Managing surplus assessments
Q. My understanding of IRS Revenue Ruling 70-604 is that it permits owners to vote to have surplus assessments either returned to owners or applied to the next year's assessments, in order to avoid taxation on the surplus. Our community association has been applying any excesses over the years to the reserve fund and not the operating fund. Is this legal and does it result in a tax to the association?
A. IRS Revenue Ruling 70-604 permits the owners of an association to vote to either have excess assessments returned to the owners or applied to the following year's assessments. This Revenue Ruling does not address transferring the surplus to an association's reserve fund, but that's a discussion for another day.
However, this may be comparing apples to oranges. If the board of an association properly transfers operating surplus to its reserve fund, it might effectively eliminate excess income and therefore eliminate the need to consider adopting a resolution under Revenue Ruling 70-604. That said, if an association does actually have excess income, and fails to adopt and implement a resolution under Revenue Ruling 70-604, the excess would be taxable income to the association.
Q. We have difficulty in recruiting candidates for the board of our association. What is the minimum number of board members required for an association?
A. A minimum of three board members is required to maintain the association's corporate status with the Illinois Secretary of State. That said, an association should maintain the number of board members established by its governing documents. If the association has difficulty recruiting candidates, or if the number of board members is high for the size of the association, the association should consider an amendment to its governing documents to reduce the size of the board.
Q. I am on the board of a 20-unit condominium. To my knowledge, a reserve study has never been done and recent previous boards have just been "winging it" as far as guesstimating useful lives and future replacement costs of capital components of our building and property. With our budget strapped from past low assessments, I would like to attempt to create a reserve study without having to hire an outside company. Can you recommend a book or computer software for how to do a reserve study, or is this something best left to professional?
A. I would not suggest attempting a "do-it-yourself" reserve study. Establishment of a reasonable reserve may be one of the more important of the fiduciary responsibilities of an association's board of directors.
In my opinion, a professionally prepared reserve study is the foundation of the establishment of a reasonable reserve. Reliance on a professionally prepared reserve study also helps insulate the board from a breach of fiduciary duty claim, if an owner contends that the amount of the reserve is not reasonable.
Q. I understand the Illinois Condominium Property Act permits a board to enter into bulk cable and Internet contracts. However, the declaration for our association requires unit owner approval of any contract over a described dollar amount. The amount of the proposed cable contract exceeds this amount. Is the spending limit applicable to a transaction authorized by the Condominium Property Act.
A. The language in a declaration that establishes a cap on expenditures is usually applicable to "capital expenditures." The language of your declaration is a little unusual, in that it applies to all expenditures. Section 18.4(a) of the act limits the applicability of expenditure caps for the common elements. This limitation would not apply to a contract for services provided to the individual units that require unit owner approval if the expenditure is above the amount stated in the declaration, and the broad expenditure cap in your declaration would seem to be valid.
• David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in the Chicago suburbs. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.