November 8, 1984
Your client proposes to form a Massachusetts corporation organized under Massachusetts General Laws Chapter 180. You anticipate that the corporation, will qualify as a homeowners association within the meaning of Internal Revenue Code Section 528(c)(1) and that the corporation will elect to be taxed as such for federal purposes. As a homeowners association the corporation will pay a federal income tax equal to thirty percent of its taxable income, as that term is defined in Section 528(b, d).
You inquire about the Massachusetts tax treatment of the proposed homeowners association. Specifically, you ask whether by virtue of language in Code Section 528(a), a homeowners association is an organization exempt from taxation under the provisions of Section 501 and therefore not taxable as a Massachusetts domestic corporation.
Section 528(a) provides that "A homeowners, association ... shall be subject to taxation under this subtitle only to the extent provided in this section. A homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes."
Corporations organized under Massachusetts General Laws Chapter 180 are subject to the Massachusetts corporate excise imposed on domestic corporations. (G.L. C. 63, § 32). "Domestic corporations," however ' do not include corporations "exempt from taxation under the provisions of section five hundred and one of the Internal Revenue Code." (G.L. C. 63, § 30(l)). A "homeowners association" is not one of the organizations enumerated in Code Section 501(c) in its list of organizations that are exempt from federal income tax. Under some circumstances, however, a homeowners association may meet the requirements of Section 501(c)(4), which exempts from tax:
Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
In order to fall within this exemption, a homeowners association must serve a community which bears a reasonable relationship to a geographical area ordinarily identified as a governmental subdivision, must not conduct activities aimed at the maintenance of private residences, and must extend to the general public the use and enjoyment of the common areas the association owns and maintains. (Rev. Rul. 74-99, 1974-1 CB 131).
The rule of statutory interpretation pertaining to tax statutes is that "exemptive provisions, being matters of exception and legislative grace, are always given a strict construction which refuses to extend exceptions by implication or inference and confines its operation to cases clearly within the letter of the statute." (Herren v.U.S., 317 F. Supp. 1198, affld. 443 F. 2d 1363 (1971)). A homeowners association is therefore not an organization exempt from taxation under the provisions of Code Section 501, unless it qualifies as a civic organization within the meaning of Section 501(c)(4). A homeowners association is merely to be "considers ' d" a tax-exempt organization for the purpose of other laws making reference to such organizations. (I.R.C. § 528(a)).
Domestic corporations are subject to tax as either tangible or intangible-property corporations, as these terms are defined in Massachusetts General Laws Chapter 63, Section 30(10) and (11). In either case, the corporate excise is measured in part by the corporation's net income allocable to Massachusetts. "Net income" is defined as gross income less the deductions, but not credits, allowable under the provisions of -the Code. "Gross income" is federal gross income, with certain modifications. (G.L. c. 63, § 30(5)(a) and (b)).
In the case of a qualifying homeowners association, federal gross income does not include "exempt function income," which is defined as amounts received as membership dues, fees, or assessments from owners of residential units or real property. (I.R.C. § 528(d)). Section 528(d)(2) disallows certain federal deductions and provides a "specific deduction" of one hundred dollars to homeowners associations. Because the "specific deduction" is in the nature of a fixed exemption, rather than being based on expenses actually incurred, it is not taken into account in determining net income for purposes of the Massachusetts corporate excise. (L.R. 82-94).
A homeowners association which is incorporated under General Laws Chapter 180 and which is exempt from federal income taxation under Code Section 528 on its membership dues, fees and assessments is subject to the Massachusetts corporate excise and must file a Domestic Business or Manufacturing Corporation Excise Return, Form 355A. The Association must attach to its Form 355A a copy of its U.S. Income Tax Return for Homeowners. Associations, Form 1120-H. Its net income for purposes of The income measure of its Massachusetts corporate excise will not include its exempt function income, but will be determined without regard to the federal specific deduction of one hundred dollars.
Very truly your,
Commissioner of Revenue
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