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Subject: reviving "ancient" 501(c)(7) status
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Author Messages
AjP
(Colorado)

Posts:5


02/09/2018 7:39 AM  
Hello,
New to this forum. I am chairman of the finance committee for our assoc. and have been tasked with looking into the following issue. A situation has arisen in our POA with regard to old tax status in our original articles of incorporation, circa 1972. In them it is stated that the POA intends to conform to IRS 501(c)(7) rules except if rules change and/or come into conflict with other activities we want to engage in. Pretty clear to me. However IRS closed the loophole in 1975 allowing POA's to use 501(c)(7), and came out with 528 in 1976 which we then used (no choice). Then 277 came out in 1986, which we've filed under ever since. The articles of incorporation were never amended to reflect any of this, nor were the Declaration of Restrictions, and we can't find any records from the time indicating membership was either consulted or informed of the change in filing status (all were as nonprofit corp registered in Colorado). It is not clear to me if we ever needed to do any of that.

Here is the issue. Some concerned activist folks in the membership have found out about the old 501(c)(7) status and raised the above issues. The change in 501(c)(7) wording that closed the loophole for POA/HOA's effectively barred groups that create and enforce covenants on member property. So the activists are claiming that since we never changed our articles, and no one can find any record of consulting membership to change our filing status, we actually still are a 501(c)(7) and thus have been in "violation of Federal law" since 1975, and furthermore any enforcement action on covenants is null and void. Some are even arguing the POA needs to be dissolved as it has no right to exist.

These folks are very adamant about their position to the point that everyone is now lawyering up and spending money. I am not an attorney but I have looked into the issue myself extensively, at the tax code history, the applicable state and federal statutes under which we operate (CCIOA), as well as relevant case law and my conclusion is this is not a problem, if anything, we'd just need to amend our articles to eliminate any reference to filing status. But these folks have spooked our board and now we could get into spending serious legal fees, money that would be far better spent on other things.

I cannot find anything out there addressing this issue. So does anyone have any experience with old articles of incorporation coming back to life in this fashion, and if so could give guidance on remedies if any exist? Would very much appreciate it. Thanks in advance.

AJ
TimB4
(Virginia)

Posts:15245


02/09/2018 8:17 AM  
Aj,

I have no experience with this.

However, if your citation is correct the words "except if rules change " says it all.
The rules changed.


The decision if you are or are not a 507(c)7 is the IRS.
AjP
(Colorado)

Posts:5


02/09/2018 3:21 PM  
Hi Tim,
Thanks for the response. Yep I agree with what you say and have previously conveyed it to the other parties involved but they insist. So I'm afraid we will at least have to pay our lawyers to render an opinion. If the other folks decide to sue, I have reminded them that either party can recover legal fees under CCIOA, and there is a lot of case law supporting minor deficiencies or errors in filing of HOA docs are not a basis for this kind of claim. We'll have to wait and see.

AJ
JohnC46
(South Carolina)

Posts:7191


02/10/2018 7:18 AM  
AJ

Let what you believe stand and if they want to sue, let them then go after damages. Do not spend a nickel of the associations money catering to their beliefs.
AjP
(Colorado)

Posts:5


02/10/2018 8:36 AM  
Thanks for your response. I agree with your sentiment unfortunately our board and assoc. management do not. I can see their point as the other parties have now taken to writing misleading and inflammatory letters to a local newspaper calling for members to hire their own lawyers and so forth. It really is a mess. It would be good to at least have one legal opinion on the table but I doubt that will stop these people.

What I don't understand is I've spoken directly to these people, in person, tried to explain that stating an intention to qualify under an IRS nonprofit designation is not binding, especially if the IRS eliminates the language that had previously allowed you to qualify AND explicitly inserts language barring your type of association from ever doing so. But no, they insist. They also don't seem to understand that even if we expressed intent to file it means nothing unless the IRS approves designation, whatever it is. Their position is equivalent to saying that we MUST file under what we said we intended to file under even if the IRS disallowed it. And that by not filing under that disallowed designation, that would be illegal. So they are saying anything we do or don't do, we are violating federal law. I know, it is crazy, I get a headache trying to follow the logic.
CathyA3
(Ohio)

Posts:1


02/10/2018 12:03 PM  
Check with your association's legal counsel first, but in Ohio when laws governing COAs changed and our Declaration was out of date, all that was necessary was to have the attorneys draft an amendment that brought our governing docs into compliance, and then the board voted to approve. In cases where the SOLE purpose of an amendment is to bring you into compliance with current law, it is not necessary to have the membership vote, because even if they were 100% in favor of not complying, they have no choice. Going to the bother and expense of amending your governing documents may seem a bit like overkill - because you have to do what the IRS says - but I've found that being obviously and publicly scrupulous about doing things by the book helps to take the wind out of the sails of our "vocational dissidents".
AjP
(Colorado)

Posts:5


02/10/2018 2:33 PM  
Good advice, I'll pass it along. Thanks. I have found case law in Colorado supporting the notion that minor filing errors in governing docs do not invalidate them, under our Common Interest Ownership Act. Those related to POA's authority to enforce covenants in the Declaration of Restrictions. 8th circuit court of appeals, note people who fought the POA lost at trial and appeal and had to pay assoc. court costs, here is the citation:

http://caselaw.findlaw.com/us-8th-circuit/1183167.html

Not the articles of incorporation but the DOR trumps everything as far as I've been able to find. Also, this should be obvious to certain people, but incorporation filings are state documents, IRS code is federal. In 1972 the only reason anyone would refer to their IRS code in articles was IRS issued guidance at the time for nonprofits filing under 501*c) designations to do so. All you need to specify in CO is whether you are a nonprofit or not.
GenoS
(Florida)

Posts:1822


02/10/2018 8:49 PM  
Sounds like a strange case. What good would it do to try and abide by a Federal agency regulation that no longer has any bearing? It's a moot point. They're willing to hire attorneys for their quest? What do the activists really want?
AjP
(Colorado)

Posts:5


02/11/2018 4:46 AM  
Not only would it have no bearing if we tried to file as a 501c7 they'd instantly disallow it anyway. It is all very frustrating. I've asked these particular people if they want to solve a problem or create one, and they say they want to solve one. But I also know others in their group are actively trying to disband the POA and set up some bizarre confederation of neighborhoods overseen by them and then turn it all into a municipality. Which would be a disaster. FYI this is a huge POA with ~7000 properties. Yes that's seven thousand. So this is not trivial and has to be addressed.
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Forums > Homeowner Association > HOA Discussions > reviving "ancient" 501(c)(7) status



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