Is an unincorporated residential condominium association, whose only income is common-charge assessments and interest, taxed as a corporation under New York's Article 9-A franchise tax?

Plain-English summary

103 Avenue A Condominium comprises 22 residential units and 2 commercial units, organized as an unincorporated association under Article 9-B of the Real Property Law. It issues no stock, shares, or ownership certificates. Each unit owner holds title to and exclusive possession of their own unit (much like owning a private home), is free to sell or lease without restriction (subject only to the Board's right of first refusal), and votes to elect a Board of Managers. Beyond individual unit ownership, unit owners together hold an undivided interest in the property's common elements. The association itself owns no real estate, provides maintenance services only to unit owners, and conducts no other trade or business -- its only revenue consists of common-charge assessments and interest income.

The Department found this exact structure taxable as a corporation. Tax Law section 208.1, amended by the Laws of 1989 (chapter 61), expanded the definition of "corporation" to include an "association" within the meaning of IRC section 7701(a)(3) -- an organization whose characteristics make it resemble a corporation more than a partnership or trust. Federal Treasury Regulations identify six hallmark corporate characteristics: associates, a business purpose to divide gains, continuity of life, centralized management, limited liability, and free transferability of interests. Walking through the specific Real Property Law Article 9-B provisions -- section 339-o's requirement that deeds/leases specify each unit's "common interest," section 339-e(5)'s definition of that common interest, section 339-e(6)'s definition of "common profits," and section 339-m's allocation of common profits/expenses among unit owners -- the Department concluded 103 Avenue A satisfies all these tests and is therefore an IRC section 7701(a)(3) association, making it a "corporation" under section 208.1. Accordingly, it's subject to Article 9-A franchise tax for all taxable years since it was organized, based on its entire net income or another applicable basis.

What this means for you

Condominium associations organized under Real Property Law Article 9-B

Being unincorporated and funded solely by common charges (no rental or business income) does not exempt a condominium association from New York's Article 9-A corporate franchise tax -- the post-1989 statutory definition sweeps in any organization meeting the federal IRC section 7701(a)(3) association test, regardless of whether it issues stock or otherwise looks like a traditional corporation.

Boards of managers and condo accountants

Confirm your association's franchise tax filing status doesn't hinge solely on whether you have rental/business income -- the corporate-characteristics test under Treasury Regulations section 301.7701-2(a) and the specific Real Property Law Article 9-B provisions on common interest and common profits are what matter here.

Part of a broader condo-taxation doctrine cluster in this corpus

This ruling sits alongside other opinions analyzing when condominiums and homeowners associations become taxable (e.g., under §7701(a)(3) association status here, versus the not-for-profit inurement test used elsewhere for HOAs, or the "conducting business beyond common charges" test used for other condo structures) -- compare carefully, since the applicable legal test can differ depending on the entity's exact organizational form and activities.

Common questions

Q: Does a condominium association need rental or other business income to be taxed under Article 9-A?
A: No -- as here, an association funded solely by common-charge assessments and interest income can still be taxed as a corporation if it meets the IRC section 7701(a)(3) association test.

Q: Does not issuing stock or ownership certificates exempt a condominium association from corporate tax treatment?
A: No. Tax Law section 208.1's "corporation" definition includes IRC section 7701(a)(3) associations regardless of whether they issue stock -- the corporate-characteristics test looks past formal stock issuance.

Q: Since when has this rule applied to condominium associations?
A: The Department applied the 1989 statutory amendment (Laws of 1989, ch. 61) retroactively to "all taxable years since [the association] was organized" in this case.

Citations and references

Statutes and regulations:

• Tax Law section 209.1 (Article 9-A franchise tax)
• Tax Law section 208.1, as amended by Laws of 1989, ch. 61 (corporation definition includes IRC 7701(a)(3) associations)
• Treasury Regulations section 301.7701-2(a) (corporate-characteristics test)
• Real Property Law section 339-e(5), (6), 339-m, 339-o (Article 9-B condominium common interest and common profits provisions)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_13c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(13)C
Corporation Tax
June 13, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITIONER NO. C900420B

On April 20, 1990, a Petition for Advisory Opinion was received from 103 Avenue A
Condominium c/o Mr. Grossman, 168 Mott Street, New York, New York 10013.
The issued raised by Petitioner, 103 Avenue A Condominium, is whether an unincorporated
association, organized pursuant to Article 9-B of the Real Property Law, is subject to the franchise
tax on business corporations imposed under Article 9-A of the Tax Law.
Petitioner comprises the land and building located at 103-05 Avenue A, New York, New
York. It includes 22 residential units and two commercial units. The condominium association was
organized with Article 9-B of the New York Real Property Law. The association is not incorporated
and it does not issue certificates or other written instruments evidencing ownership, nor does it issue
stock.
The ownership of a residential condominium unit is similar in many respects to ownership
of a private home. The owner of a residential unit owns title to his or her unit and is entitled to
exclusive possession of it. Any one unit is not subject to mortgages on any other units and a unit
owner will incur no liability if his or her neighbors fail to make payments on any mortgage affecting
their units. Each unit owner has the right to vote in the election of a Board of Managers which will
supervise the property and manage the affairs of the condominium. A unit owner may sell or lease
his unit to anyone without restriction or limitation, subject to a right of first refusal by the Board of
Managers. Each unit is assessed as a separate tax lot for real estate tax purposes.
In addition to ownership of title to his or her unit, a unit owner owns in common with all
other unit owners, an undivided interest in all parts of the property other than the residential or
commercial units themselves, the common elements. Petitioner, itself, owns no interest in real estate.
The revenues of Petitioner consist of assessments for common charges to unit owners and
interest income. The association owns no property and provides maintenance services only to unit
owners. The association does not render services to non-unit holders, nor does it otherwise engage
in a trade or business.
Section 209.1 of the Tax Law 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
TP-9(9/88)

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TSB-A-90(13)C
Corporation Tax
June 13, 1990
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.
The meaning of the term "corporation", as amended by Chapter 61 of the Laws of 1989, is
set forth in section 208.1 of the Tax Law, as follows:
The term "corporation" includes an association, within the meaning of paragraph three of
subsection (a) of section seventy-seven hundred one of the internal revenue code, a joint­
stock company or association, a publicly traded partnership treated as a corporation for
purposes of the internal revenue code pursuant to seventy-seven hundred four thereof and any
business conducted by a trustee or trustees wherein interest or ownership is evidenced by
certificate or other written instrument.
For purposes of section 7701(a)(3) of the Internal Revenue Code, an association is an
organization whose characteristics require it to be classified for purposes of taxation as a corporation
rather than another type of organization such as a partnership or a trust. Section 301.7701-2(a) of
the Treasury Regulations provides that the major characteristics ordinarily found in a pure
corporation which, taken together, distinguish it from other organizations are (1) associates, (2) an
objective to carry on business and divide the gains therefrom, (3) continuity of life, (4) centralization
of management, (5) liability for corporate debts limited to corporate property, and (6) free
transferability of interests. An organization will be treated as an association if the corporate
characteristics are such that the organization more nearly resembles a corporation than a partnership
or a trust.
Section 339-o of Article 9-B of the Real Property Law states that the deeds and leases of units
must include "[t]he common interest appertaining to the unit. ." Section 339-e(5) of said law defines
"common interest" as "the (i) -proportionate, undivided interest in fee simple absolute, or (ii)
proportionate undivided leasehold interest in the common elements appertaining to each unit, as
expressed in the declaration."
Section 339-m of said law states, in part, that "[t]he common profits of the property shall be
distributed among, and the common expenses shall be charged to, the unit owners according to their
respective common interests. . .Notwithstanding any provision of this article, profits and expenses
may be specially allocated and apportioned by the board of managers in a manner different from
common profits and expenses. . . . " Section 339-e(6) of such law defines "common profits" as "the
excess of all receipts of the rents, profits and revenues from the common elements remaining after
the deduction of the common expenses."
Accordingly Petitioner, which meets all of the tests set forth in Sections 339-o, 339-e(5), 339­
e(6) and 339-m of the Real Property Law, is an association within the meaning of section 7701(a)(3)
of the Internal Revenue Code and thus is a "corporation" as defined by Section 208.1 of the Tax Law.
Therefore, for all taxable years since it was organized, Petitioner is subject to the franchise tax

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TSB-A-90(13)C
Corporation Tax
June 13, 1990
on business corporations imposed by Section 209.1 of 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 base or upon such
other basis as may be applicable.

DATED: June 13, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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