On that date, the so-called "80/20" test defining co-ops was significantly modified – if not effectively killed – when a bill sponsored by New York Congressman Charles Rangel and Senator Charles Schumer was signed into law.

One of the requirements of Section 216 of the Internal Revenue Service (IRS) code was that "80 percent or more of the gross income [of the corporation be] derived from tenant-shareholders." Buildings with income from leasing stores, selling air rights or easements, or any other non-shareholder source faced the loss of all tax benefits if the amount exceeded 20 percent of the co-op's gross income. But under the new law a corporation may now qualify under any one of three criteria:

• The original "80 percent of income" test

• The first additional test, which requires that "80 percent or more of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential purposes or purposes ancillary to such residential use." This test would appear to help a five-story co-op with a major portion of the first floor leased to a store, no matter how much rental income the tenant generated. The reference to "ancillary" space means that a garage, basement storage area, laundry room or gym available for use by tenant-shareholders would count as "good" space.

• The second new test, which allows a corporation to qualify as a co-op if "90 percent or more of the expenditures of the corporation…are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation's property for the benefit of the stockholders."

Some operating costs, such as the real estate taxes, heating costs and capital repairs, will have to be allocated to any part leased to a commercial tenant. Other expenses, such as labor costs for services provided only to residential tenants, elevator costs if the commercial tenant does not use the elevator, heating and lighting of residential common areas, and any other expenditures that do not serve the commercial tenant may not have to be allocated at all. Future commercial leases will be structured to provide that commercial tenants pay directly for their own separately metered electrical, gas and water charges, separate insurance coverage, and the like.

As with any tax law, there will always be subtleties of interpretation that may be critical, and these new provisions have not yet been subject to any IRS interpretations. Board members should not reach any conclusion about the effect of the new provisions without consulting their lawyer or accountant.

Even though only one of the three tests must now be met, there still may be corporations that face issues in qualifying as a cooperative. Those co-ops may wish to explore such tactics as:

• working with an unaffiliated entity to lease the commercial space from the co-op at a rental level assuring less than 20 percent of the co-op's income;

• selling shares to the commercial unit and qualifying that unit as a "co-op" unit;

• seeking to increase the "good income" and decrease the "bad income" so that the bad becomes a smaller percentage of the total income; and

• bunching all of the bad into a single payment to the co-op and thereby creating a short tax year in which the corporation would not be a qualified co-op for a limited time.

Each of these solutions has advantages and disadvantages. Some co-ops have created limited liability companies (LLCs) to lease their commercial spaces, and offered existing shareholders the opportunity to purchase interests in the LLCs. The LLCs can operate at a profit because the rental income it receives from a subtenant would exceed the rent that the LLC pays the co-op. There could be no guarantee of profit, since the LLCs would be required to pay rent regardless of whether they had tenants. Any profits realized by the LLCs would be distributed to their owners and would usually represent taxable income.