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

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

As a CPA, I receive more questions about the application of 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 regularly “found” and questions are sent my way. One question I get time and time again is “when do we do 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: only two paragraphs. The absence of internal definitions within the Ruling means that readers have to interpret it and come up with their own definitions for almost all critical issues within the Ruling’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 National Office 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 worded on purpose to make the Judgment flexible. I specifically asked Mr. Ransom if an association could make its election after its fiscal year ended, and he said yes. He agreed that the only limitation on election time is that the election must be held before the tax return is filed and must be on a timely filed return.

I also asked Mr. Ransom if it was possible for an association to hold an election before the end of the fiscal year. He agreed that it would be possible to make the choice in this way, as the Resolution was purposely drafted to be flexible in 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 will not apply to that year.