What is excess revenue and IRS ruling 70-604?

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  1. Rev. Ruling 70-604 states that: A condominium management corporation assesses its stockholder-owners for the purposes of managing, operating, maintaining, and replacing the common elements of the condominium property. This is the sole activity of the corporation and its by-laws do not authorize it to engage in any other activity. A meeting is held each year by the stockholder-owners of the corporation, at which they decide what is to be done with any excess assessments not actually used for the purposes described above, i.e., they decide either to return the excess to themselves or to have the excess applied against the following year’s assessments. Held, the excess assessments for the taxable year over and above the actual expenses paid or incurred for the purposes described above are not taxable income to the corporation, since such excess, in effect, has been returned to the stockholder-owners.
  2. The Revenue Ruling 70-604 only applies if an association files Form 1120, and an election must be made every year.
  3. 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.
  4. It is important to note that an association cannot make an election under Revenue Ruling 70-604 to transfer any excess net membership income to the replacements reserves as a capital contribution. The IRS position is based on the theory that, since funds were not earmarked for capital items through the budget, the original usage of the funds was not capital in nature. The IRS also holds that an organization may not change the nature of the intent for which the money was originally to be spent. In other words, a taxable event would occur if excess funds that are transferred from the operating account to the replacement reserve account. This does not exclude an increase to the reserve-allocation budget in the subsequent year.

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