1. Tax Law and Tax Exemption
Updates and Effects on
Community Associations

2. Presenters
Gary Porter, CPA
John Knobelsdorf II, CPA, JD

3. The Presentation at a Glance
Association Tax Basics
Differences between 1120-H “exemption” and 501(c)(4) exemption
The role of governing documents
Qualification requirements by Form
New issues with 501(c)(4) exemptions

4. Association Tax Basics
CAI Policy on Taxation
All associations MUST file tax returns

5. Association Tax Basics Form 1120-H
Residential homeowners associations
No tax risk - It’s all about risk, not rates
Qualifying for Form 1120-H
30% tax rate
Only 3 IRS audits in recent years

6. Qualification Requirements Form 1120-H
Residential in nature
60% exempt function revenues test
90% exempt function expenditures test
No private inurement test
Must ELECT to file

7. Association Tax Basics Form 1120
Nonexempt membership organizations
IRC Section 277
VERY HIGH tax risk
15% AND HIGHER tax rate
More than 50 IRS audits in last 20 years – ALL BUT ONE with negative consequences
(Default Form unless you qualify under any other section of the code)

8. Qualification Requirements Form 1120
Default Form if you don’t file 1120-H
Nonexempt membership organization

9. Form H Comparison
(Default Form unless you qualify under any other section of the code)

10. Form 1120 Checklist
(Default Form unless you qualify under any other section of the code)

11. Association Tax Basics Form 1120-C
Cooperative Organizations
Moderate tax risk
Integrally intertwined activities
Patronage dividends

12. Qualification Requirements Form 1120-C
Operation on a cooperative basis
Subordination of capital
Democratic control
Sharing of “fruits” – operation at cost
Does this sound like a condominium association?

13. Association Tax Basics Form 990
Exempt Organizations - 3 Types
501(c)(4) – Social Welfare organizations
501(c)(7) – Recreational organizations
501(c)(3) – Charitable organizations

14. Association Tax Basics Form 990
Exempt Organizations
No tax risk
Same tax rates as Form 1120 for any taxable activities
Only 1 known audit of tax exempt associations in last twenty years

15. Differences between 1120-H and 501(c)(4) exemptions
1120-H is only partially exempt
501(c)(4) associations “more” exempt, AND some activities that are taxable on 1120-H are exempt on 990

16. Qualification Requirements Form 990
501(c)(4) may self declare
501(c)(7) must submit an application
501(c)(3) must submit an application

17. Qualification Requirements Form 990 under 501(c)(3)
Charitable in nature
Only 2 known associations exempt under 501(c)(3)

18. Qualification Requirements Form 990 under 501(c)(7)
The “Country Club” status
Recreational in nature
Maximum 15% nonmember income
No architectural controls
Cannot maintain roads serving residences

19. Qualification Requirements Form 990 under 501(c)(4)
“Social Welfare” organizations
Must serve a community
Promote the common good and welfare
Cannot benefit a private group of people
No maintenance of unit exteriors

20. Qualification Requirements Form 990 under 501(c)(4)
3 ways to qualify
Association itself is a community
Public access allowed to community
Occupies same area as a recognizable governmental entity

21. Qualification Requirements Form 990 under 501(c)(4)
Key rulings
IRC Section 501(c)(4)
Treasury Regulations 1.501(c)(4)
Treasury Regulations 1.337(d)(4)

22. Qualification Requirements Form 990 under 501(c)(4)
Key Rulings
Revenue Ruling
Revenue Ruling 74-99
Revenue Ruling 80-63

23. Qualification Requirements Form 990 under 501(c)(4)
Key Court Cases
Flat Top Lake
Rancho Santa Fe

24. Qualification Requirements Form 990 under 501(c)(4)
New Developments
IRS is refusing retroactive recognition
IRC 6033(j) argument
Revenue Procedure argument
IRS is wrong – how to support the retroactive recognition position