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THE 2009 FINANCIAL ADVISORY COMMITTEE REPORT ON

THE FRIENDS OF THE COLUMBIA ASSOCIATION

COMMITTEE MEMBERS
Chair: James Howard, Long Reach
Vice-Chair: Dan Woodruff, Dorsey's Search
Roger Hultgren, Harper's Choice
Alan Romack, Owen Brown

COLUMBIA, MARYLAND
FEBRUARY 12, 2009
The 2008 Financial Advisory Committee

February 12, 2009

Miles Coffman
Chair, Planning and Strategy Committee
Columbia Association, Inc.
10221 Wincopin Circle
Columbia, Maryland 21044

Dear Mr. Coffman,

Please accept the attached report from the 2008 Budget Committee on “The Friends of the
Columbia Association.”

As always, members of the Financial Advisory Committee are available for future consultation
regarding this report or other matters the Board of Directors or the Planning and Strategy
Committee require. The other committee members and I sincerely appreciate the opportunity to
have served the Columbia Association and residents as members of the Financial Advisory
Committee and on their behalf, I remain,

Respectfully,

James P. Howard, II
Chair, Financial Advisory Committee
The Friends of the Columbia Association 1

Charge
The Columbia Association Board of Directors (Board) asked the Financial Analysis Committee
(FAC) to analyze the best use of the Friends of Columbia 501(c)(3) nonprofit corporation as it
relates to CA's fiscal condition.

Recommendation
The Financial Advisory Committee recommends terminating the Friends of the CA and
proceeding no further with developing a plan to collect and use tax exempt donations. The
Committee bases this recommendation on the complexity of the political and economic
environment and expects the return on investment to be lower than initially anticipated.
The Friends of the Columbia Association 2

Background
The Columbia Association (CA) is considered a social welfare organization under section 501(c)
(4) of the Internal Revenue Code (IRC), like many other homeowners associations. This is
different and distinct from organizations typically described as charitable, which are addressed
by section 501(c)(3) of the IRC, which also includes religious, educational, scientific, and
literary organizations. As a social welfare organization, the CA is not eligible to receive
donations which are deductible from income for the donor's tax purposes. Further, it may not be
eligible to receive grants or other discretionary funds from governmental programs or private
foundations which are restricted to charitable purposes, by program or donor.

Because of these restrictions, the CA considered establishing an adjunct entity which would be
considered exempt under section 501(c)(3) of the IRC, allowing donations to be deducted from
donor's income for tax purposes. In 2005, the Board of Directors of the CA voted to establish the
"Friends of the Columbia Association, Inc." (Friends of the CA) and directed the staff to pursue
the opportunity.

The Maryland State Department of Assessments and Taxation (SDAT) accepted articles of
incorporation for the organization on November 10, 2005. If other corporate formalities were
pursued, they are not on the public record. However, to be considered for exemption, the
Internal Revenue Service (IRS) requires organizations to file Form 1023, "Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code." If the IRS
finds the organization's purpose meets the requirements of section 501(c)(3), it authorizes a
determination letter (for new organizations, there is a five year probationary period) and adds the
organization to Publication 78, "Cumulative List of Organizations described in Section 170(c) of
the Internal Revenue Code of 1986." As of January 22, 2009, the Friends of the CA does not
appear in Publication 78. According to SDAT, the organization is considered active and has filed
personal property tax returns for the years 2006, 2007, and 2008.

Eligible Activities
Determining which activities of the Columbia Association may be considered tax exempt under
section 501(c)(3) of the Internal Revenue Code is a complex question. Some programs run by
the CA are plainly eligible for 501(c)(3) recognition. However, other programs may not be and
others may be under restricted circumstances. The Financial Advisory Committee finds two core
program areas funded by the CA through the assessment and user fees which it believes could be
partially or completely funded through charitable donations. These areas represent a broad swath
of the CA's activities and are not thematically related.

First, the largest block of CA program activities which may be partially funded through
charitable funds are the open space programs. Open space management will cost CA about
$15,500,000 in fiscal year 2010, representing about 27 percent of CA's budget for this coming
year—a substantial portion of CA's total budget. The IRS has ruled that tax-exempt funds can be
used to maintain public park land and noted that "the courts have consistently upheld trust
dedicated to community beautification and the preservation of natural beauty." 1 This definition
1. Internal Revenue Service, Revenue Ruling 78-85, 1978-1 C.B. 150.
The Friends of the Columbia Association 3

might include the Friends of the Columbia Association.

Additionally, the Columbia Art Center, owned and managed by the CA in Long Reach, would
likely be eligible for charitable funding. The Art Center provides both art education, on a user
fee basis, and gallery services to artists in Columbia. Both activities are historically considered
eligible for 501(c)(3) recognition. 2 The Art Center will cost the CA $858,000 in fiscal year 2010
and representing about 1.5 percent of the budget. While significantly smaller than other
programs maintained by the CA, these costs could be partially or completely funded through
external donations. Further, there is a significant distribution network for funding art exhibits
and related projects that the Art Center may then become eligible for.

Additional activities in the community services area may qualify as charitable depending on
implementation or other circumstances. Those activities with educational components would
qualify, as would CA-issued grants to other 501(c)(3) recognized organizations. Further,
activities in sports and fitness may be charitable, as they have been regarded as such in the past.
However, the CA already faces criticism over its competitive advantage versus commercial
fitness service providers. Pursuing charitable status for the CA's sport and fitness facilities may
intensify those criticisms and cause unforeseeable blowback in the competitive market.

Moving Forward
If the Columbia Association were to reopen the discussion of the Friends of the Columbia
Association, for pursuing charitable donations, a significant amount of work will be required. In
addition to formalities, such as finalizing recognition of tax-exempt status under section 501(c)
(3) of the Internal Revenue Code, there are two major concerns the Financial Advisory
Committee has with respect to starting up the organization.

The first concern is the management. In 2005, the articles of incorporation filed with the
Maryland State Department of Assessments and Taxation state that the initial directors of the
organization were listed as the ten directors of the CA at the time. This suggests a long term plan
for the CA's board of directors to serve conterminously with the board of directors of the Friends
of the CA. This may be an untenable solution in the long term.

The Board of Directors already manages an extremely large organization and placing additional
responsibilities may cause undue stress and be perceived as a burden. This may potentially
introduce destabilizing factors that can harm the long term health of the Friends of the CA and
chill potential donors.

Because of these concerns, the CA ought to reform the management of the organization,
appointing a group of outside directors, including at most the CA's president and chairman of the
board of directors. Additionally, a representative of the ten villages may be selected to provide
additional insight and feedback on the needs of the community. The outside directors should be
selected for their skill and knowledge in supporting non-profit organizations. This model
emulates the common structure of a public university and an affiliated foundation which

2. Dennis Zimmerman, “Nonprofit Organizations, Social Benefits, and Tax Policy,” National Tax Journal 44,
no. 3, (September 1991): 341-349.
The Friends of the Columbia Association 4

maintain separate and only minimally overlapping governance structures. This would increase
the profile of the organization among potential donors and increase its ability to solicit funds and
grants.

The second concern the committee has is support structures. While the Friends of the CA may
proceed for some time with no employees or formal support, it will need access to bookkeeping
and record keeping functions. As a result, the administrative functions of the CA would need to
be prepared for and accept responsibility for supporting the organization including basic
functions, with a willingness to accept oversight from an outside body (the Friends of the CA
board of directors), in accordance with the duties performed. Again, this model emulates the
common structure of a public university and affiliated foundation, which mutually support each
other in pursuit of their missions.

Revenue Sources
There are three primary revenue sources available to the Friends of the Columbia Association.
The first revenue source is private donations. Private donations may come in either restricted or
unrestricted form, with the freedom to set conditions on disbursement and use established by the
donor (though the Friends of the CA would be able to reject donations if it did not agree upon the
conditions). These donations take the usual form of charitable donation and may include
bequests, large one-time donations, naming opportunities for Columbia Association facilities, or
multiple repeat donations of small sums from dedicated supporters.

A related option for funding comes from employer matching programs that provide a matching
gift when employees make charitable donations. Additionally, given the proximity of Columbia
to several major Federal employment centers, the Friends of the CA may be eligible for the
Combined Federal Campaign, which aggregates donations from Federal employees through a
paycheck deduction.

The second potential revenue source is grant funding through private foundations and
government programs. Many grants in both categories require the recipient be recognized as a
501(c)(3) tax exempt organization. This requirement assures the grant-makers of additional
oversight provided by the Internal Revenue Service and the courts in establishing that charitable
organizations utilize resources according to charitable missions.

Finally, there is the option for the Friends of the CA to pursue long term funding opportunities
and establish endowed funds for particular or general purposes to support the CA's activities.
Endowed funds invest the principal of a donation and provide continued funding, indefinitely,
based upon income from the investment. Such funds could be required by individual donors (see
above), or could be established independently by the Friends of the CA. Investment income is,
however, unpredictable and may not be available in a given year.

Recommendation
The Financial Advisory Committee recommends terminating the Friends of the CA and
proceeding no further with developing a plan to collect and use tax exempt donations. The
The Friends of the Columbia Association 5

Committee bases this recommendation on the complexity of the political and economic
environment and expects the return on investment to be lower than initially anticipated.