Revenue Ruling 70-604 was published by the IRS in 1970 in response to tax practitioners’ request for some sort of relief from the inherent inequities of homeowners association filing Form 1120, at that time the only tax filing option for non exempt home homeowners associations. This ruling is viewed as an elective, beneficial ruling. Elective, because it does not automatically apply and beneficial because there is no downside risk to making an election under Revenue Ruling 70-604.
The purpose of Revenue Ruling 70-604 is to allow a homeowners association to avoid taxation on its excess membership income by either refunding it to members or carrying over the excess to the following tax year.
This IRS ruling only applies to associations that receive an excess of funds at the end of the year must decide if those funds can be moved into a reserve or if they must be rolled over to the operating cost for the following year. According to some public accountants for other associations, it’s best to apply those excess funds to the reserves – thus cutting down Assessment costs to the membership.
There are no special requirements or actions required for those Associations that file Federal Form 1120H tax returns. They are just required to pay 30% tax on their “Non-Exempt Function income.” If an Association wants to file Federal Form 1120 as a technique to obtain the 15% tax rate on their “Non Exempt Function” taxable income under $50,000, then the conventional wisdom is that every year it must comply with Internal Revenue Service Revenue Ruling 70-604 and have their owners vote at their annual meeting to comply with the terms and conditions contained in the ruling.
Mr. Don Haney, CPA suggests without going into all the IRS hierarchical rules, the Internal Revenue Code trups IRS Revenue Rulings. The path he suggests Associations consider is to report any year-end “Exempt Function” excess of income over expenses as a “Section 118 Contribution to Capital.” In other words, a transfer into the Association’s Reserve account. By using this technique he has have been able to obtain the desired 15% tax rate result, without requiring owners to vote at the annual election. This is the basic concept. He also stresses that there are several nuances to this process and it should not be done without professional advice.
June 10th during the Annual Pine Mountain Member’s Meeting, Glenn Cline discussed this issue. Unfortunately, the 2016/2017 Board of Directors prevented the standing annual election that would allow each member to vote Yes or No to this ruling. Those votes were locked up with all the election ballots. Therefore, Glenn Cline presented the details of IRS Revenue Ruling 70-604 to the members present and took a vote of those in attendance. The majority of members present, voted “Yes, I’m in favor of approving IRS Revenue Ruling 70-604 for tax year ending June 30, 2017 for the Pine Mountain Property Owners Association.
I strongly believe we (POA) should seek professional advice and guidance in this matter.