[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: 26CFR1.528-9]

[Page 239-240]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.528-9  Exempt function income.

    (a) General rule. For the purposes of section 528 exempt function 
income consists solely of income which is attributable to membership 
dues, fees, or assessments of owners of residential units or residential 
lots. It is not necessary that the source of income be labeled as 
membership dues, fees, or assessments. What is important is that such 
income be derived from owners of residential units or residential lots 
in their capacity as owner-members rather than in some other capacity 
such as customers for services. Generally, for the membership dues, 
fees, or assessments with respect to a residential unit or lot to be 
exempt function income, the unit must be used for (or the unit or lot 
must be expected to be used)

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for residential purposes. However, dues, fees, or assessments paid to an 
organization by a developerwith respect to unfinished or finished but 
unsold units or lots shall be exempt function income even though the 
developer does not use the units or lots. If an assessment is more in 
the nature of a fee for the provision of services in the course of a 
trade or business than a fee for a common activity undertaken by a 
collective group of owners for the purpose of enhancing or maintaining 
the value of their residences, the assessment will not be considered 
exempt function income to the organization. Furthermore, income 
attributable to dues, fees, or assessments will not be considered exempt 
function income unless each member's liability for payment arises solely 
from membership in the association. Dues, fees, or assessments that are 
based on the extent, if any, to which a member avails him or herself of 
a facility or facilities are not exempt function income. For the 
purposes of section 528, dues, fees, or assessments which are based on 
the assessed value or size of property will be considered as arising 
solely as a result of membership in the organization. Regardless of the 
organization's method of accounting, excess assessments during a taxable 
year which are either rebated to the members or applied to their future 
assessments are not considered gross income and therefore will not be 
considered exempt function income for such taxable year. However, if 
such excess assessments are applied to a future year's assessments, they 
will be considered gross income and exempt function income for that 
future year. In addition, assessments in a taxable year, such as an 
assessment for a capital improvement, which are not treated as gross 
income do not enter into the determination of whether the organization 
meets the source of income test for that taxable year.
    (b) Examples of exempt function income. Assessments which are 
considered more in the nature of a fee for common activity than for the 
providing of services and which will therefore generally be considered 
exempt function income include assessments made for the purpose of:
    (1) Paying the principal and interest on debts incurred for the 
acquisition of association property;
    (2) Paying real estate taxes on association property;
    (3) Maintaining association property;
    (4) Removing snow from public areas; and
    (5) Removing trash.
    (c) Examples of receipts which are not exempt function income. 
Exempt function income does not include:
    (1) Amounts which are not includible in the organization's gross 
income other than by reason of section 528 (for example, tax-exempt 
interest);
    (2) Amounts received from persons who are not members of the 
association;
    (3) Amounts received from members for special use of the 
organization's facilities, the use of which is not available to all 
members as a result of having paid the dues, fees or assessments 
required to be paid by all members;
    (4) Interest earned on amounts set aside in a sinking fund;
    (5) Amounts received for work done on privately owned property which 
is not association property; or
    (6) Amounts received from members in return for their transportation 
to or from shopping areas, work location, etc.
    (d) Special rule. Notwithstanding paragraphs (a) and (c)(3) of this 
section, amounts received from members or tenants of residential units 
owned by members (notwithstanding Sec. 1.528-1(d)) for special use of 
an association's facilities will be considered exempt function income 
if:
    (1) The amounts paid by the members are not paid more than once in 
any 12 month period; and
    (2) The privilege obtained from the payment of such amounts lasts 
for the entire 12 month period or portion thereof in which the facility 
is commonly in use.

Thus, amounts received as the result of payments by members of a yearly 
fee for use of tennis courts or a swimming pool shall be considered 
exempt function income. However, amounts received for the use of a 
building for an evening, weekend, week, etc., shall not be considered 
exempt function income.

[T.D. 7692, 45 FR 26323, Apr. 18, 1980]

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