A homeowners association will be incorporated as a not-for-profit, non-stock corporation to hold title to a subdivision's common areas and collect monthly assessments for maintenance, exterior upkeep, insurance, and a reserve fund. It qualifies as a 'homeowners association' for federal tax purposes. Does New York's not-for-profit franchise tax exemption apply, or does providing maintenance and upkeep for members count as 'inurement' that defeats the exemption?

Plain-English summary

Cornhill Commons Homeowners Association, Inc. was to be incorporated under New York's Not-For-Profit Corporation Law as a non-stock corporation by the principals of the developer building the Cornhill Park Subdivision. Every home or townhouse purchaser would automatically become a member and would hold title to their own property, while the association itself would hold title to the development's common areas. Members would pay monthly maintenance charges and assessments covering common-area operation and maintenance, exterior maintenance of the townhouses, insurance on the townhouses and common areas, and a contingency reserve set by the Board. The association's only income would be member charges plus interest on funds it held, and it would qualify as a federal "homeowners association" under Internal Revenue Code § 528.

New York generally exempts not-for-profit corporations from the Article 9-A franchise tax, but 20 NYCRR 1-3.4(b)(6) denies that exemption wherever any part of the corporation's "net earnings" inures to the benefit of any officer, director, or member. Courts have long held that "net earnings" means much more than a literal bottom-line profit -- any inurement of earnings to an individual, in any form, defeats the exemption (Northwestern Municipal Association v. United States; People of God Community v. Commissioner). The Department looked to the federal statute Petitioner itself relied on for its "homeowners association" status: IRC § 528(c)(1)(D) defines a homeowners association as one whose net earnings don't inure to members, "OTHER THAN by acquiring, constructing, or providing management, maintenance, and care of association property" -- meaning Congress itself recognized that providing maintenance and care of association property IS a form of inurement, just one Congress chose to specially exempt for federal homeowners-association purposes.

New York's not-for-profit regulation contains no such special carve-out. Since Petitioner's whole purpose was providing exactly this kind of maintenance and care -- to its own members, using their own assessment payments -- the Department concluded this constitutes inurement of net earnings under New York's exemption test, disqualifying the association from the state exemption even though it would separately qualify as a homeowners association for federal purposes. The association would therefore be a fully taxable Article 9-A corporation, with its entire net income presumed equal to its federal taxable income (computed under IRC § 528(d)) and required to file an annual New York corporate franchise tax return.

What this means for you

Homeowners and condominium associations assuming automatic exemption

Don't assume that qualifying as a federal "homeowners association" under IRC § 528, or simply being organized as a not-for-profit corporation, means you're automatically exempt from New York's Article 9-A franchise tax. New York's not-for-profit exemption has no special carve-out for the maintenance-and-care activity that federal law specifically excuses -- so an association actively providing maintenance and upkeep services to its own members is likely taxable in New York even while enjoying favorable federal treatment.

Contrast with the unincorporated condominium association ruling

Compare TSB-A-82(4)C, where an UNINCORPORATED condominium association with similar assessment-and-maintenance activities was found NOT subject to Article 9-A -- but for an entirely different reason: it failed the threshold definition of "corporation" altogether (no capital stock, no membership certificates), so the inurement/exemption analysis never came into play. A formally INCORPORATED not-for-profit association like Cornhill Commons clears that threshold "corporation" test easily, but then runs into the inurement bar this ruling describes. Together, the two rulings show that the path to non-taxability differs sharply depending on whether the association is incorporated at all.

Common questions

Q: Does qualifying as a federal "homeowners association" under IRC section 528 make an association exempt from New York franchise tax?
A: No. New York's own not-for-profit exemption test (no inurement of net earnings to members) doesn't contain the same maintenance-and-care carve-out that federal law provides specifically for homeowners associations.

Q: What counts as "inurement" that defeats New York's not-for-profit exemption?
A: More than just profit distributions -- providing services like management, maintenance, and care of association property, using member-paid assessments, has been held to constitute inurement, even for a genuinely not-for-profit entity.

Q: Can another incorporated homeowners association with a similar maintenance-and-assessment structure rely on this Opinion?
A: No. It binds the Department only as to Cornhill Commons' own facts and can't be relied upon by other taxpayers, though the inurement analysis it applies is a general reading of the not-for-profit exemption regulation.

Citations and references

Statutes and regulations:

• Tax Law § 209.1; § 208.9
• 20 NYCRR 1-3.4(b)(6)
• 26 U.S.C. § 528(c)(1)(D), (d)
• Northwestern Municipal Association, Inc. v. United States, 99 F.2d 460 (1938)
• People of God Community v. Commissioner, 75 T.C. 127 (1980)

Related ruling:

• TSB-A-82(4)C -- an UNincorporated condominium association found not subject to Article 9-A on a completely different ground (fails the statutory definition of "corporation"), useful contrast on how the incorporation choice changes the analysis

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1982.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a82_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-82(2)C
Corporation Tax
March 10, 1982

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C811207A

On December 7, 1981, a Petition for Advisory Opinion was received from Cornhill
Commons Homeowners Association, Inc., 28 Willow Pond Way, Penfield, New York 14526.
The issues here raised are (1) whether a homeowners association incorporated under the Not­
For-Profit Corporation Law is exempt from the Franchise Tax on Business Corporations imposed
under Article 9-A of the Tax Law, and (2) whether such a homeowners association, if so subject to
tax, is required to file annual tax returns.
The Cornhill Commons Homeowners Association, Inc. (Petitioner) will be incorporated
under the Not-For-Profit Corporation Law as a non-stock corporation by the principals of the Mark
IV Construction Co., Inc., the sponsor of the Cornhill Park Subdivision. The sponsor is currently
engaged in the construction and sale of townhouses and detached homes within the subdivision. Each
purchaser will hold a fee interest in his property and will automatically become a member of
Petitioner. Petitioner will hold title to the common areas of the development.
Members will pay monthly maintenance and various assessment charges to Petitioner for:
1.
Operation and maintenance of the common areas.
2.
Exterior maintenance of townhouses.
3.
Insurance on the town houses and common areas.
4.
Creation of a reserve for contingencies as the Board of Directors deems proper.
The only source of Petitioner's income will be charges paid by members and interest on funds
held by Petitioner.
Petitioner will qualify as a homeowners association for federal income tax purposes under
section 528 of the Internal Revenue Code.
Subdivision one of section 209 of the Tax Law, contained in Article 9-A, imposes the
Franchise Tax on Business Corporations, as follows:
"For the privilege of exercising its corporate franchise, or of doing business, or of employing
capital, or of owning or leasing property in this state in a corporate or organized capacity, or
of maintaining an office in this state, for all or any part of each of its fiscal or calendar years,
every domestic or foreign corporation, except corporations specified in subdivision four of
this section, shall annually pay a franchise tax upon the basis of its entire net income, or upon
such other basis as may be applicable as hereinafter provided . . . . "

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-82(2)C
Corporation Tax
March 10, 1982

A homeowners association formed under the Not-For-Profit Corporation Law is clearly a
corporation described in the foregoing provision, and is not a corporation specified in subdivision
four of section 209 of the Tax Law.
Subdivision (b) of section 1-3.4 of the Business Corporation Franchise Tax Regulations
describes an exemption applicable to:
"(6) corporations organized other than for profit which do not have stock or shares or
certificates for stock or for shares and which are operated on a non-profit basis no part of the
net earnings of which inures to the benefit of any officer, director, or member, including Not­
For-Profit Corporations and Religious Corporations . . . . " 20 NYCRR §1-3.4(b)(6).
As thus stated, the exemption is not applicable to a corporation if any part of the net earnings thereof
inure to the benefit of its members. This denial of exemption based on the inurement of the net
earnings of a corporation to its members is based upon similar language found in subsection (c) of
section 501 of the Internal Revenue Code of 1954. This language is also found in the Internal
Revenue Code of 1939 and, indeed, predates such code.
Throughout its history, the term "net earnings" has consistently been held to mean more than
the net profits of an organization as shown on its books and more than the difference between gross
receipts and disbursements in dollars. (Northwestern Municipal Association, Inc. v. United States,
1938, 99 F. 2d 460). Indeed, it is well established that inurement of any of the earnings to a member
would constitute an "inurement of net earnings" for the benefit of such individual. (People of God
Community v. Commissioner of Internal Revenue, 1980, 75 TC 127). It is apparent from Petitioner's
description of the use of its funds that the net earnings of Petitioner will inure to the benefit of its
members. This conclusion is supported by an analysis of section 528(c)(1)(D) of the Internal
Revenue Code, which defines the term "homeowners association" and which provides that an
association qualifies as a homeowners association only if:
"no part of the net earnings of such organization inures (other than by acquiring,
constructing, or providing management, maintenance, and care of association property, and
other than by a rebate of excess membership dues, fees or assessments) to the benefit of any
private shareholder or individual . . . . "
The implication is clear that, for federal income tax purposes, the provision of management and the
maintenance and care of association property constitute an "inurement of net earnings" of the
homeowners association to the benefit of its members. Such interpretation is applicable herein. 20
NYCRR §1-2.1.
Accordingly, Petitioner will be subject to the Franchise Tax on Business Corporations
imposed under Article 9-A of the Tax Law, and will be required to pay an annual franchise tax upon
the basis of its entire net income or upon such other basis as may be applicable. It is to be noted that,
pursuant to the provisions of subdivision nine of section 208 of the Tax Law, Petitioner's entire net

-3­
TSB-A-82(2)C
Corporation Tax
March 10, 1982

income for purposes of Article 9-A of the Tax Law will be presumed to be the same as its federal
taxable income as computed under section 528(d) of the Internal Revenue Code. Petitioner will be
required to file an annual corporation franchise tax return on Form CT-3 (long form) or CT-4 (short
form), whichever is appropriate.

DATED: March 9, 1982

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau