Council of New York Cooperatives & Condominiums
Article Archive
Tax Issues

Published: Winter 1998

Section 277:

For a dozen years, CNYC has reported in the pages of this Newsletter on the nationwide efforts to affirm that cooperatives are not subject to Section 277 of the Internal Revenue Code. Despite repeated court decisions that uphold this affirmation, the Internal Revenue Service persists in invoking Section 277 to tax certain cooperatives. The September 3, 1996, ruling in the matter of Thwaites Terrace House Owners Corp. v. the Commissioner specifically confirmed that Section 216 housing cooperatives were 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 friend-of-the-court brief submitted by the National Association of Housing Cooperatives, CNYC and the Federation of New York Housing Cooperatives made this argument in the Thwaites case.

Despite the judge's ruling, the IRS has refused to acquiesce in the matter of Thwaites. It continues its investigation of many New York housing cooperatives, asking questions based on Section 277. Determined that this issue must be resolved, the organizations representing housing cooperatives are taking action.

In the aftermath of the Thwaites decision, many housing cooperatives that had paid taxes based on Section 277 applied for refunds. The IRS has paid many of the smaller claims, but has sent the more significant cases to the Appeals Division. At the date of this printing, no refund claim has been formally denied. If there is such denial, the cooperative will have 24 months to appeal this IRS action. But, instead of waiting for the next IRS action, the organizations representing housing cooperatives have decided to bring a case to challenge this refusal to respect the Thwaites decision. They have established a 277 Challenge Task Force to organize and fund this effort.

Joel E. Miller, the tax attorney who wrote the friend-of-the-court brief in Thwaites, has agreed to take a refund case through trial on behalf of the organizations for a fixed fee. This money is being raised through contributions from the organizations and their members, as well as many accountants representing housing cooperatives and condominiums and several other professionals. Suggested contribution for a housing cooperative is $250. The names of contributors are listed on the letterhead of the Task Force unless they specifically request not to be listed. Checks annotated with the words "277 Challenge" should be made out to CNYC and sent to the CNYC office at 250 West 57th Street, New York, NY 10019.

Congressmembers Charles Rangel and Charles Schumer have worked in the Congress to pass legislation affirming that IRC Section 277 does not apply to housing cooperatives. The legislation must be incorporated in a revenue bill, a feat which has proven daunting in recent years. In 1998, it is likely that there will be more than one revenue bill providing the opportunity to include 277 legislation. These Congressional champions of housing cooperatives are committed to furthering our legislation, and Senators Moynihan and D'Amato have both assured us that they are prepared to be supportive in the Senate.

Congressman Schumer sent the following letter to the IRS in January asking for immediate acquiescence in the Thwaites matter:

"I am disappointed and dismayed to hear reports that the IRS is once again considering a challenge to yet another court decision concerning the tax treatment of housing cooperatives under section 277 of the Internal Revenue Code.

"For the past thirteen years, housing cooperatives have fought against unfair taxation under IRC Section 277, which is intended to address social clubs. Housing cooperatives have been rewarded in their efforts with a perfect record in the courts, winning every case despite strenuous IRS opposition. That is because the courts recognize the obvious: housing co-ops are not country clubs, they are homes. The courts also recognize the intent of Congressional law dating back to 1969, which is that housing co-ops are not taxable under Section 277. Still the IRS persists in fighting a battle they perpetually lose, and following each loss they make the smallest accommodation possible for certain types of co-ops and continue to fight a losing battle against other types of co-ops. In the meantime, the cost in legal fees to the taxpayer and co-op owners continues to grow.

"In the latest battle, the IRS seems intent on challenging Thwaites Terrace Owners Corp. v. Commissioner even though several earlier broader decisions (all acquiesced to by IRS) indicate clearly that Thwaites Terrace should be subject to taxation under Subchapter T rather than Section 277.

"Instead of another costly legal battle which, judging from precedent, indicates a victory for the owners and a loss for IRS, I urge the IRS reconsider its apparent course and acquiesce in Thwaites. I believe this is in the best interests of co-op owners, the taxpayer, and is the right thing to do. Let us all agree that there has been enough litigation and the courts' views are obvious."

With these three strong attacks on the IRS's stand on Section 277 now mobilized, CNYC is hopeful of a successful outcome to this long struggle. Further developments will be reported in future issues of the CNYC Newsletter



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