Revenue Ruling 75-370

Headnote: Rev. Rul. 75-370, 1975-2 CB 25 -- IRC Sec. 61

Reference(s): Code Sec. 61; Reg § 1.61-1

Condominium management assessments; realty improvements.

Special assessments collected by a nonexempt condominium management corporation from its unit owner-stockholders and accumulated in a separate bank account for replacement of the roof and elevators in the condominium are not includible in the corporation's gross income.

Full Text:

Advice has been requested whether, under the circumstances described below, assessments collected by a nonexempt condominium management corporation from its unit owner-stockholders and accumulated in a separate bank account for specific capital expenditures are includible by the taxpayer in its gross income under section 61 of the Internal Revenue Code of 1954.

The taxpayer, a condominium management corporation, was incorporated under the laws of state M by the unit owners of a condominium housing project to provide, among other things, the management, maintenance, and care of the common elements of the project. Every unit owner of the project must be a stockholder of the taxpayer and the only stockholders are condominium unit owners. Since under the laws of state M a condominium management corporation cannot own real property, the common elements of the real property of the condominium project must also be owned by the unit owners who each have an undivided interest therein. The corporation is not an exempt organization for Federal income tax purposes. Compare Rev. Rul. 74-17, 1974-1 C.B. 130. It is supported by periodic assessments against the unit owners. An unpaid assessment is a lien on the property of the unit owner-stockholder.

The by-laws of the management corporation require that any assessments must be approved at a stockholder meeting by a majority vote of the unit owner-stockholders. In January 1974, the unit owner-stockholders decided at their annual meeting to levy and collect two special assessments totalling 15 x dollars a month for 3 years from each unit owner. The assessments will be deposited in two separate bank accounts and will not be commingled with the general assessment funds. The assessments, 10x dollars and 5x dollars a month respectively, can be used only to replace the roof and the elevators located in the common elements of the condominium project.

Section 61 of the Code and section 1.61-1(a) of the Income Tax Regulations provide, in part, that gross income means all income from whatever source derived, unless excluded by law.

Rev. Rul. 74-321, 1974-2 C.B. 16, holds that proceeds received by a farm production credit association in the form of insurance premiums from its member-borrowers and dividends from the insurance company providing the member-borrowers group credit life insurance are not includible in the association's gross income. The association was acting as an agent for its member-borrowers. It managed the program in accordance with the requirements set forth by the Federal Farm Credit Administration. It had only ministerial powers over the funds and could not divert them to its own purposes.

In the instant case, the taxpayer receives no benefit from the funds. They are specifically designated for the replacement of the roof and elevators located in the common elements of the real property of the condominium project for the sole benefit of the unit owners. The taxpayer has a fiduciary obligation to expend the funds collected in the manner approved by its unit owner-stockholders. The relationship between the taxpayer and its unit owner-stockholders insofar as the special assessments are concerned is one of agent and principal.

Accordingly, in the instant case, since the funds are received by the taxpayer as an agent for the unit owners to be used solely for the benefit of the unit owners, the special assessments are not includible in the taxpayer's gross income under section 61 of the Code.

However, this Revenue Ruling does not apply to the funds collected by a condominium management corporation to provide the services for which it was formed such as maintenance of common elements (painting, repairs, gardening, janitorial services and so forth). Thus, for example, funds accumulated to paint the common elements would not qualify under this Revenue Ruling.

Compare Rev. Rul. 75-371, page 52, which holds that the special assessment for the purchase of personal property owned by the condominium management corporation is a contribution to its capital under section 118 of the Code.