Timing of the Revenue Ruling 70-604 Election

By: Gary A. Porter, CPA

Q:   We have some dispute in our association regarding our annual election to rollover any excess operating funds on Form 1120 to the subsequent year. One professional has advised us that we may make the annual election at our annual meeting, which occurs in February each year and have it apply to the preceding tax year, which ends December 31. However, another professional we have engaged disagrees with this and believes that the wording of Revenue Ruling 70-604 clearly intends, when it says “current year,” to mean the year in which the election is made, not to any prior year. Can you shed any light on this issue for us?

A:   While Revenue Ruling 70-604 is probably our most powerful tax planning tool for associations that file Form 1120, it also is the one most subject to interpretation. Part of the reason for this is that the Ruling itself is so brief. It is only two paragraphs in length. The lack of internal definitions within the Revenue Ruling means that the readers of the Ruling have to interpret it and make their own definitions for almost all of the critical issues within the scope of the Ruling, and the timing of the Ruling is no exception to that ambiguity.

Because there were so many areas of this ruling subject to interpretation, many years ago I contacted Mr. Ransom at the Internal Revenue Service (IRS) National Office, who drafted the Revenue Ruling 70-604, to discuss this and other matters. When I pointed out the ambiguity in the Ruling with respect to the timing of the election, Mr. Ransom stated that, he felt that there was no ambiguity, as the matter was specifically left open so that the Ruling would not be too inflexible. I specifically asked Mr. Ransom if an association could make their election after their fiscal year had ended, and he affirmed that they could. As we discussed it, he agreed that the only limitation on the timing of the election is that the election must be made before the tax return is filed and must be made on a timely filed return. In other words, as applied to your case, you could not file the tax return in January, assuming that the members would at their annual meeting one month later, approve the election. If the annual meeting is in February, then the tax preparer must wait until after the election has been made and approved by the members of the association before the tax return can be filed.

I also asked Mr. Ransom if it was possible for an association to make an election for two fiscal years at the same time. I explained that in a situation like yours, what I would recommend to my client is that if the association meeting is being held in February 2002, make an election for the year 2001 and make a separate election for the year 2002. The second election is made in advance. Mr. Ransom agreed that it would be possible to make the election in this manner since the Revenue Ruling was specifically drafted to be flexible by stating that “any” excess could be carried over from one year to the subsequent year. That means that you do not have to state a specific amount that would be carried over from one year to the next, nor do you even have to know if there will be in any excess. There is no downside risk to making the election. If you do not have an excess of membership income over membership expenses, the ruling will simply not apply to that year, the same as if no election had been made.