Recently, I reviewed the case of Turkia Mullin, the former Economic Development Director of Wayne County, Michigan (including metropolitan Detroit), who received a severance payment from Wayne County when in September she voluntarily left the employment of the county to assume the role of CEO of the local Wayne County Airport Authority. Her severance ignited a controversy which has yet to abate, and some of the media accounts on the subject have described, with little elucidation, a further $75,000 sum she received from a local nonprofit with which she was also associated.
Nonprofit organizations by virtue of their federal tax exemption do not file federal income tax returns. However, they are, as a general rule, required to file an information return, the IRS Form 990, which is available for public viewing, albeit commonly a year or more after filing.
The nonprofit granting Ms. Mullen her $75,000 has been reported as Edge Opportunities. The only available online Form 990 for Edge Opportunities is a short-form 990-EZ, which covers an abbreviated tax period of July 10, 2009, through December 31, 2009, at which time it had $99,238.28 in assets. The organization has four named executives, none of whom received pay for the period, including Turkia Mullin, its inaugural Executive Director. The filing lists the entity’s name as Edge Opportunities, dba Wayne County Business Development Corp., and describes the organization as an Internal Revenue Code Section 501(c)(6) tax-exempt. This code section covers business leagues and trade associations, as well as (wait for it!) the National Football League (but not the NHL, NBA, or MLB – go figure). Edge Opportunities also carries an IRS-assigned National Taxonomy of Exempt Entities code of “S41,” which is applicable to chambers of commerce and business leagues. In other words, Edge Opportunities is similar in its mission, to list a few Michigan examples, the Society of Manufacturing Engineers, the Detroit Regional Chamber, and the Economic Development Alliance of St. Clair County.
There are standards for an organization seeking to receive and maintain federal tax exemption as a Section 501(c)(6) trade association. According to the Internal Revenue Service:
- It must be an association of persons having some common business interest and its purpose must be to promote this common business interest;
- It must be a membership organization and have a meaningful extent of membership support;
- It must not be organized for profit;
- No part of its net earnings may inure to the benefit of any private shareholder or individual;
- Its activities must be directed to the improvement of business conditions of one or more lines of business…as distinguished from the performance of particular services for individual persons;
- Its primary activity does not consist of performing particular services for individual persons; and
- Its purpose must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining.
It’s the fourth of these – that “No part of its net earnings may inure to the benefit of any private shareholder or individual” – which is important here, for the reasons that:
- It deals with payments like the $75,000 Turkia Mullin is alleged to have received from Edge Opportunities;
- It’s contained within Article VI of the July 10, 2009, articles of incorporation of Edge Opportunities filed with the State of Michigan Department of Licensing and Regulation; and
- It is contained within Internal Revenue Code Section 501(c)(3) as the very basis for federal tax exemption.
What this phrase represents is a public policy that it is impermissible for a nonprofit to convey funds or other assets to an “insider” by, for example, paying excessive compensation. If it does so, it risks the loss of its tax-exempt status. (“Intermediate sanctions” rules that punish the recipient by tiered excise taxes do not apply to 501(c)(6) concerns.) That’s a death penalty for many, perhaps most, nonprofits, and because this sanction is so severe, it is generally invoked only in egregious circumstances.
Turkia Mullin, as the former Executive Director of Edge Opportunities, was clearly an insider of the entity. Her $75,000 payment has been described as a “bonus.” Were the circumstances of her payment egregious? Recall that as of December 31, 2009, Edge had only $99,238.28 in assets. Payment of 75% of that total to an executive could readily be characterized as egregious. But what happened with Edge Opportunities between December 31, 2009, and Turkia Mullin’s $75,000 payment in or around her departure in September 2011? Has it morphed into the Wayne County Economic Development Growth Engine (Wayne County EDGE – get it?)? Could its assets have reached such a size that such a payment would appear nominal? Could it otherwise be justified? We probably won’t know the answers at least until further information is released by the investigating authorities or until Edge Opportunities files its next Form 990.
Until then, we don’t know whether the separate $75,000 Turkia Mullin received from Edge Opportunities was well back from the edge, on the edge, or over the edge. With possible consequences for her former nonprofit.