PLR 1029018: IRS rules that income and resale limits do not defeat cooperative housing status

Plain-English summary

A cooperative housing corporation developing a mixed-income project asked whether government-imposed income limits, purchase-price limits, and resale restrictions would prevent its residents from qualifying as tenant-stockholders or prevent the corporation from qualifying as a cooperative housing corporation under IRC § 216. The IRS ruled that those restrictions would not have that effect, provided the corporation satisfied the requirements of § 216(b)(1). It also ruled that purchasers of stock tied to residential units would qualify as tenant-stockholders if the stock was fully paid and reasonably related to the unit's share of the corporation's equity. The corporation would satisfy the one-class-of-stock requirement if all outstanding shares gave tenant-stockholders identical distribution and liquidation rights.

Ruling snapshot

• Question: Do government restrictions on income eligibility, purchase prices, and resale prevent the corporation or its residents from qualifying under IRC § 216?
• Outcome: approved
• Key authorities: IRC § 216(a), § 216(b)(1), and § 216(b)(2); Treas. Reg. § 1.216-1(e)(2); IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201029018 Third Party Communication: None
Release Date: 7/23/2010 Date of Communication: Not Applicable
Index Number: 216.01-00, 216.02-00
Person To Contact:
--------------------------------- -----------------------, ID No. -------------------
------------- ---------------------------------------------------
-------------------------------------------------------- Telephone Number:
-------------------------------------------- ---------------------
-------------------------- Refer Reply To:
---------------------------------- CC:PSI:B05
In Re: --------------------------------------------------- PLR-154729-09
---------------- Date:
April 14, 2010

LEGEND:

Corporation = ------------------------------------------------------------

State = -------------
a = ----
b = --
c = ----
d = ----
e = ----
f = ---------

Dear -----------------:

    This letter responds to a letter dated December 16, 2009, filed on behalf of

Corporation requesting a ruling under section 216 of the Internal Revenue Code. This
letter responds to that request.

   The represented facts are as follows. Corporation is a cooperative housing

corporation organized under the laws of State. Corporation is in the process of
constructing a mixed-income housing project that will include a residential units in one
apartment building. The a units will be divided into b and c low income units, d
moderate income units, and e market rate units, with share allocations corresponding to
each income category. Corporation has received below-market private financing and
subsidized governmental financing that require the inclusion of low income and
moderate income units (collectively referred to as the “Affordable Units”), and also entail
income eligibility requirements, limitations on purchase prices, and restrictions on resale
with respect to the Affordable Units.

PLR-154729-09 2

   Corporation is authorized to issue f shares of common stock entirely to the

residential units. Corporation represents that it is authorized to issue only one class of
stock. Corporation further represents that the shares of Corporation to be issued with
respect to each unit will be fully paid up in an amount bearing a reasonable relationship
to the portion of the fair market value of the leasehold property attributable to that unit
bears to the fair market value of the leasehold property as a whole.

     Corporation requests a ruling that the imposition by governmental units of income

eligibility requirements, limitations on purchase prices, and restrictions on resale with
respect to certain tenant-stockholders in Corporation shall not cause any person to fail
to qualify as a “tenant-stockholder,” as defined in § 216(b)(2) or shall prevent
Corporation, in which such tenant-stockholder holds stock, to qualify as a “cooperative
housing corporation,” as defined in § 216(b)(1).

   Section 216(a) provides that in the case of a tenant-stockholder (as defined in

§ 216(b)(2)), there shall be allowed as a deduction amounts (not otherwise deductible)
paid or accrued to a cooperative housing corporation within the taxable year, but only to
the extent that such amounts represent the tenant-stockholder’s proportionate share of:

   (1) the real estate taxes allowable as a deduction to the corporation under § 164

that are paid or incurred by the corporation on the houses or apartment building and on
the land on which such houses or apartment building are situated, or

   (2) the interest allowable as a deduction to the corporation under § 163 that is

paid or incurred by the corporation on its indebtedness contracted:

  (A) in the acquisition, construction, alteration, rehabilitation, or maintenance of

the houses or apartment building, or

   (B) in the acquisition of the land on which the houses or apartment building are

situated.

 Section 216(b)(1) provides that the term “cooperative housing corporation”

means a corporation:

   (A) having one and only one class of stock outstanding,

  (B) each of the stockholders of which is entitled, solely by reason of his

ownership of stock in the corporation, to occupy for dwelling purposes a house or an
apartment in a building owned or leased by such corporation,

PLR-154729-09 3

   (C) no stockholder of which is entitled (either conditionally or unconditionally) to

receive any distribution not out of earnings and profits of the corporation except on a
complete or partial liquidation of the corporation, and

   (D) meeting one or more of the following requirements for the taxable year in

which the taxes and interest described in § 216(a) are paid or incurred:

  (i) 80 percent or more of the corporation’s gross income for such taxable year is

derived from tenant-stockholders.

   (ii) At all times during such taxable year, 80 percent or more of the total square

footage of the corporation’s property is used or available for use by the tenant-
stockholders for residential purposes or purposes ancillary to such residential use.

   (iii) 90 percent or more of the expenditures of the corporation paid or incurred

during such taxable year are paid or incurred for the acquisition, construction,
management, maintenance, or care of the corporation’s property for the benefit of the
tenant-stockholders.

   Section 216(b)(2) provides that the term “tenant-stockholder” means a person

who is a stock-holder in a cooperative housing corporation, and whose stock is fully
paid-up in an amount not less than an amount shown to the satisfaction of the Secretary
of Treasury as bearing a reasonable relationship to the portion of the value of the
corporation’s equity in the houses or apartment building and the land on which situated
which is attributable to the house or apartment which such person is entitled to occupy.

    Section 1.216-1(e)(2) of the Income Tax Regulations provides, in relevant part,

that in order to qualify as a “cooperative housing corporation” under § 216, each
stockholder of the corporation, whether or not the stockholder qualifies as a tenant-
stockholder under § 216(b)(2) and § 1.216-1(f), must be entitled to occupy for dwelling
purposes an apartment in a building or a unit in a housing development owned or
leased by such corporation. The stockholder is not required to occupy the premises.
The right as against the corporation to occupy the premises is sufficient. Such right
must be conferred on each stockholder solely by reason of his or her ownership of stock
in the corporation. That is, the stock must entitle the owner thereof either to occupy the
premises or to a lease of the premises. The fact that the right to continue to occupy the
premises is dependent upon the payment of charges to the corporation in the nature of
rentals or assessments is immaterial.

     Applying the above standards to the facts and representations submitted and

subject to the limitation below, we conclude that provided Corporation satisfies the
requirements of § 216(b)(1), the imposition by governmental agencies of income
eligibility requirements, limitations on purchase prices, and restrictions on resale with
respect to certain tenant-stockholders in Corporation shall not cause any person to fail

PLR-154729-09 4

to qualify as a “tenant-stockholder” as defined in § 216(b)(2), or shall prevent
Corporation in which such tenant-stockholder holds stock to qualify as a “cooperative
housing corporation” as defined in § 216(b)(1).

   We conclude that the purchaser of the stock of Corporation attributable to the

residential units will qualify as a “tenant-stockholder” for purposes of § 216(b)(2),
provided such stock is fully paid up in an amount that bears a reasonable relationship to
the portion of the value of Corporation’s equity in the building and land that is
attributable to the unit that the purchaser is entitled to occupy.

   We further conclude, based upon Corporation’s representation that it is

authorized to issue only one class of stock, that provided all outstanding shares in
Corporation confer identical rights to distribution and liquidation proceeds to
Corporation’s tenant-stockholders, Corporation will satisfy the requirements of §
216(b)(1)(A).

    Except as expressly provided herein, we express or imply no opinion concerning

the tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Further, we express or imply no opinion whether Corporation otherwise meets
the requirements of § 216. Specifically, we express or imply no opinion as to
whether Corporation meets the requirements of § 216(b)(2) concerning whether the
stock bears a reasonable relationship to the portion of the value of Corporation’s equity
in the building and land that is attributable to the unit which the purchaser is entitled to
occupy.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent. A copy of this ruling must be
attached to any income tax return to which it is relevant.

   In accordance with the power of attorney on file, a copy of this letter is being sent

to Corporation’s authorized representative.

                                              Sincerely,


                                              NICOLE R. CIMINO
                                              Senior Technician Reviewer, Branch 5
                                              Office of Associate Chief Counsel
                                              (Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for section 6110 purposes