On the Tax Audit Results
Allegations of Forgery and Filing a False Report. What's the Connection?
Some Sun City Anthem homeowners would like to believe that there is no connection among the tax audit results, allegations of forgery by Rosalyn Berman and Roger Cooper, and the alleged filing of a false report by Bob Frank and Tim Stebbins. These homeowners are badly mistaken, poorly informed or have difficulty accepting the truth of the matter.
The 2007 tax return audit results
In no uncertain terms, the tax audit results of the 2007 tax return clearly faults the board’s decision to disregard an established IRS ruling on when they are required to distribute excess income to the homeowner. If the association has such excess income, that excess income must be returned to the homeowner, not carried forward year after year at the discretion of the board. Otherwise, if not returned in the manner specified by IRS that excess income becomes taxable as we all learned from the results of the audit.
In disregarding the simple terms of IRS Revenue Ruling 70-604, the board literally gambled with our money and lost the ability to control millions in the process, plus over $1 million in back taxes and a whopping 20% penalty on top of the amount owed. While the board was likely aware of that 14 year old Mission Heights Homeowners Association court case cited by the IRS in their audit report, that did not deter successive boards from ignoring that case and that 40-year old IRS revenue ruling.
You can read the IRS audit report, including the Letter to the Association, sections dealing with the ISSUE, FACTS, LAW, ARGUMENT and CONCLUSION, along with related forms, exhibits, and the Income Tax Discrepancy Adjustments Form 4549, by Clicking here. Also, note that there are two separate tax issues addressed by the IRS: one is the application of 70-604 and the other, located at the end of the .PDF file, is the justification for the assessment of penalties. The IRS auditor also noted that the association had failed to choose a method of accounting that clearly reflects income. Given the large size of this file, it will take a moment to appear in your browser. To read only the IRS ARGUMENT in support of their 70-604 tax adjustment determinations, Click here.
The Mission Heights case found that a homeowners association can avoid paying taxes on their excess member assessment income if pursuant to 70-604 it “refund[s] excess assessments to its members or apply such excess amounts to the members’ subsequent years’ assessments, thereby removing such amount from income.” The Sun City Anthem board did neither.
That the Sun City Anthem did neither is not surprising given the past practice of successive boards to promise compliance with the terms of 70-604 and then ignore applying those same provisions that require excess funds to be returned or credited to the homeowners next year’s assessments. What is surprising is the appalling lack of common sense exhibited by scores of directors on a matter of such financial importance. Did no one ever ask what evidence existed to support what turned out to be an illegal practice? Were they misinformed or was something else going on that has yet to be disclosed? Did successive presidents and treasurers really believe that 70-604 did not mean what it plainly said? Or, were such board officers deluded into believing that if they had the power to make an election on behalf of the members under 70-604, they also had the power to decide to roll over excess income year after year contrary to 70-604 and without having any legal or regulatory basis to support such a belief?
I believe that members should be better informed in such matters, if only to be assured that such important financial decisions are properly supported. Had our decision makers been more forthcoming about their tax practices, it’s possible that this costly mess could have been avoided. Then again, it was just as likely that our decision makers had their reasons to keep us in the dark about such matters.
There are those on the board, including those currently running for the board, who are quite content in not seeking answers to important matters and in deferring to others who ostensibly know what they are doing without making any effort to understand why things are being done one way or the other and could care less. How often have I heard from a board member, “I trust they know what they are doing.” Well, it now seems possible that such trust may have been misplaced at least insofar as complying with certain tax provisions. Perhaps we will be told the reasons why the board believed their tax decisions were correct when according the IRS they were not.
Are we now paying a heavy price for that lack of interest, involvement and knowledge by those other board members who are ever so willing to sit on the sidelines?
The board decided to appeal the IRS results
The board has decided to appeal the results of the audit. That's fine, as long as the prospects for a successful appeal are reasonable. However, it would be helpful, even transparent, if members were better informed about the direction and scope of that appeal and why the prospects for success are so good.
According to David Berman, Board President Jack Troia, was quoted at the February board meeting as saying that “we must prove the validity of the [70-604] deduction." In effect, it's all or nothing. By "all" I gather the association is looking to overthrow the IRS interpretation of 70-604 as applied to Sun City Anthem. That goal sets an incredibly high bar to achieve and a potentially lengthy one at that. If the association is not blowing smoke, let's hope there is some case law to support the association's position. Just how badly does the IRS want to win this case should it go to trial? Will the IRS settle to avoid litigation? Of course, the IRS will be looking at potential implications for the entire jurisdiction of the Ninth Circuit Court of Appeals. Do not hold your breath and expect a quick resolution.
At this stage, the impression given is that members are not entitled to know much of anything let alone where the board is headed in their appeal process. On the contrary, I believe this should be an open process and not one that is enmeshed in secrecy. The only people who might benefit by such secrecy are those same folks who were trusted in the past to make correct tax decisions, decisions that turned out to be wrong and very costly. Perhaps the board can share with us why they believe it’s necessary to keep members in the dark. If the board, the tax experts and the IRS all know “x,” i.e., the TAXPAYER’S ARGUMENTS to counter the proposed IRS adjustments, no legitimate purpose I am aware of is served in not sharing those arguments with the membership. Correct?
With numerous professionals working on the issue, it would not be unusual to spend upwards of $100,000 in pursuing an appeal; some believe a lot more than that could be required depending on the scope and length of the appeal process. Since the cost of an appeal is not on a contingency basis, the association is expected to pay dearly for each hour that is spent in the appeal process. If an expert charges as much as $500/hr., the cost of two experts plus the cost of the association’s accountant Hilburn & Lein and legal counsel can add up quickly.
Time was not on the association’s side
So, what factors did successive boards consider relevant in their decision to treat 70-604 with such disdain? Clearly, the board must have believed their chances of being audited by the IRS were quite small, if not nil. The board may have planned that the monies owed to the homeowners would be doled out over the next few years without being prodded or audited; if so, the board likely thought that the potential tax liability would merely disappear over time. The board may have assumed they had time to implement 70-604 at a pace they deemed desirable. But as the audit demonstrated time was not on the board’s side.
The cost of noncompliance.
By any measure, the association’s financial loss is potentially substantial: 1) $3.845 million in excess income that should be returned to the homeowners as the board had promised in their 2008 Resolution; however, when that transfer might occur is yet to be determined, regardless of the outcome of the association's appeal; 2) $1.120 million in taxes owed to the IRS for failing to return $3.845 million to the homeowners; that failure required the association to treat such excess income as taxable income; with allowances, the amount of taxable income was reduced to $3.428 million; and 3) a 20% penalty amounting to $224,137 because of the magnitude of the additional tax owed in relation to the taxes originally paid, which was zero. That 20% penalty applies if the audit found there was a “substantial understatement” of the taxes owed, as that term is defined by the IRS.
More precisely, the total amount owed is: $1,344,821.
Yes, Rosalyn Berman and Roger Cooper committed forgery.
Yes, Board President Rosalyn Berman and Roger Cooper committed forgery as apparently alleged by Bob Frank and Tim Stebbins. In light of the recent IRS audit results, that is exactly what happened, although admittedly we are looking at the laws of two disparate jurisdictions, federal tax law and state criminal law. Some will no doubt argue that one has nothing to do with the other. I disagree.
I believe the forgery allegation goes to the issue of knowledge and intent. Henderson City Police Chief Jutta Chambers in finding that Berman/Cooper had not committed a crime put the allegation this way in her letter to the board: “it was specifically alleged that Mr. Cooper and Ms. Berman knowingly signed a false Board of Directors Resolution in 2008, thus committing forgery.” Relying on Chambers’ statement of the allegations, the question needing an answer is whether Berman/Cooper knowingly signed a false board Resolution in 2008? Of course they did.
In light of the IRS audit results, the contents of that board resolution become especially relevant. Why? The reason is that both documents deal with the same matter, i.e., the application of IRS Revenue Ruling 70-604 to Sun City Anthem. If the IRS concluded the association had failed to comply with the provisions of 70-604 that resulted in that $1.345 tax liability and the 2008 Resolution signed by Berman/Cooper said that the association would be complying with the provisions of 70-604, someone may have a serious problem. If the IRS was wrong in their tax liability determination, then Berman/Cooper are off the hook—no forgery was committed. On the other hand, if the IRS was correct in their determinations on the application of 70-604, Berman/Cooper could be found guilty of signing a false document, i.e., forgery. What does that signed board Resolution say about 70-604?
That IRS finding happened to coincide with similar language contained in the board’s Resolution of 28 August 2008, interestingly titled “EXCESS INCOME APPLIED TO FOLLOWING YEAR’S ASSESSMENTS.” The board adopted the following resolution, signed by Rosalyn Berman and Roger Cooper:
RESOLVED, that the excess of membership income over membership expenses for the year ended December 31, 2007, shall be applied against the subsequent tax year member assessments as provided by IRS Revenue Ruling 70-604.
In signing that Resolution on applying excess income to the following year’s assessments, Berman/Cooper made a claim about an act that was to occur in the future, the subsequent tax year. Every member understands, and the IRS determined, this did not take place. Since that act did not take place, the IRS told the association they owed the IRS $1.345 million. That would suggest to some people that the document that Berman/Cooper signed was knowingly false. That conclusion was reinforced by the fact that such false Resolutions were routinely signed in the years before and in the years following 2008. Knowing that, however, does not excuse the signatories from signing a false document. Under these circumstances, it would be difficult, nay impossible, for the signatories to establish that they had signed a true document as determined by City’s Henderson Police Department. These pertinent facts were well understood in 2008.
So, you may wonder, how was it that the City’s investigator Sergeant Jeffrey Farley happened to come to the opposite conclusion. Working without the benefit of any knowledge of corporate tax issues that were addressed in the board’s Resolution, Sergeant Farley was understandably handicapped. While Sgt. Farley told me that it had been his past practice to call on professional services when his expertise was lacking. He also told me that he planned to do so in this case when he meets with the association. However, Sgt. Farley did not bring an expert to his meeting. How could that be? Did he not want the benefit of an independent third party knowledgeable on corporate tax matters? The only inescapable reason I was able to come up with was that the decision to find Berman/Cooper not guilty of signing a false document was that that decision was reached prior to Farley’s meeting with the association’s representatives. For that to have occurred in advance of his meeting with the association would suggest to this observer that the fix was already in. There would be no finding of guilt for Berman/Cooper. This matter was explored by me in greater detail in an earlier article, here.
While the audit of the association’s 2007 tax return did not address the board’s resolution, that audit did address the board’s application of IRS Revenue Ruling 70-604. Likewise, the board’s signed 2008 Resolution on 70-604 addressed the board’s intent to comply with the very same provisions of 70-604 that the IRS concluded were not adhered to, namely the failure of the board to return excess income to the homeowners. Some may have thought the tax issues raised by the board’s Resolution were not fully understood in 2008. It is now evident that any lingering doubt about the consequences to what had transpired in the signing of that Resolution 2008 disappeared altogether with the disclosure of the IRS audit results.
Will the forgery allegations ever resurface in the City of Henderson? Not as long as the sun rises in the east each day. Under existing conditions, the City will never acknowledge they made a mistake. In general, police departments and prosecuting officials are loath to admitting error, even in the face of overwhelming evidence of innocence.
Who could have anticipated that the simple act of signing a false board resolution could have led to the arrest of Bob Frank and Tim Stebbins?
No, Bob Frank and Tim Stebbins did not file a false report.
No, Bob Frank and Tim Stebbins did not file a false report as alleged by the Henderson Police Department. Sadly, these two fine and highly principled individuals are the real victims here. They are victims of those who would seek to corrupt the political process to extract a measure of retribution, payback if you will, for suggesting that volunteer board officers who knowingly signed a false document should be made legally accountable for their actions.
Bob and Tim are also victims of a city government that is unacceptably responsive to political influence that in this instance acted to thwart the proper administration of justice.
I happen to believe that the presumably directed exoneration of Berman/Cooper was politically motivated and was not supported by the available evidence. If my judgment is accurate, the City’s subsequent decision to charge Bob and Tim with filing a false report was simply unconscionable, that is, morally corrupt. Once there was a decision to exonerate Berman/Cooper, it did not follow that Frank/Stebbins had filed a false report. But for unknown reasons, that is exactly what the City decided to do, most likely from the urging of one or more persons.
I would hope that the discovery process will allow for the disclosure of how that decision came about.
The Status of the Legal Case by the City Against Bob Frank and Tim Stebbins.
There have been some recent developments in the legal case against Bob Frank and Tim Stebbins. They include:
The IRS Revenue Ruling 70-604 is quite specific, that in pertinent part reads as follows:
Excess assessments by a condominium management corporation, over and above the amounts used for the operation of condominium property, that are returned to the stockholder-owners or applied to the following year's assessments are not taxable income to the corporation.
With that language and case law to support its application to an HOA, it is difficult to imagine circumstances that would permit an alternative understanding of what the association was required to do with excess income. It’s very unlikely that our volunteer board officers were so obtuse as to not understand what the association was required to do in order to comply with the law. The only alternative explanation I can think of for the board’s erroneous tax behavior is that a conscious decision was made to literally ignore a critical portion of the law that clearly applied to our association. It would be interesting to learn on whose advice successive boards relied upon in concluding that 70-604 could be successfully ignored.
As far as I am aware, at no time did the board, or any other board for that matter, ever request their legal counsel to obtain an opinion from the IRS on the application of 70-604. Why ask if you are not prepared to comply with what you believe will be the IRS response? As a result of the board’s failure to do what the board had resolved to do in their 2008 Resolution, the association get stuck with a proposed $1.345 million tax bill. Had the board complied with the terms of their own Resolution, there would be no taxes owed and no penalties.
So, ask yourself, did Berman/Cooper knowingly sign a false Resolution? If they did sign a false Resolution, there would be no basis for charging Frank/Stebbins with filing a false report that claimed, according to Police Chief Jutta Chambers, Berman/Cooper had “knowingly signed a false Board of Directors Resolution in 2008.”
Ron Johnson, 6 March 2011