Periodically, we receive questions from readers regarding specific issues. This one came in recently, and we passed it along to one of our sponsors, Gary Porter CPA for comment.
Question - I am the treasurer of our Social Committee of our Association. I am not a member of the board of directors, but do report to the board on behalf of our committee, which is one of several within the community. It was decided years ago that the Social Committee would act in an oversight capacity for a number of clubs that some of our members have formed over the years. While we have more than 1,000 members within the community, most clubs consist of just a few dozen people that share common interests and want to perform certain activities together on a group basis.
The Social Committee is the “bank” for funds raised by our various clubs and organizations. The Social Committee has it’s own bank account, but it was established using the Association’s federal ID number. This account is separate from any Association operating or reserve accounts and is used just for the club activities. Some clubs also raise funds to pay for projects in the community, such as new benches for one of the parks.
This year, our Board of Directors informed us that any committee funds in excess of their budget was to be turned over to Association for use in the operating budget. The Board’s position is that the Social Committee is part of the Association, and any funds in excess of budget are essentially “profits” and therefore, do not belong to the committee. We’re stunned. It just doesn’t seem right. Can you provide any information on this topic?
Answer - This may be a legal question more than an accounting question, but let me address the accounting and tax issues. I have seen a similar issue arise in a number of associations across the country, and have seen three different ways in which "club" issues have been handled.
1) Complete separation - Very rarely, I have seen situations where the clubs operate completely separately from the association, and establish their own bank accounts, and have no direct relationship to the Association, other than the fact that their membership is a subset of the Association's membership. In my mind, this is probably the most correct manner of dealing with clubs, but the issue that makes this very rare is that someone other than the Association must provide a federal ID number (or social security number) to the bank in order to open a bank account. When operated in this manner, the clubs are clearly separate entities from the association, and would be recognized as such by the IRS, who would require that these clubs must file income tax returns. Since most of these clubs either would not, or do not, file for tax exemption, then they are considered by the IRS to be nonexempt membership organizations and must file accordingly. There are a number of tax issues to consider.
2) Agency relationship - Some associations take the position that "club" monies are the property of the club and are held "in trust" by the association for the separate benefit of that club. The underlying theory is that the club is comprised of only a small number of members (a subset of the total membership), whereas the association consists of ALL members, and that the club operates separately. Normally, in this arrangement, the clubs have separate bank accounts held under the association’s federal ID number.
What we have usually seen in this instance is that the activities of the clubs are NOT reported in the association's financial statements nor reported for tax purposes, as they are not considered to be activities of the Association. The financial activities of the clubs are often not even reported to the association. A variation is that the bank account balances are treated recorded as assets with an offsetting “trust” liability. However, the income and expenses are generally not recorded, or are disclosed only as supplemental information to the association’s financial statements.
The challenges with this approach are that bank account appears to be association property, as it operates under the association’s federal ID number. Theoretically, these activities should be reported for tax purposes. From a control perspective, taking the position that the bank account is technically association property, then the board is responsible for the funds, and should require regular accounting from the clubs as a condition to the establishment of the bank account. In addition, a board member should always be one signer on the account, simply so the board has access to the account information.
It is also possible that the association’s auditor may raise issues of internal accounting controls over the club’s transactions.
3) Part of association - Some associations take the position that since the association's federal ID number is used to identify the bank account, that the club monies belong to the association and are used by clubs only at the pleasure of the board of directors. Under this theory, the separate club membership is ignored, and activities of the clubs are reported in the Association's financial statements as (restricted) activities of the Association. This resolves the issues related to control and ownership of funds, and financial and tax reporting of club activities. Presumably, no clubs would be permitted to form under this arrangement unless approved by the board of directors and the club’s activities were consistent with those of the association.
This sounds like the situation described in the question submitted by your reader. Although, I have never seen an Association then "claim" the club's money.
Conclusion – I’ve simply described above what I have seen in practice. Scenario one above generally does not enter into the discussion, as the complete separation has already resolved both control and reporting issues. I have generally allowed the association’s intent to be the guiding factor in deciding between scenarios two and three above in how to report activities of clubs. We have not sought a legal opinion as to which of these two scenarios might be considered either preferable or required. Perhaps we can get a lawyer to weigh in on this issue.
