Council of New York Cooperatives & Condominiums
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Tax/Legal Issues

Published: Winter 1995


The following article appeared in the Winter 1995-1996 issue of CNYC's quarterly Newsletter. You must be a member of CNYC to receive the complete Newsletter, which features timely articles on issues of importance to cooperative shareholders and condominium unit owners. Click here to reach the CNYC Membership Registration Form.


In recent months, there has been significant forward motion in areas that are very important to CNYC regarding the way that CNYC members are taxed and the way that they are judged.

Reasonable Real Estate Taxes

Despite major belt-tightening, the city budget acknowledged that cooperatives and condominiums bear an unfair share of property taxes and it included a modest refund to these homeowners. The Action Committee for Reasonable Real Estate Taxes is pursuing implementation of this commitment to reform by pushing for appropriate legislation at city and state levels. At the January 18th Action Committee meeting, strategies will be considered for furthering these goals (see Coming Events).

Separate Part in Housing Court

A strong coalition representing thousands of housing cooperatives and condominiums throughout the city has proposed that all cooperative and condominium cases in the housing court be heard in a separate part by judges familiar with the governance of these unique forms of housing. The summer issue of this Newsletter included the position paper on this issue. Now, legislation has been proposed at city and state levels to implement this proposal, and data is being collected on case volume. An excellent spirit of cooperation prevails as we have explored this concept. Also see CNYC's Position Paper on Housing Court.

Comparative Study of 1994 Operating Costs

For 15 consecutive years, CNYC has published an annual study of building operating costs, helping member buildings determine how their costs compare to those of similar buildings. This data has been widely used in studying New York housing cooperatives and condominiums, and has helped in the development of statistical norms.

The Study is presented in six categories: Larger Buildings Outside of Manhattan, Small Buildings, Loft Buildings, East Side Cooperatives, West Side Cooperatives, and Condominiums.

With information culled from the annual financial statements of participating cooperatives and condominiums, CNYC breaks down on a per room basis the various costs of operating these buildings. Maintenance and mortgage figures are also presented, and a second set of charts present an historical review of past statistics.

The Comparative Study will be sent to CNYC members and subscribers shortly. It can be ordered from the CNYC office for $5. Also see our page on the Study.

IRS Splits Hairs on Section 277

On June 22, 1995, the U.S. Tax Court ruled that Trump Village 3, a Section 216 housing cooperative, also qualified as a Subchapter T cooperative, and, as such, it could not be taxed under Section 277. This decision freed Trump Village from an enormous tax burden that the I.R.S. had tried to impose under Section 277.

Many housing cooperatives were waiting in line behind Trump Village for decisions on 277 issues. Many of them have since accepted favorable settlements offered by the I.R.S., but the tight wording of the Trump decision still leaves questions unanswered for other cooperatives.

In October 1995, the I.R.S. acquiesced to the Trump decision. Because the "tax court concluded that a cooperative housing corporation is a cooperative described in Subchapter T if it is `operating on a cooperative basis' within the meaning of section 1381(a)(2)," the I.R.S. changed its prior position and agreed that it will "no longer take the position that cooperative housing corporations subject to Subchapter T of the code are subject to the limitations of Section 277." However, the I.R.S. will now carefully categorize Section 216 housing cooperatives either under Subchapter T or Section 277. The acquiescence goes on to state that:

"We will continue to assert in litigation that the limitations of Section 277 apply to cooperative housing corporations that do not qualify as Subchapter T cooperatives. In considering whether Subchapter T is applicable, we will consider whether the cooperative housing corporation in question has the three traditional characteristics of cooperative operation essential to be "operating on a cooperative basis." Only where all three characteristics are present, so that the housing corporation is a Subchapter T cooperative, will Section 277 not be applied."

Categories Set in Trump Ruling Subject to Interpretation

The three characteristics in question are subject to considerable interpretation. They are 1) subordination of capital, 2) democratic control, and 3) operation at cost. The I.R.S. is clearly skeptical of the ability of market-rate cooperatives to meet all three tests.

CNYC challenges the inference that, for housing cooperatives to operate on a cooperative basis, individual shareholders cannot profit from their participation in the cooperative. When individual farmers join together to sell their produce through a cooperative or when individual grocers or hardware merchants join together to purchase goods through a cooperative, each member of the cooperative seeks to make a profit as a result of dealing through the cooperative. Similarly, individual shareholders in some housing cooperatives make an eventual profit - or, for that matter, they may experience a loss - on the sales of their apartments. This has no bearing on whether the cooperative itself is operating at cost.

CNYC continues to maintain that Section 277 does not apply to housing cooperatives. We reject the inference that one or the other of these provisions must be applied to housing cooperatives.

Support Passage of H.R. 1546

Legislation continues to be the best long-term remedy for all cooperatives. CNYC continues to work with the National Association of Housing Cooperatives (NAHC) and the National Cooperative Business Association (NCBA) to affirm that Section 277 does not apply to housing cooperatives. H.R. 1546 makes this affirmation. Its prime sponsors, Charles Schumer and Charles Rangel, have been joined by more than a dozen co-sponsors including representatives Rush of Illinois and Toricelli of New Jersey, and the entire New York City delegation. Senate support could achieve passage of this legislation.

Tell the Senate About Your Situation

Please write to Senator Moynihan and Senator D'Amato. Tell how your cooperative is threatened by Section 277 and ask them to include H.R. 1546 in an appropriate revenue bill.

New York State has Reopened 277 Cases

The Division of Tax Appeals (DTA) of the State of New York, which had suspended activity on cases relating to Section 277, has decided to schedule trials of those cases. Starting in mid-December, the DTA will begin to hear these cases. The Department of Taxation and Finance's representative has indicated that if the cooperative can prove it meets the three tests cited above, the state will acquiesce.


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