IRS Ruling 70-604 and your association

By Zachary Levine, JD and Donie Vanitzian, JD

In 2001, the Internal Revenue Service published a private letter ruling clarifying IRS Revenue 70-604. The Private Letter Ruling 61.00-00 read, in part: The …owners hold a meeting each year to decide whether to return any excess assessments to themselves or to have the excess applied against the following year’s assessments. The ruling concludes that the corporation is not taxable on the excess assessments because the excess has been returned, in effect to the … owners.

Revenue Ruling 70-6-4 and the private letter ruling interpretation allow a board, after receiving approval by its titleholders, to defer income to the next year with hope that its taxable income will be lower. The alternative to deferring income is simply to return excess income to the titleholders who paid it. The IRS and most tax professionals believe that for the decision to be effective, it must be made by a vote of titleholders, not merely the board. If conditions during the next tax year are unfavorable, the association will still end up having to pay taxes on income for both years. This mistake by association advisors could be costly.

Another potentially serious flaw with your board’s actions is that it cannot unilaterally piggyback a vote unrelated to the board removal and election process merely by superimposing it into the director election ballot.

In addition, anyone who votes to ‘abstain’ may actually be casting a ‘yes’ vote for the item at issue unless there are contrary provisions in your association’s governing documents. Most courts hold that an abstention is to be construed as agreeing with the majority. So, if you want to protect your asset, vote either ‘yes’ or ‘no’.