Question: My homeowner association board hired attorneys to rewrite the bylaws, which as a result are now longer and more complex and incomprehensible than our CC&Rs. No homeowners voted on these changes. We didn't even know changes took place until a year later when the document was circulated. This year I noticed a section in the new bylaws: "Approval of IRS Resolution. The board may approve an IRS Resolution that any excess income for the current year shall be applied to the next fiscal year, as provided by IRS Revenue Ruling 70-604." What does that mean? Are owners supposed to vote on changes?
Answer: If your association has adopted new bylaws without a vote of the owners, the board would be liable for unlawful acts and the attorneys may be subject to discipline for counseling illegal actions by the board.
By using the term "IRS Resolution," the writers of your revised bylaws demonstrate a lack of substantive knowledge. That wording alone gives the false impression that an "IRS Resolution" exists in the law. It does not.
In a response to a letter requesting clarification of IRS Revenue Ruling 70-604, 1970-2 C.B. 9, the associate chief counsel of the Internal Revenue Service Income Tax and Accounting Division published the following Private Letter Ruling pursuant to IRS Private Letter Ruling 61.00-00 (Sept. 28, 2001), which reads in part: "The … owners hold a meeting each year to decide whether to return any excess assessments to themselves or to have the excess applied against the following year's assessments. The ruling concludes that the corporation is not taxable on the excess assessments because the excess has been returned, in effect, to the … owners."
Revenue Ruling 70-604 and the Private Letter Ruling interpreting it allow a board, after receiving approval by its titleholders, to defer income to the next year with hope that its taxable income will be lower and thus pay less in taxes. The alternative to deferring income is simply to return excess income to the titleholders. The IRS and most tax professionals believe that in order to be effective, the decision must be made by a vote of the titleholders, not merely the board. If the conditions during the next tax year are unfavorable, the association will still end up having to pay taxes on income for both years. This mistake by the association's attorneys could be costly.
A potentially serious flaw with your board's and association attorneys' actions is that the new bylaws appear to have taken away the approval process for amending bylaws from its titleholders in violation of your governing documents. The board cannot unilaterally take away owners' rights through a governing document amendment unless the owners vote to allow that to happen.
Each association's governing documents differ from the others. Many associations don't need new bylaws. Rewriting association bylaws into a tome can be a method for association attorneys to increase fees charged, typically resulting in higher owner assessments to fund these projects. Sometimes, reproduced forms are used into which the association's name is inserted. Simple, hand-crafted, straightforward bylaws are easier to approve and allow boards the discretion to reach decisions that can be understood by all.
Bylaws include requirements for amending that same document. Often, the method of change requires an approval vote by the homeowners. Without the required vote, any change is invalid. Attorneys who advise boards that the vote is unnecessary would be subject to discipline for counseling illegal acts. A complaint form can be found on the State Bar website at http://www.calbar.ca.gov.
Review the bylaws and the covenants, conditions and restrictions (CC&Rs) to see if either contain provisions on the vote required to amend either of those documents. If any conflict exists between the two, the CC&Rs prevail.
Glassman is an attorney specializing in corporate and business law. Vanitzian is an arbitrator and a mediator in the Los Angeles city attorney's Dispute Resolution Program. Send questions to P.O. Box 10490, Marina del Rey, CA 90295 or email firstname.lastname@example.org.