Nonprofit board members may owe: IRS, state want $1.2M from former Cyprian chair

Nonprofit board members may owe: IRS, state want $1.2M from former Cyprian chair

 

By Sherri Begin Welch

 

 

Eva Collins-Adams couldn't believe it when she opened the mail to find the Internal Revenue Service had placed a lien against her home.

 

The IRS was holding Collins-Adams liable for payroll taxes left unpaid by Cyprian Center, a nonprofit founded by the Rev. Nicholas Hood II that she chaired for nearly two years before its 2007 closure.

 

The total? An estimated $800,000 in taxes, penalties and fees to the federal government and another estimated $400,000 to the state, which also placed liens against her home.

 

The center's former executive director, Eleanor Austin, also is being held liable, Collins-Adams said. Austin did not return three calls, placed April 28, May 6 and May 12.

 

While many nonprofits carry directors and officers insurance for board members and executives, there are certain types of liability — including unpaid taxes, penalties and fees and unpaid wages — that aren't covered.

 

Many board members don't realize that until it's too late.

 

“The damage had already been done” by the time Cyprian's board learned of the delinquent taxes, said Collins-Adams, who is director of volunteer services, community affairs for Henry Ford Hospital and health network.

 

“If there's anything I could share about this whole thing, it's that if you have a heart and a passion for a ... nonprofit, you just need to make sure you read all of the fine print before you sign your name on anything, and make sure there is accurate ... sharing of agency information,” she said.

 

Unpaid payroll taxes are among the top things for which individual board members, management and other key employees can be held liable, said Melanie Lockwood Herman, executive director of the Nonprofit Risk Management Center in Leesburg, Va., which provides guidance on board liability and insurance issues.

 

“You can't buy coverage to protect you from not paying your taxes. Otherwise, you remove the incentive for paying,” Herman said.

 

The government would go to the nonprofit to collect the back-owed taxes if it were still open, she said.

 

“But if the organization isn't around or (the IRS) can't find it, it will go to the people who are responsible for the organization,” Herman said. “The chair's name is at the top of the list, but potentially the whole board is liable.”

 

The Trust Fund Recovery Penalty Law gives the IRS the right to collect delinquent taxes and penalties from “responsible” individuals when it can't get them from a business or nonprofit. And it can do so by taking collection action against personal assets, such as filing federal tax liens or taking levy or seizure action.

 

The law defines responsible individuals as those who have the duty to perform and the power to direct the collecting, accounting and payment of taxes and who must have been or should have been aware of the delinquent taxes but failed to pay them. Employees acting on the direction of higher authority are exempted.

 

The liability can be a surprise to even the most experienced board members.

 

After nearly 40 years of serving on nonprofit boards, Sue Nine was shocked two years ago to get a letter from the IRS placing a lien against her home for nearly $8,000 in outstanding employee taxes not paid by the nonprofit she had chaired before its closure, the Women's Survival Center of Oakland County in Pontiac.

 

“I recall that the board members (of the center) — of which several were attorneys — consistently said towards the end, to the executive director, "Keep the payroll taxes current, even if you can't pay other things,' ” Nine said.

 

The center closed in August 2006, after more than five years of struggling with declining funding and a failed expansion into child care.

 

“I presumed (management) had paid the taxes,” Nine said. “And I didn't realize the liability would come my way.”

 

Nine said she handled the nonprofit's last payroll, including the tax withholding payments, but did not learn until later of the previous delinquencies.

 

“(The IRS) only came after me because I was the board chair,” Nine said. “I think they would have gone down the list if they felt they had to.”

 

She and her husband, Bloomfield Hills attorney Paul Nine, ultimately paid the $7,890 owed. They were lucky in one respect, though. The center owned a building in Pontiac, and they were able to recoup the money when the building finally sold last December to Catholic Social Services.

 

Cyprian Center, however, operated rent-free from several buildings and land in Detroit owned by the Plymouth United Church of Christ, current pastor Nicholas Hood, the family of pastor emeritus Nicholas Hood II or by corporations founded by him.

 

Hood II and the church had founded Cyprian Center in 1975 to provide services for the mentally and physically challenged in honor of Hood's daughter, Sara Cyprian Hood, who lived at the center until her death about four years before it closed. The church provided annual financial support to the center, considering it a mission of the church, Collins-Adams said. The center became a 501(c)(3) nonprofit in 1981.

 

Cyprian Center's financial struggles began before Collins-Adams joined the board in 2000, she said, when the mental health agencies the center had subcontracted with changed their payment process from direct grants to a fee-for-service model with payment after services had been delivered. That meant the center had to front cash to operate.

 

The center reported total revenue of $1.6 million for fiscal 2005, the year of its last 990 tax filing, operated at a deficit of nearly $181,000 and finished the fiscal year with negative assets of nearly $350,000. That was a significant decline from the previous year, when the nonprofit operated at a $14,512 loss and had negative assets of $37,046.

 

By 2007, revenue had dropped to about $1 million, following declines in the number of mentally and physically challenged people coming to the center for services and the closure of one of the center's respite homes, Collins-Adams said.

 

The center's board hired Austin in 2004 to replace a previous executive director. Under her leadership, Cyprian Center secured a $300,000 loan from the church about a year before it closed to pay a portion of the delinquent taxes.

 

Austin, who had come to the center on a short-term basis, left in 2006, Collins-Adams said. The board then hired Marguerite Anne Saba.

 

Saba's tenure was short-lived. When the IRS in early 2007 directed Cyprian Center's mental health agency funders to send money owed to Cyprian to the IRS to pay delinquent taxes, the center's board voted to close, Collins-Adams said.

 

The IRS and state cases against Austin and Collins-Adams are ongoing, Collins-Adams said. She and her husband so far have spent more than $10,000 in legal fees, and the IRS and state have seized the couple's joint tax refunds for the past two years.

 

The Rev. Nicholas Hood III, pastor and senior minister at Plymouth United, said the church “does not have an interest in extending any more money” beyond the $300,000 loan.

 

The church took out a mortgage to fund the loan, and it's still paying it off, Hood said.

 

“We were trying to protect the board. That's why we took out a loan for them,” he said. “Unfortunately, they were not able to survive it.

 

“It's painful to the church, because most of the people who were on the board were church members.”

 

Among them was his wife, Denise Page Hood, U.S. district judge for the Eastern District of Michigan, who is “painfully aware” that she, too, could be liable for the unpaid taxes, he said. Collins-Adams, the center's other directors and the center's last executive director, Saba, were also named as defendants in a recently settled lawsuit filed in 2007 in U.S. District Court Eastern District of Michigan by Michigan AFSCME Council 25 and its affiliated Local 3994, on behalf of the center's employees.

 

The suit alleged nonpayment of employee wages for the past several weeks of the center's operation and diversion of money collected for health care premiums and child-support payments to other areas, resulting in the reported arrests of some employees for nonpayment of child support.

 

April 30, the court entered a $300,000 judgment against Cyprian Center, which has no assets to claim. The individual defendants in the case agreed in an out-of-court settlement to pay an undisclosed lump sum to the former employees, said Robert Fetter, attorney at Miller Cohen P.L.C. in Detroit, representing plaintiffs in the lawsuit.

 

Audits not enough to keep boards in the know on taxes Board members relying solely on audits to understand the financial health of their nonprofit organizations may not be getting enough information. That’s because a financial audit wouldn’t necessarily turn up unpaid payroll taxes, said Sue Perlin, a partner in the nonprofit services group of Plante & Moran P.L.L.C. “It depends on what the auditor looks at and the results of the audit testing as the audit progresses,” she said. The auditor would make the board aware of any payroll tax issues discovered, though, Perlin said. Payroll taxes include income tax withholding, Social Security taxes and unemployment taxes. Payroll deductions can also be made for health care premiums, child support and 401(k) or 403(b) contributions. So how can board members shield themselves from personal liability? Asking for proof of payroll tax payment from a financially healthy nonprofit would be “classic micromanagement,” said Melanie Lockwood Herman, executive director of the Virginia-based Nonprofit Risk Management Center. But asking questions when something doesn’t seem right is a good rule of thumb, Herman and Perlin agree, and part of a board member’s fiduciary duty. Asking to see all quarterly and annual state and federal payroll tax returns as proof of payment could be in order if an organization is struggling financially, Perlin said. Nonprofits should, as part of a standard orientation, inform board members of their responsibilities and their exposure as board members, she said. — Sherri Begin Welch Sherri Begin Welch: (313) 446-1694, swelch@crain.com