Is an unincorporated residential condominium association subject to Article 9-A franchise tax, and how does electing federal homeowners-association status affect its income?

Plain-English summary

Renaissance Condominium is an unincorporated residential condominium association organized in 1989 under Article 9-B of the Real Property Law, covering 65 units. It issues no stock and no ownership certificates; each unit owner holds title to a unit and votes for the Board of Managers. The association's only revenue is common charges (including late fees) and interest income, with any excess reserved for capital improvements. It files federal Form 1120-H as a homeowners association. It asked (1) whether it is subject to Article 9-A franchise tax and (2) whether Rev. Rul. 70-604 applies for New York purposes.

The Department held:

• It is subject to Article 9-A. Under Tax Law section 208.1, "corporation" includes an association within the meaning of IRC section 7701(a)(3) -- an organization whose characteristics require it to be taxed as a corporation. A residential condominium association whose income is only common charges and interest is such an association (following Larkfield Professional Center Condo Association, TSB-A-92(4)C, and the 1993 Condominium opinion, TSB-A-93(22)C), so it owes the section 209.1 franchise tax.
• Form 1120-H / section 528 does not exempt it; it sets the income starting point. Entire net income starts from federal taxable income (section 208.9). Because Renaissance elects homeowners-association status under IRC section 528, its starting point is its federal taxable income computed under section 528(d).
• Rev. Rul. 70-604 carries through. Excess assessments returned to owners or applied to next year's assessments are not federal gross income under Rev. Rul. 70-604, so they are not in the entire-net-income starting point, and no section 208.9 modification adds them back.

This is the foundational Renaissance opinion that the later condominium-association advisory opinions follow.

What this means for you

A condo association is taxed as a corporation even if unincorporated

An unincorporated residential condominium association whose revenue is common charges and interest is an "association" under IRC section 7701(a)(3) and a "corporation" under Tax Law section 208.1, subject to the Article 9-A franchise tax.

Filing Form 1120-H does not get you out of the tax

Electing federal homeowners-association status under IRC section 528 does not exempt the association from New York franchise tax. It only fixes the starting point for entire net income at the section 528(d) figure.

Excess assessments excluded federally stay excluded in New York

Under Rev. Rul. 70-604, excess assessments returned to owners or applied to next year's charges are not federal gross income, are not in the New York entire-net-income starting point, and are not added back by any state modification.

Common questions

Q: Does a residential condominium association owe New York franchise tax?
A: Yes. It is an association taxable as a corporation under section 208.1 and is subject to the Article 9-A franchise tax under section 209.1.

Q: Does filing federal Form 1120-H exempt the association in New York?
A: No. It only sets the entire-net-income starting point at the IRC section 528(d) amount; it does not exempt the association from the franchise tax.

Q: How are excess assessments treated?
A: Excess assessments excluded from federal gross income under Rev. Rul. 70-604 are not included in New York entire net income, and there is no modification adding them back.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 208.1 (corporation includes an association within IRC section 7701(a)(3))
- Tax Law section 208.9 (entire net income; federal taxable income as the starting point)
- IRC section 7701(a)(3) (association); IRC section 528 / 528(d) (homeowners association); Rev. Rul. 70-604 (excess assessments)
- The Larkfield Professional Center Condo Association, TSB-A-92(4)C; Condominium, TSB-A-93(22)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_24c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (24) C
Corporation Tax
October 1, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C960607D

On June 7, 1996, a Petition for Advisory Opinion was received from Renaissance
Condominium, 91-31 Queens Blvd. Suite 503, Elmhurst, New York 11373.
The issues raised by Petitioner, Renaissance Condominium, are (1) whether it is subject to
tax under Article 9-A of the Tax Law and (2) whether Internal Revenue Ruling 70-604 is applicable
for New York franchise tax purposes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is an unincorporated condominium association organized in 1989 under Article
9-B of the New York Real Property Law. The condominium comprises the land and building at 164­
170 West Broadway in Long Beach, New York 11561. It comprises 65 residential units. Petitioner
does not issue certificates or other written instruments evidencing ownership, nor does it issue stock.
The owner of a residential unit owns title to his or her unit and is entitled to exclusive
possession to that unit. Any one unit is not subject to mortgages on any other unit 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 that will supervise
the property and manage the affairs of the condominium. A unit owner may sell or lease his or her
unit to anyone without restriction or limitation. Each unit is assessed as a separate lot for real
property tax purposes.
The revenues of Petitioner are derived from assessments received from unit holders for
common charges (including late fees) and interest income. No revenue is received from garages,
laundry or commercial spaces. Any excess of income over operating expenses is reserved for future
capital improvements.
Petitioner files form l120-H for federal income tax purposes. Internal Revenue Ruling 70-604
provides that excess assessments by a condominium management corporation, over and above the
amounts used for the operation of condominium property, that are returned to the stockholder-owners
or applied to the following year's assessments are not taxable income to the corporation.
Section 209.1 of the Tax Law imposes a franchise tax on business corporations, as follows:
[f]or 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

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Corporation Tax
October 1, 1996
franchise tax, upon the basis of its entire net income base, or upon such other basis
as may be applicable as hereinafter provided ....
Section 208.1 of the Tax Law provides that the term "corporation" includes an association,
within the meaning of section 7701(a)(3) of the Internal Revenue Code.
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.
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, the condominium association was subject
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. The same conclusion was reached under similar circumstances in an
advisory opinion issued to Condominium, Adv Op Comm T & F, December 23, 1993, TSB-A­
93(22)C.
Accordingly, Petitioner is subject to the franchise tax imposed under Article 9-A of the Tax
Law.
Section 208.9 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 section
208.9 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 section
208.9 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, since Petitioner elects to file as a homeowners association pursuant to section
528 of the Internal Revenue Code, Petitioner's starting point for computing its entire net income
pursuant to section 208.9 of the Tax Law will be its federal taxable income computed pursuant to
section 528 of the Internal Revenue Code.
Excess assessments by a condominium management corporation that are not treated as gross
income for federal income tax purposes pursuant to Rev Rul 70604, supra, are not included in the
starting point for computing entire net income for purposes of Article 9-A of the Tax Law. Further,

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TSB-A-96 (24) C
Corporation Tax
October 1, 1996
there is no modification under section 208.9 of the Tax Law that would increase Petitioner's federal
taxable income for these excess assessments when computing Petitioner's entire net income.

DATED: October 1, 1996

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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