I get more questions about Revenue Resolution 70-604 than about all other tax issues combined. One of the questions that continually arises is: “How do we inform and educate our members so that they can vote on this important ruling?”

I recommend putting descriptive text on the ballot so that members have a basic understanding of Revenue Resolution. Below is an example of such wording.

Revenue Resolution 70-604 is only a tax resolution. The purpose of this decision is to allow a homeowners association to avoid tax on any excess member income (as defined in the Internal Revenue Code) that may inadvertently arise in a given tax year. The ruling establishes that the members of the Association meet to carry out the election. The rule applies to any excess member income. The ruling allows only two options; reimburse members’ excess income to members or apply the excess to the following year’s dues.

The Board of Directors has determined that it is impractical to attempt to reimburse members ‘excess income due to the administrative issues involved and the fact that members’ excess income may be required as working capital to pay for ongoing operating expenses of the Asociation. Therefore, the Board of Directors requests that you approve an election under Revenue Resolution 70-604 to apply any excess income from members to the following year’s evaluations. This does not mean that quotas will be reduced for next year, since the budget has already been prepared and approved. Since expenses generally increase from year to year, any excess income from members is likely to be absorbed by an increase in expenses.

Failure to approve this election may mean that the Association will be subject to additional federal income taxes for the current year, resulting in increased contributions for all members.

My advice to the Association and the board of directors is that the ballot be drawn up with only one option, which is to apply the excess income of the members for the following year’s dues, and that a yes or no vote is what is presented to the members.

The wording above explains why the Board of Directors is presented with only one option. Being silent on this issue and explaining both options would force members to make a decision that could result in a majority of members voting to reimburse members’ surplus income. This creates a difficult situation for the board, as that excess revenue can represent the working capital needed to operate continuously. Without adequate working capital, the board would be forced to borrow short-term funds or conduct a special membership assessment for working capital.

For the hundreds of associations that I have discussed this issue with in the past, you will probably recall that I have stated that, in my opinion, I have received verbal competence from the national IRS office, Revenue Ruling 70-604 as redacted, which requires approval. membership, is generally in conflict with the governing documents of most associations and with state law. As far as I know, the bylaws in all states confer the authority to make financial decisions regarding the disbursement of Association funds in the hands of the elected board of directors. The general membership does not normally have the authority to make such a determination. Therefore, state law generally conflicts with Revenue Resolution 70-604.

So how do you resolve this apparent conflict? In my opinion it is relatively simple, although it requires little work. First, go ahead and have the members approve the election at the annual meeting or any other meeting or format in which a valid member vote is taken. Second, have the Board of Directors meet and ratify the election approved by the members. By handling the Revenue Resolution 70-604 approval process in this way, you first meet IRS requirements and second, you meet state law requirements.

Can you bypass member approval and just have the Board make the choice? In my opinion, it can. However, doing so is inviting a challenge from the IRS. And that’s a battle that you don’t need to fight. It is so simple to get the member’s approval to make the election that it is best to simply get the member’s approval and avoid a potential fight with the IRS.