Compensation for officers when prohibited for Board Members

Dan,

The actual question is, is the Bylaws in conflict with the CC&Rs.
Even in Associations where the Officers and/or Directors are paid, those individuals, if members, would still be paying their assessments.

Without actually reading your section of the CC&Rs that address assessments or the section of the Bylaws that address compensation for the Officers or how the Bylaws were to be amended, I couldn't offer an opinion if there is a conflict or not.

However, since you asked if something is legal, no one on this site could tell you that anyway. You would need to consult a local attorney (and they would also need to see the entire CC&Rs and Bylaws).

As a side note, has the Association been issuing 1099 (I think it would be 1099-misc but check to be sure) to all the Officers who had reduced assessments? I ask, because this is a requirement and the reduction in assessments would, per the IRS, be income.

If you are the President, you should instruct your Treasurer to issue the appropriate forms. BTW, 1099 forms are to be issued by Feb 01.

Thank you, Tim , for your reply.

I'm guessing you don't actually want a copy of our Declarations and By Laws. Even if I did send them I think its a safe bet that the key features of it are 1) a clause that states every homeowner pays an equal amount and 2) no compensation shall be given to Board Members for performing their duties. Whoever wrote this failed to anticipate members rationalizing that they weren't violating the rules by saying that the compensation was to officers.

I spoke to a lawyer about a number of things when I assumed the Presidency and I came away with the notion that if anything winds up in court, a judge would have a lot of latitude in restricting this sort of shenanigan. Sort of like in small claims court where the judge can cut to the chase and do what's right without listening to a lot of legal wrangling. Thus this situation certainly doesn't pass the smell test and I've read of it before. I think some states have explicitly forbade it, but not to my knowledge Tennessee.
Anyway, I was wondering if someone knew of any past rulings or tenants of the law that said we know what you're doing and you can't get away with it. I guess not.

As for the IRS thing, I had read of the possibility of it being income. I hadn't read any interpretation that definitely it was and required a 1099. I'm not in any position to broach the topic with this group. I've got homeowners bitching at me over enforcing parking regulations and ARC regulations. Other homeowners voted to enforce them and some people don't like it. I don't need the other Board members against me too because I got the reduction taken away. (I also don't get combat pay for this job!)

It was just an issue that has had me wondering for a number of years.

Thanks again for your response.

Dan

The pros and cons of paying Board Members/Officers for the work they do are pretty evident--at least in my opinion. The developers who gave us our Declarations and ByLaws 17 years ago dealt with the issue and came down on the side of don't pay them anything. Unfortunately, as I said, they weren't too successful in putting their intentions into words. Hence, the current situation. It's been going on since 2004. There are people who used to be on the Board who know about it. They're not to keen of publicizing the policy because they took the discounts too. If others find out, I don't see them getting so worked up as to file a lawsuit or to go around the neighborhood knocking on doors and saying "you know what those bastards are doing?"

So the situation is going to continue. I was just wondering if anybody had a definitive answer of it's legality

I don't need to ask how it's documented: it's not. As for approval from homeowners, it's been going on since well before I moved into the place. However, I'm certain approval by the homeowners never happened. It certainly wasn't codified in the ByLaws.

I did a little more research.

The IRS requires a:

1099-C for a cancellation of debt (i.e. the waiving of assessments).

1099-misc when paying independent contractors. Although paying individuals to serve as Officers in your Association may have the individuals acting as an independent contractor, there are specific rules the IRS uses that differentiate between independent contractors and employees.

W-2 for employees. Additionally, see IRS Employment Taxes web page to identify additional issues the Association may need to comply with.

All the HOA documents can be ammended. The by laws and articles of incorporation take a lower vote % than the CC&R's. The CC&R go with the deed of the property and needs to filed with your county. The articles are filed with the state. The by laws are INTERNAL documents to the HOA and do NOT require filing. It is a courtesy and can be filed with the CC&R's.

It is your CC&R's that hold the most weight. Ours required a 90% of the owners to change and a special meeting. The change process is defined in each document.

We are NOT saying to let the cat out of the bag. We are saying it is time to get the policy in place in writing on how the majority of owners want done. You understand the ramifications with the IRS if you all decide for compensation. You accept the consequences and write it in. However, I do not think a majority of the membership would agree to this and it would stay as is with no compensation.

Too late to put the cat back in but not too late to evaluate your rules. Start from where you are now and keep moving forward. This is why HOA do not compensate with skipping dues. At what point do you determine when that forgiveness began to enforce liens on back dues? You can NOT. So start from a set point by say next election to put in place pay up on regular dues. If you fear no one steps up, then you do not realize there are other reasons to be involved. Those are the people you want on board anyways.

Hi Steve

Are you saying that calling it compensation to officers to get around the prohibition of compensating Directors is not only a sham but also illegal. That is the intent of the ByLaw prevails over the wording.

I know it's illegal because of the CCR provision that everyone pays the same, but I'm still curious as to whether their contention that the reduction to "officers" is a valid legal maneuver to circumvent the BYLaw. I don't know why I'm still curious about it. The issue is settled. It's just that I've been hearing it for several years --that it's a reduction to officers not Directors--- and I've winced every time I heard someone aver that was legal.

Dan

I am not nor do I play a lawyer.

I see two things in your posts. The primary one is all owners pay the same. Quite simple and understandable. Be they BOD Member or BOD Officers, as owners they all pay the same dues.

The second issue is you say Directors could be non-owners and this could open up a discussion about them being paid as your docs might not be clear on non-owners being paid.

If you want to try an end run, then get a few homeowners to question the BOD on all owners pay the same dues.

Reimbursement of expenses incurred is not usually considered income. Example: A board member purchases postage stamps for mailing out notices. He pays with his own funds and presents a receipt for the postage to the treasurer. The treasurer issues a check to reimburse the director for the costs of the postage. The money paid by the association is not income for the director as it is not payment for work.

In the case you cited, however, whether a director could be reimbursed for mileage would depend on whether your bylaws allow for reimbursement.

To sum up. No compensation or allowing those who serve in any capacity to be relieved of paying dues is NOT the right thing to do. It is IF it is documented and agreed to by the majority of the OWNERS. Otherwise, you have got you and the HOA into a big tax and underfunded mess.

Not anyone here would say for one second they wish they would receive compensation or not having to pay dues for serving on their BOD. It is very hard NOT do want or desire that. It's just in some cases a few people with that like mindiness get together and create a plan to do so. Not realizing or acknowledging the ramifications of doing such. Once realized it's very difficult to go back and say "Mea Culpa". Which is the exact situation you and your HOA faces.

I am not about the extremes of doing the whole lien or foreclosure thing and catching up from the past. You all were guilty for letting this go on or not paying attention it was going on. You all need to now say "Let's move on from this and start over from X date". From now on if you do not pay your dues, we will then follow the collection policy of 6 months we lien yada yada... (Whatever rate/time you decide for a collection policy). It's expensive to do an audit and at this rate most could not afford to pay up their skipped fees. Let's be realistic.

There is a way to be diplomatic about this without hitting the fan. Do it just right and you all move on. Do it wrong you cause chaos and cost the HOA (you and your neighbors) a ton of money. Just move on and adjust your documents as you all see fit.

Another thought, if said board members thought this was a way to induce servitude on the board, then why is it they didn't put it to the neighborhood to motivate them to serve? You were smart to continue to pay your dues and in my limited knowledge of the law, this is a ticking time bomb. Are you now in jeopardy because you knew of this being done and didn't stop it? Do your meeting minutes reflect your opposition to this and the fact that you've discovered it and were then asked to be quiet?

It's not as simple as all that.

IF you are filing a Schedule C and the income on the 1099-MISC is business income, then yes, you can take the standard mileage deduction from that business income (schedule C, line 9). Of course, you will also be required to pay self-employment tax on your business income.

However, if you are not filing a Schedule C and are simply claiming the 1099-MISC as additional income on your Form 1040 (line 21), then you may only deduct that portion of your mileage expenses that exceed 2 percent of your adjusted gross income (and that's only if you itemize deductions), AND you will need to complete Form 2106. If you take the standard deduction, you can't deduct any mileage expenses.

If you're not doing it right, just hope you never get audited. Every year I've had to fix 2 or 3 past returns for people who didn't do it right and then got notices from the IRS.

Hi JoK2

I typed out a lengthy answer to your questions and decided not to hit the send button. I can PM you if you want but I've got my answer on it's legality. The details this issue don't need to be aired here. However, the short answer is yes. Email records exist showing my opposition to all this and telling me to shut up.

Tim, the IRS would like to thank you for posting this link.

This link is for the 2014 standard mileage rates to be used when filing your 2014 taxes in 2015. The rates for business, medical, and moving expenses are 1/2 cent lower than for 2013 income taxes which you will file this year, meaning a slightly smaller deduction for 2014 than for 2013.

People should be aware that there are three different rates, depending on the purpose, and the rules for taking the deduction are also different (and, for 2013 medical miles, may also depend on your age).

Gotta love the IRS. The CPA where I work says that's what gives folks like us job security.

Dan,

I believe that you are referring to the appointment of a receiver as a magistrate is a judge.

Appointing a receiver is expensive as it requires going into the equivalent of a superior court. You will have to put out a considerable amount of money up front, which you may or may not be able to recover from the association. If the receiver is appointed, his expenses will also be paid from the association funds. The receiver is the equivalent of a guardian for a corporation and his job is to straighten out messes and eventually turn control back over to the members. Aside from the costs, one big problem with having a receiver is that you will have no control over him as he reports to the court that appointed him. Even though you sought to have the receiver appointed, you could find yourself being sued by the receiver.

There are other alternatives that you should look into. For example, you could seek an injunction to remove all the non-paying members from the board. You could file a lawsuit to seek past-due payments and late fees from the non-paying board members. You could seek declaratory judgment that board members must pay their assessments. You need not pick just one; you can do all three in one lawsuit.

The bad news is that all of this costs and it costs a lot. In one case in my state the HOA tried to prevent an owner from posting a realtor's "For Sale" sign even though state law explicitly allows this. The owners sought an injunction to permit the sign. It was a one-issue lawsuit with a minimum of witnesses. The lawyer practices in a small town in a one-man office. The plaintiff's costs were over $21,000. In another more recent case in Arizona, an owner sued to compel the association to separate certain funds as required by her CC&R's. She won but her reported costs were over $90,000. Both of those amounts would stop most of us in our tracks.

I would strongly suggest consulting with an attorney to get some idea of what your remedies may be and what it will cost to seek them.

Dan,

I have the following comments:


Consider this a tough lesson learned.
Your dry run should have been notices placed on vehicles and not actual towing. Something to the effect, "As a reminder, parking enforcement begins on mm/dd/yyyy and violators will be towed at owners expense." Then, let the chips fall where they will.
If your going to tow, have the tow company collect their costs from the owner of the vehicle. This way, you don't have to deal with the owners or the renters.


Translation: legal action would be required to force back payments.

My suggestion: simply stop the practice and move forward.


If those are the qualifiers, then those are the qualifiers.

Of course, the reality of this is, it will require support from the rest of the Board or legal action to make it happen. You will also need to have volunteers willing to serve in the vacancy created. If the issue is wide spread, there won't be support. If there aren't volunteers, there won't be anyone to take on the work.


I hope this is the battle you wanted to pick.

Personally, I would have simply said that being compensated by not paying their assessments is the same as receiving a check. The IRS will be notified of the past years practices, 1099-misc issued and you suggest that they file amended tax returns to account for that extra income OR they can simply pay the assessments they owe. Their choice.


Every decisions has both intended and unintended consequences. This is one of the unintended consequences.


So, now you need to decide if this is the battle you want to fight.

What is it that you want?

Payment of the back assessments? Then simply tell them that the IRS will be notified that it was income.

Have them removed from the Board? Might be easier to simply not reelect them or organize a recall.


And the Association will suffer. Time, energy and money will be spent and all because a simple compromise couldn't be worked out.

Pick your Battles and Know what result you want to achieve.


Larry already addressed going into receivership.
This should only be done as an absolute last resort as the reality is - nobody wins. Assessments will be increased (at the very least to cover the receivers salary) and the unintended consequence will be that most (if not everyone) within the development will probably not like you.


Well, lets see:
1)There would be the cost of bringing the issue before the court.
2)There would also be your share of the cost for the Association to defend itself before the court (and if Bylaws and Statutes were knowingly being violated Insurance likely won't pay)
3)There will be the costs of appeals
4)If you win - there will be the salary of the receiver (probably $50,000 or more per year)
5)If you win - the receiver may raise assessments to fully fund the reserves
6)If you win - the receiver will raise the assessment or impose a special assessment to pay for the legal bills associated with the case.
7)If you win - There will likely be less participation and less willingness to serve (which may keep the receive in place)
8)If you win - There may be a drop in property values caused by buyers not wanting to purchase into a development that is in receivership - thus requiring the seller to lower the price to entice the buyers.

Those are just a few of the costs involved.


An injunction is a court order. An court order is obtained by hireing an attorney to bring the issue before the court. A trial is held and the judge makes a ruling. The losing side may appeal the ruling which may delay the court order being enforced and making a lot of money for the attorneys.


Almost. See my earlier posting but remove the salary of the receiver.

Instead of legal action, I'd suggest gathering support and recalling or simply not reelecting those individuals. It's much cheaper and may even be quicker.


First, who can remove you from the Board?
Typically, if you are elected, only the membership may remove you.
If you are appointed, then the Board can likely remove you.

As for carrying on with your jobs - probably not. In reality, things would probably grind to a standstill and the Association would suffer.

My suggestion - Identify what you actually want to have happen and then look for the best (which may not be the easiest) way to achieve it.

What is it that you want to happen?


In reality, it's probably your easiest, quickest and least expensive.

Oops!
I just thought of something else. In regard to:

"Translation: legal action would be required to force back payments. "

I'm not sure of this. Our lawyer referred to putting a lien on their houses if they don't pay. Yeah I know that's legal action, but I've done that before. It's dirt cheap and in at least one case, it worked. If I put this before a new board in Sept and they vote to go after those funds, and there's nothing I haven't overlooked, I could get us a lot of money.

If the "they" you are referring to is a majority of the board, this will not likely happen as long as they are on the board.

I missed Tim's question as to whether I wanted back assessments to happen. What I'm trying to do now is hang on and somehow get new members on the board. I don't trust the judgement or integrity of the two now and their presence presents problems other than a couple of thousand dollars. So if and when new people join the BOD ( hopefully replacing the others not adding to it) I would put it to them and vote on whether to seek back assessments. This has been going on since 2004, first as compensation for Board members, then as compensation for officers ( who are always the same people) so there are a lot of former officers out there that could be held accountable. If you go after 2, maybe you should go after everyone. Again, I see that as a new board decision or maybe a group decision by the homeowners.

So, priority 1) Survive
2) End this practice or start doing it legally and let the homeowners know about it. The secrecy in it is the slimiest aspect of it IMHO
3) If I had my druthers, I druther collect the back assessments than not. The treasury will be bigger with them than without them

Right on! Those are my plans exactly

Thanks

Board members not paying opens you up to others not paying. If you dont go after the board members for not paying dues, other HOA members can simply say in court that your HOA is selectively enforcing who pays dues and that opens up another can of worms.

If I was an officer/board member, I would go through ALL the records, no matter how far back and put it on record of who owes what and what dues were not paid. I've never seen an HOA that can legally have members not pay dues, even officers. Next, everyone pays back dues. Then the HOA can decide if it wants to pay the people in question a consulting fee in the amount they just paid in. Yes, its time consuming, but legal.

Right now you have people that have unpaid dues. Unpaid dues can result in legal fees or foreclosure. All it takes is another group of people to be on the board who want the back dues and all hell is going to break loose.

It needs to be fixed.

Think I need to talk to a Hollywood producer and start a reality show on HOA. Maybe, instead of Modern Family, Modern HOA.

When I say "them" I mean each homeowner who failed to pay dues will personally face legal fees and foreclosure. Each one.

Well, and I hate to say it, realistically those comments may be very accurate.

I'm not saying that they would sustain a legal challenge. I'm saying that in the real world those statements may be accurate.

I would simply reply with "then why are you trying to hide that you are being compensated? Lets do everything legally and in the open."