Revenue Ruling 70-604

The original text of IRS Revenue Ruling 70-604 is shown below.

IRS Headnote.
Excess assessments by a condominium management corporation, over and above the amounts used for the operation of condominium property, that are returned to the stockholder-owners or applied to the following year's assessments are not taxable income to the corporation.

Full Text.
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.

Analysis

The above test seems very innocuous, but needs to be dissected and analyzed to realize the full impact of the wording used.  My conversation, many years ago, with the author of this revenue ruling determined that the rather vague wording was purposely used to leave the application of the Ruling as flexible as possible.  Unfortunately, that same vague wording has contributed to many misinterpreations, as many people have decided to conclude what they wanted, rather than what is expicitly stated.

The attached analysis of Revenue Ruling 70-604, excerpted from PPC's (Practitioners Publishing Company) "Homeowners Association Tax Library," provides a line by line expert analysis of the Ruling.

Serious tax researchers (CPA's and tax attorneys that serve the industry) should subscribe to PPC's online tax service for full information.  The "Homeowners Association Tax Library" provides ALL relevant tax citations for the homeowners association industry, with expert anlysis and crossreferencing of all citations.