The change in tax status to 501(c)4

Background

In November of 2017 the IRS Application for recognition as a 501(c)4, made by the Sun City Lincoln Hills Community Association, was approved. As a result, the SCLHCA tax filing status was changed from IRC 528 Mutual Benefit Corp. to IRC 501(c)4 Non-profit Corp. This was intended to reduce the association’s tax liability. Unfortunately, like many things undertaken by prior Boards and Executive Directors, this action was not fully disclosed to the membership until it was already accomplished.

We do not know the role the ED played in planning of this action, but we do know that one of his employees signed the application.  Since this was a major change in business practice, we can only assume that the ED had full knowledge of the plan. Neither the ED or the BoD ever disclosed this plan to the membership. Since the BoD did not disclose it , we must also assume that they had no knowledge that the application had been submitted. Whether they knew or not, the fact remains that the BoD never voted to change the IRS tax status at an open Membership meeting.

Please take time to review the PPP loan section. Lots of similarities. (Click here)

The Players

Board of Directors

President: Jim Leonhard

Vice President: John Snyder

Treasurer: Molly Seamons

Secretary: Denny Valentine

Director: Don DeSantis

Director: Hank Lipschitz

Director: Michael Deal

Staff

Executive Director: Chis O’Keefe

Director of Finance: Bruce Baldwin (signed application)

The Process

The process to obtain 501(c)4 status seemed to involved the Board’s failure to exercise its fiduciary duties to enforce our Governing Documents (GD); its seeming failure to follow procedures required by our Governing Documents; and its failure to exercise appropriate and prudent oversight of the Executive Director (ED). 

What happened

The ED put the BoD at risk when he usurped the BoD’s fiduciary responsibility by failing to disclose information regarding the application for the tax status change. It is “the Board” (not the ED) that has the duty to enforce the Governing Documents (often “in its sole discretion”), but they are unable to do so if they have no knowledge.  Since the ED apparently did not communicate to the BoD his intention to make the change, he should have been subject to disciplinary action. The BoD did nothing.

About 501(c)4

Why would they want to keep something this good under wraps? Because 501(c)4 comes with strings attached. Please see the definition of a 501(c)4 below.

501(c)4

A subsection of the Internal Revenue Code governing the status of non-profit organizations devoted to lobbying for political, civic, or other, similar causes. 501(c)4 organizations are exempt from federal taxation. However, contributions and donations made to them are not tax exempt. Examples of 501(c)4 organizations include political campaigns and groups that advocate for certain issues.

In order to qualify for 501(c)4 status, all of the organization's earnings must be used for social welfare purposes. The association should include with its exemption application evidence that areas such as roadways and park land that it owns and maintains are open to the general public and not just its own members.

The implications of using this tax status are dangerous in that it requires the associations facilities be open to the public. *See Form 1024 Attachment “Public Use Requirement” (Click here) This means swimming pools, tennis courts, lodges and hiking trails are open to the public. Aside from that, like the PPP loan application, there were many misrepresentations made during the application process.  Please take a look at an excellent and thorough review of the application. You will be appalled at the number and degree of fabrications, distortions, half-truths and outright misrepresentations made by the association to “qualify” for non-profit status. 

*See Form 1024 (Application) attachment “Statements; responses to questions on application” (Click here)

*See Form 1024 the Approval and Application (Click here)

*The above documents were obtained from the IRS under the Freedom of Information Act (FOIA)

BoD’s & ED’s Failure to comply with Governing Documents

1) 501c (4) CHANGE OF TAX STATUS:  Board made insufficient disclosure and other process violations.

a. There are a number of issues here:

i. The manner in which this change was implemented – insufficient disclosure to the membership and process violations

1. Failure to disclose the planned change to the membership prior to implementation. These changes were not publicized, publicly discussed or specifically voted upon by the BoD?  (AG) CA Corp Code 8320. The issue was likely decided upon in Executive Session which also violates Civil Code §4935, which states:

(a) The board may adjourn to, or meet solely in, executive session to consider litigation, matters relating to the formation of contracts with third parties, member discipline, personnel matters, or to meet with a member, upon the member’s request, regarding the member’s payment of assessments.

ii. The implications of this change were not disclosed to the membership and discussed.

iii. Failure to allow inspection of Books/Records (AG) CA Corp Code 8333

1. Failure to provide written documentation of public discussion and BoD vote for inspection by BoD members and/or residents

2. Failure to allow review of association's finances (i.e., change of tax status) Civ. Code #5500

The Application documents were requested from the association but not released. The documents were ultimately obtained from the IRS under the Freedom of Information Act (FOIA)

iv. Suspicious warning from BoD member: “You don’t want to go there!”

v. Failure to allow full disclosure, review and examination by not allowing BoD member to obtain a “second opinion” regarding implications   Civ. Code #5500