[Congressional Record (Bound Edition), Volume 146 (2000), Part 16]
[Extensions of Remarks]
[Page 23866]
[From the U.S. Government Publishing Office, www.gpo.gov]



H.R. 5159 AMENDING TITLE 38 TO PROVIDE TAX RELIEF FOR THE CONVERSION OF 
           COOPERATIVE HOUSING CORPORATIONS INTO CONDOMINIUMS

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                           HON. PATSY T. MINK

                               of hawaii

                    in the house of representatives

                        Monday, October 23, 2000

  Mrs. MINK of Hawaii. Mr. Speaker, I rise today to introduce an 
important piece of legislation. There are some in my district and 
around the country who would like to convert their cooperative housing 
units into condominiums but do not because section 216 of the Internal 
Revenue Code unfairly taxes such conversions.
  During the late 1950's and early 1960's the first high-rise 
apartments were built in Hawaii. Developers formed cooperative housing 
corporations for ownership. In a cooperative, a corporation owns the 
land and building, and individuals and families purchase a share in the 
corporation that grants them the right to live in a particular unit. 
This enabled homeowners to own their apartments rather than rent them, 
making home ownership possible for more individuals and families.
  As construction of high rise apartments increased, Hawaii enacted the 
nation's first condominium property laws. Condominiums permit a unit 
holder to own the unit directly rather than indirectly as stock in a 
cooperative corporation. Condominiums proved easier to finance and were 
better received by the public. The vast majority of high-rise apartment 
buildings constructed since 1963 have been condominiums rather than 
cooperatives.
  The cooperatives that were constructed before condominium laws were 
enacted have a number of finance and marketing problems. Many banks in 
Hawaii will not lend more than 70 percent of a cooperative's purchase 
price, compared with up to 90 percent for a condominium. In addition, 
banks have generally used an amortization rate of 15 years, compared to 
30 years for condominiums, and charge 1 percent more interest for 
cooperative housing loans. Furthermore, the sale price of a 
condominiums can be 15 to 40 percent higher than a similar cooperative 
apartment. Finally, Private Letter Ruling No. 8445010 the IRS 
recognized that unit holders in cooperatives have greater difficulty 
acquiring mortgages. These differences discourage the purchase of 
shares from cooperatives and making selling a unit nearly impossible.
  As a result of these shortcomings many who invested in cooperative 
housing want to convert their ownership form. This is accomplished 
through converting cooperative housing corporations into condominiums. 
In a conversion the cooperative corporation dissolves and reconstitutes 
itself as a condominium with the share holders owning their apartment 
directly. No substantive change in ownership is involved. The Internal 
Revenue Code discourages conversions because it treats the dissolution 
of the cooperative corporation as a taxable event. Prior to the 1986 
Tax Reform Act (P.L. 99-514) corporations dissolved without taxation. 
This became a classic way in which corporations bought and sold one 
another without paying a tax on the capital gains. This bill protects 
against this tax loophole. When a cooperative corporation dissolves in 
the process of conversion, the original basis of the property remains 
the basis for the condominium building. Individual unit holders also 
retain as their basis the price paid for a share purchased in the 
cooperative corporation. In the future, if the new owners of the 
building or an individual condominium owner sell their deed the gain in 
value over the original basis will be taxed.
  The IRS and Congress have recognized that this tax is unfair. In 
Private Letter Ruling No. 8812049 the IRS agreed that the conversion 
tax was severe because a tenant-stockholder continues to live in the 
same unit and incurs the same cost. Congress also agreed that this 
conversion tax was excessive and amended the Internal Revenue Code 
eliminating the tax incurred by unit holders along as the unit was 
their primary residence. While this amendment did not repeal the tax at 
the corporate level (the major impediment to cooperative conversions) 
the amendments repealed in 1997. Since 1997 cooperative corporations 
and individual unit holders that want to convert to condominiums and 
benefit from higher lending rates, longer amortization periods, lower 
interest rates and a higher market value have been discouraged by the 
Internal Revenue Code which requires them to update the original basis.
  This bill eliminates the unfair conversion tax at the corporate and 
individual level that do not include a transfer of ownership. It also 
ensures that no tax loopholes created by requiring that the original 
basis be assumed by the tenant and property owners. On passage of this 
bill cooperatives retain the option of conversion.
  I urge my colleagues to cosign this bill and end this unfair tax.

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