Important Things to Remember
I continue to gets calls and e-mails from new people every day asking for help with their associations. The stories are painful to listen to, and while I can help with some, others I simply cannot help. Their only recourse is thru the courts. In those cases I recommend legal counsel. Some common themes lately involve the CC&R’s or Declaration. I thought I’d take the opportunity to reinforce same basic points about CC&R’s that are very important for all of us to remember.
- The CC&R’s are the sum total of the covenants that run with the land. The only power the board has is what is specifically authorized in the CC&R’s.
- The only restrictions that the association can place on free and unhindered use of the land must be clearly specified or authorized in the CC&R’s. Any ambiguity or lack of clarity will result in free and unhindered use of the land.
- The Articles of Incorporation are subject to the CC&R’s and any conflict between anything in the Articles and anything in the CC&R’s the CC&R’s prevail.
- The Bylaws are subject to both the Articles and the CC&R’s anything in the Bylaws that contradict with the Articles or the CC&R’s than either the Articles or CC&R’s prevail.
- The association is allowed to generate rules only if the CC&R’s specifically authorize those rules. If the CC&R’s are silent on the ability to create rules than only rules that protect the common property may be implemented, based on the Duty of the Board to protect the common property.
- No rule is allowed to be implemented that contradicts with any provision of the Bylaws, Articles or CC&R’s. Any rule that does is invalid and unenforceable.
- Never ever take any proposal to modify the CC&R’s lightly. This change will impact you and everyone in your community forever. Do this very carefully and with deliberate thought.
- If you believe that the association or the declarant has changed the CC&R’s illegally or in an illegal manner consult a lawyer immediately. If challenged in a timely manner the CC&R change can be overturned in court.
- Even if the CC&R’s specify that normal changes to the CC&R’s need approval by a super majority of the members whatever that percentage is, some changes that materially alter the expected uses of the land and property from the original language will require unanimous consent of all owners to implement. The ability to lease homes or units is an example of this. If the original are silent on lease restrictions then any attempt to impose lease restrictions either long term or short term would require unanimous consent of the owners. If in doubt seek legal advice.
- Statute of limitations apply to everything that an association can do. So if you think that something smells fishy it probably is and seek legal advice in a timely manner or you may forever lose your ability to challenge even blatantly illegal actions by the associations or declarants. Interestingly there are no statute of limitation on the ability of the association to cite violations on a homeowner.
- Never ever vote to make a voluntary association mandatory. There is a reason that they are trying to do that and it will never be good for the homeowners and all future homeowners.
If you have any questions on any of these points or issue feel free to contact us at help@azhoc.org, we will provide our experience on the issue or direct you to legal counsel as appropriate.
On the last bullet point — one call I got last week involved a homeowner in a community that for 30 years had a voluntary HOA. This homeowner did in fact pay the voluntary assessments as part of simply being a good neighbor; he loved his community, and was willing to help pay for the support of that community. One day the association asked all the homeowner to vote to make the association mandatory. The understanding is that they needed 100% of the community to agree to make this happen. This person voted to make the association mandatory because he did not want to be the only vote against it if everyone else wanted it. Big Mistake. Only 2/3 of the community approved the vote. Soon afterward the homeowner received a notice from the association that because he voted for a mandatory association they were going to modify his deed to make his property forever a mandatory member of the HOA. In the same note the association told him that they were not happy with how the county was maintaining the roads so the association board decided to take over the roads and maintain them themselves. He was immediately assessed a $20,000 assessment as his share of that cost. This notice went to everyone that vote to make the HOA mandatory. And not to anyone that voted no. His only recourse now is to seek legal relief and try and get the vote overturned and reversed. All of that could have been prevented with a simple no vote.
Thanks,
Dennis
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This is very good information Dennis and after reviewing it again I am reminded of the important information here, Thank you for all the hard work you are doing to improve the relationship between Management Companies, BofD’s and Members. FYI, another word for Voluntary Associations is Neighborhood Associations. Too many in Tucson want to make the association mandatory. I think all the word tricks should be known to the naive buyer or HO.
Well, not anymore. The ADRE ALJ has decided that HOAs do not need a CC&R to write a Rule/Regulation and that is now law, evidently. My breach of contract lawsuit in Pinal County Superior Court judge as adjudicated that, if the ADRE ALJ says you don’t need a Restriction to write a rule, then my breaking the rule that was not based on any Restriction was still valid and has the force of a Restriction. I have fought this for well over a year and I guess I have to give up. If Arizona no longer requires Restrictions to write Rules, Texas is looking better.
Tom,
I truly understand your frustration. The ALJ in this case clearly missed the point and bought into the arguments of the HOA’s attorney. This is their territory and they will throw everything at these judges hoping that something will stick. Attorneys are not bound to the truth in defending their clients, that is why an attorney is never sworn in under oath in presenting a case. The problem is that the burden of proof is on the petitioner to prove their case, not the other way around. A flag is not a sign and the sum total of the restrictions that can be applied to a property must be identified in the CC&R’s under property servitude law. Your governing documents have no restrictions on the flying of flags so their self created rule is invalid. The ALJ however can only consider the state law and the specific provisions of the governing documents.
Dennis
Our Board, voted to submit an application to the IRS for a 501(c) (4)
They did this despite fact we have at least two CC&R’s that require the Board to obtain a percentage of homeowner votes. What can the community do?
You have nothing to worry about an IRS application does not require the approval of the community or a change to the CC&R’s.
Dennis
Dennis, what about the Articles of Incorporation? My HOAs ARTICLES of INCORPORATION specifically state we are an IRC 528 Corporation. Wouldn’t we need to change the Articles of Incorporation before (or after) we made a request to the IRS?
Keith,
IRS code section 528 address non-profit corporation that are HOA’s or Condominiums. You will then file your tax returns with either a form 1120 or 1120H. HOA’s and Condominiums are one of the few entities that are allowed to file their taxes under two separate portions of the tax code at the association’s choice. Obviously different rules apply to either option. You are most probable characterized as an IRS 501.C.6 corporation.
Dennis
Dennis
In January 2022m when our new board took office. They initially appointed a non-homeowner to the Board (there only 3 board members and they wanted a 7 member board). This month, at their March Board meeting, they changed that number to a 5-member board and this time did not include the non-homeowner. Is this legal?
Doris,
If the board votes to increase the number of board members, they must hold an election to fill the new positions. The board is only allowed fill vacancies in an established board position for the remainder of the term of the original board member. A non-homeowner can only be elected to the board if the bylaws authorize that condition. Non-members are typically not allowed to be on the board other than under declarant control, where all the board members are appointed by the declarant and not elected by the members.
Dennis
In January 2022, when our new board took office they changed our approved balanced budget. They removed $6,000 from the budget and reduced our HOA dues from $145 to $135. They NEVER, redid the budget or voted on a revised or new budget. Our by-laws call for a balanced budget to be in place at the beginning of the year. It was then this new board changed it. Is this legal?
Doris,
What your board did is perfectly legal. I’ve never heard of anyone complaining that their board reduced their assessment. Please take a breath, there are many things to worry about in an HOA and 501 c4 and assessment reductions are not any of them.
Dennis
At a board meetingthis month, our Board voted to apply for a 501 (c ) (4). despite the fact that we have a CC&R, which I believe does not allow them to change our charter with the IRS requirements to be a 501 ( c) (4). Below is a copy of the CC&R
Article 9, Specifcally: 9.3.1 The approval of Eligible Mortgage Holders holding First Mortgages on Lots the Owners of which have at least Fifty-one percent (51%) of the votes in the Association allocated to Owners of all Lots subject to First Mortgages held by Eligible Mortgage Holders shall be required to add or amend any material provisions of this Replacement Declaration, Articles or Bylaws which establish, provide for, govern or
regulate any of the following: (There is a list of 14 items, but the one below is the one i believe is applicable.)
(viii) Reallocation of interests in the Common Areas or the right to their use. Is this Article sufficient enough to prevent the Board from moving forward without a 51% of the Homeower’s vote?
Doris,
The 501 c 4 classification is appropriate for all HOAs and Condo and does not require an amendment to the declaration. Unless your CC&R’s established the association as a for profit corporation as opposed to a non-profit corporation, which by the way is illegal in Arizona, planned communities can only be non-profit corporations or unincorporated entities. You are going in many different directions with your quotes from the CC&R’s. Is the association attempting to amend the CC&R’s for some reason?
Dennis
I found you answer interesting on this issue. My HOA is going to be selling “Social Memberships” to people that are NOT Owners of property in the HOA. Does this jeopardize our status as an IRC 528 Corporation?
Keith,
I’d have to see exactly what your association is trying to do with social memberships. When I’ve heard this (social membership) term in the past it has been applied to allow non-residents to use common property facilities like tennis courts and gyms. Any income derived from this type of membership is fully taxable as profit. It does not jeopardize the non-profit status of the corporation but may limit the choices for filing taxes with form 1120H, which will also complicate how the association can use reserve funds and annual decisions relative to excess funds.
Dennis
Hello, The HOA collects thousands in (unauthorized fines not permitted in the CC&R’s) and the HOA refuses to produce their W9 in the name of the HOA; and when I requested the W9, the property manager who is also the Statutory Agent who also engages in determining “violations” and engages in debt collection despite not being a licensed debt collector in AZ, the property manager sent a W9 in a similar looking HOA name that AZCCC states that W9 entity has never been authorized to do business in AZ;
What agency does enforcement for conflicts of interest, unlicensed debt collection, trespass by the property manager/statutory agent disconnecting utilities to extort money while making up his own $fines and using his total fines he makes up to record a lien violating ARS 33-420? thx
Why do you believe that you are entitled to see an IRS W9 form. That is confidential information and protected. While you are entitled to see any association tax return don’t expect anything that you are talking about to be clearly discernable from that return. There are no laws governing community manager in any way in this state. The statutes address the association regulations and the community manager is an agent of the association. You do not need to be a registered tax collector to collect on your own debt. The contract between the association and the management company will establish the right of the community manager as their agent. I suggest that you start by requesting a copy of the contract between the management company and the association and then ask for a copy of their latest tax return. No association or their agent has the authority to deny access to utilities for any reason in these communities. Fines, penalties and any other fees, excluding common expense assessment cannot be recorded as a lien on any property in these communities without that lien being created by a Judge in a court of competent jurisdiction. Without the judgment lien being assigned the association cannot record a lien for fines and penalties. And the association is also prevented from including fines and fees on the common expense lien.
Many if not most associations exceed their true authority to restrict the use of property outside the declaration and the application of fines for those unauthorized restrictions. I’ll be providing expert testimony on these issue in a lawsuit raised by a homeowner against their association.
Dennis
Dennis
Hello and thank you for replying:
Well, the things you say they can’t the do routinely an do arbitrarily (targeted), and find an attorney to do anything constructive has proven a vain undertaking – and we are proceeding (after the fact in this Notice Pleading law forum State) to exhausting administrative remedies to set the facts via Declaratory Judgment;
Being said: No One is immune to the IRS
AND
Per 26 USC 2603, Transferees (of credit receiving payments) are personally liable for the taxes on that total amount transferred for the fiscal year with a consumer price index adjustment per 26 USC 2302; The transferee (or trustee of a termination of interest in any account and/or transferors**) are executors per 26 USC 2203 having actual or constructive possession of the property (my payments / credits are my property) those Transferees are liable for the tax per 26 USC 2002 and as all corporations are financial institution entities (receiving deposits / managing accounts etc.) these entities (known as Inadvertent Executors *see below*) are required to have a Form 56/56F on file with the secretary of the treasury per 26 USC 6036 (one of the IRS sections at the top of the forms 56) all of which code sections require the TIN which is the property of the IMF/SSA/IRS making the demand not optional: and we have a duty to report those payments/transfers to the IRS so the corporations (which are dead-fictional-entities) can be taxed on its income so I don’t get taxed (either I pay the tax when I don’t report and THEY get tax-free money -or- I report and they pay the tax and I don’t using IRS Forms 1099NEC/1098F)
Denying a W9 request is not optional, a denial invokes Penalties for Failure to furnish TIN.
Quoting the W9 Instructions:
“If you fail to furnish your correct TIN to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect.
Civil penalty for false information with respect to withholding. If you make a false statement with no reasonable basis that results in no backup withholding, you are subject to a $500 penalty.
Criminal penalty for falsifying information. Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment.
Misuse of TINs. If the requester discloses or uses TINs in violation of federal law, the requester may be subject to civil and criminal penalties”
The Inadvertent Executor Under Section 2203 of the Internal Revenue Code
by Joseph J. Hanna Jr., BBA, JD, LL.M. (In Taxation) has been a senior tax law partner in Oregon since 1967
I. INTRODUCTION
Section 2203 of the Internal Revenue Code (“IRC”)’, which defines the term “executor” for the
purposes of the federal estate tax, is an infrequently cited provision.
In fact, although § 2203 has been in the Code in its present form for over 70 years,’ very little ink has been spilled concerning the nooks and crannies of the provision.
,,,
[t]he term “person in actual or constructive possession of any property of the decedent” includes, among others, the decedent’s agents and representatives; safe deposit companies, warehouse companies, and other custodians of property in this country; brokers holding, as collateral, securities belonging to the decedent; and … or the identified trustee will be an inadvertent executor to the extent of the property (payments) held in trust and so on..
Thank you for your website
Thank for your insights and postings,
I learn a lot here
Kind Regards
🙂
Sean,
What has any of this to do with HOA law? while all your arguments may be valid relative to tax and the fair debt collection act under Federal law. None of that is within my area of expertise. Please remember the association has the right to collect its own debt, when they utilize another agent to collect debt for the association that agent is subject to the FDCA not the association. Under HOA law the records of the association are subject to records request. That statute does not apply to records of the agent that are independent from association records. If the management company or attorney is acting as a debt collection agent any federal law relative to debt collection applies to them and not the association.
Dennis
Hello, I agree- in response to your inquiry “What does any of this have to do with HOA Law?” all of this ^above^ has to do with your prior question:
“Why do you believe that you are entitled to see an IRS W9 form.”
Answer:
1.) Because the Law says so and
2.) the HOA is not filing taxes on their income (tax evasion, money laundering, securities fraud 26 USC 7212 violations) which I/We are duty bound to report tax evaders;
Kind Regards,
Sean,
You understand of course that your association is a non-profit corporation and can be classified under either IRS code 528, 501C4 or 501C7. Under 528 the association can choose to file either a form 1120 or 1120H which each have different reporting criteria and treatment of income. If the association is classified as either 501C4 or 501C7 tax filings are the same. If you are interested in challenging the tax filing of the association you should first request to see the actual filing and determine if they complied with the income treatment and rules associated with that specific form. There are restrictions on the use of 1120H that if the association cannot satisfy, they are then required to file an 1120. What constitutes taxable income is different under all three forms.
Dennis
Sean,
You understand of course that your association is a non-profit corporation and can be classified under either IRS code 528, 501C4 or 501C7. Under 528 the association can choose to file either a form 1120 or 1120H which each have different reporting criteria and treatment of income. If the association is classified as either 501C4 or 501C7 tax filings are the same. If you are interested in challenging the tax filing of the association you should first request to see the actual filing and determine if they complied with the income treatment and rules associated with that specific form. There are restrictions on the use of 1120H that if the association cannot satisfy, they are then required to file an 1120. What constitutes taxable income is different under all three forms.
Dennis
Hello Dennis,
Lets recognize 26 U.S.C. § 528 Certain homeowners associations,
[just so we hold the corporations duties by reporting to the IRS and let the IRS make a determinationi]
(a) General rule
A homeowners association (as defined in subsection (c)) shall be subject to taxation under this subtitle only to the extent provided in this section.
(b)Tax imposed
A tax is hereby imposed for each taxable year on the homeowners association taxable income of every homeowners association. Such tax shall be equal to 30 percent of the homeowners association taxable income (32 percent of such income in the case of a timeshare association).
….
(3) Residential real estate management association
The term “residential real estate management association” means any organization meeting the requirements of subparagraph (A) of paragraph (1) with respect to a subdivision, development, or similar area substantially all the lots or buildings of which may only be used by individuals for residences.
,,,
(d) Homeowners association taxable income defined
(1) Taxable income defined
For purposes of this section, the homeowners association taxable income of any organization for any taxable year is an amount equal to the excess (if any) of—
(A) the gross income for the taxable year (excluding any exempt function income), over
(B) the deductions allowed by this chapter which are directly connected with the production of the gross income (excluding exempt function income), computed with the modifications provided in paragraph (2).
Sean,
While I never cited the details of IRS code 528 most associations are classified under this section while other are classified under 501. C.4 or 7. Under 528 the association is free to choose between two filing forms 1220 or 1220 H that treat taxable income differently along with different requirement for separation of operating accounts and reserve accounts. What is the point that you are trying to make? I think we are saying the same thing. This still has nothing to do with the form you cited.
Dennis
We sued our association and part of the settlement agreement is that we’ll have another election administered by a third party and we will accept the outcome of that election. However, the third party (a retired judge) now says being present on Zoom counts for quorum but not for voting; only people physically present at the meeting next Tuesday(4/22/25) can vote (or by ballot, but no ballots are accepted after this Saturday 4/19/25). This doesn’t seem right to me (even though both sides’ attorneys already agreed to it) and I’m afraid some people may be disenfranchised.
Do you know of anything (case law, etc) you can point me to that more clearly indicates if Zoom presence counts for quorum then it must also count for voting “in person” (virtually)?
The 3rd party is really trying his best to do everything by the book, so I think he’ll accept a legitimate source clarifying that Zoom counts as “in person” these days. (In fact, this will be the first meeting our association has had in over 2 years (i.e. during litigation) that even allowed in-person attendance, since the meeting location is the private conference room of the property manager who is also an owner/association member and a current board member running for re-election (just one of the many reasons for the lawsuit).)
Chanda,
If you have attorneys and third parties addressing this election the very first thing they should do is actually read the law. The statute is ARS 33-1812. It clearly states that the association shall allow voting to be in person and by absentee ballots. Nothing in the law authorizes or prevents zoom meeting, so they are never addressed. They became prevalent since the pandemic and we did nothing to enforce the law then because there were no other options. The problem is that since the association must validate the eligibility of anyone in the zoom meeting to vote prior to the meeting they would have to do that as every vote was taken. In a regular meeting you get checked in on a sign-up sheet and handed a paper ballot if you have not already sent in an absentee ballot. You can’t do that in a zoom meeting and comply with the law that requires the association to provide for both in person and absentee ballots. I’ve been trying to address this in the law every year since the pandemic ended but the trade organization have resisted and I’ve not yet been successful. Those organization claim that associations can use online vote as an alternative to in person and absentee ballots but once again that process is very vulnerable to have manipulation of ballots and specifically prevented by statutes. If you community is interested in actually following the law they should hold actual meetings and allow members to vote in person and by absentee ballots. Until such time that we can modify the laws to address zoom meetings and the controls necessary to ensure homeowner right within those forums. If you community does not care about the law then they are free to do whatever they want and violated the law and hope that no one sues them for those blatant violations of the law. We cannot legislate integrity either you have it or you don’t. If you don’t the law is meaningless and everything in the law to protect the right and due process required by these communities thrown away by these board members and trade organizations.
To your specific question virtual meetings count as actual meetings but the association must come up with a method of validating who and how can anyone vote at the virtual meeting. While I could devise a process for you, it would be far too complicated for any community manager or attorney to figure out and pull off correctly even if I explained it to them in detail. Don’t hold member virtual meetings until the law can be changed to address them and legitimately allow for their use.
Dennis
Thank you for responding.
I should have mentioned t’s a small commercial office condo association with 23 owners. It’s not too difficult to verify who we are on Zoom; in fact they can’t use Zoom for quorum without establishing identity because our votes are all unique based on square footage (e.g. 2.98, 4.22, etc), so they have to know who is present to see if we meet 50% for quorum. And our votes aren’t secret because they logically can’t be when no two are the same amount.
They are allowing in-person & absentee ballot voting. But some owners live out-of-state and, as of yesterday, only 6 ballots had been received by the 3rd party. If I can give the 3rd party a solid legal basis to allow Zoom voting, I think he will. I just hoped you could point me in the direction of something indicating that if it was permitted by the association for quorum, it must be permitted for voting, too.
They ignored the results of the election 2 years ago by claiming we didn’t meet quorum. It took 2 years of litigation for a judge to rule we had met quorum and that election was valid, but by then we had already removed the whole board by petition, had a Zoom election administered by that board’s attorney where the removed board won again(despite not being eligible to run after removal), and their 2 year terms were already over anyway. So we settled for 3rd party administration instead of more litigation. We don’t have an agreement for what happens if we don’t meet quorum. But the person we’re trying to vote out is the single largest owner (nearly 13%) and his alliance of candidates totals about 25%. If we barely meet 50% quorum (as usual) and anyone counts for quorum but can’t vote, his alliance will win by default instead of actual votes.
Chanda,
As I explained in the initial response the law for these communities do not address virtual meetings in any way. What the law provides for in ARS 33-1248 that unit owners must be allowed to vote in open meetings of the owners and in ARS-33-1250 that “The association shall provide for votes to be cast in person and by absentee ballot” It also addresses action to be taken at a meeting. A virtual meeting must comply with any requirement for in person meetings to be valid. Including the requirement that members present in the virtual meeting must be provided the opportunity to vote at the meeting, if they have not already voted via absentee ballot. “Votes cast by absentee ballot are valid for the purpose of establishing the quorum” in addition to the members physically present at the physical or virtual meeting.
If your association can validate the identity of the member on the virtual meeting, they must allow that person to cast their votes at that virtual meeting. To comply with the law.
Dennis