A not-for-profit homeowners association elects federal 'homeowners association' tax treatment under IRC section 528 and its only income is member assessments (for maintaining roads and recreational facilities) plus bank interest -- is it exempt from New York's Article 9-A corporate franchise tax, or at least is its NY taxable income limited to just the interest income?

Plain-English summary

Heritage Hills Society, Ltd., incorporated under the Not-For-Profit Corporation Law, operates and maintains social, cultural, and recreational facilities plus certain roads for the residents of a real estate development. Membership is tied to condominium unit ownership (one membership per unit, automatically transferring on sale, one vote each). The Board apportions operating/maintenance/management costs equally among members, who pay monthly assessments; reserve funds (e.g., for replacing shuttle buses) sit in an interest-bearing bank account. Petitioner elected to file federally as a "homeowners association" under IRC section 528, whose income for federal purposes consists of exempt-function income from members (generally not taxed) plus bank interest (generally taxed). Petitioner asked whether, correspondingly, its NEW YORK taxable income under Article 9-A is exempt entirely, or at least limited to just the interest income.

The Department first confirmed a homeowners association organized under the Not-For-Profit Corporation Law is squarely a "corporation" subject to Article 9-A -- it's not one of the categories excluded outright by section 209's subdivision four. It then applied 20 NYCRR 1-3.4(b)(6), which exempts non-stock, non-profit corporations only if "no part of the net earnings... inures to the benefit of any officer, director, or member." Relying on its own 1982 Cornhill Commons Homeowners Association precedent (TSB-A-82(2)C), the Department held that an association's PROVISION of management and property maintenance/care services TO its members itself constitutes "inurement of net earnings" to those members for New York purposes -- the members receive a direct benefit (maintained roads, recreational facilities) funded by the association's activities, even though no cash dividend is ever paid out. Given Petitioner's own description of how it uses its funds, the Department concluded net earnings inure to members here too, disqualifying it from the exemption entirely -- REGARDLESS of the federal section 528 election, which is a purely federal filing status choice with no bearing on the New York exemption analysis.

Having found no exemption, the Department addressed what tax base applies: Article 9-A's entire net income starts from federal taxable income (section 208.9), and IF Petitioner elects section 528 treatment federally, its federal taxable income for NEW YORK purposes is PRESUMED to be the same as its IRC section 528(d) computation. Since section 528(d) generally excludes exempt-function income (member assessments) from taxable income but includes other income like interest, this effectively DOES result in New York taxing something close to just the interest income in practice -- but as a consequence of following the federal section 528(d) computation, not because New York independently limits the tax base to interest. Petitioner must file Form CT-3 or CT-4 annually.

What this means for you

Homeowners and condominium associations providing maintenance/management services to members

Simply being a not-for-profit, non-stock corporation doesn't exempt you from New York's Article 9-A franchise tax -- if you provide management, maintenance, or care services to your own members (even without cash distributions), the Department treats that as prohibited "inurement," disqualifying the 20 NYCRR 1-3.4(b)(6) exemption. This mirrors the doctrine in the companion TSB-A-86(6)C (condo association taxable due to rental income) and contrasts with TSB-A-86(7)C (a pure title-holding corporation WAS found exempt, since it does nothing beyond passively holding title).

Electing federal IRC section 528 homeowners-association treatment

That federal election doesn't itself determine your New York Article 9-A exemption status -- but if you're taxable anyway (as most maintenance-service associations will be), electing section 528 federally DOES shape what income New York taxes, since New York presumes your federal taxable income equals your section 528(d) computation.

Common questions

Q: Does providing maintenance services to members count as "inurement" even without any direct payout?
A: Yes -- per the Department's Cornhill Commons precedent, providing management/maintenance/care services to member-owners itself constitutes inurement of net earnings, disqualifying the non-profit exemption.

Q: Does electing IRC section 528 treatment federally exempt a homeowners association from New York tax?
A: No -- the federal election is a filing-status choice with no bearing on whether the New York inurement-based exemption applies; it only affects what income gets taxed once the association is confirmed taxable.

Q: How does this ruling differ from TSB-A-86(7)C, which found a title-holding corporation exempt?
A: That corporation merely held title to real property with no service-provision activity to members -- pure passive title-holding doesn't trigger inurement the way active maintenance/management services do.

Q: Can another homeowners association 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 associations, even those providing similar maintenance services.

Citations and references

Statutes and regulations:

• Tax Law § 209.1, § 208.9
• 20 NYCRR 1-3.4(b)(6), 1-2.1
• Internal Revenue Code § 528, § 528(d)
• Cornhill Commons Homeowners Association, Inc., TSB-A-82(2)C

Related rulings:

• TSB-A-86(6)C -- a condominium association also found taxable under Article 9-A, on rental/business-income grounds
• TSB-A-86(7)C -- a contrasting title-holding corporation found EXEMPT, having no service-provision activity to trigger inurement

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_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (4) C
Corporation Tax
January 22, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C851022C

On October 22, 1985, a Petition for Advisory Opinion was received from Heritage Hills
Society, Ltd., Route 202, Somers, New York 10589.
The issue raised is whether under Article 9-A of the Tax Law, the taxable income of a Not­
For-Profit Corporation is limited to interest income when such corporation is a homeowners
association pursuant to section 528 of the Internal Revenue Code and its income is made up of
exempt function income from its members-owners and interest on its bank accounts.
Petitioner is incorporated under the Not-For-Profit Corporation Law. Petitioner was formed
to operate and maintain social, cultural and recreation facilities, as well as certain roads existing and
which may hereafter be constructed for the residents of a real estate development.
Petitioner issues one membership for each condominium unit and the membership is
automatically transferred to the grantee upon conveyance of any such condominium unit. Each
membership is entitled to one vote.
The Board of Directors prepares estimates of the costs and expenses of rendering the
operating, maintenance and management services and apportions such costs and expenses equally
among the members, who make monthly payments as fixed, from time to time, by the Board of
Directors. Petitioner sets aside reserve funds to replace its shuttle buses as needed. Such funds are
deposited in an interest bearing bank account.
Petitioner states that it is a homeowners association pursuant to section 528 of the Internal
Revenue Code and its income consists of exempt function income from its members-owners of
residential units and interest income on Petitioner's bank accounts.
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. . . ."

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-86 (4) C
Corporation Tax
January 22, 1986
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).
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. Cornhill Commons Homeowners Association, Inc., Advisory Opinion
of the State Tax Commission, March 10, 1982, TSB-A-82(2)C. Such interpretation is applicable
herein. 20 NYCRR 1-2.1. 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. Therefore, Petitioner is not
exempt from the tax imposed under Article 9-A of the Tax Law.
Subdivision nine of section 208 of the Tax Law defines entire net income as "total net
income from all sources, which shall be presumably the same as the entire taxable income which the
taxpayer is required to report to the United States treasury department,... except as hereinafter
provided...." Therefore, the taxable income reported for Federal income tax purposes is the starting
point for computing entire net income. After determining Federal taxable income, it must be
adjusted as required by such subdivision nine of section 208 of the Tax Law.
If a homeowners association elects to file as a homeowners association pursuant to section
528 of the Internal Revenue Code, the association's Federal taxable income for purposes of
subdivision nine of section 208 of the Tax Law will be presumed to be the same as its taxable
income as computed under section 528(d) of the Internal Revenue Code.
Accordingly, Petitioner is 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. If Petitioner elects to file as
a homeowners association pursuant to section 528 of the Internal Revenue Code, Petitioner's Federal
taxable income for purposes of subdivision nine of section 208 of the Tax Law, will be presumed

-3­
TSB-A-86 (4) C
Corporation Tax
January 22, 1986
to be the same as its taxable income as computed under section 528(d) of the Internal Revenue Code.
Petitioner is required to file an annual corporation franchise tax return on Form CT-3 (long form)
or CT-4 (short form), whichever is appropriate.

DATED: January 22, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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