What is Happening on the Tax Front?? - originally published in 1994
By: Gary A. Porter, CPA
You would have to have been living on the moon during the last few months to not be aware of the fact that several (many, depending on who you talk to) associations in the San Diego area are undergoing IRS audits. This topic was deemed so "hot" that a special session was convened at the May National Conference in Seattle to discuss the subject. The stated intent was to attempt to disseminate the facts and determine what position CAI should be taking on this matter.
As one of the panelists, my personal opinion is that too few facts were released. It is particularly difficult to attempt to evaluate a complex technical subject such as this when those individuals involved will not provide sufficient evidence (copies of the underlying tax returns and IRS audit reports) to allow anyone to perform any kind of technical analysis. (Although having followed many of these CPAs on association audits, I have seen and do have copies of tax returns of most of the CPAs involved in these IRS audits. I know how they prepare their tax returns.)
Practically the only fact that everyone presently agrees on is that only form 1120 tax returns are being subjected to audit.
The IRS auditor has apparently stated that if form 1120-H tax returns had been filed, there would be no tax deficiency notices. This does not mean we have only form 1120-H as a single option, however. It means that you must be extremely careful in filing on form 1120 to comply with the letter of the law to avoid the results encountered by the San Diego associations.
Given the fact that we have not received any better information, and may not until these audits are concluded, it is difficult for CAI to form any conclusion as to what is the appropriate course of action. The most effective thing that CAI can do is attempt to positively influence legislation for the future. In this regard, the CAI national accountant's committee approved, at the Seattle conference, a position paper which I drafted for the committee on federal taxes. The intent is to approve it as a position paper for submission to legislators, for the purpose of effecting positive changes in the federal tax law as it affects homeowners associations. This paper still needs to be reviewed and approved by many people before it can be considered as representing CAI's position.
However, the importance and relevance of this document cannot be overlooked. Given the current IRS activity, it is time for CAI to take positive action. The purpose of stating here that this work is going forward is simply to keep our members informed that we are working actively for the community association industry.
SUMMARY OF PROPOSED POSITION ON HOMEOWNERS ASSOCIATION TAXATION
The present tax situation for homeowners associations is unique within the entire area of tax law. This is the only organization that may annually choose which of two forms it wishes to file for each tax year. It has created gross inequities, unintended results, and a level of complexity that has befuddled tax preparers nationwide. The appropriate response is to simplify the tax law with respect to homeowners associations. This would include eliminating the options and reducing the complexities that exist. Without setting forth all of the detailed arguments for such modifications which are included in the position paper, we will simply look directly to the recommendations.
The suggested changes to the Internal Revenue Code are:
(1) eliminate the residential requirements of Internal Revenue Code Section 528,
(2) eliminate the 60% gross revenue test of Code Section 528,
(3) eliminate the 90% expenditure test of Code Section 528.
The above changes would allow all associations to file Form 1120-H without having to go through the process of meeting these stringent qualifications.
(4) Eliminate the flat 30% tax rate of Code Section 528 and replace it with the graduated tax rate table applicable to corporations under Form 1120.
Congress and the Internal Revenue Service have clearly created a quagmire that is consuming vast amounts of effort and energy. These efforts and energies could clearly be channeled to more productive pursuits that would benefit the entire economy. It is time for congress to readdress these issues and correct the problems that exist.
We will attempt to keep you informed as this progresses.
Gary Porter, CPA began his accounting career with the national CPA firm Touche Ross in 1971. He is licensed by the California Board of Accountancy and the Nevada Board of Accountancy. Mr. Porter has restricted his practice to work only with Common Interest Realty Associations (CIRAs), including homeowners associations, condominium associations, property owners associations, timeshare associations, fractional associations, condo-hotels, commercial associations, and other associations.
Gary Porter is the creator and coauthor of Practitioners Publishing Company (PPC) Guide to Homeowners Associations and other Common Interest Realty Associations, and Homeowners Association Tax Library. Mr. Porter served as Editor of CAI’s Ledger Quarterly from 1989 through 2004 and is the author of more than 300 articles. In addition, he has had articles published in The Ledger Quarterly, The Practical Accountant, Common Ground and numerous CAI Chapter newsletters. He has been quoted or published in The Wall Street Journal, Money Magazine, Kiplinger’s Personal Finance, and many major newspapers.
Mr. Porter is a member of Community Associations Institute (CAI), and served as national president of CAI in 1998 – 1999.