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In tax forms, Maryland hospital system labeled book purchase from Baltimore mayor a 'grant' to city schools

Despite saying it bought $500,000 worth of children’s books from Baltimore Mayor Pugh, the University of Maryland Medical System told the IRS that its two most book purchases were actually “grants.”

The University of Maryland Medical System classified its two most recent purchases of books from Baltimore Mayor Catherine Pugh as “grants” in federal tax filings — one to the city public school system in 2017 and one to the Democrat’s Healthy Holly company in 2015, tax documents show.

Several tax experts said the medical center did not follow basic reporting rules for tax-exempt organizations by labeling as grants what the nonprofit hospital has called purchases it made from Pugh’s private company. The experts said they believe the medical center appears to have violated a rule that requires them to disclose Pugh’s name and her role in the two transactions — each for $100,000 — because she is a member of the hospital network’s board of directors.

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Pugh has served on the board since 2001 but resigned her seat Monday amid intense scrutiny over the total $500,000 the medical system has said it spent to purchase 100,000 “Healthy Holly” and “Healthy Herbie” books from Pugh beginning in 2011 — the same year she established her company. Pugh and UMMS have said the deal was struck to distribute the books to students in the Baltimore public school district, which it did not request and still has thousands of copies sitting in boxes in a warehouse.

In its tax forms, the medical center named Pugh’s company, Healthy Holly, as the recipient of the 2015 grant, and it names the Baltimore public school system as having received the money in 2017. In both cases, UMMS did not disclose Pugh’s involvement despite listing the mayor’s home address as the location of both the company and the school system.

“That doesn’t sound like an appropriate characterization,” said Marc Owens, who served for a decade as director of the tax-exempt division of the IRS. He said it’s important for a nonprofit to make clear when “it’s really the purchase of something, and it’s from a board member.”

The Baltimore Sun asked both the medical system and the mayor’s office for comment late Monday afternoon. Late Tuesday morning, spokesmen for both said they had no comment at this time. The mayor’s office also has not responded to The Sun’s request for her tax forms.

Michael Schwartzberg, a spokesman for the medical system, said in a statement late Tuesday that “UMMS has been fully compliant with all IRS regulations and guidelines governing not-for-profit companies.”

In a separate transaction likely to heighten ire in Annapolis, the medical system reported on its 2014 tax form that it had provided a $25,000 “grant” to the inaugural committee of Gov. Larry Hogan and Lt. Gov. Boyd Rutherford.

Hogan’s communications director, Michael Ricci, said the inaugural committee properly reported all of its sponsors, including UMMS.

“UMMS was properly listed, along with dozens of other entities, as a sponsor of the inaugural committee,” Ricci said.

The Republican ticket’s inaugural committee was set up as a Maryland nonprofit that lists in state incorporation records three members of its board of directors — including Elaine Pevenstein, a $4,000 donor to the Hogan-Rutherford campaign who is married to UMMS board member Robert L. Pevenstein.

Robert Pevenstein is one of several UMMS board of directors who have business deals with the system worth hundreds of thousands of dollars each, according to an investigation by The Sun. The goods and services they have provided the system ranged from pest control to civil engineering and insurance services.

Pevenstein, the founder of technology companies, reported in his 2017 state financial disclosure form that his firms pulled in more than $150,000 through medical system contracts, including $108,000 in pay for himself.

Legislative leaders are furious about the contracts the medical system has entered with members of its board. Governor Hogan, Senate President Thomas V. Mike Miller and House Speaker Michael Busch are scheduled to meet with UMMS officials Wednesday in Annapolis.

UMMS CEO Robert Chrencik has defended the deals with Pugh but could not say whether he approached the mayor or she approached him about the sale. Chrencik acknowledged there was no competitive process for buying the books. A medical system spokesman said there is no formal contract with Pugh, who was a state legislator from Baltimore when the system began buying her books.

Owens said most grants by nonprofit hospitals are typically made to other charities, not for-profit firms like Healthy Holly. Owens also questioned the medical system’s contribution to the governor’s inaugural committee.

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“Charities should stay away from that sort of thing,” Owens said.

The grants for the books and the inaugural committee are listed among assistance that the medical system provided to health-related charities, including $100,000 to the Upper Chesapeake Health Foundation, $70,000 to the Ronald McDonald House in Baltimore, and $50,000 to the American Heart Association.

Those donations and the UMMS spending on the mayor’s books and the governor’s inaugural are listed on the system’s Internal Revenue Service Form 990, a financial disclosure nonprofits must file annually.

UMMS reported in its 2014 form, which covers the year ending June 30, 2015, that it awarded a $100,000 grant to Healthy Holly LLC for “general assistance.” It makes no mention of how the money would be used. The address listed for Healthy Holly is that of Pugh’s home, which is the corporate address of the LLC.

The 2016 tax form, which covers the year ending June 30, 2017, lists the $100,000 grant as having gone to the “Baltimore City Public Schools.” The address listed for the school system is also that of Pugh’s home. The form states that the 20,000 books funded by the grant are related to government support, even though the school system did not request the books or the grant.

“The purchases of the books are listed as grants on the Form 990s because they were general assistance we provided to benefit the students of Baltimore City Schools,” Schwartzberg said in a statement. “Regarding the address issue that you raised, we made a clerical error and used an incorrect address for the school system.”

The medical system considered the non-cash donation of books to promote health to the City Schools as ‘other assistance to a governmental entity,’” he wrote.

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Anne Fullerton, a spokeswoman for the school district, said the system has “no record of a grant” from the medical system for a purchase of 20,000 books in any year, including from 2011 to 2018. In fact, the school system has confirmed that nearly 9,000 of the mayor’s books are sitting in boxes in a Baltimore warehouse. Staff members recall only a single shipment of books, “received in the 2011-13 time frame,” Fullerton said.

Reporting such expenditures on a list of grants “makes it look like these dollars were well spent,” said Eve Borenstein, a Minneapolis attorney who has testified before Congress on the tax forms that charities must provide to the IRS. “Most grants are about money that is going to a group that is going to do charitable work.”

Borenstein also said UMMS is required to report any grant that benefits a board member.

More important, Owens said, is whether the medical system and Pugh reported the money as income to the IRS. He said charities do not typically report grants to the IRS as income paid to individuals.

In purchasing books from Pugh, he said, the medical system would be required to send her a 1099 tax form to report the income to the IRS. An individual or business that fails to report income to the IRS faces penalty, he noted. In addition, Owens said, IRS rules for tax-exempt organizations such as the medical system requires the disclosure of any payments to insiders such as board members.

The federal Form 990 includes a column where the nonprofit can detail any “reportable compensation” that it paid to someone that would have generated W-2 or 1099 tax forms for the person paid. In the two years that the medical center purchased books, it did not list any reportable compensation for Pugh.

Schwartzberg said the medical system “provided a Form 1099” to Healthy Holly LLC. The hospital network was not required to report the two $100,000 transactions because they did not exceed the reporting threshold of $100,000 for such payments.

“We properly disclosed all transactions with interested parties that exceed $100,000 as IRS regulations require,” he wrote in a statement.

Paul Streckfus, editor of the EO (Exempt Organizations) Tax Journal and a former IRS attorney, said the medical system made a questionable decision labeling the two payments to Pugh and to Hogan’s inaugural committee as grants.

“It’s being dressed up as a grant when they’re clearly just buying the books,” Streckfus said. “And you would have to question why they are making this grant to the inaugural committee.”

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