[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.528-10]

[Page 241]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.528-10  Special rules for computation of homeowners association 
taxable income and tax.

    (a) In general. Homeowners association taxable income shall be 
determined according to the provisions of section 528(d) and the rules 
set forth in this section.
    (b) Limitation on capital losses. If for any taxable year a 
homeowners association has a net capital loss, the rules of sections 
1211(a) and 1212(a) shall apply.
    (c) Allowable deductions--(1) In general. To be deductible in 
computing the unrelated business taxable income of a homeowners 
association, expenses, depreciation and similar items must not only 
qualify as items of deduction allowed by chapter 1 of the Code but must 
also be directly connected with the production of gross income 
(excluding exempt function income). To be directly connected with the 
production of gross income (excluding exempt function income), an item 
of deduction must have both proximate and primary relationship to the 
production of such income and have been incurred in the production of 
such income. Items of deduction attributable solely to items of gross 
income (excluding exempt function income) are proximately and primarily 
related to such income. Whether an item of deduction is incurred in the 
production of gross income (excluding exempt function income) is 
determined on the basis of all the facts and circumstances involved in 
each case.
    (2) Dual use of facilities or personnel. Where facilities are used 
both for exempt functions of the organization and for the production of 
gross income (excluding exempt function income), expenses, depreciation 
and similar items attributable to such facilities (for example, items of 
overhead) shall be allocated between the two uses on a reasonable basis. 
Similarly where personnel are employed both for exempt functions and for 
the production of gross income (excluding exempt function income), 
expenses and similar items attributable to such personnel (for example, 
items of salary) shall be allocated between the two activities on a 
reasonable basis. The portion of any such item so allocated to the 
production of gross income (excluding exempt function income) is 
directly connected with such income and shall be allowable as a 
deduction in computing homeowners association taxable income to the 
extent that it qualifies as an item of deduction allowed by chapter 1 of 
the Code. Thus, for example, assume that X, a homeowners association, 
pays its manager a salary of $10,000 a year and that it derives gross 
income other than exempt function income. If 10 percent of the manager's 
time during the year is devoted to deriving X's gross income (other than 
exempt function income), a deduction of $1,000 (10 percent of $10,000) 
would generally be allowable for purposes of computing X's homeowners 
association taxable income.
    (d) Investment credit. A homeowners association is not entitled to 
an investment credit.
    (e) Cross reference. For the definition of exempt function income, 
see Sec. 1.528-9.

[T.D. 7692, 45 FR 26324, Apr. 18, 1980]

          CORPORATIONS USED TO AVOID INCOME TAX ON SHAREHOLDERS

              Corporations Improperly Accumulating Surplus