Does a not-for-profit homeowners association lose its Article 9-A tax exemption once it starts collecting dues and maintaining shared community property for its members?

Plain-English summary

Lake Shore Hills Homeowners Association, a New York not-for-profit corporation formed in 1983 by a subdivision's developer, exists to preserve and maintain shared community facilities: a common water supply, septic system, and pool. Under the developer's declaration, the developer controlled the association until more than half the subdivision's units sold -- so the association stayed inactive (no dues, no expenditures) until 1988, when it activated, began collecting dues (roughly matching expenses for lawn care, roads, and pool upkeep), and started filing federal Form 1120-H under IRC section 528. It asked whether it owes Article 9-A franchise tax.

The answer splits at 1988. Regulations section 1-3.4(b)(6) exempts not-for-profit corporations from Article 9-A only if no part of their net earnings inures to the benefit of any member. Courts have long read "net earnings" broadly -- inurement isn't limited to cash distributions; any benefit flowing to a member counts (Northwestern Municipal Association v. United States; People of God Community v. Commissioner). The federal homeowners-association definition in IRC section 528(c)(1)(D) confirms the point: providing management, maintenance, and care of association property to members is itself treated as inurement of net earnings (except for narrow carve-outs), and the Department applies the same reading to Article 9-A (Cornhill Commons Homeowners Association, TSB-A-82(2)C; Pickwick at Rocky Point Beach Club, TSB-A-87(26)C). Since Lake Shore Hills was inactive from 1983-1987 -- no funds expended, no maintenance provided -- there was no inurement, and it owed no Article 9-A tax for those years. But from 1988 on, once it began collecting dues and maintaining the pool/road/water/septic facilities for members' direct benefit, its net earnings inure to members, the exemption is lost, and it becomes a taxable Article 9-A corporation (with entire net income presumptively equal to its IRC section 528(d) federal taxable income if it elects homeowners-association treatment).

What this means for you

Homeowners associations and community facility corporations

Simply being organized as a not-for-profit doesn't guarantee Article 9-A exemption -- the moment your association starts actively managing, maintaining, or caring for shared property for members' benefit (even on a break-even, dues-funded basis), that activity itself counts as "inurement" and forfeits the exemption.

Newly formed or dormant developer-controlled associations

An association that stays dormant during a developer-control period (common in new subdivisions/condos) can avoid Article 9-A tax for those dormant years, but exemption analysis resets once the association activates and begins operating for members.

Accountants and tax professionals

This ruling applies the IRC section 528(c)(1)(D) "inurement via management/maintenance" concept directly to the Article 9-A not-for-profit exemption -- a different (and broader) trigger than the "medium for conducting business and sharing gains" test used for condo associations in rulings like Larkfield (TSB-A-92(4)C) or Bayside Mews (TSB-A-91(13)C).

Common questions

Q: Does collecting dues automatically make a not-for-profit association taxable?
A: If those dues fund management, maintenance, or care of association property for members' benefit, yes -- that itself is treated as inurement of net earnings, forfeiting the not-for-profit exemption.

Q: Can an association be exempt during a dormant/developer-control period and taxable later?
A: Yes -- this ruling found no tax owed for 1983-1987 while genuinely inactive, but tax owed from 1988 on once it began operating.

Q: Does filing as a federal homeowners association under IRC section 528 change the New York computation?
A: It affects the entire-net-income starting point -- if the association elects section 528 treatment, its New York entire net income is presumed to equal its section 528(d) federal taxable income.

Citations and references

Statutes and regulations:

• Tax Law section 209.1 (Article 9-A franchise tax)
• Business Corporation Franchise Tax Regulations section 1-3.4(b)(6) (not-for-profit exemption)
• Tax Law section 208.9 (entire net income); IRC section 528 (homeowners association election)
• Laws of 1989, ch. 61 (amending Tax Law section 208.1)

Cases and prior opinions cited in the ruling:

• Northwestern Municipal Association, Inc. v United States, 99 F.2d 460 (1938)
• People of God Community v Commissioner of Internal Revenue, 75 TC 127 (1980)
• Cornhill Commons Homeowners Association, Inc., TSB-A-82(2)C
• Pickwick at Rocky Point Beach Club, Inc., TSB-A-87(26)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_9c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (9) C
Corporation Tax
March 27, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C910125A

On January 25, 1991, a Petition for Advisory Opinion was received from Lake Shore Hills
Homeowners Association, P.O. Box 138, Kinderhook, New York 12106.
The issue raised by Petitioner, Lake Shore Hills Homeowners Association, is whether it is
subject to franchise tax under Article 9-A of the Tax Law.
Petitioner is a New York State not-for-profit corporation formed in 1983 by the developer
of the Lake Shore Hills subdivision for the purpose of preserving, protecting and enhancing the value
of the community facilities of the subdivision. The community facilities consist solely of property
on which is situated the association's common water supply, septic system and pool area which is
solely for use by association members.
The developer's declaration for the homeowners association filed with the Attorney-General
of the State of New York provides that the developer will remain in absolute control of the
homeowners association until more than half of the units are sold. While Petitioner was incorporated
in 1983, it was not activated until 1988 when the required number of units were sold. Prior to 1988,
any funds expended on what is now association property were paid separately by the developer. The
first dues were collected in 1988 and such dues are the only source of funds for Petitioner. The dues
collected roughly equal the expenses incurred. The expenses are solely for items such as lawn care,
road and pool maintenance, etc. No member has individually benefitted in any way from any funds
expended by Petitioner. All funds are spent as directed in Petitioner's declaration for the community
facilities.
Petitioner has filed Form l120H with the Internal Revenue Service under section 528 of the
Internal Revenue Code for 1988 and 1989 and has filed franchise tax returns under Article 9-A for
such years.
Section 209.1 of the Tax Law, in effect for taxable year 1983, imposes a franchise tax on
business corporations, as follows:
For 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, except
corporations specified in subdivision four of this section, shall annually pay a
franchise tax, upon the basis of its entire net income, or upon such other basis as may
be applicable as hereinafter provided, . . .
TP-9 (9/88)

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TSB-A-91 (9) C
Corporation Tax
March 27, 1991

The meaning of the term "corporation" set forth in section 208.1 of the Tax Law for taxable
year 1983 provides that:
"[t]he term 'corporation' includes a joint-stock company or association and any
business conducted by a trustee or trustees wherein interest or ownership is
evidenced by certificate or other written instrument;..."
A homeowners association formed under the Not-For-Profit Corporation Law is clearly a
corporation described in the foregoing provision, and is not a corporation specified in section 209.4
of the Tax Law.
Section 1-3.4(b) of the Business Corporation Franchise Tax Regulations (hereinafter "Article
9-A Regulations") describes an exemption from tax applicable to:
(6) corporations organized other than for profit which do not have stock or shares or
certificates for stock or for shares and which are operated on a non-profit basis no
part of the net earnings of which inures to the benefit of any officer, director, or
member, including Not-For-Profit Corporations and Religious Corporations ....
As thus stated, the exemption is not applicable to a corporation if any part of the net earnings
thereof inure to the benefit of its members. This denial of exemption based on the inurement of the
net earnings of a corporation to its members is based upon similar language found in section 501(c)
of the Internal Revenue Code of 1986. This language is also found in the Internal Revenue Code of
1954 and, indeed, predates such code.
Throughout its history, the term "net earnings" has consistently been held to mean more than
the net profits of an organization as shown on its books and more than the difference between gross
receipts and disbursements in dollars. (Northwestern Municipal Association, Inc. v United States,
1938, 99 F 2d 460). Indeed, it is well established that inurement of any of the earnings to a member
would constitute an "inurement of net earnings" for the benefit of such individual (People of God
Community v Commissioner of Internal Revenue, 1980, 75 TC 127). This conclusion is supported
by an analysis of section 528(c)(1)(D) of the Internal Revenue Code, which defines the term
"homeowners association" and which provides that an association qualifies as a homeowner
association only if:
"no part of the net earnings of such organization inures (other than by acquiring,
constructing, or providing management, maintenance, and care of association
property, and other than by a rebate of excess membership dues, fees or assessments)
to the benefit of any private shareholder or individual .... "
The implication is clear that, for federal income tax purposes, the provision of management
and the maintenance and care of association property constitute an "inurement of net earnings" of
the homeowners association to the benefit of its members. In Cornhill Commons Homeowners
Association, Inc., Adv 0p St Tax Comm, March 9, 1982, TSB-A-82(2)C, it was determined that such

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TSB-A-91 (9) C
Corporation Tax
March 27, 1991

interpretation is also applicable for purposes of Article 9-A of the Tax Law. See also, Pickwick at
Rocky Point Beach Club, Inc., Adv Op Comm T & F, October 15, 1987, TSB-A-87(26)C.
Herein, Petitioner was inactive from the date of organization in 1983 until 1988. Accordingly,
for taxable years 1983 through 1987, there was no inurement of net earnings to Petitioner's members
and Petitioner is not subject to tax for such years pursuant to section 1-3.4(b)(6) of the Article 9-A
Regulations.
However, in taxable year 1988, Petitioner became active and Petitioner collected dues and
began to maintain the association's property. Beginning with taxable year 1988, Petitioner's net
earnings inured to the benefit of its members and under section 1-3.4(b)(6) of the Article 9-A
Regulations, Petitioner is no longer exempt from the tax imposed under Article 9-A of the Tax Law.
Further, the meaning of the term "corporation", as amended by the Laws of 1989 (ch 61), is
set forth in section 208.1 of the Tax Law, as follows:
The term "corporation" includes an association, within the meaning of paragraph
three of subsection (a) of section seventy-seven hundred one of the internal revenue
code, a joint-stock company or association, a publicly traded partnership treated as
a corporation for purposes of the internal revenue code pursuant to seventy-seven
hundred four thereof and any business conducted by a trustee or trustees wherein
interest or ownership is evidenced by certificate or other written instrument...
For purposes of section 7701(a)(3) of the Internal Revenue Code, an association is an
organization whose characteristics require it to be classified for purposes of taxation as a corporation
rather than another type of organization such as a partnership or a trust. Section 301.7701-2(a) of
the Treasury Regulations provides that the major characteristics ordinarily found in a pure
corporation which, taken together, distinguish it from other organizations are (1) associates, (2) an
objective to carry on business and divide the gains therefrom, (3) continuity of life, (4) centralization
of management, (5) liability for corporate debts limited to corporate property, and (6) free
transferability of interests. An organization will be treated as an association if the corporate
characteristics are such that the organization more nearly resembles a corporation than a partnership
or a trust.
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 such
section 208.9 of the Tax Law.
If a homeowners association elects to file as a homeowners association pursuant to section
528 of the Internal Revenue Code, the association's federal taxable income for purposes of

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TSB-A-91 (9) C
Corporation Tax
March 27, 1991

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 Internal Revenue Code.
Accordingly, Petitioner is subject to the Franchise Tax on Business Corporations imposed
under Article 9-A of the Tax Law for taxable years 1988 and 1989 and after, and will be required
to pay an annual franchise tax upon the basis of its entire net income or upon such other basis as may
be applicable. If Petitioner elects to file as a homeowners association pursuant to section 528 of the
Internal Revenue Code, Petitioner'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
Internal Revenue Code.

DATED: March 27, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.