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Subject: Can a Committee Decide How to Spend Funds Raised?

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PatriciaB6
(North Carolina)

Posts:13

07/15/2008 6:30 AM
Our newly BOD appointed rec committee has stated that any funds it raises through activities will go into a rec fund and the spending of that money will be determined by that Committee only. The BOD has no say. Can this be legal??

KirkW1
(Texas)

Posts:684

07/15/2008 6:59 AM
Several things come to mind. The first being that generally a committee member serves at the pleasure of the BOD and can be fired (if the committee is an official portion of the HOA). The second thing is that if you don't like the way the funds are spent don't help them raise said funds. The third is the whole idea of a committee raising funds raises an eyebrow. Now if a group took up a collection to make something available at the next national night out or something I can see that. But they should tell owners where the money is going to be spent and ask from internally. But other then donations from owners, I would have a hard time with a carwash or something as if they are some charity. It astounds me the number of people who think of their case as a charity.

GeraldT4

Posts:909

07/15/2008 7:00 AM
PatriciaB6 - Who says the BOD has no say? The BOD always has the final say. The BOD can disband the committee and appoint new committee members that will carry out the function/charter that the BOD wishes. The BOD needs to remind the committee that it serves at the pleasure of the BOD. Not to say that the funds the committee raises should be used elsewhere, however the activities of the committee occur because there is an association, of which all are subject to the rules and regulations of the Association of which the BOD is in charge of protecting.

BruceF1
(Connecticut)

Posts:499

07/15/2008 7:28 AM
Posted By PatriciaB6 on 07/15/2008 6:30 AM Our newly BOD appointed rec committee has stated that any funds it raises through activities will go into a rec fund and the spending of that money will be determined by that Committee only. The BOD has no say. Can this be legal?? If this is an official committee established by your board then there are more ramifications to this than I believe your committee or board realizes. If this is an offical board-established committee, then any funds it raises and any money spent must be accounted for on the books of your association, or you could possibly be charged with committing tax fraud. Income raised through fundraising activities is "non-exempt function income" in the eyes of the IRS (26cfr1.528)and must be reported as such on your Form 1120-H when you file your income taxes. Any money spent that does not directly deal with managing association property must also be separately identified on Form 1120-H. Since your treasurer is ultimately the one held responsible for tax filings, then yes, your BOD must be involved. You must also recognize that you are not a charitable organization as defined in Section 501(c)(3) of the tax code. That means you cannot raise money in many of the ways charitable organizations can, and you must account for it differently. If you have a "committee" established by a group of residents that is NOT an official committee of the association established by the BOD, then it is a group of neighbors who have banded together to raise money and plan and hold activities. They are responsible for their own actions.

MaryA1
(Arizona)

Posts:1562

07/15/2008 9:28 AM
Patricia, Brad has hit the nail on the head as far as accountability goes. But, since you stated this is a board appointed committee, I'm wondering, why is the board is allowing the rec committee to operate in this manner? They (the board) should know that any monies raised by the rec committee are accountable to the HOA and, just as important, they (the board) are resp. for any actions taken by a committee they have appointed. Seems to me your board needs to be educated! Also, a little more info regarding the role of this rec committee would be helpful. Do you have a rec center they are in charge of? What type of fund raising are they embarking on and what are the funds being used for?

PatriciaB6
(North Carolina)

Posts:13

07/15/2008 12:52 PM
Great responses. Thanks everyone. This committee wants to raise "its own funds" to purchase recreation equipment, picnic tables, and I have no idea what other kind of playground equipment. The money raised does go into the Association account (earmarked for recreation) where it has to be accounted for. But, I don't think anyone on the Board ever thought out the tax implications. Fund raising is occuring in a few different ways: extra money is charged for event participation; 50-50 chances are sold; a dozen plastic pink flamingoes are showing up randomly on homeowner's property without their permission, and in order to get them removed, the homeowner has to fork over a "donation" (the group calls this getting "flocked". I feel the Board was much too hasty in voting approval of this which is why I am interested in finding out how to convey to them that they need to rethink this ASAP.

SusanW1
(Michigan)

Posts:1540

07/15/2008 1:19 PM
Any "program" would have had to be approved by the Board BEFORE this committee even started its actions. So they should have presented the Board a plan of action for raising the funds, a complete budget and timetable, and what the funds are to be spent for. They could have sold T-shirts to raise monies. A not for profit CAN have a money raising project/event AS ALONG AS proceeds relate to the mission of the association. Instead, I believe that these folks should form a group, "Friends of the HOA" and do their fundraising project outside of the association's books. But more importantly, the group should get permission for ANY action it plans on doing, including installing playground equipment. Until they get more organized, reign them in, Board!

BruceF1
(Connecticut)

Posts:499

07/15/2008 1:42 PM
Posted By PatriciaB6 on 07/15/2008 12:52 PM Great responses. Thanks everyone. This committee wants to raise "its own funds" to purchase recreation equipment, picnic tables, and I have no idea what other kind of playground equipment. The money raised does go into the Association account (earmarked for recreation) where it has to be accounted for. But, I don't think anyone on the Board ever thought out the tax implications. Fund raising is occuring in a few different ways: extra money is charged for event participation; 50-50 chances are sold; a dozen plastic pink flamingoes are showing up randomly on homeowner's property without their permission, and in order to get them removed, the homeowner has to fork over a "donation" (the group calls this getting "flocked". I feel the Board was much too hasty in voting approval of this which is why I am interested in finding out how to convey to them that they need to rethink this ASAP. Your board members need to get a copy of the IRS tax code, 26cfr1.528 that applies to HOAs. You should be able to download it from the IRS website. You can also download a copy of IRS Form 1120-H with instructions that applies to HOAs. There are rules about how much non-exempt function income you can have. Exempt function income is income received from your assessments or association dues. Pretty much anything else will be non-exempt function income. The tax code explains it all. Also, no more than 10% of your association's expenses can be used for things that are not directly related to maintaining your association property. Lawn care qualifies as maintaining your property, recreational activities do not. Picnic tables and recreation equipment? I don't know. It could be borderline. You'd have to consult a tax advisor on that one. Does your state have gambling or gaming laws? Many do. If so, a 50-50 raffle may be illegal unless you are a charitable organization under 501(c)(3), which you are not. Even there, some states regulate how they must be held. The problem comes about when you do these things officially as an HOA. Being a chartered "business" your board is supposed to know better and not violate the law. It's not as easy to get away with things as a group of private citizens might. Also, if your board members are charged vith violating any law your D&O insurance won't come to their aid either since most policies contain a clause saying that you're not protected if you violate the law. Over the years I've belonged to and have served on the committees or boards of many organizations: recreational committees, scouting organizations, PTOs, charities, fraternal organizations, service clubs, and HOAs. At one time or another I have been involved in a variety of activities and fundraisers - legally, and I've learned they may be more complex than they appear on the surface. They're not difficult to do legally, as long as you're eligible and follow the rules. Sounds like your board needs to get educated.

MaryA1
(Arizona)

Posts:1562

07/15/2008 3:54 PM
Patricia, In your original message you stated the disposition of funds generated by this rec. comm. will be determined by the comm. members. Frankly, this is not a good idea. Committee members serve at the pleasure of the board. Their mission should be stated by the board and they should not be doing anything that hasn't been sanctioned by the board. This comm. should submit a plan to the board outlining the fund raising projects they would like to hold and indicating how they think the funds raised should be used. The board would review this plan, make necessary changes then inform the committee that they can or cannot proceed. Any monies collected should be deposited in the assn's operating account and any expenditures made must first be approved by the BOD. In order to qualify as an HOA under Title 26, Section 528 and file taxes on form 1120H, ". . .at least 60% of the association's gross income for the tax year must consist of exempt function income. . ." Exempt function income consists of membership assessments used to ". . .pay principal, interest and real estate taxes on assn property; maintain assn property; and clear snow from public areas and remove trash. "At least 90% of the assn's expenses for the tax year must consist of expenses to acquire, build, manage, maintain, or care for its property. . ." Any expenses related to holding a fund raiser cannot be deducted as an assn expense on the tax return; therefore these expenses should not amount to more than 10% of the total expenses for the year. However, if recreational/plagground equipment is purchased using the proceeds of the fundraiser, that would be considered a capital expenditure and can be deducted as an expense on the assn's tax return. There is no reason why the assn cannot sponsor fund raising events but they should be careful as to how much money is raised and how much it costs to conduct the fund raiser.

BruceF1
(Connecticut)

Posts:499

07/15/2008 5:05 PM
Any form of wagering, which includes 50-50 raffles, lotteries, etc., is probably regulated. Many states conduct their own lotteries and are very jealous of competition. I would check before embarking on any of these kinds of fundraisers.

MicheleD
(Kentucky)

Posts:1445

07/15/2008 5:17 PM
Patricia said, "50-50 chances are sold; a dozen plastic pink flamingoes are showing up randomly on homeowner's property without their permission, and in order to get them removed, the homeowner has to fork over a "donation" (the group calls this getting "flocked". " Two comments re: the above. First, what the others have said about "games of chance," which include 50-50 chances, and your state's laws regulating them should be looked at very closely. Secondly, I can assure you, should plastic pink flamingos end up on MY property, they will be "donated" to my waste management company. I call that, "flocking you back." That's pretty presumptuous and cocky to place objects in someone's yard and then not remove them until they give you money. Between the gambling and the shake-down activities, I'm wondering if these committee members got their training from Tony Soprano.

BruceF1
(Connecticut)

Posts:499

07/15/2008 5:19 PM
Oh, and one other thing. As long as you involve only yourselves (members of the HOA) in your fundraising activities, you may be able to do most anything. However, as soon as you involve the general public (non-homeowners) it becomes a different ball game. Now all of a sudden you may find yourself needing licenses or permits for this or for that, depending on what you do. Even charitable organizations that have fundraisers have to jump through certain legal hoops. They've just done it so many times they know what is required and do it automatically. Been there; done that.

BruceF1
(Connecticut)

Posts:499

07/15/2008 5:25 PM
Posted By MicheleD on 07/15/2008 5:17 PM Between the gambling and the shake-down activities, I'm wondering if these committee members got their training from Tony Soprano. Add my ditto!

PatriciaB6
(North Carolina)

Posts:13

07/16/2008 7:33 AM
Thanks to all who responded. I am happy to report that at our BOD meeting the President corrected the committee representative and made it clear who does and does not have authority to spend the funds raised. As for the Pink Flamingoes, it does look awful, and I would not return them if they show up on my lawn either. Thanks again!!

KirkW1
(Texas)

Posts:684

07/16/2008 9:51 PM
I am not sure what I would do if someone were to "flock" me. I am sure that this is intended to be fun. Of course I wonder what happens when (not if) the wrong person gets flocked and police are called for the act of vandalism. (Or the allegation is made that some landscaping was damaged. One of them will occur.) I might ignore the things to see how long it would take before they gave up and collected their birds. Then again, if I had an idea who placed them, I might place them in their yard. (And if they left too soon, they could show up again and again.) Or, I might just remove them myself. And I don't know if it would be a hostage situation (I am thinking twice the price the wanted from me), or denial. (Flamingos don't come to this part of Texas. What are you talking about?") Mostly, I have to think of the oh so many ways this could end very badly. It is only a matter of time before someone gets creative with placement. And then it is a matter of time until someone gets hurt or damages property.

DwightT
(Idaho)

Posts:342

07/17/2008 8:32 AM
There is a local landscaping company that has a large flock of the things. They are known for placing the flock in interesting formations. Combined with messages on their marquee, it's become quite an advertising gimmick for them. Of course, then there was the rival landscaping company who had a plastic flamingo on a spit in the BBQ... If I got flocked, I would probably take a page from that company and start coming up with my own formations. It probably wouldn't be long before the flock disappeared the same way that the arrived.

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