A False Report?

“Ron Johnson Just Doesn’t Get It,” writes David Berman to the readers of his blog. David wants everyone to know that Bob Frank & Tim Stebbins were charged and arrested by the Henderson Police Department for filing a FALSE report, but not because they submitted a report of suspicious activity by Rosalyn Berman and Roger Cooper in signing a document they likely knew to be false. While Mr. Berman is technically correct, no one really knows if an alleged filing of a false report was the actual reason Frank and Stebbins were arrested. Conceivably, other factors may have played a more decisive role in the City’s decision to arrest Bob and Tim. We just don’t know the complete story and perhaps never will.

Personally, I doubt their arrest on the 10th of February goes to the accuracy of the report that Bob and Tim had filed. Instead, it’s just as likely that the City wanted to send a message. Until more information becomes available, we are left to speculate based on what little information is known.

As David Berman well understands, based on a legal career that was abruptly cut short by a court’s finding that he had, quite ironically, committed forgery in his capacity as a practicing attorney, the fact that the City filed such charges does not necessarily mean that the Frank-Stebbins report that was filed was false. As I relate below, a good case can be made that the police decided it was politically expedient to ignore the evidence against Berman and Cooper that is presumably in their possession.

While there may be any number of reasons the City took the action they did, it’s entirely possible that the City wanted to make examples of Frank and Stebbins. Using the charge of having filed a false report, the City may have wished to show Frank and Stebbins and others what the initial consequences would have been for Berman and Cooper had the City’s investigation determined that they were guilty of the crime of forgery.

Clearly, most would not agree on the particular means that was chosen by Bob and Tim to bring this particular federal tax matter to light. I believe that as a result of having done so, they were forced to suffer the humiliating consequences of pursuing this issue through our local police department. That included being handcuffed, searched, and locked for hours in the jail along with serious criminal elements. David suggests that the City’s action was because they had filed a false report. But did they?

Admittedly, Bob and Tim did file a report. And we are led to believe that the City would not charge someone with a crime of filing a false report unless there was evidence that a crime was committed. Of course, we do not know the scope of the City’s evidence, or for that matter, whether such evidence even exists. In fact, we do not know if the City’s evidence against Frank and Stebbins rests solely on their investigation that “determined that there is no evidence of criminal conduct by Mr. Cooper, Ms. Berman or any other Sun City Anthem Board of Directors member.” Does it then follow, ipso facto, that if the City was unable to find any evidence of criminal conduct by Berman and Cooper, a submitted report that alleged such possible criminal conduct must, therefore, be a false report? However, that would be an unusual, even unlikely application of the law.

In making their claim of filing a false report, the City must be talking about the totality of the report being false. In other words, we are not talking about a misstatement here or there, or bad reporting. But what would make a report false? Nevada law states the following:

While informative to a point, it tells us nothing about what a “false” report actually means or the criteria used in determining whether a report is false. How does one go about determining whether a report is false? More importantly, how did the City come to that conclusion?

From what we can observe, both Bob and Tim are highly intelligent, productive and dedicated individuals, whether we agree with the issues and concerns they choose to pursue. If that is true, how was it that two such individuals could manage to screw up so badly by filing a false report, as alleged by the City? In order to answer that question, we need to go back and examine what the central issues were that likely formed the basis for their report of suspected criminal activity. According to Police Chief Jutta Chambers’ letter to the board, we learned the following:

Admittedly, there is an inherent problem in relying on what Chief Chambers wrote since we do not have access to the actual report, which may not say precisely what Chief Chambers claims. For our purpose here, though, we’ll assume that Chief Chambers was accurate in her description of what had been alleged. While it’s not that clear, Chief Chambers appears to be telling us is that Berman and Cooper did not commit forgery because they did not knowingly sign a false board resolution in 2008. It’s unclear if the opposite would be true; had they knowingly signed a false board resolution, would that mean they had committed forgery?

Was Chief Chambers suggesting that Berman and Cooper did not know what they were signing when they executed that tax document? Were they merely naïve and uninformed volunteers holding down positions as directors and officers of a multimillion dollar corporation, presumably without proper counsel to advise them, or worse, ineffective counsel? And besides, perhaps Berman and Cooper were merely following what others in similar positions had done before them. Looked at differently, they really had no fiduciary duty to know or understand what they were signing when in 2008 they executed that board resolution on excess income, as unlikely as that seems.

The term “forgery” is variously defined but typically contains the following elements. Also see NRS 205.085 and following sections by Clicking Here.

For our purpose here, there appears to be five elements to establish the crime of forgery in the context of creating a document of the type involved here.

Let’s look at each of the elements in turn. If there was evidence to establish that each of these elements was present, it's at least possible that a charge of forgery had some basis under law, at least in this layperson’s opinion and whether or not we view that prospect especially distasteful. The fact that an investigation might find a basis to support the charge of forgery does not mean that the charge would be prosecuted by the office of the Clark County District Attorney, which is an entirely different issue. Nor does it mean that you or I would ever consider advancing such a charge in this manner.

Since we can view the document by Clicking here, there is no doubt that it was created, presumably signed on the 28th of August 2008. It is of some importance to understand that the document is supposed to be confined to the application of IRS tax rulings, including Revenue Ruling 70-604, to the proper handling of excess income. In pertinent parts, while focusing on the below section titled RESOLVED, here is what the document (Board Resolution) states:

That is not in dispute. We will assume that the signatures are those of Rosalyn Berman and Roger Cooper, each an officer of the corporation. There is a presumption that the signers read the document they signed; it was a board approved resolution. Since the document's paragraphs (see above) address the tax matter in language that is easily understood, there is no reason to believe that the signers did not have knowledge of what they were signing.

Commonly, a document is false if it is inaccurate, misleading or untrue. Here we have a document that makes an unequivocal statement following the word RESOLVED that excess income shall be applied against the subsequent tax year assessments as provided by IRS Revenue Ruling 70-604. On its face, the document was false, misleading a homeowner into believing one thing while intending just the opposite. The document says "shall," in the phrase "shall be applied;" it does not say that the board will consider the matter. In a legal sense, the term "shall" can mean mandatory, is required to, or has a duty to, or it may mean only direction. However, the language of RR 70-604 provides no alternatives or options for the board to consider. Keeping the excess income was not an option open to the board. Past experience has told us that excess income was NOT applied against the next year's homeowner assessments. One possible conclusion was that the Resolution was merely a sham, something for the board to show the IRS just in case they happened to ask.

It’s not unreasonable to conclude that the document was read and understood. As fiduciaries, board officers have a duty of care to know and understand what they were doing. Acting under the business judgment rule, it is assumed that an officer will carry out their duties in good faith, after proper investigation, and for reasons that made sense. That did not happen in the case of these excess income tax resolutions. The board's position was even more troublesome in view of competent tax advice that was solicited by the board and received in June 2008 from Gary Porter, as discussed in the next section. Gary Porter is considered an expert in homeowners association taxation.[3]

I believe it is fair to conclude that the signers of that document had no intention to apply excess income against subsequent year assessments at the time the document was signed, if only based on past practice of prior board members signing similar resolutions.

On the other hand, Berman and Cooper could make an after-the-fact argument along the following lines. Since the decision not to return excess income was made at a later date in the year, there is no evidence to demonstrate that the document was false at the time it was signed. However, a further investigation into the actions of former board officers in signing similar resolutions that disregarded the application of IRS ruling 70-604 might establish the existence of a long-established pattern of similar acts to disregard the application of this revenue ruling.

That appears to be the most reasonable conclusion based on what prior board officers have done in executing similar board resolutions on excess income. Is there any reason to believe that this resolution was any different from those that were executed in the past? Yes and no.

While the language was exactly the same as that adopted by the board in their amended resolution of 2007, the 2008 board had the unique benefit of having additional, even expert tax advice that was not available to prior boards. That information consisted of a Tax Research Memorandum from the homeowners association tax expert Gary Porter to Sun City Anthem dated 19 June 2008. That Tax Research Memorandum addressed the issue of the Association’s annual election for the disposition of excess income under RR 70-604 and whether the board had the authority to make the annual election required by 70-604 in place of the members making that election as specified by 70-604. Mr. Porter concludes that the association was acting within the intent of 70-604 by having the board make that annual election.

According to Mr. Porter’s informal discussions with IRS staff, the IRS was forced to “acknowledge that Revenue Ruling 70-604 would not be valid if the members did not have the authority to make a decision regarding disposition of funds.” That interesting conclusion was based I presume on the alleged fact that association members do not have the authority to make a decision regarding disposition of funds under Nevada state law. However, it's unclear whether Gary Porter's conclusions were based on his own research of Nevada statutes, considered unlikely, or on the association's position of member rights under Nevada law, considered more likely, as presumably conveyed to Mr. Porter in their written request for his opinion. In that case, the issue of member rights to make a decision regarding the disposition of funds remains an open and unresolved question.

Of particular note in Porter’s Tax Research Memorandum to the board was his reference to an IRS Field Service Advice in 1992 that concluded the following:

It would seem that in June of 2008 the board was put on notice by an HOA tax expert that the IRS found it improper for an association to fail to refund excess income to members or to apply that excess income to next year's membership expense. In other words, the association's practice, just like Sun City Anthem's practice, violated IRS rules regarding the disposition of excess income. With that piece of pertinent information on improperly applying 70-604 freshly in their minds in June of 2008, Berman and Cooper should have had the benefit of that important advice when they signed that excess income resolution 60 days later in August of 2008. As Porter wrote, the FSA established Revenue Ruling 70-604 as “. . . an exercise of administrative authority to provide a convenient tool for . . . associations to deal with an inadvertent collection of membership payment . . .”

If the board did not wish to make use of that "convenient tool" to deal with excess income, they always had the option of paying taxes on that income. The board did neither and placed those funds in the bank or used the money for what the IRS might deem to be for non-exempt purposes.

How convenient was it for Berman and Cooper to merely ignore Porter's tax advice by knowingly signing a false document?

The “intent to defraud” refers to the intent to deceive ordinarily for the purpose of causing some financial loss to another. That Berman and Cooper had the “intent to defraud” seems pretty clear as long as we have a creditable reason to believe they knowingly signed a false document. The language of RR 70-604 clearly intended a transfer of excess income to the homeowner as a credit towards assessments if the board wanted to avoid paying taxes on that income. If Berman and Cooper understood that the document they were signing was false, that would mean they understood that excess income intended for the homeowner by IRS ruling 70-604 would not be credited towards next year's homeowner’s assessments, thereby intending to deprive such homeowner of property (a credit against assessments) they were entitled to under that rulling.

The signed board document contains two resolutions, one we have already discussed dealing with RR 70-604, and a second one that contains some notable language. The language is notable for what it states and does not state. On first blush, it would be easy for one to get the wrong impression that the second Resolution, in supposedly augmenting the first resolution, has the potential to modify if not nullify the application of the first resolution. That would be convenient if that were true.

As it turns out, the second Resolution, possibly drafted as an alternative to the application of RR 70-604, has nothing to do with the application of RR 70-604. Significantly, the second resolution does not supplant or nullify the application of IRS RR 70-604. This second resolution suggests that the board may set aside certain funds for future major repairs as provided by three different revenue rulings. As possibly viewed by the signers of the board’s resolution, this second resolution may have been regarded as a get-out-of RR 70-604 free card. It’s no such thing. Here is what that second resolution states:

So, what is this resolution all about? The resolution and cited revenue rulings pertain ONLY to the issue of “special assessments,” something Sun City Anthem has not done to fund capital projects. Moreover, this resolution does not apply to regular assessments and it does not apply to excess income accumulated from regular annual assessments. It's sole purpose is to give examples of what income is or is not taxable income. For example, RR 75-371 provides that a member approved special assessment for a specific capital project is considered a non-taxable contribution to capital, but only if the funds accumulated for that specific capital project were deposited in a separate bank account and not commingled with the general assessment funds. The other revenue rulings provide additional examples of special assessment items that qualify as capital contributions and items that are not. Since Sun City Anthem has no such “special assessments” budgeted items, the application of the second resolution appears to be moot. The second resolution has no relevancy insofar as Sun City Anthem is concerned.

According to HOA tax expert Gary Porter, if the special assessment money is not first earmarked for a specific capital purpose, it cannot qualify as a tax exempt capital contribution. See his "The Association Tax Audit," bottom left, pg. 2, and Mr. Porter taking the part of an "IRS" auditor.

Chief Jutta Chambers tells us in her letter to the board that their investigation “determined that there is no evidence of criminal conduct.” Her statement appears to be pretty conclusive and final. What Chief Chambers does not tell us is how she came to that conclusion. In view of the above discussion of the five elements of what constitutes a forgery, it seems quite possible that someone could reasonably conclude that there was evidence of forgery, at least based on my lay understanding of the law.

Is it possible that the department's sergeant conducting the investigation did not wish to find evidence of criminal conduct? I can believe that based on my having talked with Sergeant Jeffrey Farley, who was in charge of the Berman-Cooper investigation. In his comments to me, Sergeant Farley appeared to be especially reticent to find any fault based on reasons that had nothing to do with the application of the law, suggesting that this was a tax matter, there might be adverse tax consequences, it was a civil matter, that no personal gain was involved, or that they were volunteer board members, all seemingly unrelated to the technical issues supposedly under investigation. At least in the sergeant's mind, there were many reasons to find no evidence of a violation.

Or is it possible that Sergeant Farley did not understand the concept of forgery as conveyed to him in this unique situation. I can understand that based on my discussion with him. He fully acknowledged to me that he lacked the kind of background that would enable him to comprehend the issues involved. He said his understanding of forgery was limited in scope to issues like check forgery where the party signing the check is not the financially responsible party.

I was dismayed to subsequently learn that when Sergeant Farley and his supervisor met with Association representatives to discuss this matter they apparently did not include an accounting expert. Sergeant Farley had told me that it was his plan to bring an accounting expert along with him so that he would not be overwhelmed or buffaloed into believing something that was not true or relevant on accounting issues. Did his failure to include an accounting expert mean that the decision that "there is no evidence of criminal conduct" had already been made by someone long before he met with Association representatives? Was Sergeant Farley merely going through the motions in meeting with representatives of the association? No matter what Sergeant Farley thought in the end, I believe it's fair to say that the department's "no evidence" decision was made at a higher level in the City's government and without regard to what the evidence showed.

Standing alone, the Chief’s statement is only a conclusion. While seemingly carrying great weight, there is nothing, evidence if you will, to support her “no evidence” determination or how she came to that conclusion. Perhaps the Chief’s omission will be clarified in the future; then again, perhaps not.

If on balance there appears to be some evidence of forgery, as I have set out above, and, on the other hand, Chief Chambers tells us there is no evidence of forgery, we appear to have a problem; we have two diametrically opposed conclusions and both cannot be true. If some evidence of forgery exists, however weak that evidence might be, it is inconceivable the City could then bring a reasonably-based charge against Bob and Tim for filing a false report. Clearly, there is a need to clarify this matter further and find where the truth lies.

Some may ask whether the boards' actions in ignoring the application of 70-604 caused the homeowner to suffer a loss. Yes and no. Ostensibly, the excess income that was intended as a future credit against homeowner assessments was deposited in the bank by the association for the board’s use at a later time, possibly to fund among other things association improvements. However, for the most part, those monies just kept accumulating in the bank year after year. Arguably, it was a lot easier on the board to retain excess income that should have been returned to the homeowner than it would have been for the board to periodically request additional funds via a special assessment for this or that repair or improvement. Using excess income in the manner the board did allowed the board to appear as if they were meeting their fiduciary duty while avoiding any possible criticism that they were poor or inept managers. Perhaps the board’s view was that what the homeowners did not know about the implications of excess income retention would not hurt them.

Needless to say, without excess income available to the board, a more restricted pocket book would have had the potential of forcing the board to consider the unwelcome prospect of making periodic special assessments over this extended period. Such recurring special assessments could only have placed in jeopardy a board member’s chance for reelection by regularly raising member assessments and concerns over this or that proposed capital improvement. Is that why the board made the decisions they did to retain excess income year after year rather than returning that income to the homeowners?

[1] According to People v. McAffey, 182 Cal. App.2d 486, 6 Cal. Rptr. 333,337. Or, more plainly, “Forgery is the process of making documents with the intent to deceive,” Also, forgery is "The false making of an instrument, which purports on the face of it to be good and valid for purposes for which it was created, with design to defraud any person or persons," per State v. Goranson, 67 Wash.2d 456, 408 P.2d 7,9.

[2] The term defraud or the intent to defraud can mean the following: “To make a misrepresentation of an existing material fact, knowing it to be false or making it recklessly without regard to whether it is true or false, intending for someone to rely on the misrepresentation and under circumstances in which such person does rely on it to his or her damage. To practice Fraud; to cheat or trick. To deprive a person of property or any interest, estate, or right by fraud, deceit, or artifice.” “Intent to defraud means an intention to deceive another person, and to induce such other person, in reliance upon such deception, to assume, create, transfer, alter, or terminate a right, obligation, or power with reference to property.” http://legal-dictionary.thefreedictionary.com/defraud

[3] Gary Porter, CPA is licensed by the California Board of Accountancy and the Nevada Board of Accountancy. His CPA practice is limited to Common Interest Realty Associations, including homeowners associations, condominium associations, timeshare associations, fractional ownership associations, and condo hotel associations. Mr. Porter is the co-author of the PPC (Practitioners Publishing Company) Guide to Homeowners Associations and Other Common Interest Realty Associations, and Homeowners Association Tax Library. He is also the author of more than 200 published articles on financial matters related to homeowners associations. He has been working with homeowners associations since 1976.