Lawmakers re-try IRS amendments

Real Estate Weekly, May 12, 1993 by Lois Weiss

Once again area legislators are attempting to amend the Internal Revenue Service Code to benefit cooperatives by excluding certain income from taxes. Last year, a measure was vetoed by former President George Bush as part of a larger tax package.

The current bills include a form of the previously vetoed measure originally introduced by Senator Daniel Patrick Moynihan and former Representative Bill Green. Representative Charles Rangel introduced a bill at the end of April, and a similar one was introduced in January by Representative Charles Schumer. Both new bills follow the original legislation with minor changes.

An aide m Moynihan, who is now head of the Finance Committee, said they are looking at the co-op matter now and are likely to introduce a bill within the next month. Currently, it appears that it may be the same version as last year. The aide said, however, they would be taking a look once again all of the issues.

The acts would make interest earned on reserves, plus income derived from tenant-shareholders and their guests from laundry and parking facilities untouchable by the IRS agents. The Schumer bill broadens that to include income from any sub-tenants, as well.

That section would make it easier for accountants who are concerned now, for instance, which quarters in the laundry room are derived from renters and technically subject to tax.

Charles Rappaport, president of the Federation of New York Housing Cooperatives which represents more than 700 member buildings, said he has not seen where there has been a problem with laundry rooms on audits. But, he observed, the Schumer language would be preferable because there are many sub-tenant renters of shareholders.

Additionally, the bills define cooperative housing corporations and tenant stockholder for the first time. The Schumer legislation defines limited equity cooperatives -- such as Mitchell--Lama buildings, as well.

The bills also give protection to low-equity co-ops that receive government funding -- such as Mitchell-Lamas - by making rental income derived from those other than tenant shareholders - such as commercial tenants - into member or 'patronage ' income. While the measures carve out this Mitchell-Lama niche, they exclude in the same breath lower and middle income co-ops in. which a majority of cooperators reside.

Last year a Moynihan aide explained this had been a policy decision because other members of Congress did not want to aid "luxury" co-ops. It would be possible, however, to add language tying an average unit sales price to a multiplier of the Federal Housing and Urban Development median prices for the area to arrive at some compromise so that those whose units are worth up to say, an average of $250,000 or so could, be included - the New York middle class.

This would in particular give smaller co-ops a financial boost if they have retail space in the building.

Council of New York Cooperatives' Executive Director Mary Ann Rothman hopes the limited equity co-ops are not treated any differently. "We've had a real hit on the unlimited equity co-ops," she noted. "Every time the co-ops are divided into subgroups we weaken what a co-op is."

While the Schumer measure would permit cooperatives to elect to have the provision applied retroactively - something the cooperatives would desperately like, but what Hill watchers think is wishful thinking - the Rangel bill would automatically apply to all past years. The Moynihan measure, on the other hand, became prospective on the final bill after an election clause was vigorously attacked by the Treasury Dept.

"Now that I see the texts are so different, we have to know what our preferences are for conciliation," Rothman added.

The rule, under Section 277 of the Internal Revenue Code, was designed to tax the non-membership income of organizations such as country clubs. The IRS first sought to tax reserves on Mitchell-Lamas and more recently turned towards other cooperative buildings and their large reserve funds which were not a significant factor in housing ownership when-the original IRS Code was drafted.

CPA Eric 1. Engelhardt said most accountants are abiding by 277 for the moment until court challenges are decided. "It means that when you do a corporate return, you split out the interest income separately and perhaps can allocate expenses against the reserve accounts," he explained noting there is usually a tax, at the low end, of 15 percent on the interest earnings. The huge losses brought about by the depreciation are suspended, he added. "This is a way the IRS is taxing co-ops on interest earned."

Richard Siegler, a partner with Stroock, Strook & Lavan, tried a case to challenge the imposition of taxes on Mitchell-Lama co-ops where such reserves are mandated by law. "We've been waiting for this decision three years," he lamented.

Meanwhile, he said, the co-ops that have been reviewed by the IRS are settling for favorable amounts with the right to seek a refund later on if his Trump Village case or the Congressional dance card goes their way.