Is an unincorporated residential condominium association whose only revenue is common-charge assessments subject to the New York Article 9-A franchise tax?
Plain-English summary
Board of Managers Condominium X is a residential condominium association organized under Article 9-B of the New York Real Property Law. Formed under Article 9-B of the Real Property Law in 1991, it owns no real or personal property, issues no stock, has no profit motive, and its only revenues are pro-rata common-charge assessments to the unit owners. 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 and all future taxable years it is so classified. 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_24c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-97(24)C
Corporation Tax
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C970627A
On June 27, 1997, a Petition for Advisory Opinion was received from Board
of Managers Condominium X, c/o Michael A. Mammolito, CPA, 4 Clinton Square, Suite
104, Syracuse, New York 13202.
The issue raised by Petitioner, Board of Managers Condominium X, is whether
it is subject to New York franchise tax under Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is an unincorporated entity formed under Article 9-B of the New
York Real Property Law on May 16, 1991. Petitioner was established to facilitate
the maintenance and sharing of the costs relative to the condominium. All of the
condominium units are used for residential purposes. Petitioner does not own
real or personal property. All of the real property is owned by the condominium
owners.
No stock or other evidence of ownership has been issued to the
condominium owners relative to Petitioner.
Petitioner's revenues consist only of assessments to condominium owners
for their pro-rata share of common costs.
Petitioner states that no other
revenue is received. There are no extra charges (i.e., use of fitness equipment
or other facilities) assessed to the condominium owners. Each condominium owner
is assessed based on his or her respective common interest. No profit motive
exists.
The individual condominium owners are receiving no benefits from
Petitioner other than the ease of paying common expenses.
Any liability which arises from Petitioner (except from willful misconduct)
is a liability of each condominium owner based on his or her pro-rata share of
the common interest. The ultimate liability is with the condominium owners.
Before a condominium owner sells his or her condominium to a third party,
the owner must first offer the condominium to all other owners as a group through
Petitioner. Petitioner may purchase or lease units offered for sale or lease by
the unit owner. Petitioner may not exercise this option without a majority vote
from condominium owners (either present or by proxy.) Petitioner may sell, lease
or sub-lease the units that it acquires. If Petitioner purchases a unit offered
for sale, the purchase may be made from the working capital and common charges
on hand, or if such funds are insufficient, Petitioner may levy an assessment
against each unit owner as a common charge.
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
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TSB-A-97(24)C
Corporation Tax
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 such fiscal or calendar year or part
thereof ....
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 ("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 a membership dues, fees, and
assessments received from member-owners of residential units in the particular
condominium or subdivision involved.
In Rivercliffe Condominium, Adv Op Comm T & F, August 6, 1997, TSB-A
97(21)C, it was held that where a condominium association, consisting of only
residential units, that did not issue membership certificates and did not have
commercial units, garages, laundry room or other rental facilities or
recreational facilities, and received revenues only from common charges and
interest earned on the funds in a small reserve account, 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 and taxable as a corporation. The same conclusion was
reached under similar circumstances in an advisory opinion issued to Board of
Managers Plum Court, Adv Op Comm T & F, August 6, 1997, TSB-A-97(20)C.
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. The same
conclusion was reached under similar circumstances in advisory opinions 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, TSB-A-92(4)C.
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TSB-A-97(24)C
Corporation Tax
Accordingly, in this case, Petitioner's organization is a corporation
pursuant to section 208.1 of the Tax Law 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 for all 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, if 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: September 30, 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.