Is a condominium association that only collects common charges and reserve-fund interest -- with no rental or business income -- subject to New York's Article 9-A corporate franchise tax?

Plain-English summary

The Larkfield Professional Center Condo Association manages a 19-commercial-unit condominium organized under Article 9-B of the Real Property Law. It is not incorporated. Its only revenue for the years at issue was common-charge assessments from unit owners and interest income on building reserve funds -- it owns no property, provides maintenance only to unit owners, and does not otherwise engage in a trade or business. It asked whether it owed New York's Article 9-A corporate franchise tax for 1986 through 1989.

The answer splits at 1989. Article 9-A taxes "corporations," and before 1989, Tax Law section 208.1 defined "corporation" narrowly (joint-stock companies/associations, certain business trusts). Case law required the entity to actually "provide a medium for the conducting of business and the sharing of its gains" to count -- which is why two earlier condo associations that rented out garages, parking, laundry rooms, or storage space (Galen & Company, TSB-A-86(6)C; Astor Terrace Condominium, TSB-A-90(7)C) were found taxable: they were running a business. Larkfield wasn't -- common charges and reserve interest aren't business income -- so for 1986-1988 it owed no Article 9-A tax.

Then Laws of 1989, chapter 61 amended section 208.1 to sweep in any entity that is an "association" within the meaning of IRC section 7701(a)(3) -- a federal test based on corporate-resemblance factors (associates, objective to share gains, continuity of life, centralized management, limited liability, free transferability), not on whether the entity actually conducts business. A condo association satisfies that federal association test almost by definition. So starting in 1989, Larkfield became subject to Article 9-A -- even though its activities and income sources didn't change at all.

What this means for you

Condominium and homeowners' associations

If your association's only income is common charges and reserve-fund interest, the "provides a medium for conducting business" test from Galen and Astor Terrace no longer controls your Article 9-A status for 1989 and later years. The 1989 law change means essentially any condo association organized under Article 9-B -- regardless of whether it rents space or otherwise does business -- is now treated as a corporation subject to franchise tax.

Boards and property managers

Don't assume that a "passive" association (no rental income, no business activity) is automatically outside Article 9-A. That assumption was correct for pre-1989 tax years but has not been correct since the law changed.

Accountants and tax professionals

This is a clean before/after illustration of the 1989 amendment's effect: it replaced a business-activity test with a much broader federal association test, sweeping in entities (like passive condo/co-op associations) that the older case law had excluded.

Common questions

Q: Did the definition of "corporation" change for condo associations?
A: Yes. Before 1989, an association had to actually conduct business and share gains to be treated as a corporation. Since 1989, any entity meeting the federal IRC section 7701(a)(3) "association" test counts, regardless of business activity.

Q: Does collecting common charges make an association taxable?
A: Not by itself, and not for pre-1989 tax years under the business-activity test. But for 1989 forward, common charges alone don't matter -- the broader post-1989 definition applies regardless.

Q: Is this ruling still current law?
A: The 1989 amendment to section 208.1 is the operative rule going forward; check current Tax Law section 208 and any later amendments, since this 1992 opinion reflects law and facts current only as of the years it addresses.

Citations and references

Statutes and regulations:

• Tax Law section 209.1 (Article 9-A franchise tax imposition)
• Tax Law section 208.1 (definition of "corporation," before and after the 1989 amendment)
• Laws of 1989, chapter 61 (amending section 208.1 to include IRC section 7701(a)(3) associations)
• 20 NYCRR section 1-2.3 (Business Corporation Franchise Tax Regulations)
• Treasury Regulations section 301.7701-2(a) (corporate-characteristics test)
• Real Property Law Article 9-B, section 339-e(5) (definition of "common interest")

Cases cited in the ruling:

• Galen & Company, TSB-A-86(6)C
• Astor Terrace Condominium, TSB-A-90(7)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a92_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (4) C
Corporation Tax
February 28, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C911125B

On November 25, 1991, a Petition for Advisory Opinion was received from The Larkfield
Professional Center Condo Association, 554 Larkfield Road, East Northport, New York 11731.
The issue raised by Petitioner, The Larkfield Professional Center Condo Association, is
whether it is subject to tax under Article 9-A of the Tax Law for taxable years 1986 through 1989.
Petitioner comprises the land and building located at 554 Larkfield Road, East Northport,
New York 11731. It includes 19 commercial units. Petitioner was organized in accordance with
Article 9-B of the New York State Real Property Law and is not incorporated.
The owner of a commercial unit owns title to its unit and is entitled to exclusive possession
of it. Each unit owner has the right to vote in the election of the Condominium Board which will
supervise the property and manage the affairs of the condominium. A unit owner may sell or lease
its unit to anyone without restriction or limitation, subject to a right of first refusal by the
Condominium Board. In addition to ownership of title to its unit, a unit owner owns in common with
all other unit owners, an undivided interest in the common elements. Petitioner, itself, owns no
interest in real estate.
For the taxable years at issue, the revenues of Petitioner consist of assessments for common
charges to unit owners and interest income on building reserve funds. The association owns no
property and provides maintenance services only to unit owners. The association does not render
services to non unit holders, nor does it otherwise engage in a trade or business.
Section 209.1 of the Tax Law 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 base, or upon such other basis
as may be applicable as hereinafter provided.
For taxable years 1986, 1987 and 1988, section 208.1 of the Tax Law provided that "the 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."
TP-9 (9/88)

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TSB-A-92 (4) C
Corporation Tax
February 28, 1992
For taxable years beginning on or after January 1, 1989 and ending after April 19, 1989,
section 208.1 of the Tax Law is amended by the Laws of 1989 (ch 61) 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.
The term "corporation" is elucidated in section 1-2.3 of the Business Corporation Franchise
Tax Regulations, which provides, in part, that:
(a) The term 'corporation' means an entity created as such under the laws of the
United States, any state, territory or possession thereof, the District of Columbia, or
any foreign country, or any political subdivision of any of the foregoing, which
provides a medium for the conducting of business and the sharing of its gains.
(b) The 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. An entity conducted as a
corporation is deemed to be a corporation. . . 20 NYCRR § 1-2.3
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 interest. 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 339-0 of Article 9-B of the Real Property Law states that the deeds and leases of units
must include "[t]he common interest appertaining to the unit. . ." 49 NYCRR § 339-o. Section 339­
e(5) of such law defines "common interest" as "the (i) proportionate, undivided interest in fee simple
absolute, or (ii) proportionate undivided leasehold interest in the common elements appertaining to
each unit, as expressed in the declaration" 49 NYCRR § 339-e(5). Thus, each unit owner's interest
is evidence by a written instrument.

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TSB-A-92 (4) C
Corporation Tax
February 28, 1992
In Galen & Company, Adv Op St Tax Comm, March 12, 1986, TSB-A-86(6)C, it was held
that where a condominium association, organized under Article 9-B of the Real Property Law,
generated income from rentals of a garage, parking spaces, laundry areas and commercial space
owned by the condominium association, such association had demonstrated that it provided a
medium for the conducting of business and the sharing of its gains. Therefore, such condominium
association presented itself as a corporation to conduct business and was subject to tax under Article
9-A of the Tax Law.
In Astor Terrace Condominium, Adv Op Comm T & F, March 1, 1990, TSB-A-90(7)C it was
held that where a condominium association organized pursuant to Article 9-B of the Real Property
Law may lease portions of the common elements and does receive income from a laundry room
concession and storage charges, the association has demonstrated that it provides a medium for the
conducting of business and the sharing of its gains. Therefore, such condominium association
presents itself as a corporation to conduct business and is subject to tax under Article 9-A of the Tax
Law.
However, herein for taxable years 1986 through 1988, Petitioner's income consisted of only
common charges and interest income from building reserve funds. Unlike, Galen & Company,
supra, and Astor Terrace Condominium, supra, Petitioner did not provide a medium for the
conducting of business and the sharing of its gains. Petitioner has not presented itself as a
corporation to conduct business and, therefore, for taxable years 1986 through 1988, Petitioner is not
considered a corporation and is not subject to tax under Article 9-A of the Tax Law.
However, pursuant to section 208.1 of the Tax Law as amended by the Laws of 1989 (ch 61)
and applicable to taxable years beginning on or after January 1, 1989 and ending after April 19,
1989, the term corporation includes an association within the meaning of 7701(a)(3) of the Internal
Revenue Code and therefore for taxable year 1989 Petitioner is subject to tax under Article 9-A of
the Tax Law.

DATED: February 28, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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