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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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At our condo association we are considering having the residents

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At our condo association we are considering having the residents obtain some tax credits that (for various reasons) must be obtained directly by the residents rather than be the association directly, then carrying out an assessment to bring those credits to the association. However, due to the rules that an assessment must be apportioned according to the residents' percentage interests, some households will be assessed less than the credits they receive while others will be assessed more. We are considering establishing a one-time fund, managed by individuals completely separate from the condo association, into which underassessed individual residents can contribute and from which overassessed individual residents can draw. As far as I'm aware, this would not trigger any consequences from the IRS (or the state of Massachusetts). However, I'd like to verify that that is indeed the case.

Thank you very much for your assistance.

Sincerely,
David Heimann XXX@XXXXXX.XXX
Submitted: 1 year ago.
Category: Tax
Expert:  socrateaser replied 1 year ago.
Hello,

I've been contemplating this issue for about 30 minutes, now, and I do not believe that there is any way for you to accomplish this goal as you propose.

Your members cannot form a partnership or LLC to contract for labor and materials and the obtain tax credits, because a partnership/LLC must be formed as a "for-profit" enterprise in order to qualify as a partnership under federal tax law. Since this particular partnership will not be creating any profits, it cannot qualify under Title 26Subtitle AChapter 1Subchapter K › of the Internal Revenue Code.

A Trust can be formed for a nonprofit purpose, but the trust cannot qualify independently for tax credits which would be available to an individual -- and if all it is doing is transferring principal back to the individual members as beneficiaries, then those beneficiaries are not actually paying for the labor and materials -- rather, they are receiving principal from a "self-settled" trust, and that would once again negate the availability of the tax credit, because the taxpayer/member would not be paying for the labor and materials.

I would really like to help you with this issue, and I'm actually rather curious as to whether or not you have received any independent advice from a CPA or other tax professional -- suggesting a method under which you could undertake your contemplated plan. If you have, I'll be happy to investigate that advice, and see what the tax code, regulations and case law provides on the subject.

However, at this point, my answer is that you cannot do what you are attempting.
Expert:  socrateaser replied 1 year ago.

Hello again,

I just had a "eureka moment."

Your membership could create a revocable trust, name a particular member or members as trustee(s), and each member as a beneficiary, open a bank account and deposit the money necessary to fund the transaction.

This trust would be self-settled and invalid, but you really don't care about that, because the trust will only be used to hold the money until the contract for labor and materials is negotiated by the trustee(s). The contract will state that immediately after signing, each member will sign to approve the contract as an individual, and the trustee(s) will be relieved of liability for the contract. The trust will then be revoked, the proceeds of the account will be authorized by the members to be transferred to the vendor on behalf of each individual member, and thus, the contract will actually be between each member and the vendor, which means that the members will be paying for the benefits of the contract directly, and so they will also be eligible for the tax credit to the extent of their individual payment.

 

The trustee(s) would terminate the trust, close the account, file a single Form 1041 with nothing but zeros on the return, inform the IRS that the trust is revoked and the EIN should be closed out...and that's the end of the deal.

Hope this helps.

Customer: replied 1 year ago.

Hello socrateaser:


 


Your "eureka" reply (thanks) and my reply to your original post may have crossed paths. Here's my reply again, can you please address it?


 


Thanks,


David Heimann


 


 


Hello Socrateaster:


 


Actually, my question is not whether our unit owners can take the solar tax credit or not -- we have answered that to our satisfaction in the affirmative. For example, the bottom of the first column of page 3 for IRS Form 5695, Residential Energy Tax Credits, says "Association or cooperative costs -- If you are a member of a condominium management association for a condominium you own or a tenant-stockholder in a cooperative housing corporation, you are treated as having paid your proportionate share of any costs of such association or corporation.", and the instructions for MA DOR Form EC, Solar and Wind Tax Credit, says "Joint owners, who occupy residential property as their principal residence, share any credit available to the property in the same proportion as their ownership interests. A condominium or cooperative housing corporation dwelling unit may qualify." We have also received a similar affirmative answer from our condo attorney. We also have established that we can assess ourselves for the tax credits received (or for any other condo expense for that matter), as long as we allocate the assessment according to the percentage interest.


 


My question is "We are considering establishing a one-time fund, completely separate from and managed separately from the condo association, into which some (underassessed) individual residents can voluntarily and personally contribute and from which other (overassessed) individual residents can draw. As far as I'm aware, this would not trigger any consequences from the IRS (or the state of Massachusetts)." This is what I would like to verify.


 


Thanks,


David Heimann

Expert:  socrateaser replied 1 year ago.
Treas. Reg. 1.23-3 provides:

  • (i) Condominiums and cooperative housing corporations. An individual who is a tenant stockholder in a cooperative housing corporation (as defined in section 216) or who is a member of a condominium management association with respect to a condominium which he or she owns shall be treated as having made a proportionate share of the energy conservation expenditures or renewable energy source expenditures of such corporation or association. The cooperative stockholder's allocable share of the expenditures is to be the same as his or her proportionate share of the cooperative's total outstanding stock (including any stock held by the corporation). However, in the case where only certain cooperative stockholders are assessed for the expenditures made by the cooperative housing corporation, only those cooperative stockholders that are assessed shall be treated as having made a share of the expenditures of such corporation. In such case, the cooperative stockholder's share of the expenditures is the amount that the stockholder is assessed. The allocable share of a condominium management association member's energy conservation of renewable energy source expenditures is the amount that the member is assessed (or would be assessed in the case where expenditures are from general funds) by the association as a result of such expenditures. The residential energy credit for a qualified expenditure is allowable for the year in which the association or corporation has completed original installation of the item (or has paid or incurred the expenditure, if later). For purposes of this paragraph, the term “condominium management association” means an organization meeting the requirements of section 528(c)(1) of the Code (other than subparagraph (E) of that section), with respect to a condominium project substantially all the units of which are used as residences. [emphasis added].

 

Note from the language of the regulation, which mirrors IRC § 25D(e)(6), provides that to qualify for the credit, the expenditure must be made by the "corporation or association." Or, the expenditure can be made by the individual taxpayer.

 

Thus, my previous "eureka" moment, is the only way that your members can pool their assets to obtain the benefits of a large contract and also receive the benefits of their direct payments for the tax credit. This assumes that the goal is to improve the individual members' separate properties. If the goal is to improve association common elements/areas, then the association would have to pay -- not the members. Otherwise, the members would be making a gift to the association, because the expenditure would be made by the association, and there would be no corresponding assessment of the membership -- and no tax credit would be available.

 

Hope this helps.

Customer: replied 1 year ago.

Hello socrateaser:


 


Let me aim one more time to focus on the area I want to address with my original question. Let's stipulate that the condo association has spent money to buy solar panels, that the association has passed through those costs to its unit owners, that the unit owners have obtained their tax credits for these costs, that the association makes an assessment for (part of) these costs, apportioned accordingly to the owners' percentage interests, and that the owners have paid this assessment. All of that has happened, and is not the subject of my question.


 


We now go forward from that situation. Someone not connected with the homeowner association board or management (maybe even someone who does not live in or work for the condo) offers to accept voluntary and personal contributions. These contributions can come from anyone, whether they live in the condo or not. That person then uses the money contributed to them to pay various unit owners whose tax credits are zero or otherwise less than their assessment amount. The contributions and the payments are between individuals with no involvement by the condo association, its board, or its employees. The contributors do not intend to deduct these contributions from their taxes.


 


My question is: to me this would not raise any red flags with the IRS. Do you agree or not?


 


Regards XXXXX XXXXX


David

Expert:  socrateaser replied 1 year ago.
Let's call the "someone" in your hypothetical, "X", for convenience, and individual members shall be called. "M", As long as: (1) each M who makes payments to X does not pay more than $14,000 in any calendar year; and (2) X does not make any payment to any individual M in excess of $14,000 during any calendar year; and (3) there is no express or implied agreement that X must pay any M any particular amount in exchange for any particular M's payment to X, then all transactions are nontaxable gifts, which do not have to be reported to the IRS, because they are less than the annual gift tax exemption maximum amount.

There is one way that this transaction could raise the IRS' radar: X may receive a lot of money in this transaction. If X is audited, because X's bank reports to the U.S. Treasury that X has received all of this money in a short period of time (i.e., under Patriot Act as a "suspicious transaction"), then X will have to explain how so many of these wonderful M's gave X a substantial gift out of "affection, respect, admiration, charity or like impulses," which is the definition of a nontaxable gift, under the landmark ruling in Commissioner v. Duberstein, 363 U.S. 278, 285 (1960). And, if X 's explanation doesn't satisfy the IRS, then it may just decide to audit every single M to see what happened with the transaction. And, if the result of that audit is that it appears that X and the collective M's had some sort of agreement to move money around between themselves, then the IRS could argue that the transaction was not a gift at all, but rather some sort of contract, where the parties received some benefit in exchange for their respective payments.

If all of that were to happen, the gifts would be ruled taxable income, and the M's would be relatively screwed. X might be prosecuted for tax evasion, depending upon the amount of money transacted. I have no idea how much is involved, but if it exceeds $25,000, I'd start worrying, and if it exceeds $100,000, I would say that an audit is practically certain.

Obviously, if all of these transactions were to take place in cash, then unless someone were to file a whistleblower complaint with the IRS, the entire "shell game" would probably go unnoticed.

All of that having been said, I cannot encourage you to do what I've just hypothesized. Not only because of the possibility of being caught -- but also because there is something about the transfer of a lot of money in cash that causes people who the day before, were completely trustworthy, but all of a sudden, they decide that it's payday.

Remember the movie "Psycho?" Janet Leigh stole the dough and ended up being subjected to some really bad Karma by Norman Bates.

I'll leave it at that. Hope this helps.
Customer: replied 1 year ago.

 


Hello socrateaser:


 


Thanks. Except for one detail relating to the actual scale of our intended transactions, this answers my question.


 


What I want to mention is that the maximum amount likely paid by any particular M to X would be around $1300, the maximum amount likely paid by X to any particular M would be around $1600, and the aggregate amount of money changing hands would be a bit over $10000. Would these levels of activity likely trigger the IRS radar you mentioned?


 


Many thanks,


David

Expert:  socrateaser replied 1 year ago.

It really boils down to the coincidence of the deposits and withdrawls. If they all happen during the same month, the bank security system will probably register it and the security officer will probably report it to the Treasury. If it happens over, maybe 90 days, the amount would be too small, in my opinion to show anything.

Again, it's still tax evasion at its core, and as an officer of the court, I must strongly suggest that you do not engage in this activity. Bad Karma -- and Murphy's Law.

Hope this helps.

socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34085
Experience: Retired (mostly)
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