Reserve Study Books and Articles

Recognizing a Failed Reserve Funding Plan

By: Gary Porter, FMP, RS, RRC, CPA

We recently performed a reserve study for a 40-year old condominium association and discovered an all-too-familiar scenario we’ve seen in older projects. The situation? Huge deferred maintenance obligations that should have been resolved long ago, and an assessment structure that is higher than comparable projects.

How did this association get to this place? Forty years ago, reserve studies as we know them today were rare. This association never prepared a complete reserve study. Instead, they prepared an annual budget that included reserve calculations for the major reserve categories; roofing, painting, and paving. The association then created a fixed amount reserve funding plan that fit the “political” assessment climate within the association. This was done in the very early years of the association’s existence, but that was not based on any comprehensive analysis of the actual major repair and replacement needs of the association. There was considerable reluctance to raise the assessment because this “senior” community consisted primarily of fixed income retirees.

Over time, the association was not able to afford all of the reserve maintenance projects that needed attention, because of their “fixed income” reserve funding policy. While they knew that special assessments or borrowing funds from a commercial lender were options, the board felt that these options were politically impractical based on their member demographics. What each board decided to do was to simply fund all of the maintenance projects that they could each year until they ran out of money. This literally became the association’s policy. This caused them to defer any uncompleted projects to the following year, thus passing the buck to the succeeding board. Unfortunately, the uncompleted projects continued to accumulate, so that this “uncompleted projects” list grew to include a several year accumulation of maintenance projects.

When we came on the scene, this problem had reached critical mass and could not be ignored. We were engaged to perform the first comprehensive reserve study for the association, and had a number of meetings with the board to help them understand how they had reached this position. The association’s failure to perform timely maintenance caused further damage by the complete failure of certain components that would not have required replacement had the scheduled maintenance been performed. An example of this was the failure to correct numerous water intrusion issues from poor roofing, poorly designed gutter and downspout systems, misdirected irrigation sprinklers, landscaping issues such as earth/wood contact on wood siding, etc. These issues ultimately required the complete replacement of siding on many buildings; a cost that could have been avoided. This is just one example of issues that caused future repair costs to escalate even further.

In the more recent years before we were engaged, the association had begun to recognize that it had a problem and had more aggressively raised reserve assessments to the point that they were higher than those of comparable projects. But, it still was not enough to overcome decades of underfunding. Further, our reserve study and analysis of the association’s reserve expenditures over the last few years resulted in almost doubling the reserve requirements. This was because the association paid for numerous “small” repair projects from reserve that were clearly appropriate reserve expenditures, but for which the association had never established a reserve budget. They were spending money on projects for which no assessments ever existed.

We have observed several associations over last 25 years attempting to fund their deferred maintenance projects in this manner. All suffered a very predictable ending. The fact is if you just spend the amount of money you’ve got available and not the amount of money it takes to actually complete a project, the projects never get completed as planned, and your deferred maintenance projects snowball into an insurmountable problem. This is not a plan, this is a reaction.

A responsible board must make tough decisions rather than passing the buck to the successor board. That often means that a current board has to resolve problems created by a prior board. The fact is that you don’t get to play the cards that you want, you get to play the cards that you’re dealt. When the board is faced with a situation of not enough money coming in and too much money going out, there are only two possible solutions. One, increase revenues, or two decrease expenses.

An association may attempt to decrease expenses by making temporary repairs that extend the life of a component or by substituting lower-cost products in making repairs or replacements. Since most associations have already done this analysis and still are coming up short, the only remaining answer is to increase revenues. This generally means that the association must make a special assessment or borrow funds, or a combination of both.

In this particular association, we also recommended that several substitute products that didn’t exist forty years ago be used in repair and replacement work. While these resulted in higher immediate costs, it considerably reduced the long term maintenance costs to the association.

How expensive was this for the association? They ended up borrowing $30,000,000 (about $10,000 per member) to fund major reserve repair and replacement projects. Unfortunately, they will still need more, as that does not address all the association’s needs. Had that amount instead been assessed ratably over time to the members from inception, it would only have amounted to about $20 per month per member. Effectively, given the age of the association and member demographics, this resulted in a shift of the entire cost from one generation to the next.

Gary Porter, FMP, RS, RRC, CPA is the CEO of Facilities Advisors International and has prepared reserve studies for associations since 1982. As a Facilities Management Professional (FMP) he has training in all phases of facilities management. As a valuation expert he has testified at trial more than 50 times. As a CPA he also focuses on the numbers. Gary is the author of seven books on financial aspects of community associations totaling nearly 5,000 pages and is also the author of more than 400 articles. He has been published or quoted in The Wall Street Journal, Money Magazine, Kiplinger’s Personal Finance, The Practical Accountant, Common Ground, The Ledger Quarterly, Timesharing Today, Hawaii Building Trades, and The Florida Community Association Journal. Gary is a past president of CAI (1998) and was a founding member of the CAI California Channel Islands Chapter in 1979. 47 years as a CAI member. He resides in Las Vegas, NV. Facilities Advisors provides reserve study and maintenance planning services to associations nationwide.

Should Painting Be Included In The Reserve Study?

The question of including painting in reserves continues to arise, even 15 years after the matter should have been settled. To understand why, you need to know that this issue first arose from tax considerations, not because of any budget, maintenance, or economic factors.

Painting is one of the largest expenditures that most condominium associations will incur. The primary purpose for establishing reserves is to assure funding is available for major repairs and replacements that do not occur on an annual basis. Consequently it is logical that it should be included in reserves because it is not an annual maintenance expense. For most associations painting will occur every 7 to 15 years.

The tax issues causing this perceived problem arose in 1993 when the IRS audited approximately 15 associations in San Diego, California. IRS proposed to add back as taxable income all the painting reserve assessments that had been excluded from income in calculating taxable income on the Form 1120 tax returns. This created a national furor within the HOA industry on the concept of the inclusion of painting in reserves, but only because of the misunderstanding that occurred related to this issue. The difference lies in definitions and perceptions, not in any differences of facts.

HOA Industry Positions

These are general statements only, and like all general statements, there will always be exceptions.

1. The HOA industry has generally always considered reserves as “capital contributions” for tax purposes

2. The HOA industry has generally excluded reserve assessments from taxable income for tax purposes. If the association is filing Form 1120, this is a major factor in eliminating taxable MEMBER income.

3. Many tax preparers recommend Form 1120 so that the association can take advantage of the lower 15% tax rates of Form 1120, versus the 30% tax rates of Form 1120-H

It is also necessary to state certain tax facts

1. Form 1120 carries a 15% tax rate for the first $50,000 of taxable income

2. Form 1120 requires the association to delineate between capital and noncapital transactions

3. Form 1120 requires noncapital transactions to be separated between member and nonmember activities

4. Form 1120 considers all nonmember activities to be taxable

5. Form 1120 considers member activities to be taxable only if there is a net member income

6. Form 1120-H does not tax ANY exempt function activities

7. Form 1120-H taxes all nonexempt function activities at a flat 30% tax rate

It is important to note that member activities on Form 1120 are generally similar to exempt function activities on Form 1120-H, but with critical differences that can affect certain tax returns.

IRS Positions

1. The IRS has its own rules

2. The IRS doesn't care what the HOA industry thinks

3. Internal Revenue Code (IRC) Section 277 requires separation of member and nonmember activities on Form 1120

4. IRC Section 263 defines capital activities – painting is not considered a capital activity (in most circumstances)

5. IRC Section 118 (with numerous interpretations in Rulings and Tax Court cases) defines contributions to the capital of a corporation

6. Revenue Ruling 75-370 specifically states that painting does not qualify as a capital activity that may be excluded from the income of a homeowners association as a contribution to capital. Painting is considered to be a non annual maintenance expense.

The crux of the issue is that the HOA industry refers to expenditures as being either operating or reserve in nature, and considers all reserves to be “capital” expenditures. The IRS refers to expenditures as being either noncapital or capital in nature. These two definitions are not the same, and the major area of difference is painting expense.

The simplest way to look at this is to realize that painting is simply a noncapital reserve component. OK. So now what?

Let me state for the record that I, as a reserve preparer, am of the opinion that the components to be included in any reserve study should be determined by the maintenance plan, budget policies, and economic considerations. Tax considerations should NOT be a determining factor in what components are included in a reserve study.

Certain conclusions can be drawn from the above discussion of tax issues related to painting as a reserve component.

· It’s acceptable to include painting in the reserve study

· Painting reserve assessments cause potential tax issues on Form 1120

· Careful tax planning can allow you to minimize tax risks of painting reserve assessments on Form 1120

· Painting reserve assessments cause NO potential tax issues on Form 1120-H

Consideration of Interest and Inflation In The Reserve Study

Both interest and inflation considerations are important to the calculation of your future reserve requirements. Unless the association has made a conscious decision to transfer all interest earnings to the operating fund (which is the subject of an entirely different article), it is generally assumed that interest earnings will be retained in the reserve fund. Likewise, inflation is a factor that will cause the prices you pay for future repairs to be higher than the cost you’re paying presently for those same repairs and replacements.

The two questions that continually arise are “Should interest and inflation be included in the reserve study; don’t they cancel each other out?” and “How do you calculate what interest or inflation rate to use?”

I believe that both inflation and interest earnings should generally be considered in the funding plan of a reserve study. To ignore these would be to ignore reality. While it is a policy matter of the board of directors whether or not to include these items, it is common practice to include both interest earnings and inflation in the funding plan of the reserve study. Inflation should never be ignored. Failure to consider inflation will generally lead to significant future underfunding, unless the association updates its reserve study and underlying cost assumptions annually.

The fact is that interest earnings do not offset inflation. While interest and inflation rates may be similar, the inflation factor is applied to the total estimated future expenditures for all common area components included in the funding plan. This is (virtually) always a higher number than the current funds set aside for reserves. Conversely, the funds set aside for reserves are (virtually) always a smaller amount. That means that the dollar amount of interest earnings will grow far slower than the dollar amount of inflated costs, even if the rates are the same. An example is that an association may anticipate spending $3,000,000 over the next 30 years, which includes inflation calculations. The current reserve cash on hand may be as little as a few hundred thousand dollars, as that is all that is required to pay for planned expenditures arising in the next few years. Inflation of 2% on $3,000,000 is $60,000 annually. An interest rate of 2% on $500,000 of cash invested generates only $10,000 of interest earnings annually, creating an annual funding gap of $50,000.

The second question, how do you calculate these rates, has no correct answer. Some people use a rule of thumb. Others look at their current interest earnings rates as a guide. Current interest earnings rates cannot be ignored, but if they unusually high or low, it is not practical to expect those rates to continue indefinitely. However, so long as you keep your assumed interest earnings rate relatively the same as your inflation assumption, you shouldn't get into too much trouble, as they do usually move in tandem. California associations should be aware that California law limits the interest rate assumptions that may be used in a reserve study to 2% above the discount rate published by the San Francisco Federal Reserve Bank.

Since the funding “window” of a reserve study is normally a 30-year projection, many believe it is legitimate to consider average rates rather than current rates in establishing your funding plan. The attached historical tables of interest and inflation rates allow you to put current rates into perspective. Table 1 reflects solely at annual rates. Table 2 reflects the 5-year average rate in any given year. Table 3 reflects the 30-year average rate in any given year. You will note that Table 3 does not contain the sharp peaks and valleys of the annual rates in Table 1. However, general trends are still similar.

Note that regardless of sometimes significant annual variations in rates, the moving 5 and 30-year averages smooth out the rates considerably, eliminating the extreme spies and valleys that generally occur for only short periods of time. Since the reserve funding plan typically projects for a 30-year period, it is usually safe to ignore current extreme changes in rates in favor of longer term moving averages.

I was forced to address this issue when I first started preparing reserve studies in 1982. Look at the annual rates for that year and you can understand why. If we had used the current interest and inflation rates of that year, NO reserve study could be developed that would provide adequate funding without “breaking the bank” by forcing reserve assessments so high that no one could pay them. We opted then for using approximately 5% interest and inflation rates, because we knew the current situation was abnormal and could not be sustained. Time proved us right on that assumption, but the fact is no one could reliably predict future rates.

Current interest rates are at an all time historical low. Despite political pressure to keep rates low, they are beginning to trend back up. Inflation rates reported by the government are also at all time lows, actually reflecting a deflationary rate in 2009. However, because of changes made in recent years to the government data as to what is included in their calculations of the official inflation rate, current inflation rates are not comparable to prior data.

ARE RESERVE FUND ADDITIONS "CAPITAL CONTRIBUTIONS" FOR TAX PURPOSES?

By: Gary Porter, RS, FMP, CPA

Most discussions about homeowner association income taxes begin and end with the single issue of filing Form 1120 or Form 1120-H. This is usually discussed simply from the perspective as the difference in tax rates. But, Form 1120 carries significantly higher tax risk. The largest risk, and the focus of this article, is the issue of reserves being considered as capital contributions for tax purposes. This an important issue because capital contributions are automatically excluded from income. It has no significant impact if filing Form 1120-H, as Exempt Function Income (EFI) is not taxed on that Form. It is a critical issue on Form 1120, as any amounts received from members that cannot be classified as capital contributions may create excess member income under IRC Section 277 that is subject to taxation.

The Internal Revenue Code (IRC) is law passed by Congress. Regulations are the Internal Revenue Service (IRS) interpretation of that law. Revenue Rulings are specific situations described by the IRS that clarify how certain tax rules are to be applied. Judicial decisions by various courts provide the final say in how certain tax law is interpreted. There are actually numerous other levels of authoritative rulings, but these are the primary guiding authorities. It is important to understand this framework to see why something as simple as a reserve contribution can actually be very complex.

The basic structure of the Internal Revenue Code is that all receipts are considered income under IRC Section 61, unless exempted from income by another section of the Code. IRC Section 118, “Contributions to the Capital of a Corporation,” exempts capital contributions from income. IRC Section 118 has been interpreted by numerous subsequent rulings. The balance of this article examines each of the criteria raised by those various rulings.

While IRC Section 118 establishes the broad principle that capital contributions are not included in taxable income, the detailed parameters established by subsequent rulings are:

1) The PURPOSE of the assessment must be capital in nature (IRC Section 263, Revenue Rulings 74-563, 75-370, and 75-375, Court cases Chicago Board of Trade and Maryland Country Club)

2) ADVANCE NOTICE must be given to members as to the intent of the purpose of the capital contribution (Court cases Gibbons and Maryland Country Club, Revenue Rulings 75-370 and 75-371, GCM [General Counsel Memorandum] 35929)

3) Money contributed must be ACCOUNTED FOR as a capital contribution (IRC Section 118, Court case Chicago Board of Trade, GCM 35929)

4) Money must be HELD FOR THAT PURPOSE and no other purpose (Court cases Chicago Board of Trade and Maryland Country Club)

5) Money must be HELD IN SEPARATE BANK ACCOUNTS from the operating (noncapital) bank accounts of the association (Revenue Rulings 75-370 and 75-371)

6) Money must be actually EXPENDED FOR THE INTENDED PURPOSE (Court Case United Grocers)

7) Money must INCREASE THE CAPITAL ACCOUNT OF THE MEMBER or unit owner-stockholder (Court case Chicago Board of Trade , GCM 35929)

My many years of experience as a tax preparer in the homeowner association industry have provided numerous examples to me that virtually no associations are aware of these critically important rules, and few tax preparers believe they are important. I have been retained as a consultant on dozens of homeowner association IRS audits, probably more than any other tax practitioner in the country. In all but one case, Form 1120 was involved. I did not prepare ANY of the tax returns being audited by the IRS; I was retained at the recommendation of the CPA firm or tax attorney as their expert consultant. The issue of capital contributions existed in 100% of these IRS audits.

Associations that do not adhere to each of the parameters set forth above MAY not lose their reserves as capital contributions in an IRS audit, but each instance where the association fails to adhere significantly increases the risk that your reserve additions will not qualify as capital contributions.

How associations can qualify under each of the parameters set forth above.

1) The PURPOSE of the assessment is described in IRC Section 263 as “Any amount paid out for new buildings or for permanent improvements or benefits made to increase the value . . . “ and “Any amount expended in restoring property . . . “ That pretty much describes the majority of reserve funds expended by associations. But, it also includes additions to or replacements of personal property. It DOES NOT include monies expended or set aside for painting or contingencies.

The purpose for which funds are being accumulated in reserves is generally set forth in the reserve study Is a reserve study absolutely required to establish the capital purpose? No, it could be more informal, such as being described in the budget. However, the reserve study is better, and this is an instance where it is better to comply than to have to fight this issue in an IRS audit.

Other critical mistakes associations make are (a) not formally adopting their reserve study, (b) having a reserve study that contains multiple proposed funding plans with no indication of which plan was adopted, (c) having a reserve study that does not agree with the amounts adopted in the association’s annual budget as reserve contributions.

2) ADVANCE NOTICE is usually given to members as part of the annual budget, with accompanying information that discloses the reason for the “Capital” reserve assessments. It is critical to note that if painting or contingency are part of the reserve budget and the amounts are not disclosed it jeopardizes the entire capital contribution, because painting and contingency are not capital in nature.

3) Money contributed must be ACCOUNTED FOR as a capital contribution in the association’s financial statements. While this is routinely done in professionally managed associations, too many small, self-managed associations fail to take this critical step. As long as reserve monies are held in a separate bank account and there is a clear record of reserve contributions and expenditures, the association should be able to overcome this accounting deficiency in an IRS audit situation.

4) Money must be HELD FOR THAT PURPOSE and no other purpose. This means that once you set aside monies in reserve accounts, you should NEVER invade those reserve accounts for operating purposes. California statutes permit associations to borrow from reserve under certain circumstances. While permitted under California law, federal tax law does allow such use of funds.

5) Money must be HELD IN SEPARATE BANK ACCOUNTS from the operating (noncapital) bank accounts of the association. The IRS interpretation of this is that (as an example) roofing and paving funds, considered capital in nature, cannot be held in the same bank account as painting monies. Why? Painting is considered non-capital in nature. Combining painting or contingency reserves with your capital reserves jeopardizes the entire capital contribution. This is probably the most critical item in your reserve planning. If you do not have these separate bank accounts, you should probably not be filing Form 1120, as your tax risk is too high. This issue has been raised on virtually every IRS audit on Form 1120 on which I have consulted.

What this means is that most associations must maintain three different bank accounts – one for operating funds, one for capital reserve items, and one for noncapital reserve items. Virtually no one is doing this. This deficiency could potentially be overcome in an IRS audit if you have adequate accounting, but there is no guarantee. This is one of those situations where, although it is a pain to comply, it is still easy to comply, and why have to fight the IRS over an issue that is so easy to comply with.

6) Money must be actually EXPENDED FOR THE INTENDED PURPOSE. This does not mean that if you assessed money for roofing that that exact amount must be expended for roofing. It means that if you assess reserve monies for a capital purpose, it must be spent for a capital purpose. Reserve bank accounts commingle various capital components (roofing, paving, fencing, etc.). That dollar in the account does not know that it is a roofing dollar or a paving dollar. That dollar does not know what kind of dollar it is, other than it is a capital dollar. That is the only important criteria.

7) Money must INCREASE THE CAPITAL ACCOUNT OF THE MEMBER or unit owner-stockholder. This is effectively an automatic process with which the association normally need take no action. The reason is that, as defined in other sections of the Code, a member’s “capital account” is presumed to reflect an increase in value for monies added to reserves.

What all of this means is that the association must be very careful in its handling of reserves IF IT IS FILING FORM 1120. If you’re filing Form 1120-H, you can effectively ignore all of the above and still have a safe tax return.

If the association fails to comply with the above parameters established in tax law, THERE IS NOTHING THAT THE TAX PREPARER CAN DO TO MITIGATE YOUR TAX RISK. The tax preparer’s responsibility is limited to properly presenting reserve activity in Schedules M-1 and M-2 of the association’s Form 1120 tax return. Any errors at this level can generally be overcome during an IRS audit.

How Safe Are Your Reserve Funds?

By: Gary Porter, FMP, RS, RRC, CPA

Many associations, more than half, according to CAI’s recent survey, file IRS Form 1120. We all know the reason; to take advantage of the 15% corporate tax rate versus the 30% homeowners association tax rate. But you have to give something up to gain this tax advantage. And what you give up is the safety of IRS Form 1120-H (IRC § 528). So, most people think they are retaining their safety by keeping their operating bank accounts separated from their reserve bank accounts, and that is all the safety they need. Indeed, that’s exactly what I here many CPAs saying also. But there is more to it than that (of course there is, or why would we need IRS audits anyway?). So, if keeping the bank accounts separated isn’t enough safety, what is? The only legitimate answer is “I don’t know”. And anybody who tells you he (or she) does know, must have a crystal ball, because even the IRS doesn’t know for sure. They keep making up the rules as they go along. Every time we hear of new audit activity (San Diego and Florida come to mind), we find out new things the IRS considers as important factors in accumlating reserves.

Let’s review some of the basics. On Form 1120-H, congress purposely created a safety net that allows associations to accumlate reserves without doing anything special at all. Apparently, just identifying some money as reserves is OK. There are no record keeping requirements. An even if, for some strange reason, the IRS said that this particular money didn’t quality as reserves, WHO CARES? It then becomes exempt function income and it doesn’t get taxed anyway.

But you decided you wanted to save a few bucks, so you filed Form 1120. By the way, let’s look at how much you are saving your association. According to CAI’s survey, the average association reported $ 5,582 of interest income. If we assume that you legitimately have $ 1,582 of deductions aginst your interest income, you have $ 4,000 of Taxable income. Did you notice how the taxable income came out to a nice round number? Neat trick, huh? That’s something they don’t teach you in accounting courses. Only years of brutal experience auditing homeowners associations prepares one to make such important decisions as being able to come up with the exact amount of deductions that will allow me to get to a nice round amount for taxable income. I did that only so I could make the calculation easy. So, with $ 4,000 of taxable income, you pay $ 600 federal tax on Form 1120. On Form 1120-H, you will pay $ 1,170. You are taking this enormous risk to save $ 570. Are you insane? Do you think that as a board member who saved your association $ 570 that your association members are going to thank you? Do you think they will even know? And if they know, will they care? As a board member, you have an obligation to try to get the best services for the best amount of money. (OK, we’re not going to talk about the quality ov government services, because (a) it would take too much space, and (b) “quality government service” is an oxymoron.) But the least amount is not always the best amount. You must consider the risk factor when filing Form 1120.

So, now, let’s look at Form 1120. I mean really look at. Not just as a way to save $ 570. But from a risk analysis standpoint. What does it mean when you file Form 1120? Most importantly, it menas that you are no longer a homeowners association. The term “homeowners association” is defined in IRC § 528, and applies only to an organization that meets the qulifying criteria and files Form 1120-H. So if you are no longer a homeowners association, what are you? A non exempt membership organization as defined in IRC § 277 (as a matter of law; you dont’ have a choice in the matter). And I’m here to tell you, those rules were not written with you in mind. So what you now have to do is contort yourself to look like the type of organization that congress had in mind when they created IRC § 277. And what they had in mind was not an organization that has an obligation to accumulate huge cashe reserve accounts to meet future needs. As you contort yourself, you must comply with a very large body of tax law. Unfortunately, and unlike IRC § 528, this body of law is not codified into a nice, neat set of rules. You have to look at many different categories of rulings to be able to see the whole picture. Too many people see a few key rulings and think they see the whole picture. This is like the story of the three blind men, each touching a different part of an elephant, then trying to describe the entire elephant. You are doomed to failure unless you toch the whole elephant. Likewise, you are doomed to failure on Form 1120 unless you are familiar with the entire body of applicable tax law. Practitioners Publishing Company’s Homeowners Association Tax Library contains more than 100 different rulings at eight different levels trying to capture these concepts in a coherent manner. More than 600 pages (and that’s after deleting the least important sections) of this book are devoted to Form 1120.

The major risks you assume with Form 1120 are quite simple. First, there is the risk that you could expose excess member income to taxation. Unlike Form 1120-H, where the excess exempt function income (a roughly similar concept and definition) avoids taxation, it is taxed on Form 1120, unless you successfully get rid of it. My best , and safest suggestion, is to just pay more accounting fees to your CPA (is that sel serving?). But, if you don’t like that suggestion, there are only three options: (1) pay tax on the excess income, (2) refund it to members or roll it over to the next year under Revenue Ruling 70-604, or (3) transfer it to reserves. Hmmmm! Sounds like more risk to me. Second, there is the risk that you could expose your reserves to taxation. That’s it. Real simple. Only a couple of risks. Actually, I just combined stuff together to make it seem simple.

But hey, are these risks really that great? Why not just rely on the good old IRS audit lottery. Less than 1% of corporations (read that as associations) get audited. And if you don’t get a really sharp IRS auditor, he won’t be familiar with the tax law either, and you might just skate on by. Lot’s of people already have. However, the IRS has announced that within the next two years they expect to develop a tax audit guide for this industry. All of a sudden, the iRS agents will be smarter. And you will have a bigger problem.

Let’s closely examine each of the risks mentioned above. Excess member income. Pay tax on it? Are you kidding? Of course not! So let’s use Revenue Ruling 70-604.

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