Is a residential condominium association that files federal Form 1120-H subject to the New York Article 9-A franchise tax for tax years 1991 through 1995?
Plain-English summary
Board of Managers Plum Court is a residential condominium association organized under Article 9-B of the New York Real Property Law. It issues no stock, has no separate-entity charter, has no profit motive, and funds its operating expenses and capital improvements from owner contributions; for federal income tax it files Form 1120-H. It asked whether it is subject to the New York business corporation franchise tax under Article 9-A.
Yes. For federal income tax, residential condominium and homeowners associations are generally classified as associations taxable as corporations under IRC section 7701(a)(3) -- and a qualifying association may elect to be treated as a homeowners association by filing federal Form 1120-H under IRC section 528. Because the petitioner is an association within the meaning of section 7701(a)(3), it meets the New York definition of corporation in Tax Law section 208.1, so it is subject to the franchise tax under section 209.1 for tax years 1991 through 1995 and all future taxable years. The Department reached the same result in Renaissance Condominium (TSB-A-96(24)C), 440 East 6 Condominium (TSB-A-93(22)C), and Larkfield Professional Center (TSB-A-92(4)C).
If the association files Form 1120-H, its starting point for computing New York entire net income (section 208.9) is presumed to be its federal taxable income computed under IRC section 528(d).
What this means for you
A residential condominium association is a taxable corporation in New York
Even though it issues no stock, has no profit motive, and only collects common charges, an unincorporated condominium association is an "association" taxable as a corporation under IRC section 7701(a)(3), so it meets the Tax Law section 208.1 definition of corporation and owes the Article 9-A franchise tax.
Filing Form 1120-H does not exempt the association from New York tax
Electing homeowners-association status under IRC section 528 protects only exempt-function income (dues, fees, assessments) from federal tax; it does not remove the association from the Article 9-A franchise tax. It does set the New York entire-net-income starting point at the section 528(d) figure.
Annual franchise tax reports are required
The association must file annual Article 9-A franchise tax reports for the years at issue and every future year it is taxable, with the tax computed under section 210 on its entire net income base or other applicable base.
Common questions
Q: Does a residential condominium association have to file a New York franchise tax return?
A: Yes. If it is an association taxable as a corporation federally (it files Form 1120 or 1120-H), it is a corporation under Tax Law section 208.1 and must file Article 9-A franchise tax reports.
Q: Does electing homeowners-association (1120-H) status avoid New York tax?
A: No. The section 528 election limits federal tax to non-exempt income but does not exempt the association from the Article 9-A franchise tax; it only fixes the entire-net-income starting point at the section 528(d) amount.
Q: How is the New York tax computed?
A: Under section 210, generally on the entire net income base (section 208.9), which starts from federal taxable income (section 528(d) for a 1120-H filer) and is then adjusted as Article 9-A requires.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 208.1 (corporation includes an association under IRC section 7701(a)(3))
- Tax Law section 208.9 (entire net income; starts from federal taxable income)
- Tax Law section 209.1 (Article 9-A business corporation franchise tax)
- Tax Law section 210 (computation of the franchise tax)
- IRC section 7701(a)(3) (association classification)
- IRC section 528 / 528(d) (homeowners association election; Form 1120-H)
- 20 NYCRR 1-2.5 (definition of corporation in the Article 9-A Regulations)
- Renaissance Condominium, TSB-A-96(24)C (October 1, 1996)
- 440 East 6 Condominium, TSB-A-93(22)C (December 23, 1993)
- Larkfield Professional Center Condo Association, TSB-A-92(4)C (February 28, 1992)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_20c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-97(20)C
Corporation Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C970602A
On June 2, 1997, a Petition for Advisory Opinion was received from Board
of Managers Plum Court, c/o Highlander Associates Ltd., 340 East Brighton Avenue,
Syracuse, New York 13210.
The issue raised by Petitioner, Board of Managers Plum Court, is whether
the organization is a corporation under section 1-2.5(a) of the Franchise Tax on
Business Corporation Regulations ("Article 9-A Regulations") that is taxable
under Article 9-A and required to file franchise tax reports for taxable years
1991 through 1995 because it files a Form 1120-H for federal income tax purposes.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner states that the by-laws of the organization do not address the
issues of associates, continuity of life or free transferability of interests.
The unit owners elect the board but are also able to remove any one or more of
them for just cause. There has never been any "stock" issued to the unit owners
as would be in the case of traditional corporations. However, the by-laws do
address the issues of "liability for corporate debts limited to corporate
property" and "an objective to carry on business and divide the gains thereon".
Each unit owner's share of any liability that arises is limited to such
proportion of total liability as his/her interest in common elements bears to the
interest of all unit owners in the common elements. Finally, there is no profit
motive inherent in the operation of this organization.
Both the operating
expenses and capital improvements are funded by the owners, and no profits or
surpluses are distributed to them.
This organization also does not state that the formation of the Board of
Managers was intended to be a separate legal entity distinct from the individuals
themselves. No corporate charter was ever established either.
For federal income tax purposes, the organization files Form 1120-H, U.S.
Income Tax Return for Homeowners Associations under section 528 of Internal
Revenue Code ("IRC").
Section 209.1 of the
corporations, as follows:
Tax
Law
imposes
a
franchise
tax
on
business
[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,
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TSB-A-97(20)C
Corporation Tax
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 such fiscal or calendar year or part
thereof, on a report which shall be filed ....
Section 1-2.5(a) of the Article 9-A Regulations provides that:
[t]he term corporation means an entity created as such under the
laws of the United States, any state, territory or possession
thereof, the District of Columbia, or any foreign country, or any
political subdivision of any of the foregoing, which provides a
medium for the conducting of business and the sharing of its gains.
Section 208.1 of the Tax Law and section 1-2.5(b) of the Article 9-A
Regulations provides that the term corporation includes an association, within
the meaning of section 7701(a)(3) of the IRC.
For purposes of section 7701(a)(3) of the IRC, an association is an
organization whose characteristics require it to be treated for purposes of
taxation as a corporation rather than another type of organization such as a
partnership or a trust. Generally, for federal income tax purposes, residential
real estate management associations and condominium management associations are
classified as associations taxable as corporations.
If qualified, such
associations may elect to be treated as homeowners associations under section 528
of the IRC by filing federal Form 1120-H. This election protects an association
from tax only on its exempt function income, such as membership dues, fees, and
assessments received from member-owners of residential units in the particular
condominium or subdivision involved.
In Renaissance Condominium, Adv Op Comm T & F, October 1, 1996, TSB-A
96(24)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 assessments from unit holders for common charges and interest income, the
condominium association was subject to tax under Article 9-A of the Tax Law.
The condominium association was classified as an association, within the meaning
of section 7701(a)(3) of the IRC, taxable as a corporation and it elected to be
treated as a homeowners association under section 528 of the IRC. Since it was
classified as an association under section 7701(a)(3) of the IRC, it met the
definition of corporation pursuant to section 208.1 of the Tax Law and section
1-2.5(b) of the Article 9-A Regulations. The same conclusion was reached under
similar circumstances in an advisory opinion issued to 440 East 6 Condominium,
Adv Op Comm T & F, December 23, 1993, TSB-A-93(22)C and The Larkfield
Professional Center Condo Association, Adv Op Comm T & F, February 28, 1992, TSBA-92(4)C.
Accordingly, in this case, Petitioner's organization is a corporation
pursuant to section 208.1 of the Tax Law and section 1-2.5(b) of the Article 9-A
Regulations and is subject to the franchise tax imposed under section 209.1 of
the Tax Law. Petitioner's organization must file annual franchise tax reports
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TSB-A-97(20)C
Corporation Tax
for taxable years 1991 through 1995 and all future taxable years that it is
subject to tax under Article 9-A. Petitioner's organization's tax liability is
computed under section 210 of the Tax Law and is based on its entire net income
base, or other basis as may be applicable.
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 condominium association or a residential real estate management
association elects to file as a homeowners association pursuant to section 528
of the IRC, 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 IRC.
Accordingly, since Petitioner's organization elects to file as a homeowners
association pursuant to section 528 of the IRC, Petitioner's organization'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 IRC.
DATED: August 6, 1997
NOTE:
/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.