||| FROM ELISABETH BRITT |||
Introduction
A 501(c)(12) organization, as defined by the Internal Revenue Code (I.R.C.) includes benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies, electric companies, or similar organizations. These cooperatives are designed to provide essential services to their members at the lowest possible cost. To maintain their tax-exempt status, these organizations must derive at least 85% of their income from members, collected solely to cover losses and expenses.
Selling a 501(c)12) mutual ditch or irrigation cooperative like EWUA, involves several critical steps and considerations. RCW 23.86. outlines the process a cooperative must follow to ensure a smooth and compliant transaction. It includes a requirement that two-thirds of the board of directors and two-thirds of the members consent to the sale.
- Board Approval and Member Consent
- Board Approval: The board of directors must first approve the sale, typically requiring a majority vote.
- Member Consent: As the owners, members must also approve the sale, usually through a vote at a special or annual meeting.
- Valuation
- Professional Appraisal: Hire a professional appraiser to determine the fair market value of the cooperative’s assets.
- Financial Statements: Prepare detailed financial statements to present to potential buyers, ensuring transparency and accuracy.
- Legal and Regulatory Compliance
- IRS Requirements: Ensure compliance with IRS regulations for 50(c)(12) organizations, including the 85%-member income test.
- State Laws: Adhere to state-specific laws governing cooperatives and mutual ditch companies.
- Finding a Buyer
- Potential Buyers: Identify potential buyers, which may include other cooperatives, private companies, or municipalities.
- Marketing: Market the cooperative through industry networks, brokers, or public listings to attract interested buyers.
- Negotiation and Sale Agreement
- Negotiation: Negotiate the sale, including price, payment terms, and any conditions.
- Sale Agreement: Draft a sale agreement outlining all terms and conditions, and have it reviewed by legal counsel.
- Distribution of Proceeds
- Member Distribution: Distribute the proceeds to members based on their patronage or ownership share.
- Debt Settlement: Ensure all debts and liabilities of the cooperative are settled before distributing proceeds.
- Dissolution
- Formal Dissolution: Follow the legal process for dissolving the cooperative, which may include filing dissolution documents with the state.
- Final Tax Filings: Complete any final tax filings required by the IRS and state tax authorities.
Conclusion
Despite the flurry of scandalous articles and emails being circulated by EWUA claiming otherwise, selling a 501(c)(12) mutual ditch and irrigation cooperative like EWUA is a complex process that requires careful planning and strict adherence to legal and regulatory requirements. Hence, a sale of Eastsound Water Users Association cannot be accomplished under a shroud of
secrecy.
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Eastsound Water Users Association has become nothing short of an episode of the Jerry Springer show.
Out of all of the various arguments and shenanigans that have taken place, what is most worrisome to this member is the potential that the organization seems to be placing itself in for potential damages related to slander and libel. The statements that are being made have the potential to bring additional lawsuits to the organization above and beyond the issues that are already in play. Is there no one in the organization who has ever been involved in litigation? Is ESWUA council asleep at the wheel? Why is the staff or any member of the board engaging in online media or emailing campaigns other than to report bare facts?
If they keep it up, they won’t have to worry about the organization being sold, they’ll be bankrupt from settling all the lawsuits they have brought upon themselves. As my attorney once said while heading into trial: “If you can manage to stay quite through the whole thing, there’s zero chance they can twist your words. Every time you open your mouth, you’re putting bullets in their gun.” Based on that, there’s a shootout brewing at the Eastsound Corral!
Like many, I only have the bandwidth for so much in my life. Even so, as this issue affects me, I have been been trying to keep abreast of it, (that is, I’ve read everything that’s been sent my way and have bookmark all of it for comparison purposes and future reference). But, like many, I’ve been confused along the way as the issue is so complex, I know and respect insiders from both sides, and there’s obviously a lot of misinformation going around. As earnest as all of the players appear, it’s also apparent that there are some who are not telling the truth, the whole truth, and nothing but the truth. As such, I find myself trying to keep up but also keeping out of the fray.
For those that aren’t EWUA members and are also trying to keep up with the issue, know that I received the following from EWUA this morning, (see below). From reading this one of the questions that I would like to have answered is, “who is the ‘deep pockets member’ that is being referred to in the fourth paragraph up from the bottom?”
“He told me he had a “deep pockets” member who can help to make it so that we could, “make the members an offer they can’t refuse.”
From EWUA 8/20/24–
Good-morning friends and neighbors.
I am Teri Nigretto, President and Director of EWUA. Most of you know me as Teri.
For just a moment, I would like to step off my director’s platform and give you just a tiny peek into what it is like to be me.
I wake up each day with a target on my back. Or is it crosshairs on my forehead or poison in my veins? You get the idea. It happens because there is one individual – a relative newcomer to our beautiful island community – who devotes each and every one of his many waking hours to making my life as miserable as possible. Why? Because by simply doing my job, I stand in the way of his innermost fervent desire – namely to own or control a public water system.
You know him as Steve Smith, of course. We know him as “Plaintiff.” We also know he is exercising his American right of free speech, and we respect that. Sadly though, Mr. Smith disrespects his own right by trading endlessly in relentless, withering tirades of misinformation, personal attacks, distortion, innuendo, and occasional outright lies – all to clear a pathway for an ownership plan he is not actually telling you about.
But enough about me. We will come back with more another time. Let me introduce Scott Lancaster, former VP and Board Treasurer of Eastsound Water, who served under Smith’s leadership and himself became a target of Smith’s first RecallWater.com campaign.
Scott, you have the floor…
In his own words, Scott Lancaster
In early Oct. 2021, I was serving as VP of Eastsound Water Users Association. I received a phone call from the President of EWUA, Steve Smith, ostensibly to talk about the agenda for our upcoming meeting.
Towards the end of the call, he asked me if I had a few minutes to talk about a very lucrative idea that he was working on. I said I would listen. He said, “you know water is the new oil and I have a plan for us all to prosper from it”.
He then told of his plan to take over EWUA and turn it into an employee-owned company of which he would be 51% owner, but those in on the start would get a piece of the action equal to their input. All I had to do was to support it now with a yes vote when it came before the Board.
I told him I didn’t like the idea and that the membership would never support it. He told me he had a “deep pockets” member who can help to make it so that we could, “make the members an offer they can’t refuse.”
He followed with, “when we have control of EWUA we will have access to low interest loan money to pay back the initial investors.” I told him, “HELL NO – I would not vote for it and in no way support this coup of EWUA.”
He did not speak to me directly about this again. I heard from a friend, later, that he “needed to get Lancaster off the Board.”
This was the beginning of the current turmoil that we are all experiencing…
Thanks much for this excellent summary, Elisabeth. I hope it helps staunch the flow of misinformation that’s been arriving at member’s email in-boxes of late, not to mention on these hallowed pages. It would be great to have someone like you on the EWUA board, so I hope you consider running when the elections finally occur this year.
Of course the current Board members could have located this information with a bit of research, instead of sending inflammatory emails around, and posting and then un-posting to theorcasonian on more than one occasion. And Alex makes an important point regarding the legal exposure that accusations from the current Chair, Treasurer and General Manager have made about Steve Smith trying to take things over. The last thing we need is the drain on our accumulated organizational savings caused by yet further legal expenses. This manager and current and prior Board members have already wasted far more money on such expenses than was necessary.
Perhaps some of us concerned members of EWUA should form a “stability group” to study the issues that the current board is unable to deal with and make recommendations, modeled on the one formed last year to study the OIFR conflicts?
A sale of the EWUA’s assets might incur a transfer tax (I haven’t found an exception but there might be one), and if the sale is as a result of marketing, would likely be to a profit-oriented group of investors. Given such a sale, you can count on increased rates. I do not see this as benefiting the customers whose predecessors created the EWUA for the least expensive reliable source of potable water.
Thank you for sharing your thoughts, Bill. I’m not advocating that we sell EWUA to another entity. I’m just explaining the process that takes place if and when a sale is proposed.
It’s important for members understand that there are statutory regulations in place to protect them, should they object to a future proposed sale or merger of the association.
I think we are largely in agreement, Elisabeth, and my comment was not a criticism of your helpful comments. I do think that a water district might alleviate some of what is going on, but I also think that there may be a failure on the part of many people to put the facts into the context of experience even if there were instead a water district.
People want transparency, not understanding that in personnel matter, even (particularly) messy ones, there can be no transparency. Public disclosure of some matters may expose the organization to liability. Life on a board is not black and white; some matters involving sums that if litigated would involve attorneys fees that would dwarf the amount in contest. In such cases a responsible board might let the matter lie. The foregoing is only to give an example of the kind of thing that upsets people but must be accepted with gritted teeth.
I’m only hoping to lower the temperature somewhat. The amount of time and energy spent on acrimony is not productive, and we all know it.
The election is another matter.