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Habitat Magazine Business of Management 2021

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FLIP TAX UPDATE 2011, P.2

Flip Tax Update 2011, p.2

 

More clearly and importantly, the court concluded that the new flip tax was a charge "totally disproportionate" to stockholdings, thus enforceable only if qualifying for the BCL 501(c) exemption, which the court concluded required shareholder approval (indisputably not present there).

A series of back-and-forthing between these cases then occurred, with each selectively citing the other in a sort of ladder effect from court to court. The upshot is: Under Weigel, co-op boards seemingly can adopt increases to flip taxes initially adopted by shareholders even if disproportionate, and even possibly such flip taxes having just board approval from the outset. Under Pello, co-op boards seemingly need shareholder approval for disproportionate flip taxes, possibly with the exception of the Weigel situation in which shareholders previously approved a lower but still disproportionate flip tax. Pello also could be requiring shareholder approval even if the flip tax is not disproportionate. Last but not least, Weigel does not find flip taxes disproportionate if based on a percentage of sales price, while Pello surely does.

Where does this leave our questioner and those co-ops similarly situated? The law has evolved in fits and starts and has all kinds of pitfalls. So, if adopting a flip tax that is arguably disproportionate, to be safe, you must get shareholder approval. The consequences of not doing so are just too great. Also, of course, it is more democratic.

The questioner's flip tax is even more than usually at risk because it has alternative rates that might apply to each shareholder. If charging on a per-share basis, the risks seem far less for board-only modification, or even initial adoption, of a flip tax, provided that it is properly done as a board-permitted amendment to the bylaws.

But even then, I would seriously consider taking no chances, and securing shareholder approval. Taxes, these days, are none too popular in any realm, and the mandate of voters for something like this is a very nice thing to have.

Robert D. Tierman, a longtime co-op and condo attorney, is a partner at  Litwin & Tierman 

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