In general, a cooperative housing corporation is a corporation (1) that has one class of stock, (2) each of the stockholders of which is entitled, solely by reason of ownership of stock, to occupy a dwelling owned or leased by the cooperative, (3) no stockholder of which is entitled to receive any distribution not out of earnings and profits of the cooperative, except on a complete or partial liquidation of the cooperative, and (4) 80 percent or more of the gross income for the taxable year of which is derived from tenant-stockholders. A tenant-stockholder generally is an individual owning fully paid up stock in the cooperative corporation, the purchase price of which bears a reasonable relationship to the value of the cooperative's equity in its land and buildings which is attributable to the dwelling unit that the individual is entitled to occupy.

Under section 277, deductions attributable to providing services or goods to members of a cooperative organization are allowed only to the extent of income derived from members. Section 277 has been held to apply to cooperative housing corporations.6 The Internal Revenue Service takes the position that interest on a cooperative housing corporation's reserve fund does not constitute income derived from members.

Explanation of the Bill

7

Under the bill, income derived from the reserve fund of a limited profit cooperative housing corporation is treated as derived from its members for the purposes of section 216 and section 277. In addition, any amount of interest claimed by such a cooperative with respect to a second mortgage loan made by a city housing development corporation and reported before April 16, 1986, by such a cooperative to its tenant-stockholders would be treated as having been paid by the cooperative.

The bill also provides that the payment of closing costs or the creation of certain reserve funds in connection with certain refinancings of a first mortgage of such a cooperative prior to January 1, 1984 would not be treated as taxable income to the cooperative, but that the basis of property acquired after December 31, 1985 with untaxed amounts in the reserve fund would be zero.

Effective Date

The bill generally would be effective for taxable years beginning before January 1, 1986.

6 Shore Drive Apts., Inc. v. U.S., 76-2 U.S.T.C. para. 9808, (M.D. Fla. 1976). See also, Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976 (JCS-33-76), December 29, 1976, p. 603.

7 A limited profit housing cooperative is a housing cooperative for which the resale price of its shares is limited to the seller's basis in the stock plus the seller's proportionate share of the amortization of the corporation's indebtedness on its property.