Members, we (the Recreation Centers of Sun City West – Association) wanted to provide you with an important update on where we are at with resolving the tax status issues with our chartered clubs and the Village Store.
You may have heard a lot of rumors or read misinformation in the Independent and on various social media accounts, so we wanted to update you directly.
Let’s first take a look at the history of this issue. Prior to COVID, one of our chartered clubs (Kiva West Bridge), brought to our attention that their tax preparer had concerns about the club’s filing as it appeared they were in violation of IRS tax codes. The codes require that 501(c)7s (social clubs) ensure at least 85 percent of their revenues come from club members (not Association members, but club members). Specifically, no more than 15 percent of a club’s gross receipts can come from non-club members.
Our clubs are independent tax entities with their own tax ID numbers, boards of directors, and operating rules. They exist under the auspices of our Association as chartered clubs, so there is some crossover. However, we do not check their tax filings for compliance or accuracy. We do help the smaller clubs with the digital filing, and we provide general training to the treasurers and officers.
We had a similar compliance issue with clubs in 2011 that was addressed and corrected at that time. Over the years, compliance from craft clubs has slid off the tracks and the Association is attempting to rectify that by encouraging the clubs to get back in line with the rules. Following IRS regulations benefits the clubs and the Association.
One proposal offered by Director Lou Mancuso would dissolve the clubs’ independent 501(c)7 statuses and move the clubs under the Association’s 501(c)4 umbrella. He further proposes that non-Association members could enjoy the clubs by paying a fee.
The impacts of such a major change have not been fully investigated yet, but we do know more staff would have to be hired to run the day-to-day operations of the clubs and handle the accounting for the clubs. This includes accounting for public usage of the club facilities.
The proposal from Mr. Mancuso was discussed at the June 4 Workshop (you can view it here). It is not clear if this proposal has the support of the full Board. The current Board ends its term on June 30. A new Board will be seated July 1 with many of the same Directors. Which officers will be in place at that time is in question as Mr. Mancuso and Directors Sharon Hettick and Lisa Vines have challenged the last election of officers and called for a new vote simply because one of the Directors resigned from the Board a month later for personal reasons. That effort will be voted upon by the Board at a Special Meeting, which begins at 9 a.m. tomorrow (Thursday) in the Lecture Hall. It is open to the community and may also be viewed live here.
When the 501(c)7 tax issues came to our attention pre-COVID, we looked at ways to rectify it and came up with a proposal to help Kiva West continue operating in much the same way they do now. That proposal was shelved during COVID but as operations got back into gear, we looked again at Kiva as well as the other 102 chartered clubs to make sure they were aware of the tax codes governing 501(c)7s.
It soon became apparent that three groups of our chartered clubs had veered off the track in terms of following IRS regulations, Association policies and RR&Ps, and it was time to get them back in line with the rules. The vast majority of our groups operate just as they should with their tax status. About 10 clubs that fall into three distinct categories are the concern.
The three groups include:
- Social Clubs that have a high number of outside guests, where the revenue from those outside guests far exceed the 15 percent limit.
- Clubs, particularly some sports club, that take in outside advertising revenue. In some cases, this advertising was sought to pay off interest-free loans offered by RCSCW to pay for the club’s facility enhancements. (It has since been determined these loans will no longer be allowed.)
- Craft clubs that sell large amounts of products or higher-priced products at the fairs, their storefronts and through the Village Store.
In the case of group No. 3, it became apparent the Village Store was unintentionally promoting this problem. Due to the complicated nature of these issues, the Board met in executive session to receive legal advice from our attorney on how to proceed. The Board also appointed a special committee to investigate the potential tax status issue.
The committee was comprised of Board Treasurer Anne Brown, General Manager Bill Schwind, CFO Pete Finelli, Accounting Manager Tim DeAngelo, Chartered Clubs Chair Donna Maloney, Pickleball Club rep Ken Holtz (for the club advertising issue), Kiva Bridge representative Gary Bosak (for the outside guests issue), and incoming (and now sitting) Director Lisa Vines, as a representative for the arts and crafts clubs since she is a member and instructor with some of the clubs. Our Association attorney and a tax attorney in their firm that is a CPA also were involved.
The committee held three meetings – April 22, April 29 and May 6. These were held in executive session as we were discussing the legal advice received from our attorneys.
The information they gathered was disseminated as quickly as possible after the committee concluded its work and was dissolved. This was expedited due to a number of timing issues, including: COVID restrictions were lifting, the Village Store Manager was retiring, our snowbirds were beginning to depart, and the Governing Board was nearing the end of its fiscal year and the beginning of a three-month summer hiatus.
The first decision made was the difficult announcement that we were temporarily closing the Village Store. The closure was done to give the exiting manager time to get products back to their artisans before the manager’s retirement and the snowbirds’ departure. The store remains in limbo. We are trying to determine its future.
We then held a meeting with the clubs – all 103 of them! – broken into three sessions to accommodate everyone. We went over our findings and discussed the need for them to get back to following current policy and stay within IRS regulations or risk losing their federal tax-exempt status.
Closing the store resolved that one area of non-compliance; in whatever format or location the store reopens, it will be done in such a way that the issue remains resolved. As far as the fairs, our Events Manager is currently working on a craft fair sale that will allow for member sales while remaining in compliance with tax codes.
At this time, we still have some clubs operating in probable violation of the IRS rules and RR&Ps. Director and Chartered Clubs Chair Donna Maloney attempted to offer a solution by drafting proposed changes to the RR&Ps. The Chartered Club Committee unanimously approved the changes, and they were brought to the Board on June 4. The issue was contentious, and the proposed changes were not approved. (You can view the discussion here.)
Since that time, Director Lou Mancuso has announced he is leading a recall effort on Director Maloney and another Director who supported the changes – incoming President Sue Fitzsimons.
As we know more, we will keep you apprised in future editions of the enews (and the Rec Center News to the extent the deadline allows). If you know residents who do not get the enews, we ask that you encourage them to sign up for future updates.