PLR 1244005: IRS permits a homeowners association to revoke a section 528 election

Plain-English summary

A homeowners association filed Form 1120-H and elected the tax treatment provided by IRC § 528 without discussing the choice with its accounting firm. A new accounting firm later advised the association that it could file Form 1120 instead, and the association asked to revoke the section 528 election for the earlier year. The IRS granted permission because the requirements for relief under the applicable regulations were satisfied, but only if the revocation was not sought to obtain the benefit of a net operating loss incurred in a later year. The association must file Form 1120-X within 120 days, and amounts that would otherwise be exempt-function income must be included in taxable income after the revocation.

Ruling snapshot

• Question: May the homeowners association revoke its IRC § 528 election for Year 1?
• Outcome: Revocation permitted
• Key authorities: IRC §§ 528 and 277; Treas. Reg. § 1.528-8; Treas. Reg. §§ 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201244005 Third Party Communication: None
Release Date: 11/2/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 528.04-00 ----------------------------, ID No. ---------------
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------------------------------- Telephone Number:
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---------- Refer Reply To:
----------------------- CC:PSI:B05
--------------------------- PLR-105495-12
In Re: Date:
August 02, 2012

LEGEND:

Taxpayer = --------------------------------------

Year 1 = -------

Year 2 = -------

Dear ------------------------:

    This letter responds to your letter, dated February 1, 2012, and subsequent

correspondence, submitted on behalf of Taxpayer, requesting permission to revoke an
election under § 528 of the Internal Revenue Code for Year 1.

      The information submitted and the representations made are as follows:

Taxpayer, a homeowners association, hired an accounting firm to prepare its federal
income tax return for Year 1. The accounting firm prepared Form 1120-H for Year 1
without discussing with Taxpayer the consequences of filing Form 1120-H, or the option
of filing Form 1120. Taxpayer, relying on the accounting firm, filed the Form 1120-H,
and made an election under § 528.

     For Year 2, Taxpayer hired a new accounting firm. The new accounting firm

advised Taxpayer of the option to file Form 1120 for Year 1 and Year 2. Taxpayer then
filed this request to revoke the election under § 528 for Year 1.

    Section 528 provides that certain homeowners associations may elect to be

treated as tax-exempt organizations, but only to the extent of their exempt function
income. Exempt function income consists solely of amounts received as membership
dues, fees, or assessments from owners of residential units or residential lots.

PLR-105495-12 2

   Section 1.528-8(a) of the Income Tax regulations provides that a separate

election to be treated as a homeowner’s association under § 528 must be made for
each taxable year. The election is made by filing a properly completed form 1120-H.

  Section 1.528-8(f)(1) provides that an election to be treated as a homeowners

association is binding on the organization for the taxable year and may not be revoked
without the consent of the Commissioner.

    Rev. Rul. 82-203, 1982-2 C.B. 109, and Rev. Rul. 83-74, 1983-1 C.B. 112, set

forth situations in which the consent of the Commissioner was requested to revoke an
election under § 528. These revenue rulings provide that considerations or factors
similar to those described in Rev. Proc. 79-63, 1979-2 C.B. 578 (factors that were taken
into consideration by the Commissioner in determining whether an extension of time for
making an election will be granted under the former regulation § 1.9100-1) were
appropriate in determining whether taxpayers would be permitted to revoke previous
elections made under § 528. Factors that are given consideration are now found in
§§ 301.9100-1 through 301.9100-3 of the Administrative and Procedure Regulations.
When applied to a request for the revocation of a § 528 election, these considerations
require that the taxpayer requesting permission to revoke its election must establish that
(1) the taxpayer acted reasonably and in good faith, and (2) the granting of relief would
not prejudice the interest of the government.

   Rev. Rul. 82-203 holds that a homeowners association will not be permitted to

revoke elections made under § 528 in previous years to obtain the benefit of a net
operating loss incurred in a subsequent year.

    Based solely on the information submitted and the representations made, we

conclude that the requirements of §§ 301.9100-1 through 301.9100-3 have been
satisfied. Accordingly, Taxpayer is granted permission to revoke the election made
under § 528 for Year 1, provided that the revocation is not sought in order to obtain the
benefit of a net operating loss incurred in a subsequent tax year. We note that § 277
will apply to Taxpayer if a § 528 election is not in effect. See, Rev. Rul. 90-36, 1990-1
C.B. 59.

  Taxpayer must file a properly completed Form 1120-X (Amended U.S.

Corporation Income Tax Return) for Year 1 within 120 days of the date of this ruling. A
copy of this ruling must be attached to the Form 1120-X.

   Upon the revocation of the election under § 528, any amount received as

membership dues, fees, or assessments that would qualify as exempt function income
under § 528(d)(3) will not be treated as exempt, and such amount must be included in
calculating taxable income for purposes of Form 1120 or Form 1120-X.

PLR-105495-12 3

  The rulings contained in this letter are based upon information and

representations submitted by Taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. Because this office has not verified any of
the material submitted in support of the request for a ruling, it is subject to verification on
examination.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to Taxpayer’s authorized representative.

                                       Sincerely yours,



                                       NICOLE R. CIMINO
                                       Senior Technician Reviewer, Branch 5
                                       Office of Associate Chief Counsel
                                       (Passthroughs and Special Industries)

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