FACTS: Kondo Associates is a condominium association formed by the unit owners of a condominium housing project located in Massachusetts. Kondo Associates was incorporated pursuant to chapter 180 of the General Laws and was formed to manage and maintain the common areas and facilities of the housing project. For federal tax purposes, Kondo Associates qualifies and elects to be treated as a homeowners association pursuant to section 528 of the Internal Revenue Code.

Kondo Associates collects assessments and membership dues from each unit owner which qualify as exempt function income under section 528 of the Code. This exempt function income is not included in Kondo Associates' gross income on its federal return.

The association deposits the exempt function income in an interest-bearing account and earns $100 in interest for the taxable year. The specific $100 deduction provided in section 528 in taken against this amount on Kondo Associates' federal return. Kondo Associates has no other income.

ISSUE 1: Is the exempt function income of Kondo Associates, an incorporated homeowners association, included in its Massachusetts gross income?

ISSUE 2: Is the specific $100 deduction taken on the association's federal return permitted under Massachusetts law?

DISCUSSION: An association incorporated pursuant to chapter 180 is taxed according to chapter 63 of the General Laws. For purposes of computing the income measure of the corporate excise, the net income of a corporation is gross income, less the deductions but not the credits allowed under the Internal Revenue Code. G.L. c. 63, § 30(5)(b). Gross income is federal gross income with certain modifications. G.L. c. 63, §30(5)(a). Every corporation subject to the corporate excise must pay a minimum excise. G.L. c. 63, § 32(b).

The exempt function income of a homeowners association that qualifies and elects to be treated as a homeowners association under section 528 of the Code is excluded from its federal gross income. I.R.C. § 528(d)(1)(A). Consequently, for purposes of the income measure of the corporate excise, the Massachusetts gross income of a homeowners association does not include its exempt function income.

A homeowners association which qualifies under section 528 is allowed a specific $100 deduction on its federal return. I.R.C. § 528(d)(2)(A). This specific $100 deduction is in the nature of a fixed exemption and is not allowed in determining net income for purposes of the corporate excise.

DIRECTIVE 1: Kondo Associates, and incorporated homeowners association, is subject to the minimum tax and must report its income on a Form 355A, Domestic Business or Manufacturing Corporation Excise return. Its exempt function income is not included in its Massachusetts gross income.

DIRECTIVE 2: The specific $100 deduction taken on the association's federal return is not permitted under Massachusetts law.

REFERENCE: G.L. c. 63, §§ 30(5)(a), (b), 32(b); I.R.C. § 528(d)(1)(A), (2)(A).

/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue

12 June 1986

DOR-D 86-6

This Directive represents the official position of the Department of Revenue on the application of the law to the facts as stated. The Department and its personnel will follow this Directive, and taxpayers may rely upon it, unless it is revoked or modified pursuant to 830 CMR § 62C.01(5)(e). In applying this Directive, however, the effect of subsequent legislation, regulations, court decisions, Directives, and TIRs must be considered, and Department personnel and taxpayers may rely upon this Directive only if the facts, circumstances and issues presented in other cases are substantially the same as those set forth in this Directive.