Authors note: This article raises several legal and ethical issues about the Mesquite Regional Business Inc. that have remained unresolved by elected officials for over five years.
On September 31, 2012, [i] Mesquite Nevada Mayor Mark Wier and Councilmen Al Litman(now Mayor), Geno Withelder, Kraig Hafen and George Rapson directed the establishment of the Mesquite Regional Business Inc., (MRBI) as a tax exempt organization to licensed in Nevada as a Limited Liability Company.
The Mesquite residents forming the corporation include current city councilman Dave Ballweg, 1352 Amen Ct, current candidate for the city council George Gault, 498 Clark Street, former resident Ken Cook, Roger Ingbretsen, 535 Long Iron Dr., Mesquite, NV, and Dan Wright, 11 West Pioneer Blvd.
Before MRBI formal approval, Gault filed an Internal Revenue Service (IRS) 1024 application to set up the MRBI as a 501 C6 tax exempt organization. On October 5, 2012, IRS employee Zenia Luk approved the tax exempt status for the MRBI.
Later that month, then Mayor Wier supported a vote by Litman, Withelder, Hafen, and Rapson to gift $475,000 over three years for Ballweg, Gault, Ingbretsen, Wright, and Cook to form the MRBI.
As of March, elected officials have gifted $732,615.83 of tax payer dollars to the MRBI with implied consent to continue to give away $15,833.33 per month into the foreseeable future.
Issue: Mesquite’s elected officials used a “technical personal services contract” to make the MRBI award thus avoiding routine bidding laws.
Concern: The City could not use the normal bidding process since city employee Aaron Baker worked with Gault, Ballweg, and Ingbretsen on the MRBI project before the official vote. Therefore, Gault, Ballweg, and Ingbretsen had insider information which prohibited them from bidding under normal contracting laws.[ii], [iii], [iv], [v]
Issue: The project lacked any measurable goals and deliverables.
Concern: Funding arguably was and remains “a gift” by elected officials to specific public people one of whom (Ballweg) now sites on the council and another (Gault) is running for a council seat
Issue: It appears that the MRBI is not a membership organization as required by IRS regulations.
Concern: The MRBI does not now, nor has ever planned to have a “meaningful extent of membership support.” It has been taxpayer supported [vi] to the turn of $732,615.83 as of March 3, 2018, and continues at a rate of $15,833.33 per month into the foreseeable future.
Issue: It appears that the MRBI is actually organized for profit.
Concern: The distribution of accumulated income to the principles may constitute an inurement [vii]. If so, that practice would disqualify an organization from the exemption. The degree of inurement, if any, is hidden from review because the MRBI claims it is immune to discovery as a private sector activity. [viii]
Issue: The MRBI performing the functional equivalent of a public activity but hiding information from the public.
Concern: Nevada Senior Deputy Attorney General George Taylor issued an opinion pointing out that the MRBI performs the “functional equivalent of public activity. Therefore, it is subject to Nevada’s open meeting law. Therefore, it should show its financial distributions to the public.
Issue: Following the AG, opinion representatives of the MRBI contacted Mesquite Nevada Attorney Jedediah Bo Bingham, Esq. of Mesquite, NV. asking for pro bono services to dispute Taylor’s opinion.
On September 24, 2014, Taylor sent MRBI Bingham a letter. Taylor wrote that a promise to migrate the MRBI to private sector status rendered them an independent contractor.
Concern: 1) The crux of the proposed migration, according to Taylor required attention to two important factors. First, the City must avoid entanglement with MRBI’s core functions, and second, they be aware of the amount of its financial support for MRBI operations.
2) In a February 10, 2014 city council meeting, Councilman Rich Green said: “We funded MRBI and have to be entangled.” As stated by Green, the council has no intention of “migrating” the MRBI from city oversight and funding.
3) Tax payer funding of the MRBI has exceeded by original agreed upon funding of $47,500 by $257,615.83 and continues at a rate of $15833.33 per month into the foreseeable future.
4) A 501 C (6) organization cannot be both a “public activity,” and private business activity at the same time. That is tantamount to giving tax-exempt status to tax-exempt city service.
Issue: Under IRS regulations a 501 C (6) 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.”
Concern: The MRBI has a personal service contract to perform “Economic Development,” for the community. In fact, they do not perform economic development activities such as taxation, zoning or planning, They prepare marketing material for the city. Marketing is an activity normally carried on for profit my any number of businesses. [ix]
Issue on December 29, 2014, Mayor Litman was asked several questions about the MRBI.
On January 10, 2015, Mayor Litman responded:
“I spoke with the city attorney as well as Councilman Green, Delaney, Hafen, and Withelder. Did not speak with Rapson. I like to get the councils feelings on issues. Although Sweeten tends to agree with your analysis, the fact that the IRS issued the 501 c6 poses the issue that all is ok with the IRS unless they rule otherwise.
On February 10, 2015, the Mesquite city council met. They discussed continuing to fund the MRBI. y. During the meetings, each of them rendered their continued support for the MRBI despite knowing the legal issues. Further, there discussions Clearly shows that they considered the MRBI a start-up.
See YouTube. Part 1 at: http://youtu.be/ZJ16BLgdaoQ Part 2 at: http://youtu.be/hl4MN0_ngqY Part 3 at: http://youtu.be/b6kVpF8Slyc Part 4 at: http://youtu.be/7fToGn35dkE
Here are some key comments from that meeting:
- Barbara Ellestad, who reported for the Mesquite Local News on council activities when the council originally considered MRBI said at the February meeting; “If you shut it down now, before the three-years you all said, or most of you said [referring to the council], it would take to make this a viable operations, Mesquite will, and I hate to be draconian, but Mesquite will not have a viable economic development for at least eight to ten years. Clearly, she is talking about the funding of a start-up business activity and not a normal contract. (See Video Part 2 16:10/30:11)
- Councilwoman Cindy Delaney in response to Ellestad: “I support MRBI, and I continue to support MRBI. No business starts up and in three years decides to throw in the towel, not if they have done good planning. Not if they are serious about it, I don’t want to pull the rug out from under them now. (See: Video Part 3, 9:52 /30:11)
- Councilman Geno Withelder; “I have been on the bench [City Council] for about 6 years. In a nutshell, I support MRB.” See: Video Part 3 22:59 /30:11)
- Councilman George Rapson: “I did promise 3 years and feel obligated up to that. I am in for another year.” Rapson, who addressed the MRBI-IRS problems told citizens to “rat them [MRBI] out [to the IRS].” (See Video Part 3 at 24:29 /30:11)
- Councilman Green: “site consultants come hear either at MRB or tax payer We funded MRB and have to be entangled.” In talking about a potential loss of momentum, he feared among other things falling “off the radar of Sandoval’s [Nevada Governor’s Office of Economic (See part 3 at 17:2530:11)
- Councilman Hafen. “I fully supported the MRBI.”(See Video part 4 at o.007/17:52)
During a Committee on Oversight and Government Reform hearing on May 22, 2013, the IRS Inspector General (IG) told sitting representatives that employees of the Cincinnati, Ohio office of the IRS “lack knowledge of what activities are allowed by tax-exemption organizations.” The IG reportedly believes “this could be due to a lack of specific guidance on how to determine the primary activity of an IRC 501(c)(4) organization”.
Mayor Litman reported that Although (city attorney Robert) Sweeten tends to agree with your analysis, the fact that the IRS issued the 501 c6 poses the issue that all is OK with the IRS unless they rule otherwise.”
Given the problem in the Cincinnati office that granted the tax exempt status to the MRBI and given that Sweeten appeared to agree with the MRBI analysis presented to the Mayor, he had and continues to have a responsibility to the community to have the MRBI status reviewed by the IRS.
Further, Senior Deputy Nevada Attorney General Taylor’s’ opinion that the MRBI is the functional equivalent of a public activity must 1) end its dependence on government dollars and 2) until then hold open meeting laws. Therefore, Sweeten had and continues to have a responsibility to the community to have the status of the MRBI again reviewed by the AG’s office.
On March 13, the Mayor and City Council were advised that Courtney Sweetin, wife of City Attorney Robert Sweetin would be the interim CEO of the MRBI.
[i] State of Nevada, MRBI ID: V20121507032..
[ii] NRS 332.820 prohibits colluding between government staff and contractors.
[iii] NRS 332.810 (c) prohibits potential “bidders” from soliciting or obtaining proprietary information regarding a potential contract. Since the city could not enter into a normal contract, they also could not advertise for competitors.
[iv] NRS 332.039 requires advertising for contracts when the estimated annual amount exceeds $50,000
[v] Contracting law also requires the government to determine the bidders past performance and experience. The MRB was a new organization with no prior experience.
[vi] In this reference from the IRS regulations a local association of insurance agents, exempt under IRC 501(c)(6), would lose its exempt status because its only significant source of income came from commissions earned by Providing insurance services to local governmental units in the city in which it is organized. The MRBI receives its sustaining funds from tax dollars.
[vii] The inurement prohibition forbids the use of the income or assets of a tax-exempt organization to directly or indirectly unduly benefit an individual or other person that has a close relationship with the organization or can exercise significant control over the organization.
[viii] Because the determination whether inurement is present is factual and depends on the facts of each case, no precise definition has emerged from the court decisions. Nevertheless, factors considered material by courts can be useful in determining whether inurement exists in a case. The MRBI hides inurement issues from public view, hence the importance of the open meeting complaint.
[ix] A google search for “marketing services companies, revealed about 188,000,000 results (0.33 seconds)