TAX TREATMENT OF CERTAIN INCOME ITEMS

FOR CONDOMINIUM AND HOMEOWNERS' ASSOCIATIONS

Under IRC Section 277, member assessments for major repairs and replacements are nontaxable contributions of capital if they meet certain criteria. (See discussion beginning in Paragraph 501.14.) Under IRC Section 528, even member assessments for future major repairs and replacements that are not considered to be contributions of capital (for example, painting), are nontaxable because they relate to the CIRA's exempt function activities.

Under IRC Section 277, late fees, fines, and penalties from members are membership income because they result from transactions with members. There are differences of opinion, however, about whether they are taxable or nontaxable under IRC Section 528. Some accountants believe that they are taxable because they are not assessed proportionately to all members. They are similar to "if-and-when-used" charges, which are considered to be nonexempt function income. In the authors' opinion, however, late fees, fines, and penalties are exempt function income because they are derived from owners in their capacity as owner-members rather than in some other capacity, such as customers for services. Furthermore, the legislative intent of IRC Section 528 is not to tax members of an association for doing on a mutual basis that which they could do on an individual basis and not be taxed. On an individual basis, the only taxable income is from other unrelated business activities.

Under IRC Section 277, transfer fees and move in/move out fees are membership income because they result from transactions with members. For the reasons discussed above, there are differences of opinion about whether they are taxable or nontaxable under IRC Section 528. In the authors' opinion, they are exempt function income.

Interest on state or local government obligations is not taxable by statute [IRC Section 103(a)].

Under IRC Section 277, fees charged for services to members generally are considered to be membership income because they result from transactions with members. That conclusion is supported by Revenue Ruling 68-387, which held that "income derived from tenant-shareholders" of a cooperative housing corporation included amounts paid for the use of a swimming pool on an "if-and-when-used basis" because such payments are "associated with the occupancy of the corporation's property." Furthermore, proposed Regulation 1.277-1 required associations to allocate rents or lease income from concessionaires that operated facilities by charging fees between membership and nonmembership based on usage, and it permitted expenses to be allocated in that same proportion. Although the proposed regulation has been withdrawn, it does indicate IRS thinking on the matter. Under IRC Section 528, fees paid by members for services and per use admission fees are not exempt function income unless (a) amounts are paid by members not more than once in any 12-month period and (b) the privilege obtained from the payment of those amounts lasts for the entire 12-month period (or other period if the facility is not used for the entire 12-month period).

Private Letter Ruling 8216056 stated, however, that parking fees received from members of a condominium association for assigned parking spaces are exempt function income because each owner owned a portion of the common area garage, and all were charged based on their pro rata share. Thus, income was derived based on their capacity as owners, not as customers receiving services.

Refundable key fees should be recorded as a liability.

Under IRC Section 277, utility pass-through charges are membership income because they result from transactions with members. Under IRC Section 528, those charges can be either exempt or nonexempt function income, as discussed beginning in Paragraph 502.31.