Revenue Ruling 70-604 – The Complete Guide

By:  Gary A. Porter, CPA

This article addresses the basic issues of interpreting Revenue Ruling 70-604, and answers questions you may never have even considered.  It helps you understand the ruling, and provides you with the practical and mechanical means of properly complying with the ruling.  The most frequent questions about this ruling are:

(1) What is a 70-604 Election? 
(2) Should an association make a 70-604 Election? 
(3) Why should an association make a 70-604 Election? 
(4) Are there any undesirable consequences of making a 70-604 Election? 
(5) How does an association make a 70-604 Election? 
(6) When does an association make a 70-604 Election? 
(7) Who makes the association’s 70-604 Election? 
(8) Can the election be used indefinitely, or is it a one year election?
(9) Can excess assessment be transferred to reserves?
10) What types of associations can make an election in revenue ruling 70-604?

These questions are answered below.

This article assumes that the reader is already familiar with the overall tax scheme applicable to homeowners associations and understands the difference between the filing options of Form 1120 and Form 1120-H.  Revenue ruling 70-604 applies ONLY to associations that file Form 1120.  If you do not fully understand the complexities and risks inherent in filing Form 1120 for a homeowners association, please see my overview of homeowners association tax issues at

(1)    The purpose of revenue ruling 70-604 is to allow a homeowners association that has excess member income in a given tax year to either refund that excess to the members or roll it over to the next tax year to avoid taxation of the “inadvertent” excess member income.  Revenue Ruling 70-604 may appear to be a very innocuous revenue ruling, but, it is one of the most significant tax planning tools available to a homeowners association that files Form 1120.  This revenue ruling allows an association to make an election which will remove the association's excess membership income from taxation for the year for which the election is made. 

(2)    Every association should make a 70-604 election every year.  If the association does have excess membership income, then having made a proper 70-604 election can be a lifesaver for the association.  The association would be able to safely file Form 1120 subjecting only net non-membership income to the 15% tax rate up to the first $50,000 of taxable income of the association.  If the 70-604 election is not made, the excess membership income would be taxed along with the non-membership income of the association. 

(3)    Any association that is properly planning its financial affairs to minimize taxes must consider making an election under IRS Revenue Ruling 70-604 to remove any excess membership income from the association's taxable income by either refunding it to members or rolling it over to the next tax year. 

There are only three options with respect to the tax treatment of homeowner association excess membership income on Form 1120, U.S. Corporate Income Tax Return:

A)  The association, if it does not making an election under Revenue Ruling 70-604, would pay tax on 100% of the net membership income, in addition to the net non-membership (mostly interest) income.  Obviously, this is an undesirable option, and would preferably be avoided by properly making an election under Revenue Ruling 70-604 as indicated below.

B)  The association can make an election under Revenue Ruling 70-604 to apply the excess of membership income over membership expenses to the following year's assessments, or

C) The association can make an election under Revenue Ruling 70-604 to refund the excess of membership income over membership expenses to the members of the Association.  (This option is the least desirable, and may be in conflict with certain state statutes).

It is important to note that the association can NOT make an election under revenue ruling 70-604 to transfer any excess member income to reserves as a capital contribution. The principal reason for this is that such an election will fail to meet the requirements of Internal Revenue Code Section 118 various interpretive rulings and cases of that Code section.  See number 9 below.  A full discussion of this issue can be found at

(4)    The revenue ruling 70-604 election carries no downside risk.  If circumstances are such that an election would not apply to the given year, meaning you have no excess member income, or, you decide to file Form 1120-H, then the election is simply ignored. 

(5)    The association should make a formal election in the form of a resolution by the association, to document its intent.  See election form.

Since 1970, when this revenue ruling went into effect, associations have been plagued with the question of exactly how does an association properly make an election under the provisions of Revenue Ruling 70-604.  The ruling provides general guidance only, with no specific requirements.  I have observed in practice that many associations do not make a formal election, but simply file the tax return.  The CPA literally makes the election for the association by making the appropriate calculations.  I believe there is a great danger in this because upon audit the association has no documentation of its intent. 

The forum for making the election by the members is usually the annual membership meeting.  The relationship of the date of the membership meeting to the association’s year end will dictate the timing of the election.  In other words, if the annual membership meeting occurs so far after the association’s fiscal year end that the election could not be made before the due date of the tax return, then the association would need to make sure that it makes the election in the prior year meeting so it is effective for the desired year (If the year end is December, and the annual meeting is in October, that is after the due date of the tax return.  Therefore, to have an effective election for a given tax year, the election would have to be made in the October meeting two months before the tax year begins.).

The IRS clarified this issue somewhat with the issuance of Technical Advice Memorandum (TAM) 9539001, which stated in footnote 3 “The revenue ruling clearly contemplates an annual choice by the member-payers on the subject.  Whether this is accomplished at an annual meeting or in some other fashion is not significant.”  The IRS clearly means that an actual meeting is not required; that an association could make the election via a “mail-in” vote of the members without an actual meeting.

The amount of the carryover should not be specified in the election for a number of reasons, but primarily because it is not required.  Revenue ruling 70-604 states “. . . any excess assessments . . .” are the subject of the election.

(6)    The election under revenue ruling 70-604 MUST be made before the tax return is filed.  It SHOULD be made before the tax year has ended.  It COULD be made before the tax year even starts.  Also see number 5 above.

Revenue Ruling 70-604 simply states "A meeting is held each year ...".  There is no authority which addresses this question.  The timing of most such elections is spelled out in the Internal Revenue Code, Regulations, Revenue Rulings or other authoritative sources.  The timing of the 70-604 election is not addressed by these or any other authorities.  Again, in the absence of clarification in this matter, I recommend that to expose itself to the minimum risk of losing the benefit of this election, the Association make the election prior to the end of the fiscal year for which the election is to apply.

(7)    In order to comply with the exact wording of the ruling, the election should be made by the members, not the board of directors.  I also strongly recommend that the board of directors also ratify the election by the members. 

Why this double effort?  The IRS lives only by its own rules, and their ruling states that “. . . A meeting is held each year by the stockholder-owners of the corporation, at which they decide . . .”   Therefore, the IRS position is that the members must make the election.  This, however, conflicts with state law in most jurisdictions, which states that ONLY the elected board of directors has authority to make such financial decisions.  The best bet for the association is to have members make the election, then have the board ratify it, and you’re covered both ways.  My personal opinion, and backed up by informal discussions with individuals at the IRS National Office, is that the ruling is simply poorly worded.  Given contradictory state law, the only logical way to interpret the ruling is to interpret the term “stockholder-owners” as “those persons with the legal authority to make the decision.”  The IRS National Office has informally agreed with this interpretation, but this is non authoritative and cannot be relied upon.

Recent IRS audit activity on homeowners associations has indicated that IRS agents are requiring that the election be made by the members, and not by the Board of Directors.  In the absence of clarification on this matter, I recommend that the wording of Revenue Ruling 70-604 be literally interpreted and that the election be in the form of a resolution adopted by the membership.

(8)    Many CPAs contend that an association can make and use the revenue ruling 70-604 election every year. Some CPAs even remove the excess member income from one tax year, but never add it back to the next tax year to which the carryover was made.

The IRS has repeatedly indicated that revenue ruling 70-604 was intended to be a one year carryover only, and could not be used indefinitely year after year, as such a scheme would represent a permanent deferral of income.  The ruling was meant as a one year deferral only, a “timing difference’ in tax parlance.

The ruling uses the words “. . . have the excess applied to the following year’s assessments” to describe the carryover.  “Year’s” is used in the singular, not the plural “years’.”  General Counsel Memorandum (GCM) 34613 likewise uses the singular form in two different places in that analysis of the ruling.

It is clear that the IRS considers revenue ruling 70-604 to be a single year election only, that was never intended to defer excess revenues forward indefinitely.

FSA (Field Service Announcement) 1992-0208-1 ruled directly on this issue, noting that “. . . the subsequent year’s shortfall must be at least equal . . .” to the carryover assessment for the requirements of revenue ruling 70-604 to have been met.

(9)    An association can NOT make an election under revenue ruling 70-604 to transfer any excess member income to reserves as a capital contribution. FSA (Field Service Announcement) 1992-0208-1 ruled directly on this issue, noting that a transfer of excess revenues to reserves does not meet the two criteria specified in the ruling; refund to members or carryover to the next tax year.  The principal reason for this is that such an election will fail to meet the requirements of Internal Revenue Code IRC Section 118 various interpretive rulings and cases of that Code section.  The biggest hurdle here is that IRC Section 118 requires advance notice to the members of the capital nature of their assessment before it will qualify as a contribution to capital under IRC Section 118.  There are also other requirements to qualify as capital contributions.  This subject is so extensive that it requires a completely separate discussion, which is located at

(10)    TAM 9539001 is the only guidance, other than the ruling itself, regarding the types of associations that may make an election under revenue ruling 70-604. 

Revenue ruling 70-604 states “A condominium management corporation assesses its stockholder-owners for the purposes of managing, operating, maintaining, and replacing the common elements of the condominium property.  This is the sole activity of the corporation and its bylaws do not authorize it to engage in any other activity.”  The key words to note here are “condominium management corporation” and “managing, operating, maintaining, and replacing the common elements . . . is the sole activity . . .”

TAM 9539001, in denying the revenue ruling 70-604 election to a timeshare association, stated “. . . The association does not have as its sole activity the management and maintenance of the common areas of the property; the purposes, nature, and scope of the time-share association’s activities are materially distinguishable from those of a regular condominium association . . .”

One conclusion that can be drawn from the above is that any association with extensive activities other than maintenance of the common areas will not qualify to make an election under revenue ruling 70-604.

A question that still remains is whether or not the TYPE of association is also a “make or break” qualifier under the revenue ruling.  Revenue ruling 70-604 specifically identified the subject association as a “condominium management corporation”.  From the wording of the ruling, it is assumed that the subject association is a “residential” association, particularly since commercial associations were virtually unknown in 1970.  Does this mean that a residential property owners association will not qualify, since it is not a condominium management corporation?  Does this mean that a commercial condominium association will qualify, although since it is not residential in nature, it still is a “condominium management corporation?  I would argue that both should qualify.  However, we will need to wait for additional guidance to find out the official answer.

The above analysis attempts to demonstrate that, like so many other areas of Community Association taxation, what would seem like a simple issue, the filing of a Revenue Ruling 70-604 Election, is actually a very complex consideration.  Like other areas of Community Association tax law, the deeper you delve into it, the more you discover that there are no conclusive answers, but more questions that arise.  Unfortunately, associations and tax preparers have to make decisions and answer questions based on the best information and support available to us at the time.  When an IRS audit occurs years later, we will be second-guessed by the IRS agent.  Further, the person doing the second guessing, the IRS agent, will surely have the benefit of hindsight, and may have the benefit of subsequent IRS rulings and/or tax court cases that clarify these issues.  Community Association taxation is an emerging and evolving area and there are still many questions that must be answered by the issuance of further rulings by the IRS or tax court decisions.

I recommend that an Association should be making and documenting a formal 70-604 election.  The election form located on this site is one means of accomplishing this.  As discussed above, however, the election form can by no means be considered foolproof. Only the passage of time and the further development of this area of tax law will indicate whether or not this is an adequate election.  However, it is certainly better for an association to have made this election and documented it in the association minutes, than not to have any documentation at all.

To see our videos on understanding Revenue Ruling 70-604, follow this link to our video learning page or this link to our main menu for other information about Revenue Ruling 70-604.  This site contains more information about revenue Ruling 70-604 than any other site on the web.



Gary Porter, CPA began his accounting career with the international CPA firm Touche Ross in 1971.  He is licensed by the California Board of Accountancy and the Nevada Board of Accountancy.  Mr. Porter has restricted his practice to work only with Common Interest Realty Associations (CIRAs), including homeowners associations, condominium associations, property owners associations, timeshare associations, fractional associations, condo-hotels, commercial associations, and other associations.


Gary Porter is the creator and coauthor of Practitioners Publishing Company (PPC) Guide to Homeowners Associations and other Common Interest Realty Associations, and Homeowners Association Tax Library.  Mr. Porter served as Editor of CAI’s Ledger Quarterly from 1989 through 2004 and is the author of more than 200 articles.  In addition, he has had articles published in The Practical Accountant, Common Ground and numerous CAI Chapter newsletters.  He has been quoted or published in The Wall Street Journal, Money Magazine, Kiplinger’s Personal Finance, and many major newspapers.


Mr. Porter is a member of Community Associations Institute (CAI), American Resort Development Associations (ARDA), and California Association of Community Managers (CACM).  Mr. Porter served as national president of CAI in 1998 – 1999.