“Long-Awaited Legislation Relaxes Tests for Qualification as a Code Section 216 Housing Cooperative,”

On December 18, 2007, Congress passed H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 (“H.R. 3648”). President Bush signed the legislation on December 20, 2007.

H.R. 3648 significantly modifies the requirements for qualification as a “cooperative housing corporation” for purposes of Section 216 of the Internal Revenue Code of 1986, as amended (the “Code”).  The legislation relaxes the current requirement under Code Section 216(b)(1)(D) that 80 percent or more of a cooperative’s gross income must be derived from tenant-stockholders (the “80/20 test”) with a much more flexible approach that would allow a corporation that does not satisfy the 80/20 test to nevertheless qualify for the benefits of Code Section 216 under two new alternative tests.

These new tests appear to be inspired by (but in certain respects are more lenient than) the requirements under Code Section 528 relating to qualification of certain condominium associations as “homeowners associations.”  Under the revised test, a corporation would qualify as a “cooperative housing corporation” in a given taxable year if, in addition to meeting certain other requirements, it satisfies either the 80/20 test or one of two alternative tests.