I obtain extra questions on Income Ruling 70-604 than on all other tax issues merged. A person of the thoughts that continuously arises is, “How do we inform and educate our customers that they can vote on this important ruling?”
I propose putting some descriptive wording on the ballot so that the customers have a standard comprehension of the Revenue Ruling. An case in point of this kind of wording follows.
Revenue Ruling 70-604 is a tax ruling only. The reason of this ruling is to make it possible for a homeowners’ affiliation to stay away from taxation on any excess member income (as defined in the Inner Income Code) that may well inadvertently crop up in a provided tax yr. The ruling states that the customers of the Association meet up with to make the election. The ruling applies to any extra member profits. The ruling lets two selections only refund the excessive member money to the associates or utilize the excessive to the pursuing year’s assessments.
The Board of Directors has identified that it is impractical to endeavor to refund the extra member money because of the administrative issues associated and the actuality that the extra member income may be wanted as doing the job cash to pay back for continuing Affiliation running expenses. Therefore the Board of Directors requests that you approve an election under Income Ruling 70-604 to use any excess member earnings to the adhering to year’s assessments. This does not signify that the assessments for future yr will be lowered, as the price range has previously been prepared and permitted. Because bills normally rise year-to-yr, it is possible that any extra member cash flow will be absorbed by an improve in expenditures.
Your failure to approve this election may possibly imply that the Association will be subject to additional federal earnings taxes for the latest calendar year, which will trigger a increase in assessments for all users.
My assistance to the Association and the governing board is that the ballot be drafted with only a solitary solution, which is to utilize the extra member earnings for the following year’s assessments, and that a of course or no vote be what is offered to the customers.
The wording previously mentioned explains why the Board of Directors is introduced only a solitary possibility. To be silent on this issue and make clear both of those selections would force members to make a determination which could final result in a majority of customers voting to refund any excess member cash flow. This makes a tough predicament for the board, as that surplus in profits may possibly symbolize functioning cash that is necessary to run on a continuing basis. Without suitable doing work cash, the board would be pressured to both borrow funds on an expensive shorter-term basis or to make a distinctive assessment of customers for operating cash.
For the hundreds of associations with whom I have mentioned this problem in the previous, you will most likely remember that I have stated that, in my opinion, on which I have been given verbal concurrence from the countrywide business office of IRS, Income Ruling 70-604 as drafted, necessitating acceptance of the associates, is typically in conflict with the governing paperwork of most associations and with condition law. To the most effective of my understanding, statutes in all states vest the authority to make economical decisions relating to the disbursement of Affiliation money in the arms of the elected board of administrators. The typical membership generally does not have authority to make these kinds of a determination. Hence condition regulation is frequently in conflict with Profits Ruling 70-604.
So how do you take care of this obvious conflict? In my view it is reasonably straightforward, whilst it calls for minimal function. Initial of all, go ahead and have the membership approve the election at the annual conference, or in any other meeting or structure in which a legitimate membership vote happens. 2nd, have the Board of Directors meet up with and ratify the election accredited by the membership. By managing the Income Ruling 70-604 acceptance course of action in this method, you 1st, meet the prerequisites of the IRS and 2nd, satisfy the demands of state law.
Can you skip the member acceptance and merely have the Board of Administrators make the election? In my viewpoint, yes you can. Nonetheless, to do so is to invite a obstacle by the IRS. And that is a fight that you do not want to fight. It is so uncomplicated to get the member approval to make the election that it is finest to just get member acceptance and steer clear of a prospective struggle with the IRS.