Tax Type
Individual Income Tax
Description
Exempt function income, dues paid by members of an association
Topic
Exemptions
Date Issued
12-09-1982
December 9, 1982
Re: § 58-1118 Application
Gentlemen:
This letter is in response to an application for correction of an erroneous assessment filed on your behalf on May 18, 1982.
Taxpayer is a homeowner's association which files Federal Form 1120-H. Under Federal law., a qualifying homeowner's association excludes "exempt function income" from taxable income ("exempt function income" is primarily dues paid by members of the association.) The federal taxable income of a homeowner's association is its gross income, other than "exempt function income," less expenses directly connected to the production of such income.
For 1978, 1979 and 1980 Taxpayer computed Virginia taxable income by starting with federal taxable income, adding exempt function income and; subtracting other expenses associated with the exempt function income. In each case the Virginia taxable income after the additions and subtractions was substantially higher than federal taxable income..
Taxpayer filed amended returns for 1978, 1979 and 1980 claiming a refund of the entire tax paid on the grounds that it was exempt from Virginia income tax under § 58-151.03(c)
The refund claims were denied and within 90 days of the denial taxpayer made this application. The application reasserts the claim of total ********** exemption and, in the alternative, claims a partial refund based on ***************** removing the additions and subtractions from the computation of Virginia taxable income.
DETERMINATION
§n 58-151.03(c) imposes the income tax on corporations except for "...religious, educational, benevolent and other corporations not organized or conducted for pecuniary profit." Taxpayer claims to be a non-profit corporation exempt from federal income tax under Sections 501(a) and 501(c) of the Internal Revenue Code. However, taxpayer also states that it "...is subject to federal income taxation on only that portion of net income considered unrelated business income...that income not related to its exempt purpose."
In fact, taxpayer is not one of the types of corporations defined in §501 (c) I.R.C., but is taxed in part and exempted in part under § 528 I.R.C. The latter section subjects a homeowner's association to a tax on income other than exempt function income, and exempts homeowner's association from other federal income taxes.
The Department of Taxation has a long-standing policy of interpreting the term "organized or conducted for pecuniary profit" to refer to corporations which are organized or conducted in such a manner that all or part of their income is subject to federal income tax. Since taxpayer is subject to federal income tax on that part of its income which is not exempt function income, taxpayer is, in fact, conducted for pecuniary profit and is subject to Virginia income tax.
However, the Virginia taxable income was computed incorrectly. Taxpayer properly started with federal taxable income but then made additions and subtractions that were not authorized or required by Virginia law.
These additions and subtractions shall be removed. Although Taxpayer paid Virginia income taxes each year, no deduction was claimed on the federal returns for state income tax; therefore, no addition is required. Review of the returns indicates that no additions or subtractions are required for 1978, 1979 and 1980. The computations are set forth on a separate sheet.
Accordingly, your claim for refund is as set forth in this letter. A check you shortly.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner