Is a homeowners association that maintains a private beach for its members subject to New York's corporate franchise tax, even if it elects federal homeowners-association tax treatment under IRC § 528?

Plain-English summary

Pickwick at Rocky Point Beach Club, Inc. is a homeowners association formed in 1967 whose only real activity is maintaining a private beach for its members -- membership is required for anyone who owns a lot subject to the association's covenants. It doesn't maintain common areas, doesn't maintain the exteriors of individually owned homes, and doesn't carry insurance on anything except the beach. Its dues roughly match its expenses each year, so it runs at close to break-even. It had never filed a corporate tax return and planned to elect, for 1987, to file its federal return as a "homeowners association" under IRC § 528 (a special federal regime for these associations).

The Department explained that a homeowners association formed under New York's Not-For-Profit Corporation Law is a "corporation" for Article 9-A purposes, and could potentially claim the regulatory exemption for nonprofit corporations that issue no stock and where no part of net earnings benefits any officer, director, or member. But that exemption is unavailable if any part of net earnings "inures" to members -- and both New York and federal case law treat inurement broadly: it isn't limited to cash distributions or bottom-line profit, but includes the corporation simply providing management, maintenance, and care of association property for members' benefit. In fact, the federal definition of "homeowners association" under IRC § 528(c)(1)(D) explicitly acknowledges that providing "management, maintenance, and care of association property" is itself a form of inurement -- it's just one the federal homeowners-association regime specially permits. A prior 1982 New York opinion (Cornhill Commons) had already applied that same inurement reading to homeowners associations for Article 9-A purposes. Since Pickwick's sole activity -- maintaining the private beach for its members -- is exactly that kind of inurement, the Department concluded its net earnings inure to its members, so it doesn't qualify for the not-for-profit exemption and is a taxable corporation under Article 9-A regardless of whether it makes the federal § 528 election.

What this means for you

Homeowners associations, condo associations, and similar member organizations

Don't assume that federal homeowners-association tax treatment under IRC § 528, or simply operating on a nonprofit/break-even basis, exempts your association from New York's corporate franchise tax. If your association's core activity is maintaining shared property (a beach, pool, common area) for members' use, that's likely "inurement" under New York's regulatory standard -- which is broader than most people expect and doesn't require any cash payout to members.

Tax professionals advising member associations

The § 528 election affects only how federal taxable income is computed (which then becomes New York's starting point for entire net income) -- it doesn't itself create or preserve a state tax exemption. The inurement analysis for the not-for-profit exemption is a separate, threshold question, and mere maintenance of association property answers it against exemption.

Common questions

Q: Does electing IRC § 528 change how much tax the association owes?
A: It changes how federal (and thus New York) taxable income is computed under § 528(d), but doesn't affect whether the association is subject to tax in the first place -- that's answered by the separate inurement/exemption analysis.

Q: What if the association charges only enough in dues to cover its costs, with no profit?
A: That doesn't matter here -- inurement doesn't require net profit; providing maintenance/care of association property for members is itself treated as inurement, regardless of whether dues exceed costs.

Q: Can another homeowners association rely on this opinion?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other associations, though it applies the same inurement standard set out in the 1982 Cornhill Commons opinion.

Citations and references

Statutes and regulations:

• Tax Law § 209(1) (Article 9-A franchise tax); § 208(1) (definition of corporation); § 208(9) (entire net income)
• Business Corporation Franchise Tax Regulations § 1-3.4(b)(6) (not-for-profit exemption)
• IRC § 501(c) (inurement standard); § 528, § 528(c)(1)(D) (homeowners association election)
• Tax Law § 1085(a)(1) (late-filing addition to tax)
• TSB-A-82(2)C, Cornhill Commons Homeowners Association (March 10, 1982)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_26c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (26) C
Corporation Tax
October 15, 1987

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C870618A

On June 18, 1987, a Petition for Advisory Opinion was received from Pickwick at Rocky
Point Beach Club, Inc., P.O. Box 300, Rocky Point, New York 11778.
The question raised is whether Petitioner, a homeowners association, is subject to tax under
Article 9-A of the Tax Law. Also, would Petitioner be subject to tax under Article 9-A if for federal
income tax purposes an election is made to be treated as a homeowners association under section 528
of the Internal Revenue Code.
Petitioner is a homeowners association organized on April 28, 1967 under the provisions of
the New York Membership Corporations Law (repealed and replaced by the Not-For-Profit
Corporation Law, effective September 1, 1970 (L. 1969 c. 1066)) and its sole purpose is to maintain
a private beach in Rocky Point, New York. Membership is required for any record owner of a fee
or undivided fee interest in any lot, which is subject by covenants of record to assessment by the
association.
Petitioner does not maintain common areas of the development, does not maintain the
exteriors of the individually owned homes and does not carry insurance on the common areas, except
for the private beach. In fact, the maintenance of the private beach is Petitioner's only activity.
Management states that each year's dues income approximately equals each year's expenses
leaving an immaterial amount of income or loss.
Petitioner has never filed federal or New York State corporation tax returns. For 1987,
Petitioner will elect to file its federal income tax return pursuant to the provisions of section 528 of
the Internal Revenue Code.
Subdivision one of section 209 of the Tax Law, as amended by Chapter 817 of the Laws of
1987, imposes a 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 base, 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

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TSB-A-87 (26) C
Corporation Tax
October 15, 1987

The meaning of the term "corporation" is set forth in subdivision one of section 208 of the
Tax Law, as follows:
"[t]he term 'corporation' includes a joint-stock company or association and
any business conducted by a trustee or trustees wherein interest or ownership
is evidenced by certificate or other written instrument;..."
A homeowners association formed under the Not-For-Profit Corporation Law (New York
Membership Corporations 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 from tax 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 1986. This language is also found in the Internal
Revenue Code of 1954 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). 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.

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TSB-A-87 (26) C
Corporation Tax
October 15, 1987

In Cornhill Commons Homeowners Association, Inc., Advisory Opinion of the State Tax
Commission, March 10, 1982, TSB-A-82(2)C, it was determined that such interpretation is also
applicable for purposes of Article 9-A of the Tax Law. In the instant case, it is apparent from
Petitioner's description of the association's activities, namely, the maintenance of the private beach
for the homeowners, 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 t aw.
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. Whether Petitioner elects to
file its federal income tax return pursuant to section 528 of the Internal Revenue Code or files a
regular corporate federal income tax return has no impact on determining if Petitioner is subject to
tax under Article 9-A of the Tax Law. 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 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.
Paragraph one of subsection (a) of section 1085 of the Tax Law imposes an addition to tax
for failure to file a timely return under Article 9-A, at the rate of five percent of the tax due for each
month or fraction thereof during which such failure continues, not exceeding 25 percent in the
aggregate. If it is shown that the failure to file a return was due to reasonable cause and not due to
willful neglect, such addition to tax will not be imposed.

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TSB-A-87 (26) C
Corporation Tax
October 15, 1987

The determination of whether the failure to file a return is due to reasonable cause is a
question of fact not susceptible of determination in an Advisory Opinion. An Advisory Opinion
merely sets forth the applicability of pertinent statutory and regulatory provisions to "a specified set
of facts." Tax Law, section 171, subd. twenty-fourth; 20 NYCRR 901.1(a). For guidance in
determining whether reasonable cause exists, see Part 46 of the Corporate Tax Procedure and
Administration regulations. 20 NYCRR 46.

DATED: October 15, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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