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  1. #1
    Join Date
    Nov 2009
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    5

    Default HOA Tax Liability

    My question involves business law in the state of: California

    I'm a board member of a HOA where a social committee of HOA homeowners have formed a separate legal entity for the the purpose of generating revenue (selling advertising) to fund HOA social events. If this same social committee was under the direction of the board as an appointed committee, the HOA would have to pay taxes on the advertising revenue received and would be subject to the tax-exempt thresholds specified in IRC 528. However, since the social committee is now a separate legal entity, most board members feel the HOA has no tax liability concerns. To me, this falls under the category of: 'it's too good to be true." Am I too suspicious or are there legitimate tax liability issues that have to be addressed?

  2. #2
    Join Date
    Sep 2005
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    Behind a Desk
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    Default Re: HOA Tax Liability

    It's difficult for me to imagine that the separate entity is sufficiently independent and autonomous, with all transactions at arm's length, that there's not a potential problem. But I am powerless to investigate. The HOA should get advice from its attorney.

  3. #3
    Join Date
    Jul 2007
    Location
    Florida
    Posts
    2,344

    Default Re: HOA Tax Liability

    Presumably they are selling advertising in some medium. Do they intend to publish something, or are they selling advertising in the HOA newsletter? Are they getting the advertising space for free from the HOA so they have no cost? Why would the HOA give away its ad space for free to an unrelated entity? How would the new entity avoid paying taxes on its advertising revenue? How does that solve the problem? It really doesn't matter. Creating a complex set of entities whose sole purpose is to evade paying taxes, having no legitimate business purpose, is illegal.

  4. #4
    Join Date
    Nov 2009
    Posts
    5

    Default Re: HOA Tax Liability

    Thanks for the feedback. Some answers to the questions posed:

    Per their business plan, the social committee legal entity is a nonprofit organization. I doubt it would qualify for tax-exempt status so it will have to pay taxes on revenue received. Tax rate is unknown. The advertising would be several 8 1/2 x 11 sheets of vendor ads. Each ad would be approx. the size of a business card so each sheet will contain somewhere between 8 & 12 ads per. Distribution costs are paid by the social comm. and would be by mail or hand delivery to the homeowners of the HOA. Initially, this group was thinking of putting the ads in the monthly billing statement to save postage but, thankfully, smarter heads prevailed. As of now, the social comm. pays for all its expenses.

    Two issues I think a tax auditor may have some concern.

    1) The HOA files either a 1120 (15% tax rate) or 1120H (30% tax rate) return depending upon taxable revenue generated (essentially interest income) and other factors. Chances are that the revenue from the sold ads would push the HOA into the higher bracket if the social comm. were part of the HOA. For a tax auditor, wouldn't there be the appearance that the HOA is avoiding the higher tax rate by allowing a separate legal entity to generate the revenue and pay taxes at possibly a lower rate?

    2) IRC 528 states there are certain thresholds that must be maintained to keep HOA tax-exempt status. One is the use of revenue for non-operating reasons. Social functions are non-operating. By creating a separate legal entity to fund social events, could it be interpreted that the HOA is avoiding being subject to IRC 528?

    There may be other legal issues I'm not aware of but the above are two that come to mind. The board tried to approve retaining a tax attorney for a written opinion but it failed. The majority that voted against the motion are on this social committee. lol!

    I don't know. I can't shake the feeling that the old adage: "If it walks like a duck, .... " applies here and that the HOA may have a tax issue down the road.

  5. #5
    Join Date
    Mar 2009
    Location
    Key West, FL
    Posts
    2,350

    Default Re: HOA Tax Liability

    Non-profits can legally earn money. Not sure what the maximum amount is per year. Years ago it was $5,000. Churches, like the Mormons, own all kinds of income producing property.

    Lots of non-profits sell advertising in their programs, it is perfectly acceptable.

    In addition the income producing activity has to be outside of the purposes of the organization and produce lots of money for the IRS to care. Nobody else is going to care.

    I have never read a tax case where the IRS went after a non-profit for advertising sales in its publications... at least not one that made it to any federal court of appeals or tax court.

    Hello folks. The Christian Science Monitor is non-profit and sells subscriptions and advertising.

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