Published: Winter 1998
FULL COURT PRESS TO AFFIRM
THAT IRC SECTION 277
DOES NOT APPLY TO COOPERATIVES
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.
REFUND CASE TO CHALLENGE
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
FUNDRAISING EFFORT FOR "277
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.
LEGISLATIVE REMEDY MAY SUCCEED
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
CONG. SCHUMER DEMANDS IRS
ACQUIESCE IN THWAITES
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