Question: Whatever our homeowner association's management company says, the board does. Management uses its own forms and various versions of election ballots. In our recent election, they put out a ballot written in English when the majority of owners speak only Spanish. One page states in English: "Official Ballot, date, time, and location, This ballot was to be used for election of three directors to serve on the board for two-year terms, and any adjournment thereof. Cumulative voting is permitted. Fractional voting is not allowed. Ballots with more than three votes will not be counted but will be used for quorum purposes." A second page lists candidates and adds two additional blank lines with no explanation for the lines.
Management piggybacked unrelated issues at the bottom of our association's annual board elections ballot, stating: "IRS Revenue Ruling 70-604 Vote: If the Association has a surplus of funds at the fiscal year end, the membership needs to vote to apply any excess funds to the next year's budget to reduce potential tax liabilities. ( ) Yes ( ) No ( ) Abstain." Underneath that, it states in bold print larger than any other, "SEND YOUR BALLOT IN TODAY!" Is this confusing?
Answer: Confusing instructions and incorrect, or illegal, ballots disenfranchise owners and prevent them from properly managing their assets. Appropriate instructions need to clearly define a cut-off date and time that ballots will be accepted, and that language needs to be on the same page where the votes are placed. The language your board is approving by ratifying the actions of the management company is deficient and misleading. Spanish-language ballots should also be available for those who prefer them.
Merely making the statement, "Ballots with more than three votes will not be counted but will be used for quorum purposes," does not make it so. Nothing in your official ballot language states authority for that statement, and under Civil Code section 5115(b), a quorum shall be required only if so stated in the governing documents or other provisions of law. Generally, the requirement of a quorum pertains to the subject matter of the vote. If a quorum is required by the governing documents, each ballot received by the inspector of elections shall be treated as a member present at a meeting for purposes of establishing a quorum. Adding two additional blank lines with no explanation also has the effect of invalidating the ballot.
The words "Send Your Ballot in Today!" is an additional instruction and admonition that could invalidate the election because it contradicts the fact that those voting do not have to "send in their ballot," let alone "today." Typically, voters can deliver ballots in person by a specific date and time. That phrase gives voters the incorrect impression they must mail their ballot and must send it in the day they received it. Pre-prepared forms and templates can be a useful starting point but these oversights by management and the board highlight why every official document of your association must comport with the association's governing documents and the law.
The ballot's phrase about the IRS Revenue Ruling 70-604 vote is speculative and misstates the law. There is no per se dollar amount stated on what the association is asking voters to approve. This law is not about "surplus of funds"; it is about "excess assessments" paid to the association by titleholders.
In 2001, the Internal Revenue Service published a private letter ruling clarifying IRS Revenue Ruling 70-604. The Private Letter Ruling 61.00-00 read, 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 interpretation 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. The alternative to deferring income is simply to return excess income to the titleholders who paid it. The IRS and most tax professionals believe that for the decision to be effective, it must be made by a vote of titleholders, not merely the board. If 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 association advisors could be costly.
Another potentially serious flaw with your board's actions is that it cannot unilaterally piggyback a vote unrelated to the board removal and election process merely by superimposing it into the director election ballot.
In addition, anyone who votes to "abstain" may actually be casting a "yes" vote for the item at issue unless there are contrary provisions in your association's governing documents. Most courts hold that an abstention is to be construed as agreeing with the majority. So, if you want to protect your assets, vote either "yes" or "no."
Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or firstname.lastname@example.org.