BOD Meeting 26 May 2011, Part 2

The NEW MEMBERS Board Meeting, 26 May 2011, Part 2

Below we review the attempted coup of the Billiards Club domain, the IRS response and the next step, and the Villa owners' cash windfall.

The Board’s Dilemma over Billiards

Did the board scratch (commit a foul) and relinquish control of the ball? The board first faces the billiards table purchase dilemma with what was assumed were the correct purchase decisions but then abruptly retreats when our pocket pool sharks become displeased. What went wrong?

The Property & Grounds Committee had done their due diligence, or so they thought, and made recommendations to the board. Purchase three 7’ tables and one carom billiards table (no pockets). One gathered from the discussions that ensued at the board meeting that the wishes of the Billiards Club were either not sought or were not given much weight. The reason for dismissing the wishes of the Billiards Club was simple; the proposed purchase would cause the Billiards Club to lose 33% of their regular play 9’ pocket billiards tables. When you’re attempting to meet an overlooked need, one does not expect to get the permission of the Club whose cherished table space you are proposing to reduce. The Billiards Club did not welcome what amounted to a behind-the-scenes coup.

Our non-pool homeowners might think that pool is just like the play depicted in the 1961 high drama pool movie The Hustler starring Paul Newman and Jackie Gleason. They would be wrong. According to the board, there are actually four factions in Sun City who are vying for the board’s attention in this ongoing dispute about who should decide who gets what.

Faction one is the Billiards Club, which dominates play in the Independence Center’s Billiards Room. As I understand it, the Billiards Club would like to be able to decide what type of pool equipment is available for play in the Billiards Room. They are happy with the current set up and are not seeking any changes in the mix of available pool tables. They currently have nine 9’ Brunswick billiards tables and one snooker table.

Then there are the more casual players who are not associated with the Billiards Club and who frequent the four 9' pool tables at the Anthem Center. They too are happy with the current arrangement in the Anthem Center and would like some voice in the decision-making process about what is under consideration. They are opposed to the Billiards Club making decisions that would affect their play.

Then there is what some refer to as the league or bar room players. Casual bar room or league players typically participate in events sponsored by the bar where pool is played. The unique feature of such play is that pool is played on smaller tables, 7’ x 3½’. For comparison, home pool tables are typically 8’ and professional tables are 9’.

Finally, there are those who are looking for additional variety in the type of play that is offered, a new challenge with different balls and different rules. That would account for the request to purchase a non-pocket carom table. Currently, all Sun City tables are pocket tables

Sun City Anthem players who participate in bar pool play would like to be able to play here on 7’ tables. As billiards play is currently configured in Sun City, there is no opportunity for such players to play on tables of the type they are accustomed to. Essentially, those players are locked out from being able to play here on the type of tables they enjoy playing billiards on.

Now, with the Billiards Club exercising their considerable weight, the attempted coup has suffered a setback. The Billiards Club, fighting back, instead of relinquishing three tables, will yield up only one space for a new 7’ table as a result of a new agreed upon arrangement. And there will be no 10’ carom table. Another 7’ table will replace one 9’ table at the Anthem Center. Along with the proposed purchase of some new 9' tables for the Anthem Center, that is the new table arrangement to go before the P&G Committee this week and presumably the board for June meeting.

The IRS Response was Received

Continuing to keep a tight lid on their dealings with the IRS, the board announced that the IRS had responded to their arguments of why the association owed nothing to the IRS on their audit of the 2007 tax return.

While reluctant to reveal the complete contents of the IRS response, the board said that the IRS had agreed to one association request, namely to advance their arguments to the administrative appeal level. That means their appeal will be reviewed, at least initially, by the IRS regional office, presumably San Francisco, CA. Given the likely infrequency of such audits by the IRS and the paltry litigation record, one might assume that the IRS would not have made this effort had their Washington D.C. national office not been keenly involved in the decision making process. With that in mind, any review by their regional office will likely be influenced by advice from IRS's national official staff.

There is little doubt that the board pursued the argument that since they can lawfully act on behalf of the members in making certain IRS-related decisions under 70-604, there is nothing to bar the association from making certain other decisions on behalf of the members, such as to carry forward 70-604 funds without being required to remit those excess income funds the following year. Said differently, the association might have argued that since they were acting in good faith in their application of 70-604, no penalty is owed, certainly not $224,000.

Ruling 70-604 allows an HOA to exclude from taxable income certain funds as long as certain conditions are met. The fact that one United States District Court judge ruled in favor of the IRS in the Mission Heights HOA case may or may not prove controlling in deciding our case. However, that case can be distinguished from our case since, unlike the Mission Heights case, the IRS determined that Sun City Anthem had made a timely election under 70-604. That difference may prove to be significant. However, as in the Mission Heights case, Sun City Anthem neither refunded the excess assessment amounts to its members nor applied such amounts to the members’ subsequent year’s assessments.

Further, the board may have an equity or similar argument to mitigate the amount owed based on the fact that some funds, amounting up to a half year’s assessments, were returned to the homeowners by way of assessment holidays in the following years.

How much more of a reduction in monies owed will be subject to negotiations, along with an assessment by IRS of whether they might prevail or lose in the event the matter is litigated, available resources, and their desire to close the case with a settlement agreement and move on. Ideally, the IRS should be more interested in achieving future compliance over the recovery of unpaid taxes and assessing penalties. However, in some instances their ability to assure future compliance is often achieve by adhereing to strict enforcement policies.

Presumably the IRS is unconcerned about limitations that would hinder the ability of Sun City Anthem to litigate inasmuch as both our CC&Rs and Nevada statutes greatly hinder the ability of the association to initiate any legal action by requiring prior approval of the members.

The Neighborhood Villa Owners Windfall

An innocuous Finance Committee agenda item, 12E, is expected to a provide the Neighborhood Villa owners with a windfall in excess working capital funds. The amended agenda item as announced by Dan Forgeron detailed the amounts due each Villa Neighborhood, for a grand total of $176,500. The method of disbursement has yet to be determined, whether by check to the homeowners, an assessment holiday, or by way of a capital expenditure.

With respect to whether the returned funds can be used to fund a capital expenditure, the board was put on notice that they lacked the authority under IRS regulations to disburse such funds in such a manner if the board wants to exclude the return of such income from taxable income under IRS Revenue Rulings 75-370 and 75-371. It would seem that even the current board is adverse to following applicable IRS rulings.

As to who will make that disbursement decision, we were told that the Villa Neighborhood Advisory Committee will make that determination. Since there is no longer a valid pine tree/sewer connection problem to address by extracting the pine trees and xeriscape planting in lieu of grass, a capital expenditure for that purpose would be unnecessary.

Ron Johnson, 5 June 2011