CC&R’S interpretation??
Hello Dennis, I know we’ve spoken about this before. Our HOA finance committee has told me when I mention the language in the CC&R’s is being violated, they stated it doesn’t matter what it says, all that matters is how the BOD interprets it.
Saying this, when we first moved in they had close to 100% of accumulated surplus in the operating fund. They felt as long as it was there they could use it anyway they wanted…they built a large solar canopy in the parking lot which cost $100,000, without ever budgeting it, or getting a member vote, which is required by CC&R’s for un-budgeted discretionary items that exceed anticipated surplus.
What they did this year is increase assessment. Our assessment brings in about $500,000. After I objected to the large slush fund in the operating fund, they decided to only allow a 3 month accumulation. Saying that, they carried over $160,000 accumulated surplus from 2022. Then they raised assessment 10%, which brought in another Just under $50,000. Now there was already about a $20,000 surplus for 2023 budget, so the total additional surplus for 2023 is now $70,000. They offset this with an expense called “Reserve Expense”. Reserve expenses are paid out of the reserve account. The allocation required comes out of the revenues. It posts as a negative to revenues.
I believe their plan is to move the slush fund into the reserve fund by creating a capital reserve account and comingle those funds with the existing reserve account funds.
Now you mentioned transferring surpluses to the reserve account violated IRS law, but I cannot find that law/statute. Can you please provide it.
Also, I inquired to the board why was the assessment raised when we already had a surplus, and what exactly is the Reserve Expense for.
The reponse from our Treasurer was…”we have benchmarks, and the BOD approved having a annual 3 month surplus. So it appears they created a budget line item for the surplus, and they plan on putting it into this new capital account, without it being earmarked for anything!
I also asked for specifics on the “benchmarks” and what this bugeted “Reserve Expense” is for…her response has been “I am having trouble with my email…I can’t seem to be able to respond to you. She has emailed me twice with that response.
What can I do here, our by-laws state our assessment is for each share of reserve allocation, mgmt costs, and actual expenses for common area maintenance and improvements.
I am at a total loss. The mgmt. Co. (AAM) stance is Do Not Engage and the attorney has told them to Ignore.
Help! Is there any recourse here?
Thank you, R. Gordon
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Rosalie,
You are correct while there are no state laws regulating the use of reserve accounts what they board is doing in co=mingling the reserve accounts and the operating accounts both violates the fiduciary duty of the board to the community and violates IRS regulations relative to the co-mingling of funds. The relative IRS rules depend on exactly how the association is classified by the IRS. Associations as non-profit corporations can be classified as either 501 C4 or C 7 corporations and are tax exempt. This is however very rare and very few HOA’s or Condo’s are classified as such. The vast majority of these communities are classified under IRS code 528 which is not tax exempt but parts of their income is classified as tax exempt while other parts of their income is taxable. They all must file either IRS form 1120 or 1120H. The rules for the use of either form is very specific but mandate that operating funds must be maintained separate from reserve funds. The good thing is that if the association is in fact violating the requirements for the appropriate IRS classification a simple anonymous phone call to the IRS will trigger an IRS audit and the IRS has the power to fine associations and imprison violators as appropriate.
Do a records request for the last association tax return and look up the guidance and requirements for that form, and the appropriate sections of code 528 that regulates how the association must report income. I’d be willing to bet that most associations know very little about this process and most if not all actually get it wrong. If you find wrong doing then inform the board and tell them to either change their practices or face an IRS tax audit that could result in the board members being held personally liable to fines and criminal penalties deemed appropriate by the IRS. None of them are the son of the President of the US so they have no immunity from IRS persecution. Just ask Al Capone.
Dennis