I receive more questions on Income Ruling 70-604 than on all other tax issues blended. One of the issues that regularly occurs is, “How do we notify and educate our members that they can vote on this important ruling?”
I propose putting some descriptive wording on the ballot so that the users have a standard understanding of the Income Ruling. An example of these kinds of wording follows.
Income Ruling 70-604 is a tax ruling only. The goal of this ruling is to allow a homeowners’ affiliation to avoid taxation on any surplus member cash flow (as outlined in the Interior Income Code) that may inadvertently occur in a provided tax calendar year. The ruling states that the users of the Association satisfy to make the election. The ruling applies to any extra member revenue. The ruling allows two alternatives only refund the surplus member earnings to the customers or use the excessive to the following year’s assessments.
The Board of Administrators has identified that it is impractical to attempt to refund the excessive member profits due to the fact of the administrative problems concerned and the reality that the excessive member income may perhaps be desired as working cash to spend for continuing Association operating fees. Thus the Board of Administrators requests that you approve an election under Income Ruling 70-604 to use any surplus member money to the following year’s assessments. This does not signify that the assessments for subsequent yr will be lessened, as the price range has already been ready and approved. Given that charges usually rise year-to-calendar year, it is possible that any excessive member revenue will be absorbed by an boost in expenditures.
Your failure to approve this election may well necessarily mean that the Affiliation will be subject matter to additional federal income taxes for the current year, which will result in a increase in assessments for all customers.
My advice to the Affiliation and the governing board is that the ballot be drafted with only a single solution, which is to apply the excessive member profits for the adhering to year’s assessments, and that a yes or no vote be what is presented to the users.
The wording previously mentioned explains why the Board of Directors is presented only a single solution. To be silent on this situation and make clear each solutions would pressure members to make a final decision which could outcome in a the greater part of customers voting to refund any surplus member cash flow. This generates a difficult situation for the board, as that excess in profits might depict doing the job money that is vital to function on a continuing foundation. Devoid of sufficient doing the job money, the board would be pressured to both borrow funds on an high priced quick-phrase basis or to make a distinctive assessment of users for doing the job cash.
For the hundreds of associations with whom I have discussed this issue in the earlier, you will probably remember that I have stated that, in my opinion, on which I have obtained verbal concurrence from the countrywide workplace of IRS, Earnings Ruling 70-604 as drafted, demanding acceptance of the associates, is usually in conflict with the governing paperwork of most associations and with point out law. To the ideal of my understanding, statutes in all states vest the authority to make financial choices regarding the disbursement of Association money in the fingers of the elected board of administrators. The normal membership generally does not have authority to make these a determination. For that reason point out regulation is typically in conflict with Income Ruling 70-604.
So how do you solve this clear conflict? In my feeling it is rather very simple, while it needs minimal get the job done. To start with of all, go in advance and have the membership approve the election at the once-a-year conference, or in any other meeting or structure in which a legitimate membership vote happens. Next, have the Board of Administrators meet and ratify the election accepted by the membership. By managing the Revenue Ruling 70-604 approval process in this fashion, you to start with, meet the prerequisites of the IRS and second, satisfy the requirements of state regulation.
Can you skip the member acceptance and only have the Board of Administrators make the election? In my viewpoint, sure you can. On the other hand, to do so is to invite a problem by the IRS. And that is a fight that you don’t need to have to combat. It is so easy to get the member approval to make the election that it is most effective to just get member acceptance and stay clear of a likely combat with the IRS.