Timing of Revenue Judgment Election 70-604

It’s getting to that time of year again when associations are thinking about year-end procedures, one of which is holding the annual election under Revenue Rule 70-604.

I have been asked several times what those numbers mean. “70” means the year the ruling was issued (1970), and “604” simply represents the number sequence of the ruling for that year. This was sentence number 604 issued in 1970.

As a CPA, I get more questions about applying for Revenue Resolution 70-604 than about all other tax matters combined. Several of my articles on the subject of Revenue Resolution 70-604 are posted in various places on the web, so I am often “found” and questions are sent to me. A question I get over and over again is “when do we make the election?”

While Revenue Resolution 70-604 is one of our most powerful tax planning tools for partnerships filing Form 1120, it is also the most subject to interpretation. One of the reasons for this is that the ruling itself is very short: it is only two paragraphs long. The absence of internal definitions within the Judgment means that readers have to interpret it and make their own definitions for nearly every critical issue within the Judgment’s scope, including the timing of the election.

Because so many areas of this Resolution are subject to interpretation, many years ago I contacted Mr. Ransom (who drafted Revenue Resolution 70-604) at the IRS to discuss this and other issues. When I pointed out the ambiguity in the Judgment regarding the timing of the election, Mr. Ransom said that he felt there was no ambiguity as the matter was purposely worded to make the Judgment flexible. I specifically asked Mr. Ransom if an association could make its election after its fiscal year was over, and he said yes. He agreed that the only limitation on the timing of the election is that the election must be held before the tax return is filed and must be held on a timely filed return.

I also asked Mr. Ransom if it was possible for an association to hold an election before the fiscal year was over. He agreed that it would be possible to make the choice this way, as the Resolution was purposely worded to be flexible by stating that “any” excess could be carried over from one year to the next. That means you don’t have to indicate a specific amount that will carry over from one year to the next, you don’t even have to know if there will be any excess.

There is no risk of disadvantage in making an election under Revenue Resolution 70-604. If an association does not have an excess of membership income over membership expenses, the election will simply not apply to that year. It would be the same as if no choice had been made. If an association files Form 1120-H instead of Form 1120, then no election is needed, so again, the election simply does not apply to that year.