Rev. Rul. 74-563

Advice has been requested whether, under the circumstances described below, a special assessment collected by a nonexempt homeowners association from its members and accumulated in a special bank account for specific expenditures will qualify as a contribution to the capital of the association under section 118 of the Internal Revenue Code of 1954.

The taxpayer, a homeowners association, was incorporated under the laws of the state of M by a commercial real estate developer as an integral part of a plan for the development of a subdivision. The taxpayer is not an exempt organization for purposes of Federal income taxation. Every owner of a lot in the development is a member of the association. Each member is entitled to one vote for each lot owned. The association is supported by periodic assessments against the members. An unpaid assessment constitutes a lien on the property of the homeowner-member.

The general purposes of the association are to administer and enforce covenants for preserving the architecture and appearance of the development, and to own and maintain common green areas, streets and sidewalks. The declaration of covenants, condition and restriction states that the association will provide exterior maintenance upon each lot as follows: paint, repair, replacement and care of roofs, gutters, downspouts, exterior building surfaces, trees, shrubs, grass, and walks. In addition the association is empowered to undertake improvements to the common areas.

In January 1974 the homeowner-members decided at the annual meeting of the association to levy and collect a special assessment of 20x dollars a month for two years from each member. The assessments will be deposited in a special account. They will be used only for paving a community parking area. They will not be commingled with the general assessment funds of the association.

Section 61 of the Code provides that gross income means all income from whatever source derived, unless excluded by law.

Section 1.118-1 of the Income Tax Regulations provides that, in the case of a corporation, section 118 of the Code provides an exclusion from gross income with respect to any contribution of money or property to the capital of the taxpayer. If a corporation requires additional capital for conducting its business and obtains such funds through voluntary pro rata payments from its stockholders, the amounts so received being credited to its surplus account or a special account, such amounts do not constitute income, although there is no increase in the outstanding shares of stock of the corporation. But the exclusion does not apply to any money or property transferred in consideration of goods or services rendered.

In United Grocers, Ltd. v. United States, 308 F. 2d 634 (9th Cir. 1962), aff'g. 186 F. Supp. 724 (N.D. Calif. 1960), the court held that monthly payments by the members of a non-profit retail grocers' cooperative were made in consideration of, and in payment for, services rendered by the cooperative and not as contributions to capital. The court said the dominant factor in determining whether the amounts were contributions to capital or payments for goods or services was the motive or purpose and intent in making the contribution.

In the instant case, the special assessment is specifically earmarked and segregated for a specific capital improvement. It is assessed pro rata upon each homeowner-member. Moreover, the availability of a paved parking lot will enhance the value of a homeowner-member's property since membership in the association is inextricably and compulsorily tied to the acquisition and ownership of a lot. This enhanced value is sufficient to show that the motive or purpose and intent for paying the special assessment is enhancement of the homeowner's proprietary interest. Accordingly, the special assessment for paving the community parking lot constitutes a contribution to the capital of the association under section 118 of the Code. See Lake Petersburg Association, 33 CCH Tax Ct. Mem. 259 (1974), where special assessments levied for the purchase of land and construction of specified improvements were held to constitute contributions to the capital of a nonexempt membership association.