Does a newly formed co-op corporation qualify for New York's reduced 0.04% franchise-tax capital rate for 'cooperative housing corporations,' if its units are currently zoned/certified for commercial use but the co-op plans to convert them to residential dwelling use?

Plain-English summary

246 W. 38th St. Tenants Corp. operates and maintains 15 co-op units in New York City. In its first year of operation, its only income was tenant maintenance charges plus $14 of interest. The units were originally offered -- and are currently certified -- for COMMERCIAL occupancy, but Petitioner planned to amend its governing documents (leases, etc.) so owners could obtain revised certificates of occupancy permitting residential/dwelling use, following proper zoning and building-code procedures, and said it would not unreasonably withhold consent to alterations needed to get that amended certificate. Petitioner pointed to a recent IRS private letter ruling holding that issuing stock allocated to "professional apartments" doesn't by itself prevent a building from qualifying as a cooperative housing corporation, and argued its facts were comparable.

Petitioner asked whether it could use New York's reduced capital-base tax rate for cooperative housing corporations (four-tenths of a mill, or 0.04%, under section 210.1(a)(2)) rather than the standard rate. New York's statute doesn't define "cooperative housing corporation" itself -- it borrows the federal definition in IRC section 216(b)(1): a corporation with (A) one class of stock, (B) stockholders entitled SOLELY by their stock ownership to occupy a unit "for dwelling purposes," (C) no non-liquidation distributions except from earnings and profits, and (D) at least 80% of gross income from tenant-stockholders.

The Department didn't resolve whether Petitioner's units -- still certified for commercial use at the time of the ruling -- actually satisfy the "dwelling purposes" prong of the federal test. Instead, it issued a CONDITIONAL ruling: New York's reduced rate follows the federal determination automatically, so if Petitioner qualifies as a cooperative housing corporation under IRC section 216(b)(1) for federal income tax purposes, it also qualifies for New York's reduced capital rate -- but the opinion doesn't itself decide (and can't decide) whether Petitioner's still-commercial units meet that federal test.

What this means for you

Cooperative corporations converting from commercial to residential use

New York's reduced co-op capital-tax rate is entirely derivative of your FEDERAL tax classification under IRC section 216(b)(1) -- there's no separate New York-specific test. If your building's units are certified for commercial rather than dwelling use, get your federal cooperative-housing-corporation status confirmed (an actual IRS ruling, not just a comparable precedent) before relying on the reduced New York rate.

Reading conditional advisory opinions

When a ruling says "IF Petitioner qualifies... THEN the rate applies," that's not a "yes" -- it's the Department declining to make the underlying factual/federal determination and leaving it open. Don't treat a conditional ruling as resolving your actual eligibility.

Common questions

Q: Does New York have its own definition of "cooperative housing corporation," separate from federal law?
A: No -- section 210.1(a)(2) incorporates the federal IRC section 216(b)(1) definition directly; there's no independent New York test.

Q: Did the Department decide whether Petitioner actually qualifies?
A: No -- the ruling is conditional on Petitioner satisfying the federal test (particularly the "dwelling purposes" requirement), which wasn't yet resolved given the units' commercial certification at the time.

Q: Does a comparable IRS private letter ruling for a different taxpayer establish that Petitioner qualifies?
A: Not according to this opinion -- the Department didn't treat the cited IRS ruling (about a different corporation's stock allocated to professional apartments) as dispositive of Petitioner's own status.

Q: Can another co-op corporation rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other cooperative corporations, even ones converting from commercial to residential use.

Citations and references

Statutes and regulations:

• Tax Law § 210.1(a)(2)
• Internal Revenue Code § 216(b)(1)
• 20 NYCRR 3-1.2(b)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a86_18c.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-86 (18) C
Corporation Tax
August 29, 1986

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C860513A

On May 13, 1986, a Petition for Advisory Opinion was received from 246 W. 38th St.
Tenants Corp., c/o Smetana Associates Property, Inc., 321 Fifth Avenue, New York, New York
10016.
The issue raised is whether Petitioner, pursuant to section 210.1(a)(2) of Article 9-A of the
Tax Law, may calculate its New York State franchise tax liability under the capital rate of .0004 as
applicable to cooperative housing corporations.
Petitioner is a corporation operating and maintaining 15 co-op units in New York City. Its
only source of income in its first year of operations consists of maintenance charges collected from
the tenants and $14 in interest income.
The units were initially offered and are currently available for commercial occupancy.
However, Petitioner would like to amend its pertinent documents (including leases, etc.) to enable
each owner to obtain a revised certificate of occupancy permitting use of the unit for dwelling
purposes. Any such changes would be made pursuant to proper zoning laws, building and housing
codes, etc. In addition, Petitioner will not unreasonably withhold its consent to any improvement,
alteration, etc. necessary to obtain such an amended certificate of occupancy to allow residential use.
Petitioner contends that in a recent private letter ruling, the Internal Revenue Service ruled
that the issuance of stock allocated to professional apartments will not prevent qualification as a
cooperative corporation. Petitioner believes the facts and circumstances of that case are the same
as Petitioner's.
Section 210.1(a)(2) of the Tax Law provides, in part, that the computation of tax measured
by business and investment capital "...in the case of a cooperative housing corporation as defined in
the internal revenue code, ..." shall be at the applicable rate of four-tenths of a mill.
Section 216(b)(1) of the Internal Revenue Code defines the term "cooperative housing
corporation" as follows:
"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,

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-86 (18) C
Corporation Tax
August 29, 1986

(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) 80 percent or more of the gross income of which for the taxable year in
which the taxes and interest described in subsection (a) are paid or incurred is derived
from tenant-stockholders." [see also 20 NYCRR 3-1.2(b)].
Therefore, if Petitioner is a cooperative housing corporation for Federal income tax purposes
pursuant to section 216(b)(1) of the Internal Revenue Code, Petitioner is a cooperative housing
corporation for New York State franchise tax purposes pursuant to section 210.1(a)(2) of the Tax
Law. Accordingly, if Petitioner is a cooperative housing corporation, the computation of the
business corporation franchise tax measured by business and investment capital is computed at the
rate of four-tenths of a mill (.0004).

DATED: August 29, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.