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The Internal Revenue Service will no longer apply Section 277 of the Internal Revenue Code to housing cooperatives of any kind, but will instead treat all housing cooperatives as subject to Subchapter T of the Internal Revenue code. This new policy comes in response to the efforts of tax attorney Joel E. Miller, who initiated a refund case to challenge the long-held I.R.S. position on Section 277 on behalf of the recently formed 277 Challenge Task Force. It brings to a successful close a long campaign waged in the courts and in Congress to establish that housing cooperatives are not subject to Section 277 of the Internal Revenue Code.

What is IRC Section 277?
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For more than a dozen years, CNYC has worked with the National Association of Housing Cooperatives on this important issue. In June 1995, Judge Whelan's decision in the long-pending Trump Village Section 3 case made it clear that Trump was subject to Subchapter T and not Section 277. However, the I.R.S. chose a very narrow interpretation of the Trump Case, and continued to apply Section 277 to housing cooperatives that did not precisely fit the Trump fact pattern. It focused particularly on differences in voting procedures.

Then, the September 1996 ruling in Thwaites Terrace House Owners Corp. v. Commissioner specifically confirmed that all Section 216 housing cooperatives are within Subchapter T and therefore not subject to Section 277, regardless of whether shareholders vote by the number of shares that they own or on a one-person one-vote basis. The amicus curiae brief submitted by the National Association of housing cooperatives, CNYC and the Federation of New York Housing Cooperatives in the Thwaites case had urged that position.

But the I.R.S. refused to acquiesce in the Thwaites ruling. It continued to apply Section 277 to some housing cooperatives. Although housing cooperatives with new audits could resist by bringing their cases to the tax court where they could be confident that the Thwaites rule would be applied, there was no binding precedent in the courts that handled refund claims. Determined that this issue must be resolved, CNYC called together organizations representing housing cooperatives in late 1997 to form the 277 Challenge Task Force.

In the aftermath of the Thwaites decision, many housing cooperatives that had paid taxes based on Section 277 applied for refunds. The Internal Revenue Service did pay some smaller claims, but continued to apply Section 277 in most cases. At that point, the 277 Challenge Task Force decided to bring a test case to challenge the I.R.S. position that not all Section 216 cooperatives were within Subchapter T.

Joel E. Miller, the tax attorney who wrote the amicus curiae brief in Thwaites,agreed to take a refund case through trial on behalf of the organizations for a fixed fee. The 277 Challenge Task Forced raised the necessary funds through contributions from the organizations and their member housing cooperatives and condominiums, as well as many accountants representing housing cooperatives and several other professionals. The names of contributors are listed on the letterhead of the Task Force, which you can view by clicking here (112K file).

In April of 1998, Mr. Miller commenced a refund case on behalf of a New York City housing cooperative called Rutherford Tenants Corp. in the U.S. District Court. Over the ensuing months, Mr. Miller had many discussions with the Assistant U.S. Attorney assigned to defend the suit, as well as with I.R.S. personnel familiar with the issue. Eventually, the I.R.S. came to accept that such things as a no-proxy rule or a one-person-one-vote rule or limited-equity restrictions are not essential to "operating on a cooperative basis," leading to the conclusion that all kinds of housing cooperatives are covered by Subchapter T and therefore not subject to Section 277.

Once this happened, the I.R.S. began at once to implement its new position. Mr. Miller was informed that internal memoranda had been circulated instructing both auditors and appeals officers that, barring exceptional circumstances, they are not to assert Section 277 against any housing cooperatives.


Mr. Miller cautions cooperatives that Section 277's disappearance from the scene does not mean that they will never have to pay tax on any of their income. Although Subchapter T has considerably more flexibility than Section 277, a Subchapter T cooperative is not permitted to use "patronage" deductions to offset "non-patronage" income, so that issues may arise as to the classification of income not coming directly from tenant stockholders. Accountants and attorneys who work with housing cooperatives are working together for a better understanding of Subchapter T, and developing insights that will be shared in future issues of this Newsletter.


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