financial Officer Dayo Smith, were spending the nonprofit's money and selling its assets without board approval.
Five Rivers went out of business in November. It is not clear what assets remain at the nonprofit or what will happen to those assets.
All excess benefits paid by nonprofits "must be documented with an explanation of the factors which permit the organization to pay more than the going rate," according to the Nonprofit Financial Center.
Five Rivers did not document any excess benefit transactions and did not report any excess benefit transactions on its federal tax returns, as required by law. The Sun News obtained copies of Five Rivers' tax returns through Guidestar.
If board members think a questionable transaction does not count as an excess benefit, they must vote on the transaction and describe their reasons for approving the transaction despite its higher-than-fair-market cost, the Nonprofit Financial Center said.
Five Rivers' board did not document reasons for approving questionable transactions, such as White's salary, since at least 2003, according to minutes of board meetings.
Meeting minutes for the past three years were included in documents subpoenaed by the 15th Judicial Circuit Solicitor's office, which is conducting a criminal investigation of Five Rivers. The Sun News reviewed those documents under terms of the S.C. Freedom of Information Act.
Without documentation showing good reasons why potential excess benefit transactions were approved, the IRS could charge board members an excise tax equal to 10 percent of any excess benefit during their tenure with the nonprofit agency, according to federal law.
For example, if the IRS determines that the board should have authorized a salary for White that matched the state average of $54,614 for nonprofit directors, the potential excise tax for board members would be $2,960.90 - 10 percent of the $29,609 difference between the state average and White's pay.
Each board member could be assessed that fine and each incident is subject to its own excise tax, with a cap of $10,000 per incident, according to IRS rules.
If the IRS determines that White's salary was excessive during each of the last three years, for example, board members could be charged three separate 10 percent fines.
The IRS also can charge board members with an excise tax if it holds them accountable for any other excessive spending, such as unauthorized travel and automobile expenses.
White, Smith and other Five Rivers executives spent $110,316 on travel since the nonprofit was founded in 1995. There was no documentation in financial records for how much of that travel was related to the agency's stated purpose of providing job training and affordable housing.
White also had full-time use of the agency's Volvo automobile and drove the car for business and personal reasons.
Nonprofit expert Gary Snyder, author of the book "Nonprofits: On the Brink," said those are the types of expenses the IRS scrutinizes when it review an agency's finances for excess benefits.
Whether the IRS holds board members responsible for excess benefits could depend on how much care the board took to make sure the nonprofit was operating within normal financial guidelines.
"They need to ask questions, review the financial statements and make sure they have basic [financial] policies in place," Walker said. "They must exercise reasonable care in carrying out their fiduciary responsibilities. Even though they are volunteering, the public still expects that they will provide oversight."
It is not clear how much care Five Rivers' board members took to ensure the nonprofit's finances were in order. The board approved budgets and received financial reports, but minutes of meetings show board members rarely asked questions about those documents.
Board members also failed to ask for detailed lists of revenues and expenses that might have tipped them off to problems.
The board did not ask for details even after the nonprofit's auditor included disclaimers with their financial reports. Those disclaimers told the board that Five Rivers' management was purposely excluding nearly all of the details they would need to make informed decisions about the nonprofit's finances.
Board members also told The Sun News earlier this year they had little knowledge of how the agency spent money, and Livingston said he had never reviewed Five Rivers' federal tax returns.
"The board has the ultimate responsibility for what happens at a nonprofit, but 80 percent of them don't have a clue what to do," Snyder said. "They don't take their responsibility seriously. It's why we see so many nonprofits running into trouble these days."
Although the IRS can hold board members accountable when others in the agency profit from financial wrongdoing, the federal government levies its biggest penalties against those who actually receive the benefits.
The IRS can force recipients to repay any excess benefits and can charge the recipient of excess benefits an excise tax equal to 25 percent of the overpayment, according to federal law. If the excise tax isn't paid within a 90-day correction period, the IRS can charge an additional tax of 200 percent ofs the excess benefit.
Using the example of White's salary for 2005, the 25 percent excise tax would be $7,402.25 and the 200 percent penalty would be $59,218. That would be in addition to repayment of the $29,609 in excess salary.
Background on the Five Rivers Community Development Corp. | Page 8A
For more about the HUD deadline | Page 8A