NY TSB-A-93(22)C Corporation Tax 1993-12-23

Is an unincorporated condominium association that only collects common charges and bank interest, owns no property, and is not engaged in business subject to the Article 9-A franchise tax?

Short answer: Yes. The 440 East 6 Condominium is an unincorporated condominium association formed under Article 9-B of the Real Property Law to manage the common elements; its income is only common charges from its two unit owners plus interest on bank accounts, it owns no property, serves only the unit owners, and is not engaged in any trade or business. Even so, it is an association within the meaning of IRC section 7701(a)(3) -- its characteristics more nearly resemble a corporation than a partnership or trust -- and so meets the definition of corporation under section 208.1 of the Tax Law (as amended in 1989). Following Larkfield, that makes it subject to the Article 9-A franchise tax.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

The 440 East 6 Condominium is an unincorporated condominium association created under Article 9-B of the Real Property Law to manage the common elements of a building with two units (one residential, one commercial). Its only income is the common charges assessed against its two unit owners plus interest on bank accounts; it owns no property, provides services only to its unit owners, and is not engaged in any trade or business. It asked whether it is subject to the Article 9-A franchise tax.

Yes. Section 208.1 defines "corporation" to include an association within the meaning of IRC section 7701(a)(3) -- and an organization is such an association where its characteristics more nearly resemble a corporation than a partnership or a trust. In Larkfield (TSB-A-92(4)C), the Department held that an unincorporated condominium association under Article 9-B, whose income was only common charges and reserve-fund interest, was an association under section 7701(a)(3) and therefore a corporation under section 208.1 (as amended in 1989) -- subject to Article 9-A. The 440 East 6 Condominium is in the same position: it is an association under section 7701(a)(3), so it meets the section 208.1 definition of corporation and is subject to the Article 9-A franchise tax -- even though it owns no property, serves only its unit owners, and conducts no business.

What this means for you

A condominium association is a "corporation" for Article 9-A

Being unincorporated does not help: an Article 9-B condominium association is an association under IRC section 7701(a)(3), which makes it a corporation under section 208.1 and subject to the franchise tax.

Collecting only common charges and interest is enough

The association is taxable even though its only receipts are common charges and bank interest, it owns no property, and it is not running a business. The classification turns on resembling a corporation, not on doing business.

This rule dates to the 1989 amendment

The 1989 amendment to section 208.1 brought associations (section 7701(a)(3) entities) within the definition of corporation -- which is why condominium associations are taxed under Article 9-A (see Larkfield and the later condo-association opinions).

Common questions

Q: Our condo association is unincorporated and just collects common charges -- do we owe Article 9-A tax?
A: Yes. It is an association under IRC section 7701(a)(3), which makes it a corporation under section 208.1 and subject to the Article 9-A franchise tax.

Q: We own no property and aren't in business. Does that matter?
A: No. The association is taxable because it resembles a corporation under section 7701(a)(3), regardless of owning property or conducting business.

Q: Where does this rule come from?
A: The 1989 amendment to section 208.1 and the Larkfield opinion (TSB-A-92(4)C) treating Article 9-B condominium associations as Article 9-A corporations.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 208.1 (definition of corporation -- includes an association within IRC section 7701(a)(3))
- IRC section 7701(a)(3) (association taxable as a corporation)
- Real Property Law Article 9-B (condominium)
- The Larkfield Professional Center Condo Association, TSB-A-92(4)C (unincorporated condo association is subject to Article 9-A)

Source

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (22) C
Corporation Tax
December 23, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C930907A

On September 7, 1993, a Petition for Advisory Opinion was received from 440 East 6
Condominium, c/o Mr. Grossman, P.O. Box 253, Knickerbocker Station, New York, New York
10002.
The issue raised by Petitioner, 440 East 6 Condominium, is whether Petitioner, a
condominium association, is subject to the franchise tax on business corporations imposed under
Article 9-A of the Tax Law.
The declaration of establishment of a plan for condominium operation under Article 9-B of
the Real Property Law was recorded in New York County, Office of the City Register on March 31,
1993 on Reel 1959, at 0128. The condominium commenced operation as an unincorporated
association on Nay 14, 1993 when the first closing of a unit occurred.
The condominium consists of two condominium units. One condominium Unit is known
as the residential unit, and consists of all 26 residential apartments in the building, and said unit is
owned by the "440 East 6 Corp." (a New York State Corporation), which is a housing cooperative
and which portion of the building is managed by its unit owner, the "440 East 6 Corp." The other
condominium unit, is known as the commercial unit and contains all commercial space in the
building and is managed by its unit owner.
The condominium association was formed solely for the purpose of managing only the
common elements of Petitioner. The common elements consist of all portions of the building not
incorporated in either the residential unit or the commercial unit.
Petitioner's by-laws provide that "The Common Expenses may also include such amounts
as the Board of Managers may deem proper for the operation and maintenance of the Property,
including, without limitation, an amount for working capital of the Condominium, for a general
operating reserve, for a reserve fund for replacement, and to make up any deficit in the Common
Expenses for any prior year. The Common Expenses may also include such amounts as may be
required for the purchase or lease by the Board of Managers or its designee, corporate or otherwise,
on behalf of both Unit Owners, of any Unit whose owner has elected to sell or lease such Unit or of
any Unit which is to be sold at a foreclosure or other judicial sale." Petitioner's income is derived
solely from common charges assessed against the two unit owners and any income earned on bank
accounts.
The condominium association owns no property and provides services only to the two
condominium unit owners. The condominium does not provide any services to non-unit owners.
The condominium is not engaged in any trade or business.
TP-9 (9/88)

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Corporation Tax
December 23, 1993
Each condominium unit is a separate tax lot for real estate tax purposes. Each unit owner,
owns his own unit and an undivided interest in the common elements.
The condominium association does not issue any shares of stock or other evidence of
ownership of a condominium unit. The condominium is operated as an unincorporated association
consisting of only two units.
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 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 ....
For taxable years beginning on or after January 1, 1989 and ending after April 19, 1989,
section 208.1 of the Tax Law is amended by the Laws of 1989 (ch 61) 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 interest. 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.
In The Larkfield Professional Center Condo Association, Adv Op Comm T & F, February
28, 1992, TSB-A-92(4)C, it was held that where a condominium association organized pursuant to
Article 9-B of the Real Property Law was unincorporated and its income consisted of only common
charges and interest income from building reserve funds, such condominium association was subject

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TSB-A-93 (22) C
Corporation Tax
December 23, 1993
to tax under Article 9-A of the Tax Law because it was an association within the meaning of section
7701(a)(3) of the Internal Revenue Code and therefore met the definition of corporation pursuant to
section 208.1 of the Tax Law as amended in 1989.
Herein, Petitioner is an association within the meaning of section 7701(a)(3) of the Internal
Revenue Code and, therefore, meets the definition of corporation pursuant to section 208.1 of the
Tax Law. Accordingly, Petitioner is subject to tax under Article 9-A of the Tax Law.

DATED: December 23, 1993

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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