Is a non-stock cooperative housing corporation that has taxable income exempt from Connecticut's corporation business tax?

Note: DRS states within this Ruling that it "is obsoleted in part by AN 94-1." It is preserved here as grounded historical guidance, but confirm the current corporation business tax law before relying on it.

Plain-English summary

A non-stock cooperative housing corporation owned an apartment development. Its members were people who both held a 99-year apartment leasehold and had bought a membership; members elected the directors, and on dissolution the net assets would be split among members in proportion to what they had paid in. The corporation's federal return showed it had taxable income. It asked whether it was exempt from Connecticut's corporation business tax as a cooperative housing corporation.

The answer has two parts.

1. A non-stock co-op can still be a "cooperative housing corporation." Conn. Gen. Stat. § 12-214(a)(5) exempts "cooperative housing corporations, as defined for federal income tax purposes, where there is no taxable income to the corporation," and Conn. Agencies Regs. § 12-214-2(b)(6) ties that definition to 26 U.S.C. § 216(b)(1). Although § 216(b)(1) is written in terms of stockholders, the IRS long ago held (in Rev. Rul. 55-316) that a non-stock cooperative apartment corporation that otherwise qualifies is treated the same way, because members' perpetual use, equity and proprietary lease, coupled with membership, are the practical equivalent of stock ownership. So being a non-stock entity did not disqualify this corporation.

2. But the exemption requires NO taxable income. The Connecticut exemption applies only "where there is no taxable income to the corporation." This corporation had taxable income as described in 26 U.S.C. § 63(a), so it was not exempt from the corporation business tax.

DRS added a filing point: even a co-op that qualifies and has no taxable income must still file a corporation business tax return every year (under Conn. Gen. Stat. § 12-222) in order to claim the exemption. The exemption isn't automatic; it must be claimed on an annual return.

What this means for you

Cooperative housing corporations (stock or non-stock)

Whether your co-op is organized with stock or as a non-stock membership entity, you can be a "cooperative housing corporation" for Connecticut purposes — the non-stock form is not, by itself, a bar. What controls the exemption is whether the corporation has taxable income.

The exemption is conditioned on "no taxable income"

If your cooperative housing corporation has taxable income under 26 U.S.C. § 63(a), it does not qualify for the § 12-214(a)(5) exemption and owes corporation business tax. Only a co-op with no taxable income is exempt.

File a return every year, even when exempt

Don't skip the return. DRS is explicit that a co-op must file a corporation business tax return annually (Conn. Gen. Stat. § 12-222) to claim the exemption — an exempt year still requires a filing.

This ruling is partly obsolete — check current law

DRS itself flags that the Ruling "is obsoleted in part by AN 94-1." Treat the reasoning as historical background and verify the current corporation business tax rules for cooperative housing corporations.

Common questions

Q: Can a non-stock housing co-op be a "cooperative housing corporation" in Connecticut?
A: Yes. Even though the federal definition in 26 U.S.C. § 216(b)(1) speaks of stockholders, the IRS treats a qualifying non-stock cooperative the same (Rev. Rul. 55-316), and DRS followed that. The non-stock form alone does not disqualify it.

Q: So is a cooperative housing corporation exempt from the corporation business tax?
A: Only if it has no taxable income. The § 12-214(a)(5) exemption applies "where there is no taxable income to the corporation." A co-op with taxable income is not exempt.

Q: Does an exempt co-op still have to file a return?
A: Yes. Even with no taxable income, the corporation must file an annual corporation business tax return under Conn. Gen. Stat. § 12-222 to claim the exemption.

Q: Is this ruling still good law?
A: DRS states it "is obsoleted in part by AN 94-1." Use it for historical context and confirm the current statute and any superseding guidance.

Citations and references

Statutes, regulations, and authorities:

• Conn. Gen. Stat. § 12-214(a)(5) (exemption for cooperative housing corporations with no taxable income; formerly § 12-214(a)(6) until 1990 Conn. Pub. Acts 28)
• Conn. Gen. Stat. § 12-222 (annual corporation business tax return)
• Conn. Agencies Regs. § 12-214-2(b)(6) (definition of exempt cooperative housing corporation)
• 26 U.S.C. § 216(b)(1), (b)(2) (federal "cooperative housing corporation"); § 63(a) (taxable income); § 23(z) of the 1939 Code
• Rev. Rul. 55-316, 1955-1 C.B. 312; Evans v. United States, 251 F. Supp. 296 (D. Or. 1966), rev'd 375 F.2d 730 (9th Cir. 1967)

Related guidance (described in prose, not linked):

• Announcement AN 94-1 (DRS states this Ruling is obsoleted in part by it)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 93-19

Original ruling text

Ruling 93-19, Corporation Business Tax

This Ruling is obsoleted in part by AN 94-1

FACTS:

The Corporation was formed as a non-stock housing development corporation. The Corporation owns a housing development with numerous apartment units, none of which are leased to commercial tenants. The Corporation also owns, and uses in connection with the housing development, an administration building, a plant facility building and a meeting hall.

Only persons who have entered into an apartment leasehold with the Corporation and have purchased a membership in the Corporation are members of the Corporation. The Corporation's directors are elected by members of the Corporation.

Each apartment leasehold is between the Corporation and a member, and inures to the benefit of the member's heirs and assigns. Membership is not transferable except in conjunction with the transfer of an apartment leasehold. The leasehold is for a term of 99 years, with the right to renew, upon payment of $10, for a second term of 99 years, and the further right to renew, upon payment of $10, for a third term of 99 years.

In case the Corporation is dissolved, its net assets, after payment of its debts, are to be distributed among its members in proportion to each member's payments to the Corporation of the membership subscription price and principal payments under the apartment leasehold.

The Corporation's federal income tax return indicates that it has taxable income, as described in 26 U.S.C. § 63(a).

ISSUE :

Whether a non-stock cooperative housing corporation with taxable income is exempt from corporation business tax under Conn. Gen. Stat. § 12-214(a)(5).

DISCUSSION:

Conn. Gen. Stat. § 12-214(a)(5) (formerly, Conn. Gen. Stat. § 12-214(a)(6) until the repeal of the preceding subdivision by 1990 Conn. Pub. Acts 28) exempts "cooperative housing corporations, as defined for federal income tax purposes, where there is no taxable income to the corporation." Conn. Agencies Regs. § 12-214-2(b)(6) defines such a corporation as:

a company which is described in section 216(b)(1) of the Internal Revenue Code and section 1.216(d) of title 26 of the Code of Federal Regulations and which has no taxable income as described in section 63(a) of the Internal Revenue Code. For each income year for which exemption from the tax imposed under chapter 208 is claimed, the company shall file with the commissioner the annual return which is required by section 12-222 ....

Section 216(b)(1) of the Internal Revenue Code defines a "cooperative housing corporation" as 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,

(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 partial or complete liquidation of the corporation, and

(D) 80 percent or more of the gross income of which for the taxable year ... is derived from tenant-stockholders.

Although 26 U.S.C. § 216(b)(1) and the regulation thereunder appear to apply only to stock corporations, the Internal Revenue Service has held that

a non-stock cooperative housing apartment corporation which otherwise qualifies is in accord with the purpose of section 23(z) of the 1939 Code [now 26 U.S.C. § 216]. The purpose of section 23(z) is to place the cooperative apartment owner in as favorable a position with respect to interest and taxes paid as the owner of a dwelling house. See Senate Report No. 1631 on the Revenue Bill of 1942, C.B. 1942-2, 504, at pages 546 and 577. Perpetual use of and equity in an apartment or the proprietary lease of an apartment, coupled with membership in the corporation, is the equivalent for practical purposes of ownership of an apartment.

Rev. Rul. 55-316, 1955-1 C.B. 312, 314-315.

Cooperative members in the instant case possess the normal and usual rights of stockholders, namely, a pro rata distribution of assets upon liquidation, participation in the management by reason of electing the board of directors, and transferability of their interest.

Id. at 314. ( Evans v. United States, 251 F. Supp. 296 (D. Or. 1966), which held that another part of Rev. Rul. 55-316 was an arbitrary and unreasonable interpretation of 26 U.S.C. § 216(b)(2), was reversed by the Court of Appeals; 375 F.2d 730 (9th Cir. 1967).)

However, even though the Corporation qualifies as a "cooperative housing corporation" under 26 U.S.C. § 216(b)(1), it has "taxable income as described in 26 U.S.C. § 63(a)." Conn. Agencies Regs. § 12-214-2(b)(6). Therefore, the Corporation is not exempt from corporation business tax under Conn. Gen. Stat. § 12-214(a)(5). (Even if the Corporation had no taxable income, and, thus, was exempt, it is required to file a return each year to claim the exemption.)

RULING:

A non-stock corporation may be a cooperative housing corporation, as described in Conn. Gen. Stat. § 12-214(a)(5) and as defined in Conn. Agencies Regs. § 12-214-2(b)(6), but it is not exempt from corporation business tax unless it has no taxable income as described in 26 U.S.C. § 63(a). Even if it has no taxable income, a cooperative housing corporation must file a corporation business tax return to claim exemption under Conn. Gen. Stat. § 12-214(a)(5).

LEGAL DIVISION

Issued: October 21, 1993