98-078

Response January 6, 1999

 

 

REQUEST LETTER

 

October 3, 1998

 

RE: Request for clarification on determining exempt function income and qualifying expenditures when filing an 1120-H Income Tax Return.

 

Dear Ms Rees.

 

INTRODUCTION:

This letter is to request clarification regarding the Utah State Tax Commission's interpretation of the guidelines of determining 60% exempt function income and 90% qualifying expenditures for when filing a 1120H Income Tax Return, particularly considering returns filed by OWNERS Property Owners Association located in COUNTY, Utah.

 

FACTS:

In 1992 the Association reinstituted assessing dues 10 the owners or lots located in LOCATION Plats A & B. The following table sets forth file percentage or Expenses as compared to Total Income:

 

 

 

1992

 

1993

 

1994

 

1995

 

1996

 

1997

 

%

 

%

 

%

 

%

 

%

 

%

 

 

By July 998, a total or over $$$$$ had been shown on balance sheets hr total income of which only 50% had been disbursed for expenses, the balance has been retained Maximum interest income has been 10%. additional income not directly related to assessments is minimal. (Tax returns for the association in 1994, 1995 and 1997 were filed on Form 1120H.) Without a budget being set forth for the Trustees or the membership to approve, the Treasurer once again sent out Assessments in 1998. The excess retention of assessments was explained as Arainy day fund,.but no documentation(such as for IRS Section 118, or for a sinking find) as to the purpose for the retention of these finds has ever been presented or documented in Member or Trustee minutes. The association has NO fee simple common area to maintain.

QUERY

As Corporate Secretary for the Association. I am responsible for assisting in compliance with State Law, and need the Tax Commissions=s assistance to clarify my understanding of this situation. My research of file State of Utah Corporate Franchise and Income Tax Code indicates that it relies upon Internal Revenue Codes for guidance in filing 1120H Income Tax. Returns

1. Is it allowable to assess for dues and retain excess assessments without claiming said dues as income when here is no documentation as 0 the purpose of those assessments or when the fluids will be disbursed'? (IRS Section 45(})

 

2 Is the 60% test for exempt function income satisfied only by the action of assessment, regardless of the purposes or lack thereof for those assessments? (IRS Section 528)

 

3 Is the 90% expenses test met by the disbursement of funds for qualified expenses regardless of the retention of excess assessments during flat tax year? (IRS Section 528)

 

Your assistance in clarification of these matters is greatly appreciated. If you have any questions herewith please feel free to contact me at #####.

 

Sincerely

Enclosures

 

 

RESPONSE LETTER

 

January 6, 1999

 

 

RE: Advisory Opinion - Utah Corporate Franchise Taxation of Homeowner Associations

 

Dear NAME,

 

We have received your request for interpretation of several sections of the Internal Revenue Code (AIRC@) as they pertain to the OWNERS ASSOCIATION (AAssociation@). You have stated in your letter that the Utah Corporate Franchise and Income Tax Act relies upon the IRC, which is true. Because of Utah=s reliance on the IRC, you have asked us how to properly complete the federal 1120H income tax return for your Association.

 

Section 59-7-102(1)(b) of the Utah Code provides that a homeowner association is exempt from Utah corporate franchise taxation if that association is recognized as exempt by the Internal Revenue Service (AIRS@) and has no federal taxable income under Section 528 of the IRC. We currently have records that show that the IRS deemed the Association to be exempt in 1990. Unfortunately, we are not in a position to establish federal income tax exemptions or establish your Association=s taxable income for federal tax purposes. That jurisdiction lies not with us, but with the Internal Revenue Service (AIRS@). Accordingly, for interpretations of the IRC, we suggest you contact the IRS to receive the proper guidance you request.

 

We can, however, offer you guidance as to your Utah state tax obligations. If the IRS determines that your Association has no taxable income for federal tax purposes, then under Utah law, you will have no taxable income for Utah tax purposes. In this circumstance, the Association need not file any Utah state tax return. However, should the IRS determine that the Association does have taxable income for federal tax purposes, then this income is also taxable income for Utah tax purposes. In this circumstance, you would need to report this taxable income on Utah=s TC20HA tax return.

 

Please contact us if you have any other questions.

 

 

For the Commission,

 

Joe B. Pacheco, CPA

Commissioner

^^