f. Estate Tax Credit for Payment in Kind (sec. 2010 of the Act) Prior law In addition to legal tender, it is lawful for the Secretary of the Treasury to accept checks or money orders in payment for estate tax liability. Under prior law, there was no provision authorizing the Secretary of the Treasury to accept other forms of payments, such as the conveyance of real property. Reasons for the change The Congress believed that the Secretary of the Treasury should be authorized to accept payment of estate tax in kind in the case of the estate of La Vere Redfield. In this way, a forced sale of certain land bordering the Toiyabe National Forest could be avoided and the property could be transferred to the Secretary of Agriculture for administration by the National Forest Service. Explanation of provision The Act allows the Secretary of the Treasury to accept conveyance of real property bordering the Toiyabe National Forest as payment of estate tax imposed on the estate of LaVere Redfield. The Act provides, however, that interest will accrue if the property is not conveyed expeditiously. Effective date This amendment is effective on the date of enactment (October 4, 1976). Revenue Effect of Estate and Gift Tax Provisions It is estimated that the Estate and Gift Tax provisions will reduce receipts by $728 million in fiscal year 1978 and $1,449 million in fiscal year 1981. However, in the long run (18 to 20 years), it is estimated. there will be a net revenue gain from these provisions which will result in a net increase in receipts of $260 million. These estimates are set forth in the table immediately following: ESTIMATED EFFECT ON FISCAL YEAR RECEIPTS OF THE ESTATE AND GIFT TAX CHANGES T. MISCELLANEOUS PROVISIONS 1. Tax Treatment of Certain Housing Associations (sec. 2101 of the Act and secs. 216 and 528 of the Code) Prior law In developing a real estate subdivision or a condominium project, it is common for developers to form owners' associations as an integral part of the overall development. Generally, membership in the association is open only to owners of lots or dwelling units and is normally required as a condition of ownership. These associations are formed to allow individual homeowners, etc., to act together in managing, maintaining, and improving certain areas where they live. The purposes of the organization may include, for example, the administration and enforcement of covenants for preserving the architectural and general appearance of the development, the ownership and management of common areas such as streets, sidewalks, parks, swimming pools, etc., and the exterior maintenance and repair of property owned by its members. The association is funded by either annual or periodic assessments of the members. Generally, there are two categories of assessments and expenditures made by the association. First, operating assessments are made to acquire, construct, administer, manage, maintain, and operate the areas and facilities common to all residential units. This includes the maintenance of parking areas, hallways, elevators, roofs, exterior of buildings, etc. Second, capital assessments are made to build up reserves for the replacement of equipment and facilities used in common. This includes the equipment and facilities used with respect to swimming pools, tennis courts, clubhouse facilities, etc. Under prior law, generally a homeowners' association could qualify as an organization exempt from federal income tax (under sec. 501 (c) (4) of the Code) only if it met three requirements (Rev. Rul. 74-99, 1974-1 C.B. 131). First, the homeowners' association was required to serve a "community" which bears a reasonable, recognizable relationship to an area ordinarily identified as a governmental subdivision or unit. Second, it could not have conducted activities directed to the exterior maintenance of any private residence. Third, common areas for facilities that the homeowners' association owned and maintained must be for the use and enjoyment of the general public. If an association was unable to meet these three requirements, it ordinarily was taxed as a corporation. In general, this meant that the excess of current receipts over current expenditures at the end of the year was taxable to it unless the excess was refunded to the members or applied to the subsequent year's assessment. With respect to assessments for capital improvements, if the assessments were designated to be used solely for the purpose of making capital improvements and if the association homeowners had an equity interest in the association, the assessments were not treated as current income to the association but were treated as contributions to capital. Also, to the extent that the association's accumulated funds earn income, this income has been taxable to the association. In contrast with the individual ownership of dwelling units in condominium projects and projects involving residential real estate management associations, the dwelling units in a cooperative housing project are owned by the cooperative housing corporation which leases the apartments or other dwelling units to tenant-stockholders who are required to purchase stock to be able to lease dwelling units. If a cooperative housing corporation meets certain requirements, a tenant-stockholder may deduct amounts which he pays to the corporation which represents his proportionate share of the corporation's real property taxes and mortgage interest. Also, if a tenant-stockholder utilizes depreciable property leased from the cooperative housing corporation in a trade or business or for the production of income, the tenant-stockholder is allowed to take depreciation deductions with respect to his stock in the corporation (sec. 216(c)). In general, for a tenant-stockholder to qualify for these deductions, 80 percent or more of the gross income of the cooperative housing corporation must have been derived from individual tenant-shareholders. (However, stock owned, and dwelling units leased, by governmental entities empowered to acquire shares in a cooperative housing corporation for the purpose of providing housing facilities are not to be taken into account in determining whether this 80-percent test is satisfied.) Cooperative housing corporations have generally been treated as taxable corporations. However, under prior law there was some ambiguity as to whether a cooperative housing corporation was entitled to deduct depreciation with respect to depreciable property leased to a tenant-shareholder (and with respect to which, if such property were used in a trade or business or for the production of income, the tenant-shareholder would take deductions for depreciation with respect to his stock in the corporation).2 Reasons for change Most homeowners' associations have found it difficult to meet the three requirements set forth in Rev. Rul. 74-99, discussed above, and therefore, have not been able to qualify for tax exemption. To avoid being taxed on the excess of current receipts over current expenditures, the associations were required to refund such excess to the members or apply the excess to the subsequent years' assessment. In addition, it was not clear that assessments earmarked for major repair and improvements of a member's individual dwelling unit would not have been taxable. Since homeowners' associations generally allow individual homeowners to act together in order to maintain and improve the area in which they live, Congress believes it is not appropriate to tax the revenues of an association of homeowners who act together if an 1 The allowance of these amounts as deductions to the tenant-stockholders does not prevent a cooperative housing corporation from deducting the mortgage interest and real property taxes it pays. Rev. Rul. 62-178. 1962-2 C.B. 91. 2 A recent case has held that the corporation was not entitled to such deductions. Park Place, Inc., 57 T.C. 767 (1972). individual homeowner acting alone would not be taxed on the same activity. Consequently, these provisions exempt from income tax any dues and assessments received by a qualified homeowners' association which are paid by residential property owners who are members of the association, where the assessments are used for the maintenance and improvement of association property. This treatment is essentially equivalent to the tax treatment of individual homeowners who set aside amounts to maintain and improve their property. Also, under these provisions an association's net investment income, and net trade or business income, is to be taxable, since an individual homeowner would be similarly taxed on investment income, such as interest earned on money set aside for improvements. In the case of cooperative housing corporations, Congress believed that it was appropriate to resolve the ambiguity in prior law as to whether a cooperative housing corporation is entitled to a deduction for depreciation with respect to personal property leased to tenantstockholders. Congress also believed that the provision of prior law which, in effect, required that most tenant-stockholders of cooperative housing corporations be individuals should be revised so that banks and other lending institutions which lend money for the purchase of stock in these corporations can hold stock obtained through foreclosure for a limited period of time. Explanation of provisions Under the Act, a qualified homeowners' association (that is, a condominium management association or a residential real estate association) generally may elect to be treated as a tax-exempt organization. If an election is made, the association is not to be taxed on any "exempt function income". Exempt function income means membership dues, fees, and assessments received from persons who own residential units in the particular condominium or subdivision and who are members of the association." The association is to be taxed, however, on any net income which is not exempt function income. For example, any interest earned on amounts set aside in a sinking fund for future improvements is taxable. Similarly, any amount paid by persons who are not members of the association for use of the association's facilities, such as tennis courts, swimming pools, golf courses, etc., would be taxable. Further, any amount paid by members for special use of the association's facilities, the use of which would not be available to all the members as a result of having paid the membership dues, fees, or assessments_required to be paid by all members of the association, would be taxable. For example, if the membership dues, fees, or assessments do not entitle a member to use the association's party room or to use the swimming pool after a certain time period, then amounts paid for this use are taxable to the association. Deductions are allowed for expenses directly connected with the production of taxable income. 3 If the provisions of the Act are not met (or an election is not made to be treated as tax-exempt), a homeowners' association is to continue to be treated as it was under prior law. Assessments for the current management, maintenance and care of association property are to be exempt from tax as exempt function income. Also, as under prior law, assessments to finance current or future capital improvements to association property are capital contributions and are not subject to tax. The Act provides a $100 deduction against taxable income so that associations with only a minimal amount of taxable income will not be subject to tax. However, a net operating loss deduction is not allowed, and the special deductions for corporations (such as the dividends received deduction) are not allowed. A homeowners' association is taxed as a corporation on its taxable income. The tax rate to be applied is the corporate rate without the surtax exemption. If the association has net long-term capital gain, the capital gain portion of the taxable income is taxed at a 30-percent rate. Generally, two different types of homeowners' associations are treated as tax-exempt under the Act: condominium management associations and residential real estate management associations. In order to qualify for this treatment under the Act, a homeowners' association must meet several common requirements. First, the association must be organized and operated to provide for the management, maintenance, and care of association property. Although the property maintained by the association is generally property owned by the association and available for common use by all the members or property owned by a governmental unit and available for the common benefit of residents of the unit, the association may maintain areas that are privately owned but affect the overall appearance and structure of the project. For example, in a condominium project, the condominium association may enforce covenants with regard to the appearance of the individual units and may maintain the exterior walls and roof of the individual condominium units. Although the property maintained is private, its appearance may directly affect the condition of the entire project. As a consequence, the exterior walls and roofs may be considered as association property which may be maintained by a qualified association. However, for this property to qualify as association property, it is intended that there be a covenant of appearance applying on the same basis to all property in the project, that there be pro rata annual mandatory assessments for maintaining this property on all members of the association, and that membership in the association be compulsorily tied to every person's ownership of property in the project. Second, a homeowners' association must meet certain income and expenditure tests. Generally, these tests are to insure that the primary activity of the association is to manage, maintain, and improve association property, and that the owner-members of the association finance. these activities. Under the Act, at least 60 percent of the association's gross income must consist solely of membership dues, fees, or assessments from owners of residential units or owners of residences or residential lots, (exempt function income), as the case may be. For this purpose, amounts that qualify for the 60-percent test are not to include assessments for capital improvements which otherwise would not be treated as income to the association but would be treated as capital contributions. Qualified income includes fixed annual membership dues or fees and assessments that vary depending upon the Every homeowners' association which elects to be taxed under these provisions and has taxable income is to file an annual return. |