Is or was The Devoted Barn ever in violation of the Excess Benefit Transaction due to housing and horse boarding provided to the Director?
To find out, we will be researching IRS Publication 557, US Code 5958, Nonprofit issues.com, Salary.com, ziprecruiter.com, zillow.com
Fact: On August 12, 2023, Ms. Borden stated via Facebook that her compensation from the nonprofit was her housing and the boarding of her animals.
We also know that she used the house funded by the nonprofit in Rose Township as her place of residence for herself, her children, boyfriend and other family members. She also boarded approximately 13 of her own horses on the property to include care which was also funded by the nonprofit.
Let’s do the research, shall we......
A question was raised to nonprofitissues.com regarding housing provided for its non profit director. See below.
“Can a 501(c)(3) own a house that is partly used as the organization's place of business and partly used as the home of the board director? Further, can the house be gifted to that board member upon his/her retirement if that is an agreement that has been previously put in writing?
It is permissible for a charity to provide lodging for a member of the board, but it is clearly a potential excess benefit situation and is likely to be subject to an excess benefit tax if the director is not paying fair market rental value for the use of the apartment or treating the value as taxable income. (It is more frequent to see a founder of a charity own the house and provide space to the charity, either free or at fair market value or less.)
In rare situations where the charity owns the building, such as when a college president is required to live on campus and use the home for college business, the resident officer may avoid taxable income. It also avoids excess benefit tax treatment if you provide charitable services to a person within the class for which you are exempt for providing services, such as housing for a homeless person who is also receiving support services.
Likewise, it would not be permissible to “gift” the house to the director upon retirement, whether or not the arrangement was in writing. That transfer would be considered compensation and an additional possible excess benefit tax situation. You would need to be sure that the “gift” was considered compensation and that his/her total compensation was not unreasonable.”
Simply put, an excess benefit transaction occurs when a non profit overpays or enriches an insider or disqualified person in which it does not receive fair value in return for it’s payment.
Below are the IRS definitions of an excess benefit transaction and disqualified person per Publication 557, Chapter 5 (page 60):
An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit.
A disqualified person is any person in a position to exercise substantial influence over the affairs of the organization to include the founding person of the organization, voting members of the governing body/board members/directors, financial officers, treasurers, presidents, chief executives, chief operating officers, etc. In this case it would be Ms. Borden, Director of The Devoted Barn.
Excise tax on excess benefit transactions. A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c) (29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange.
To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. See Publication 557, Chapter 5. (https://www.irs.gov/pub/irs-pdf/p557.pdf)
In reading the above rules, regulations and law, it has been established that a non profit CAN provide housing in exchange for services if the person is required
to live on the property and use the home for the organizations business operations, however, the compensation must be an even exchange for services. If the fair market rental rate (home/boarding) is in excess of the fair market value for the services provided, then that additional value is an excess benefit in which there are steep excise tax fines of 25% up to 200% through the IRS if not corrected.
In order to see if a violation occurred, we must first know the cost of services provided, boarding costs of animals, the fair market rental value of the property that the director was provided and the utility costs that was also provided by the non profit.
Now let's see what the fair market compensation would be for the services provided. Keep in mind, you can only choose one roll. There are four rolls to choose from for this particular case:
1. Nonprofit Executive Director (Appointed by board of directors, responsible for managing the organizations daily activities and directing the nonprofit to achieve its mission including financial management).
2. NonProfit Development Director (Responsible for planning and implementing fundraising efforts/activities, board development, recruiting and training volunteers, financial management, maintaining donor/sponsor relationships).
3. NonProfit Board Member (responsible for setting the organization’s mission, strategy, goals, and ensuring that the organization operates in compliance with legal and ethical standards).
4. Livestock Farm Hand (Taking care of animals; maintaining and cleaning animal housing areas, etc)
In looking at the above average salaries for the four roles that may apply to Ms. Borden, we must figure out what her salary would be. We know that she is the founder of the Devoted Barn starting in August 2013, she is on the Board of Directors and has ran the rescue for approximately 10 years. Therefore, the best fit for her role would fall under NonProfit Executive Director. On Form 990 she claims to work 35 hours per week. Because she has 10 years of experience, below is the progression of what her salary would be by year based on the average cost of living raise (COLA) 3.7% per year starting at the 2023 starting pay rate to what she would be making today. Keep in mind that we are using 2023 current year rates not 2013 then year rates. So her beginning pay in 2013 could be much lower if we were using rates from 2013. Based on the Salary Table below, Ms. Borden’s salary in 2023 should be $72,274.88 per year based on her 35 hour work week and experience. Note: The work week hours for all the years are based on using the 2021 990 form. In 2020 and 2021 she reported
35 hours per week. The assumption is that all years prior to and after that are the
same.
Now that we have her estimated salary rate, we must figure out the total benefit she received via free housing, free utilities and free boarding for her animals during the years to determine if there was an excess benefit transaction that occurred. This does NOT include any Veterinary or Farrier Care for any of her personal animals if donor funds were used for this. In calculating this, you take the fair market rental value of the home she was living in, the boarding costs and utility costs per year. For this exercise we are only using the Holly Residence from the year she moved in which was June 2019. Below is the Zillow home
information on the that home.
The residence in Holly is a 4 bedroom, 2 bath home that is 2,116 Square Feet. To determine the fair market rental rate for the home only not the land, homes comparable in size within the area will be used. Below are comparable properties.
Looking at the size of the homes above and the rental rates, I took into account the square footage and the rental rates of each home to figure the average rental rate for the Holly home. Based on the comparable homes the average rental rate would be $1.29 per square foot which is approximately $2,729.64 per month ($1.29 X 2116 sf). The average cost of utilities for that size home is estimated at $419 per month.
The boarding cost for 13 horses per month at $575 each is $7,475 per month. Below is a table of the average cost to live in the home and board the animals.
Based on these figures and research above, Ms Borden is, indeed, in violation of the Excess Benefit transaction by several thousand dollars. See table below. This is just an example of the last few years so how much more was really received by Ms. Borden. Remember, the benefit/compensation given by the non profit must not be in excess of fair value of services provided.
Again, this research does not include any veterinary and farrier costs for her personal animals and all of Mr.Borden's other personal expenses (food, clothing, bills, etc.) so there could be potentially additional benefits received that have not been accounted for.
It also does not include any vehicle that may have been purchased by the non profit (if any) that may have been used for personal use. Using the organizations vehicle for personal use is also an Excess Benefit transaction. We all believe in fair compensation for services provided but just this small sample of the last few years is a clear example that Ms. Borden has enriched herself above and beyond what was deserved by $192,600.78. How much more did she make off of the donors backs from 2013 to 2019?
As for penalties, once the IRS does their investigation and comes to a conclusion of any Excess Benefits received, the fines are very steep if not corrected and paid back. Not only can Ms. Borden be fined equal to 25% of the excess benefit, but if not paid by the time allotted, an additional penalty equal to 200% of the unpaid benefit could also be applied. In addition, the Board of Directors can be fined 10% of the excess benefit for allowing this to happen as well. NONE of these fines will be allowed to be paid from donor or the organizations funding. It will come from their own pockets.
You ask how is this possible......the answer is simple...... the fiduciary standards were lacking and were null and void to Ms. Borden and the Board of Directors. There was no accountability within the organization. The result of this excess benefit allotment without any oversight is what is happening currently causing animals to be spread out among multiple locations and an organization in extreme financial distress. The animals and the organization are in the situation they are in BECAUSE of the donations that were siphoned off to Melissa Borden's personal gain.
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