Time to Close the Book on the Tax Issue

The Whole Story About the I.R.S Case 

Against Sun City Anthem

For a considerable period of time, Sun City Anthem has dealt with an income tax issue that has plagued our community. Recently this matter was settled with the IRS, and having that issue behind us, has brought considerable relief to all residents.

Whether it cost residents $100,000 or $1,000,000, the fact remains that it cost our association an unnecessary amount of money; had the income tax return been completed properly under Revenue Ruling 70-604, it should not have cost any of us one single cent, and that any sum paid to the IRS could have been used for a much more productive purpose.

Who is to blame for this unnecessary expenditure?  Does it matter who was responsible?  That is for you to decide, but if you feel that there should be accountability, who would that person or persons be?

As Harry Truman's plaque on his presidential desk stated, "The Buck Stops Here," and that "buck" belongs to the person or persons who made the incorrect decision that cost the Sun City Anthem community an unnecessary expense.

But....who was that person? Who was the culprit(s)?

Rather than blame a board candidate, a candidate's spouse, or their friend, and create even greater controversy about "he said, she said"; we in turn, would rather examine this matter from an OBJECTIVE point of view, taking the high ground, rather than spewing hatred between neighbor and neighbor.

The ultimate responsibility therefore rests with members of that particular board of directors, the individuals who provided an auditor, the information to complete our 2007 return. 

Lately there seems to be some kind of movement to blame others for the problem; that there were "whistle blowers" who should be held accountable.

Once again, that is for you to decide, but before any of you come to any specific conclusion, we did a bit of research with a time line that should be closely examined in order to make an intelligent decision.

We urge you NOT to accept any writings elsewhere where personal conflicts of interest may arise; instead, look closely, and be adult in making that determination...if it matters to you at all.

So, if this does concern you in any way, here is a time line of just what took place following the filling of the 2007 income tax return.

Although discussions regarding the validity of returning the excess funds to residents started several years prior....

...on August 21, 2009 a planning workshop was conducted by then association president, Jack Troia.  During that session, it was stated that as of December 31, 2008, Sun City Anthem had a substantial balance of "income not taxed" under IRS Revenue Ruling 70-604, the section of the IRS code pertaining to homeowner association filings. 

This was the history of the cumulative Build Up of Funds presented at that meeting.

2002----455,000

2003--1,050,000

2004----909,000  (CC&R's amended to conclude Asset Enhancement Fee)

2005--2,348,000

2006--3,845,000

2007--4,755,000

As you can see, this fund continued to grow year after year.

Let's now examine the section of Revenue Ruling 70-604 that applied.

(Sun City Anthem is considered a Condominium management corporation.)

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"A condominium management corporation assesses its stockholder-owners for the purposes of managing, operating, maintaining, and replacing the common elements of the condominium property.  This is the SOLE ACTIVITY of the corporation and its by-laws DO NOT AUTHORIZE IT TO ENGAGE IN ANY OTHER ACTIVITY."

"A meeting is held each year by the stockholder-owners of the corporation, at which THEY DECIDE what is to be done with ANY EXCESS ASSESSMENTS not actually used for the purposes described above; i.e., THEY DECIDE EITHER TO RETURN THE EXCESS TO THEMSELVES or TO HAVE THE EXCESS APPLIED  AGAINST THE FOLLOWING YEAR'S ASSESSMENTS."

"Held, the EXCESS ASSESSMENTS for the taxable year OVER AND ABOVE THE ACTUAL EXPENSES  PAID OR INCURRED for the purposes described above ARE NOT TAXABLE to the corporation, SINCE SUCH EXCESS, in effect, HAS BEEN RETURNED to the stockholder-owners."

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There does not appear to be any ambiguity as to how excesses are to be treated; either GIVE IT BACK, or REDUCE THE FOLLOWING YEAR ASSESSMENT.

Having studied the ruling in detail, even finding a court case where a homeowners association was subsequently penalized (the Mission Heights Case), and a subsequent article written by our then auditor, Gary Porter, where it indicated that this section of the IRS code, if not followed, COULD PRODUCE A SUBSEQUENT TAX ISSUE, a letter was composed by Tim Stebbins to the Sun City Anthem Board of Directors. 

This was a FACT FINDING mission, and conducted on behalf OF EVERY RESIDENT for their BENEFIT.

We have a copy of the letter from then Association Treasurer, Shirley Cheri, to Tim Stebbins dated September 11, 2009.

Here are the pertinent contents of that letter sent to Mr. Stebbins.

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"This a response to your letter of August 27, 2009 where you SET OUT YOUR CONCERNS that a vote of the membership is required to adopt a Resolution utilizing the tax benefits of electing to use Revenue Ruling 70-604."

..."Gary Porter, IN HIS OPINION, cites TAM 9539001 in SUPPORT of the board of Directors adopting Revenue Ruling 70-604---IT DOES NOT REQUIRE A MEMBERSHIP MEETING."

"I have read all of your statements and it appears that you are misinterpreting the rulings.  WE DO NOT CARRY OVER SURPLUS FUNDS YEAR AFTER YEAR.  Each year is accounted for when the tax return is prepared."

"There is NO REQUIREMENT to ask unit owners TO VOTE ON DISTRIBUTION OF FUNDS.  In our Association it is impractical because the tax return is due before the annual meeting."

"I am UNAWARE of any IRS RULING to support the reference you made to quote the Adams Kessler Law Firm.  GARY PORTER, of Porter and Company, is a recognized National authority on HOA tax and his opinion CLEARLY SUPPORTS THE BOARD SIGNING THE ELECTION as they are empowered by the State of Nevada to act on behalf of its members."

"I COULD NOT FIND ANY IRS RULING TO SUPPORT your contention that TRANSFERRING SURPLUS FUNDS TO RESERVES is not permitted."

"Please rest assured your concerns are UNFOUNDED."

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As one can see, there are inconsistencies between the actual written law and the letter from Ms. Cheri to Mr. Stebbins.  No documentation for her statements were presented to Mr. Stebbins verifying what was written to support her position, and there is NO RECORD that, to our knowledge, of any that exist.

Mr. Stebbins, confused, then wrote the IRS for CLARIFICATION of the matter.  He asked two questions in his letter:

a. Just who is to decide the distribution method: return the excess assessments or apply them against the following year?

b. Can the distribution of the excess assessments be withheld so as to build up a reserve of tax free "working capital?"

He subsequently received a return letter from the Department of the Treasury dated November 2, 2009.

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"Rev. Ruling 70-604 does NOT PROVIDE that a condominium management association MAY AVOID RECOGNIZING TAXABLE INCOME attributable to EXCESS ASSESSMENTS by ACCUMULATING THE EXCESS AMOUNT IN A WORKING CAPITAL RESERVE."

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Approximately 7 months later, SUN CITY ANTHEM was AUDITED based on what was believed to be an incorrect filing.

Within a short period of time following the SCA audit, the IRS also AUDITED SUN CITY SUMMERLIN under the same revenue ruling. 

Though both circumstances were different, nonetheless, BOTH WERE AUDITED for the SAME IRS CODE VIOLATION.

Was there a connection, or was this a coincidence?  That question will always remain unanswered.

But where all is considered, does that make Mr. Stebbins a problem maker or a problem solver? A bad guy or a hero?

This matter has now been resolved and CLARIFIED, costing Sun City Anthem a total of approximately $140,000.

Subsequently all residents WILL hopefully, NOW BE RECEIVING excess distributions back in one form or another; and if this problem REAPPEARS, there leaves little doubt as to the manner in which it must be handled according to the law.

When all is said and done, and the facts are fully digested, it appears that without this man's dedication and persistence, this problem would have in all likelihood, magnified itself due to the INCORRECT ACTIONS of the BOARD MEMBERS whose decisions ultimately caused the problem. 

Does that define a whistle blower or a person who, as result of his inquiries, forced a Board of Directors to correctly file their taxes?

Regardless of your opinion, the result is evident.

Excess dues payments, as a result of these inquiries and audits, will either HAVE TO BE SPENT the following year, or RETURNED in CASH or in the form a REDUCED ASSOCIATION DUES the following year.

Mr. Stebbins MADE THE EFFORT to solve this problem internally, was rejected, and  through his efforts, the PROBLEM WILL HOPEFULLY NEVER OCCUR AGAIN.