Normally, a stockholder cannot deduct expenses that are incurred by a corporation, even if the stockholder pays those expenses. With cooperative housing corporations, however, a special rule allows the tenant-stockholder to deduct a share of the mortgage interest and real estate taxes paid by the corporation.
In a case related to this rule, the Court of Appeals for the Second Circuit has reversed an earlier decision of the Tax Court and decided that Christina Alphonso, a stockholder in a residential cooperative housing corporation, had sufficient property interest under state law to claim a casualty loss deduction.
The claim was for Alphonso’s share of an assessment to fix damage to a retaining wall on the co-op’s premises.
Unlike condominium owners, who own their units and an undivided interest in the common elements, a co-op owner is a stockholder in a corporation that owns the residential units and common elements. The tenant-stockholder rents the unit from the corporation.
In this case, Alphonso owned stock in Castle Village (CV), a cooperative housing corporation. She leased an apartment from CV.
In 2005, a retaining wall owned by CV collapsed. CV levied an assessment against each of its tenant-stockholders to repair the damage, and Alphonso paid $26,390, which she deducted as a casualty loss.
The Tax Court denied the deduction, concluding that Alphonso did not possess a property interest in CV’s grounds. Alphonso contended that her right to use the grounds and to exclude persons who are not tenants or the guests of tenants, coupled with her obligations as a tenant-stockholder under the cooperative lease, constituted a property interest in the land sufficient to entitle her to the deduction. The IRS argued that Alphonso did not have a property interest in the retaining wall and grounds.
The Second Circuit ruled that the lease, as augmented by house rules, gave a defined group of persons – building residents such as Alphonso – the right to use the CV grounds. Under New York law, Alphonso’s right to use the grounds shared with the other residents and their respective guests, but not with anyone else, was a property interest in the grounds. In the view of the court, this property interest was sufficient to entitle Alphonso to a casualty loss deduction (Christina A. Alphonso v. Commissioner, 1111 AFTR 2d 2013-XXXX, Feb. 6, 2013).
Note that Alphonso could still lose her deduction. The appellate court sent the case back to the Tax Court to determine whether the collapse of the wall resulted from a sudden, unexpected casualty or from gradual erosion. Losses caused by erosion usually do not qualify for the casualty loss deduction.